Excerpt: Saints, Sinners & Heroes by Brian Mahany
The Whistleblower's Toolbox
Four primary federal laws allow whistleblowers to share in monies recovered by the government from wrongdoers. In addition to federal laws, 29 states have enacted legislation that also empowers whistleblowers to act when state or local funds have been mismanaged because of fraud.
Those laws are:
The U.S. False Claims Act, Securities Exchange Commission (SEC) Whistleblower Statute, Internal Revenue Service (IRS) Whistleblower Provision and The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).
The Federal False Claims Act
The False Claims Act is the single most powerful tool in the whistleblower’s toolbox. It is also the government’s most powerful fraud fighting tool. No other country has a law like ours.
Because of the False Claims Act, ordinary people are empowered to rise up against fraud, greed and corruption. They are the new American heroes and their stories are sprinkled throughout this book.
America has enjoyed a long tradition of rewarding people who step forward to report fraud. Until the False Claims Act, however, there was no statute or law that provided clear guidance and rules for whistleblowers to follow.
In 1777, when our new nation was just one year old, the Continental Congress passed a special bill to protect two U.S. naval officers who blew the whistle on mistreatment of British prisoners of war. It would be almost another century, however, before we saw the first comprehensive whistleblower legislation.
Originally passed during the U.S. Civil War, the False Claims Act empowers ordinary individuals with inside knowledge about fraud involving government programs to bring an action in the name of the government.
Today, those who submit false claims for payment of government funds can be held liable for the government’s actual damages or up to $11,000 per “false claim.” The law also allows the government to seek triple damages.
Whistleblowers who provide the evidence of wrongdoing can receive awards of 15 percent to 30 percent of what the government collects.
Origins of the Law
As noted earlier, America’s tradition of promoting whistleblowing has a long history. Although the present day False Claims Act was actually passed during the Civil War, the law’s roots go back centuries. Famed English jurist and legal historian Sir William Blackstone talks about whistleblower laws in his 1768 treatise, Commentaries on the Law of England.
Under English common law, “informers” were allowed to expose fraud and corruption and were rewarded with a portion of any recovery. The original doctrine was called “qui tam pro domino rege quam pro se ipso in hac parte sequitur” a Latin phrase meaning, ‘he’ who sues in this matter for the king as well as for himself. The term is still widely used today. Although now the Latin expression is considerably shortened, it is now known as “qui tam”.
The doctrine survived the trip across the Atlantic and was widely used in the colonies. The First Continental Congress codified the practice into law. That law was limited to certain import tariffs, however.
Our Continental Congress also passed a special bill to protect naval officers Samuel Shaw and Richard Marvin, the whistleblowers who claimed their commander was mistreating prisoners. That law declared the duty of "all persons in the service of the United States, as well as all other the inhabitants thereof" to inform the Continental Congress or proper authorities of "misconduct, frauds or misdemeanors committed by any officers in the service of these states, which may come to their knowledge.” Congress then appropriated money to help the two officers who were dismissed from the Navy for being heroes and coming forward.
Several decades later, the still-young American government found itself in the throes of the Civil War. During the war, the Union Army often found itself on the receiving end of poor quality provisions, weapons and horses. Back then, the Federal Government was nearly broke and spread quite thin because of the war. The government simply didn’t have the resources to prosecute every dishonest vendor.
One disreputable vendor bragged, “You can sell anything to the government at almost any price you’ve got the guts to ask.” The vendor was reportedly selling blankets to the US Army that had been infested with moths. Another vendor sold gunpowder to the Army that contained sawdust while another supplied mules so lame they couldn’t leave the barn. A reported case claims that Colt revolvers were being sold to the government for $25 apiece but could readily be obtained on the open market for just $14.50.
Fearful of the huge drain on the government’s coffers caused by shady vendors, President Lincoln lobbied for the passage of the Act. Because the law was enacted during Lincoln’s term as president, many people today still call the False Claims Act “Lincoln’s Law.”
The original act was both powerful and generous. The government could collect either double damages or a fine of up to $2000 for each false claim. (In 2014 dollars, that penalty would be $37,736!)
Whistleblowers, called “relators,” also were treated quite generously. Under Lincoln’s original Act they were entitled to half of the government’s recovery.
The False Claims Act was born during a time of war but another major war, World War II, almost killed it.
The law had remained virtually unchanged until World War II. In 1943, Congress drastically cut the relator’s award share to as low as ten percent in some cases.
The 1943 amendments also drastically limited who could file a claim. The law was redrafted to say that no award could be based on information already in the government’s possession, including information provided by the whistleblower! With such ridiculous circular logic, the law was emasculated.
As a result of the 1943 amendments, cases brought under the Act dried up virtually overnight. Congress managed to take a law that functioned perfectly well and render it useless.
But for some last minute opposition, the law was almost repealed in its entirety. Then-Attorney General Francis Biddle wrote to Congress in 1942. In his letter he urged the repeal of the law and said,
“The reasons advanced by Senator Howard for the enactment of these sections are no longer pertinent. Recent experience shows that plaintiffs in informers’ suits not only fail to furnish to the United States the information that is the basis of their actions, but on the contrary, at times base the litigation on information which has been secured by the Government in the regular course of law enforcement. Such plaintiffs at times not only use information contained in indictments returned against the defendant, but also seek to use Government files to prove their cases. Consequently, informers’ suits have become mere parasitical actions, occasionally brought only after law enforcement offices have investigated and prosecuted persons guilty of a violation of law and solely because of the hope of a large reward.”
It wasn’t solely the Department of Justice that wasn’t supporting the law. A federal appeals court in Philadelphia in reversing a $315,000 whistleblower award had ruled, “Qui tam actions have always been regarded with disfavor. It is wrong for a free country to allow an informer to seek redress for his own pecuniary advantage in respect of a public wrong in which he has no direct personal interest or concern. A wrong to the State should surely be atoned for by a penalty payable to the State alone.”
The Senate acted immediately and repealed the law. Before the House could act in that legislative session, however, the U.S. Supreme Court rebuked and reversed the appeals court and in a strongly worded opinion said, “We cannot accept either the interpretive approach or the actual decision of the court below. Qui tam suits have been frequently permitted by legislative action, and have not been without defense by the courts.”
By the time the Supreme Court acted, folks in the Senate began to have second thoughts. Although the law wasn’t repealed, as noted above it was certainly curtailed and rendered unusable.
While there might have been some merit in limiting the ability of law enforcement officers for collecting awards, Congress gutted the law. Instead of fixing the problems, they eliminated the ability for anyone to collect an award. Those who managed to figure out a way to still file a claim were left with a maximum award of just ten percent For most, the remote possibility of a small award wasn’t worth the effort.
The 1943 amendments may have been effective in curtailing cases brought by law enforcement officers but they had become so onerous that no one was filing claims and fraud was again running rampant. Then-President Reagan and Congress were grappling with a burgeoning national deficit. Many in Congress believed that much of government spending could be attributed to fraud and waste.
A 1986 Senate report claimed that, “In 1985 ... 45 of the 100 largest defense contractors, including 9 of the top 10, were under investigation for multiple fraud offenses. Additionally, the Department of Justice has reported that in the last year, four of the largest defense contractors ... have been convicted of criminal offenses while another ... has been indicted and awaits trial.... The Department of Justice has estimated fraud as draining 1 to 10 percent of the entire Federal budget. Taking into account the spending level in 1985 of nearly $1 trillion, fraud against the Government could be costing taxpayers anywhere from $10 to $100 billion annually.”
Senator Charles Grassley and Representative Howard Berman pushed through significant amendments to the law. Unlike 40 years earlier, by 1986 the Department of Justice was once again a big supporter of the law and the amendments. Those amendments remain in force today.
Some of the significant changes in the 1986 amendment include:
- Elimination of the "government possession of information" bar against qui tam lawsuits;
- An explicit cause of action for reverse false claims (false statements calculated to reduce an obligation to pay the United States);
- Establishment of liability for "deliberate ignorance" and "reckless disregard" of the truth;
- Ability for government to issue civil investigative demands;
- Refinements to the “public knowledge” bar against certain claims;
- Restoration of the "preponderance of the evidence" burden of proof standard for all elements of the claim including damages;
- Imposition of treble damages and civil fines of $5,000 to $10,000 per false claim;
- Increased rewards for qui tam plaintiffs of between 15–30 percent of the funds recovered from the defendant;
- An expanded statute of limitations (more time to file claims);
- Requirement for the defendant to pay the whistleblower’s expenses and attorney's fees, and;
- Strong whistleblower protection and anti-retaliation provisions including the ability to order reinstatement with seniority, special damages, and double back pay.
If some of these concepts seem difficult to grasp, they will become easier to understand once we begin looking at actual examples of cases.
All of the changes to the law in 1986 were necessary and important. The emergence of anti-retaliation provisions in the amendments represents one of the most significant achievements in the law, however. Finally, Congress recognized the hardship that many whistleblowers face when courageous enough to come forward.
The Senate had reported that, “Under current law, there is no federal whistleblower protection statute for persons who are fired or otherwise discriminated against by their employer because of their lawful participation in a False Claims Act case. Often, the employee within the company may be the only person who can bring the information forward. If the person stands to lose his job, he may be unwilling to expose company fraud.”
Retaliation against whistleblowing employees and statutory protections is the subject of an entire section of this book.
After the mortgage and financial crisis of 2008, Congress enacted further amendments to the Act in 2009. Called the Fraud Enforcement and Recovery Act of 2009 (“FERA”), Congress strengthened the 1986 amendments.
Key provisions of FERA include:
- Elimination of the need to prove that any false claims were made directly to the federal government (this amendment expanded liability to entities administering government funds such as Federal National Mortgage Association “Fannie Mae”, Federal Home Loan Mortgage Corporation “Freddie Mac” or Medicare Administrative Contractors);
- Addition of a specific materiality element defined to encompass those false statements having natural tendency to influence payment;
- Expansion of Civil Investigative Demands;
- Ability of relators and government to share information with states;
- Expansion of anti-retaliation provisions to contractors and agents;
- Expansion of the conspiracy proscription; and
- Expansion of the reverse false claims provisions to cover not only false statements but also improper avoidance or improper retention of overpayments.
The False Claims Act was amended twice in 2010. Once as part of the Patient Protection and Affordable Care Act (“ObamaCare”) and as part of amendments to the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Until passage of the Affordable Care Act, bad actors were often able to get claims against them dismissed because of a technicality in the law. The so-called “public disclosure bar” says False Claims Act suits can be dismissed if the information brought forward by the whistleblower was previously disclosed in a federal proceeding or news media. Many whistleblowers were unwittingly caught up in a prior “disclosure” if they filed a retaliation claim with the EEOC or local unemployment office.
Until Congress fixed the loophole, whistleblowers who were fired had to decide whether to feed their families (and file for unemployment) or pursue their False Claims Act complaint. Because a couple of judges had interpreted the law too literally, whistleblowers found themselves in a Hobson’s choice.
Fortunately, Congress provided a partial remedy by giving the Department of Justice the ability to veto any dismissal on prior disclosure grounds. If the government wants your case, they can keep it alive.
The amendments also revised the public disclosure bar by limiting prior criminal, civil and administrative proceedings to federal proceedings in which the government is a party. Lawsuits or other claims filed in federal court are no longer a possible disclosure allowing defendants to escape responsibility unless the U.S. government is also a party and even then, the Department of Justice has veto power over any dismissals.
The 2010 amendments contained in the ObamaCare legislation were a big win for whistleblowers.
The Dodd-Frank legislation also made changes to the False Claims Act. Under those amendments there is now a national, uniform statute of limitations for retaliation claims. Whistleblowers who feel they are the victims of retaliation have three years to bring a claim. (See Chapter Three for more information on retaliation.)
What It All Means and How It Works
The best way to fully understand how the False Claims Act works is to meet a few of the many thousands of whistleblowers. In this book they are the Heroes. Throughout the remainder of this section we will share some of their stories. Most have happy endings but some do not.
While we truly believe that our clients and whistleblowers in general are truly heroes, no one ever claimed it was easy being a hero. It is important to see a complete picture, including the cases that are sometimes unsuccessful.