Case Studies

In the cases summarized below, defendants were accused of defrauding the government or investors by intentionally or recklessly over-billing;  providing goods or services that did not meet the specifications of the applicable government contract; manipulating the market through anti-competitive conduct such as bid-rigging, price-fixing or market allocation; or simply misleading investors.  With the advent of the new SEC whistleblower program, an undisclosed False Claims Act violation or tax fraud can also for the basis for an SEC whistleblower claim.

Securities Fraud

For aspiring SEC whistleblowers, as outlined in the SEC’s civil complaint against Goldman Sachs, the SEC’s $550 million settlement was a product of alleged misrepresentations that violated three primary federal securities laws: Section 17(a) of the Securities Act of 1933 (15 U.S.C. §77q(a)), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5.  While these code sections may read like Greek to the uninitiated, what they all boil down to is that companies like Goldman who sell “securities” like stocks and bonds to investors are required to provide potential investors ALL material information — positive, negative and neutral — about the proposed investment.

The SEC alleged, in general, that Goldman made

materially misleading statements and omissions in connection with a synthetic collateralized debt obligation (“CDO”) Goldman structured and marketed to investors. This synthetic CDO, ABACUS 2007AC1, was tied to the performance of subprime residential mortgage-backed securities (“RMBS”) and was structured and marketed by Goldman in early 2007 when the United States housing market and related securities were beginning to show signs of distress.

More specifically, Goldman and its co-defendant Fabrice Tourre “recklessly or negligently misrepresented in the term sheet, flip book and offering memorandum for ABACUS 2007-AC1 … the significant role in the portfolio selection process played by Paulson & Co., a hedge fund with financial interests in the transaction directly adverse” to investors in the fund:

Undisclosed in the marketing materials and unbeknownst to investors [Paulson] played a significant role in the portfolio selection process.

The complaint also alleges that the defendants misled one investor, ACA, into believing that Paulson invested in the equity of ABACUS 2007AC1 and, accordingly, that Paulson’s interests in the collateral section process were closely aligned with ACA’s when in reality their interests were sharply conflicting:

After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS** portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future.

In short, the SEC says, Goldman and Tourre misled ABACUS 2007-AC1’s investors about Paulson’s role in structuring the deal and concealed the fact that Paulson was betting against the fund’s portfolio.  Key whistleblower takeaways: Failure to disclose material information about the deal and the people who put it together can violate the securities laws in multiple ways.

Pharmaceuticals

In February 2008, Merck & Company agreed to pay $650+ million to resolve allegations it failed to pay proper rebates to Medicaid and other government health care programs and paid kickbacks to health care providers in exchange for prescribing Merck’s products.
Relator H. Dean Steinke, a former Merck district sales manager, alleged that Merck violated the Medicaid Rebate Statute in connection with Merck’s marketing of drugs Zocor and Vioxx. Merck allegedly offered deep discounts for the two drugs if hospitals used large quantities of those drugs in place of competing brands.

Steinke also alleged that from 1997-2001, Merck had fifteen programs primarily consisting of payments to physicians disguised as fees paid for “training,” “consultation” or “market research.” In fact, the government alleged that these fees were illegal kickbacks intended to induce the purchase of Merck products.

In settlement of Merck’s alleged violations, the federal government will receive more than $360 million, and forty-nine states and the District of Columbia over $290 million. In addition, Mr. Steinke will receive $44.7 million from the federal share of the settlement plus $23.5 million from the states.

Mortgages

Two California real estate investors arranged for 27 home purchasers to finance their homes with HUD-guaranteed mortgages. To qualify the mortgages for the HUD guarantee, the investors themselves made the down payments on the homes but falsely certified in the loan documents that they had not done so. Because HUD would not have insured the mortgages if the seller-investors had been truthful, in 2007, the court granted summary judgment to the government, awarding nearly $6 million in damages, civil penalties and costs.

Export-Import Financing

A U.S. manufacturer relied on loans from the U.S. Export-Import Bank to finance the sale of irrigation pumps to Nigeria. In applying for financing, the exporter falsely certified that it had not paid “irregular” commissions to its Nigerian sales agent. The defendant exporter argued that the government suffered no damage because the loans were repaid in full. The court disagreed holding that even where fraudulently obtained loans are repaid in full, the original loan amount is a loss to the government under the False Claims Act.

Health Care

Over a period of six years, an Atlanta-area hospital falsely claimed, among other things, in-patient status for patients whose charts showed they were admitted and discharged on the same day. These false billings to Medicare, together with others, resulted in an out-of-court settlement of $26 million. The relator was a hospital case manager whose responsibilities included reviewing patient files for Medicare billing accuracy. For her role in bringing the fraud to light, she was awarded approximately $5 million, 19 percent of the total settlement.

Bid rigging

In May 2008, the Department of Justice (DOJ)  intervened in two qui tam actions alleging a conspiracy to rig bids, fix prices and allocate the market for the transportation of household goods belonging to military personnel between Europe and the United States. The defendants include a Belgian company, four German companies, and an American company, The Pasha Group.  California-based Pasha Group, its subsidiaries and two employees together paid $13 million to settle claims brought against them in the lawsuits alleging their participation in the bid-rigging scheme. Relators Kurt Bunk and Daniel Heuser are German citizens who worked with one of the German companies. Relator Ray Ammons owned an American freight forwarding company. As a result of the settlement, the relators will receive $2.6 million as their share of the $13 million Pasha payment.

Defective Goods/Defense Contracting

The relator was a quality-control engineer working for a Boeing subcontractor on a contract to remanufacture CH-47D helicopters for the U.S. Army. After fatal chopper crashes in 1988, 1991, and 1993, the relator discovered that Boeing had installed defective transmission parts. After trying in vain to draw attention to the problem inside the company, he was laid off in 1994 and filed his qui tam complaint under seal in May 1995.  Five years and 27,000 attorney hours later, in August 2000, he received $10.5 million as his share of a $50+ million government settlement.

Elder Care

In October 2008, the DOJ joined a qui tam action alleging that several companies including McKesson Medical-Surgical MediNet Inc. (MediNet) and CERES Strategies Medical Services Inc. (CSMS) entered an agreement through which McKesson durable medical equipment (“DME”) & supplies were used by Beverly nursing facilities.  McKesson allegedly promised Beverly facilities (now Golden Horizons) significant profits in exchange for Beverly’s falsely telling Medicare that Beverly – not McKesson or MediNet – was supplying the DME equipment and supplies.

To facilitate the fraud, the DOJ alleges that MediNet set up a sham corporation called CSMS and that MediNet allowed CSMS – “thinly capitalized, with few employees, and almost no DME equipment” — to bill Medicare and retain millions of dollars in Medicare payments for services and supplies that actually were supplied by MediNet and not by CSMS. In exchange for accepting this arrangement, Beverly allegedly agreed to buy McKesson’s DME supplies. This suit is ongoing in the Northern District of Mississippi. The DOJ’s intervention increases the likelihood that the private relators will be compensated for their efforts at exposing the alleged fraud.

Environmental Testing

In 2002, Intertek Testing Services Environmental Laboratories agreed to pay $8.7 million to settle claims that Intertek failed to conduct environmental laboratory tests prescribed by its contract with the government.  Intertek’s Richardson, Texas laboratory had contracted to test air, liquid and soil samples for hazardous substances for the Army Corps of Engineers, Department of the Air Force, Department of the Navy and the Environmental Protection Agency (EPA).

False Claims Act Settlement

In this quirky 1996 case, Allegheny Teledyne Incorporated (“ATI”) paid $2.79 million to settle a qui tam suit alleging that ATI lied to the DOJ during settlement negotiations over a 1994 qui tam suit. The 1996 claim alleged ATI hid testing cost data used in the U.S. Air Force’s APX-109 program involving “identification of friend or foe” equipment. ATI’s failure to disclose the data meant that the government received less in the 1994 settlement than it should have. The relator in this case was a former ATI internal auditor.