Whistleblower Attorneys Blog

Alcatel-Lucent Agrees to Pay $4.2 Million to Resolve False Claims Act Allegations

September 25, 2012 | Greene LLP

A subsidiary of Alcatel-Lucent, Lucent Technologies World Services Inc. (“LTWSI”), has agreed to a $4.2 million settlement to resolve all allegations brought in a False Claims Act (“FCA”) suit against the company. Alcatel Lucent is a French global telecommunications equipment corporation, and LTWSI contracts with the U.S. Department of Defense to provide communications equipment in the ongoing U.S. effort to promote a stable government in Iraq. According to the government’s complaint, LTWSI submitted misleading testing certifications to the Army pertaining to the design, construction, and modernization of Iraq’s emergency communications system. The government became aware of the allegations as a result of a whistleblower complaint filed under the qui tam (whistleblower) provisions of the False Claims Act filed by a former contract manager for the project in December of 2008.

In 2004, the U.S. Army awarded LTWSI a $250 million to build the emergency communications system, called the Advanced First Responder Network (AFRN), a 911 emergency response and first responder communications system designed to enable Iraqis to contact police, fire and medical assistance in emergencies. The False Claims Act complaint alleged that the company submitted claims for payment for equipment, services, and contract performance award fees pursuant to the AFRN contract based upon erroneous certifications that LTWSI had performed and completed testing of some of the project’s radio transmission sites as well as validation of the network as a whole. The tests were required under the contract to ensure the network’s proper functioning before the Army accepted the product and transferred control of the system to the Iraqi government.

Under the qui tam provisions of the False Claims Act, private whistleblowers with knowledge of fraud against the government may file legal claims on behalf of the government. The Act imposes liability on individuals and contractors for the submission of false claims for payment, as well as the retention of over-payments from the government. After whistleblowers (known as “relators”) file suit, the government has sixty days to investigate the allegations in the whistleblower complaint and determine whether or not to intervene in the litigation. Although the government may elect to intervene, it does not always exercise this right, and relators may proceed with their legal claims with our without the aid of federal investigators. Victorious relators stand to recover between 15% and 30% of any final judgment or settlement. Fraud in the performance and enforcement of defense contracts is a common cause of action under the False Claims Act, and the whistleblower in the LTWSI case will receive a $758,000 award for his participation in the litigation.

Importer Avoids Customs Duties, Pays $6.3M False Claims Act Settlement

September 20, 2012 | Greene LLP

CMAI Industries LLC (“CMAI”), an importer in Michigan, has agreed to pay $6.3 million in fines and plead guilty to federal criminal charges to resolve allegations the company pocketed customs duties owed on imported automotive components. CMAI is a Chinese-owned logistics and warehousing firm that imports parts for distribution to the Big Three automakers in Detroit (Ford, General Motors, and Chrysler). The government’s investigation of the claims, which transpired for 2.5 years, was precipitated by a qui tam lawsuit filed under the False Claims Act, a federal whistleblower law. The qui tam provisions of the False Claims Act allow private individuals with knowledge of fraud perpetrated against the government to file suit on behalf of the government. The suits are initially filed under seal while the government investigates the allegations, and the United States may elect to intervene in certain cases. The government does not always elect to intervene in qui tam False Claims Act suits. Importing firms file customs documents with the U.S. government indicating the content of the imports for the purposes of levying tariff duties (taxes imposed on imports), and consequently firms that file false customs reports in order to evade tax payments may be liable for violating the False Claims Act. According to the government’s complaint, CMAI — a subsidiary of Hong Kong-based China Metal Automotive Co. Ltd. — was misclassifying automotive components to evade tariff obligations. In particular, the allegations center on the false classification of exhaust manifolds, which collect exhaust gases in automobiles. CMAI argued in answer to the allegations that the company had received conflicting advice from customs brokers as to whether or not duties were owed on the imported exhaust manifolds. Between June 2004 and June 2011, the United States alleged that the company evaded $2.55 million worth of taxes on 706 entries involving manifolds valued at $102 million. CMAI also pleaded guilty to fraudulent importation of goods, a felony for which the company was sentenced to probation and a $25,000 criminal fine.

The qui tam suit that gave rise to the government’s investigation was filed by Ted Ludlow, a former sales account manager for CMAI. The multi-year litigation underscores the complexity and difficulty of seeing an False Claims Act whistleblower suit through successfully from start to finish. Even if the United States declines to intervene in a particular case, whistleblowers (called relators) may elect to proceed with their claims privately, represented by private counsel. Due to the daunting challenge of undertaking the prosecution of an False Claims Act case, it is important for relators to obtain experienced counsel with a proven history of success in representing whistleblowers under the False Claims Act.

Dating back to 1863, the False Claims Act imposes liability when a person either knowingly or with reckless disregard submits a “false claim” for payment to the government, or a grantee or beneficiary of government funding. Additionally, there is liability under the statute for so-called “reverse false claims,” or failing to return an overpayment from the government. Relators stand to recover, if successful, between 15% and 30% of any final judgment or settlement, and violators are subject to treble damages and up to an $11,000 penalty per violation. Recent changes to the law, particularly in the wake of passage of the Dodd-Frank Bill and the PPACA in 2010, have increased the number of types of actionable False Claims Act fraud and heightened the Act’s protections against employer retaliation. The statute’s anti-retaliation provisions are designed to deter employers from taking adverse actions against any employee, contractor, or agent who makes lawful efforts to stop a violation of the False Claims Act.

New York Reaches $13.4M Settlement With Hospital Over Medicaid Fraud

September 11, 2012 | Greene LLP

The office of New York State’s Attorney General, Eric Schneiderman, has announced a $13.4 million settlement with New York Downtown Hospital to resolve all claims against the hospital related to an alleged illegal scheme to defraud the state’s Medicaid program. The AG’s Office alleged that the hospital entered in an arrangement with SpecialCare Hospital Management Corp., an out-of-state vendor not licensed by the State of New York, whereby the hospital would refer Medicaid patients in exchange for a $38,500 monthly fee, violating both New York State and federal anti-kickback statutes. The nexus between the two companies was disguised as a contract for administrative services. In addition to the alleged unlawful kickbacks, the hospital’s drug treatment wing also violates state regulations prohibiting hospitals from operating discrete dependency services or treatment units without obtaining a license from the New York Office of Alcohol and Substance Abuse Services. Schneiderman furthermore alleged that the hospital’s detoxification services failed to meet minimum standards of care in the profession and were medically unnecessary. The federal and state Medicaid programs do not reimburse for medically unnecessary services, or services that wholly fail to meet basic professional standards of quality.

The claims against the hospital came to light after two whistleblowers filed a civil complaint under the qui tam (whistleblower) provisions of the New York False Claims Act. Like the federal False Claims Act (“FCA”), the New York State statute permits whistleblowers to sue on behalf of the state government for fraud perpetrated against the state. New York is one of thirty states in the U.S.with a state FCA statute on the books. Schneiderman’s Medicaid Fraud Control Unit and the United States Attorney’s Office of False Claims Act investigated the allegations after the whistleblower complaint was filed, culminating in the recently-announced settlement between the hospital and Schneiderman’s office. Under the terms of the settlement, the hospital will return more than $12.6 million to the state’s Medicaid program and $800,000 to the federal Medicare program.

When health care providers participate in federal health programs such as Medicare and Medicaid, they expressly and impliedly certify compliance with various federal and state statutes and regulations, and non-compliance may lead to liability under the FCA. Under the qui tam provisions of the FCA, private whistleblowers (relators) may file suit on behalf of the government. While the government may elect to intervene in a whistleblower complaint, it does not always do so, and relators may proceed with their claims regardless of whether or not there is government intervention. Individuals and contractors face liability under the FCA and its state analogs for the submission of false claims for payment to the government, or failure to return over-payments to the government. Victorious relators stand to recover between 15% and 30%of any final judgment or settlement. Fraud and abuse in the Medicare and Medicaid programs frequently give rise to claims under the FCA.

AstraZeneca Agrees to Pay $26M to Resolve Off-Label Marketing Claims for Seroquel

August 28, 2012 | Greene LLP

Faced with allegations brought by the South Carolina Attorney General claiming that its drug Seroquel causes harmful side-effects and was promoted for off-label uses, AstraZeneca has abandoned a lawsuit against the South Carolina AG, agreeing instead to pay $26 million to resolve all of the state’s claims related to Seroquel.

In late December of 2012, a state court judge in South Carolina denied the state AG’s motion to dismiss a suit claiming that AstraZeneca’s Fourteenth Amendment due process rights were violated by the contingency fee arrangements between the AG’s Office and three private law firms. The lawsuit invoked a legal strategy pursued by other major pharmaceutical companies, including Merck, that face claims of off-label promotion and other fraudulent practices. According to AstraZeneca, because the AG’s Office would retain 10% of any recovery under the contingency agreement, the AG essentially had a financial stake in the outcome of the litigation and had compromised his independence. The state court judge’s denial of the motion to dismiss signaled that the protracted litigation would be allowed to continue, and cast doubt upon the ability of the South Carolina Attorney General to pursue the state law claims against the pharmaceutical company. Despite the judge’s ruling, AstraZeneca has assented to a $26 million settlement to resolve the legal claims against it. The company’s decision may reflect the inefficiency of a legal strategy predicated upon litigating two lawsuits simultaneously. The South Carolina attorney general sought to recover funds spent to treat side-effects for Seroquel, an antipsychotic medication, and for reimbursements for alleged off-label uses. Since South Carolina’s Medicaid program generally does not reimburse for off-label prescriptions (that is, prescriptions for uses of a drug that have not been approved by the FDA), the state may seek to recover funds spent to reimburse for such prescriptions.

South Carolina is one of twenty U.S. states that does not have its own version of the federal False Claims Act (“FCA”), a statute containing qui tam (whistleblower) provisions that allow private citizens with knowledge of fraud to sue on behalf of the government. The FCA allows for recovery of treble damages and a penalty of up to $11,000 per violation, creating a strong incentive for whistleblowers (known as relators) to come forward; if successful, relators stand to recover between 15% and 30% of any final judgment or settlement on behalf of the government. The Act imposes liability for false claims for payment, and also for failure to return over-payments from the government. Recent changes to the FCA have expanded the scope of liability and increased the statute’s protections against employer retaliation. Unfortunately for potential whistleblowers, there is no South Carolina False Claims Act. The AstraZeneca litigation highlights the potential benefits that would accrue to a state like South Carolina if it were to adopt its own False Claims Act, empowering private individuals to come forward with information concerning fraud and abuse of the state’s funds.

Hospital Pays Millions to Settle Allegations of Improper Ambulance Billing Practices

August 27, 2012 | Greene LLP

After discovering erroneous billing practices for ambulance services, Maury Regional Hospital (“MRH”), located in Columbia, TN, made a voluntary self-disclosure to federal investigators. The hospital’s self-disclosure led to a swift resolution of allegations that the false claims for payment for ambulance services violated the federal False Claims Act (“FCA”). MRH will pay $3.59 million to dispose of all legal claims in the matter. Such self-disclosures are encouraged by the federal government to help avoid the high costs of an investigation and litigation; MRH disclosed its knowledge of the billing issues to the U.S. Attorney’s Office and the Office of Inspector General for the Department of Health and Human Services (“OIG-HHS”). According to the internal audit conducted by the hospital, the government claimed that MRH submitted claims for payment and was compensated for ambulance services that weren’t medically necessary or for which medical necessity was not documented, for which Physician Certification Statements weren’t obtained, that were assigned incorrect transport levels (descriptions of the level of care provided on ambulances), for which the proper signatures were not obtained, and that were billed with inaccurate mileage measurements. The $3.59 million settlement agreement resolves allegations of conduct that took place between January 1st, 2004 and December 31st, 2009.

Although MRH’s self-disclosure brought about a timely conclusion to the claims against it, such a course of events is unusual for government investigations of fraud and abuse. Under the qui tam (whistleblower) provisions of the FCA, private citizens with knowledge of fraud may file suit on behalf of the government, bringing the matter to the attention of federal investigators. The FCA imposes liability for submission of false claims for payment, as well as failure to return over-payments from the government. Upon reviewing the allegations in a qui tam complaint, the government may elect to intervene in the litigation, but it does not always do so. Private relators (whistleblowers) may proceed with their legal claims regardless of whether or not the government intervenes, and stand to recover between 15% and 30% of any final judgment or settlement if they prevail. The length and complexity of FCA cases requires that relators carefully select seasoned counsel with the resources and experience to successfully navigate through the process.

Numerous amendments to the FCA, particularly in the wake of passage of the Fraud Enforcement and Recovery Act (“FERA”) in 2009, as well as the Dodd-Frank Act and the Patient Protection and Affordable Care Act (“PPACA”) in 2010, have increased whistleblower protections and strengthened the law’s protections against employer retaliation. The PPACA, in particular, has clarified the time frame in which health care entities must return over-reimbursements for services from federal health programs upon identifying the mistake. Under the updated anti-retaliation provisions, any contractor, agent, or employee who makes lawful efforts to stop a violation of the FCA may invoke the statute’s protection, even if the individual did not file a qui tam complaint.

T-Mobile Ordered to Pay Whistleblower $345,000 for Retaliation

August 10, 2012 | Greene LLP

The U.S. Department of Labor has ordered T-Mobile USA, the Washington-based cellphone company, to pay more than $345,000 to a whistleblower who raised concerns that international business customers were being fraudulently charged for roaming outside of the network. Although the Labor Department has not specified the exact amount by which customers were overcharged, it has confirmed that the damages reached into the millions. The government investigation was led by OSHA’s Seattle office, and found that T-Mobile terminated the whistleblower in retaliation for reporting the concerns of fraud in violation of the Sarbanes-Oxley Act, a corporate accountability statute passed by Congress in 2002. The charges T-Mobile has been ordered to pay include $244,479 in back wages and interest, $65,000 in punitive damages, and $36,493 in attorney’s fees. T-Mobile has been ordered to reinstate the employee and train its other workers on the whistleblower provisions in Sarbanes-Oxley. T-Mobile is expected to appeal the Labor Department’s order.

In addition to mandated whistleblower programs under the purview of various government agencies, whistleblowers may file suit under the False Claims Act (“FCA”). The FCA is a federal statute with qui tam provisions that allow relators (i.e., whistleblowers) to file civil claims on behalf of the government for fraud. A person is liable under the FCA for submitting a false claim to the government, either to obtain payment or to reduce or eliminate a liability owed to the government. As is true for most agency-based whistleblower programs, the False Claims Act contains robust provisions which protect whistleblowers against retaliation from their employees. Any contractor, agent, or employee who makes lawful efforts to stop a violation of the FCA may file suit under the anti-retaliation provisions, even if the whistleblower has not filed an FCA claim.

After a relator files a claim, the government reviews the allegations in the complaint and determines whether or not to intervene in the litigation. Even if the government declines to intervene, however, a relator may proceed with his or her private claims. Victorious relators stand to recover between 15% and 30% of any final judgment or settlement. Whistleblower suits under the False Claims Act have proven remarkably successful at rooting out fraud against the government, with total recoveries expected to exceed $8 billion for the year 2012 alone.

Federal Court: Contracts Tainted By Fraud Trigger False Claims Act Liability

August 9, 2012 | Greene LLP

In a decision released on August 6, 2012 in the case of United States of America v. BNP Paribas SA; BNP Paribas AMERICA; BNP Paribas Houston Agency; and Jovenal Miranda Cruz, the United States District Court for the Southern District of Texas, Houston Division allowed the government’s lawsuit alleging banking fraud under the False Claims Act (“FCA”) to move forward, denying the defendants’ motions to dismiss. The defendants, various divisions of the bank BNP Paribas (“BNPP”), are alleged to have engaged in a scheme to defraud the Commodity Credit Corporation (“CCC”). The CCC is a federally chartered corporation within the United States Department of Agriculture (“USDA”) that administers a Supplier Credit Guarantee Program (“SCGP”), which extends credit guarantees to eligible commodity exporters. Under the program, exporters assign to a financial institution both an importer’s promissory note and the exporter’s right to payment, and the CCC guarantees payment to the financial institution. The government’s complaint alleges that BNP, largely through the initiative of defendant Cruz, who was serving as VP and Manager of Trade Finance for BNP in Houston, entered into a series of Master Purchase and Sale Agreements (“MPSAs”) with several United States exporters pursuant to which BNPP agreed to provide financing to the Exporters in exchange for receipt of payment obligations from a series of corresponding Mexican importers and SCGP guarantees for those payment obligations. Because the exporters were owned and/or controlled by Mexican national Pablo Villareal Cantu (“Villareal”), who also owns the importers with which the exporters enter into commerce, the Villareal exporters are ineglible for participation in the SCGP program. The SCGP does not guarantee payments to exporters that are directly or indirectly owned or controlled by the foreign importer or by a person or entity that owns or controls the importer. According to the United States’ complaint, the Villareal exporters and importers submitted false documents to the CCC, as a result of which they received SCGP guarantees. Subsequently, the guarantees and importers’ payment obligations were assigned to BNPP. The arrangement provided that BNPP would extend a line of credit to the exporters up to the amount of the importer payment obligations, minus a fee. After certain importers failed to make over $78 million in payments owed to BNPP, the banks filed claims with the CCC to recover their losses. The fraudulent CCC claims are the gravamen of the government’s complaint, constituting the false claims that gave rise to liability under the FCA.

The BNPP defendants, including Cruz, filed motions to dismiss in the case, both for failure to state claims for which relief can be granted and for failure to plead fraud with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. The defendants claimed that, taken on their face, the government’s pleadings affirmatively demonstrated that the FCA’s six year statute of limitations barred the claims. Moreover, the defendants argued that the three year equitable tolling period provided for in the statute did not apply. The court rejected these arguments, and additionally found that a federal law originally dating back to the World War I period, the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287, applied to civil claims under the FCA and thus the statute of limitations was suspended at any rate. The WSLA was amended in 2008 to apply not only during times of war, but also “‘[w]hen… Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).'” The court’s finding on the applicability of the WSLA to civil FCA claims may be of great import to whistleblowers.

At the heart of the case, however, was the defendants’ contention that technically “true” claims submitted to the government pursuant to fraudulently-induced contracts could not constitute false claims as a matter of law. The court roundly rejected this argument, underscoring that fraudulent inducement to contract does indeed result in FCA liability. Since the exporters and importers in the BNPP case knowingly submitted false claims in order to qualify for the CCC guarantees in the first place, any claims registered pursuant to the guarantees are tainted by fraud and give rise to FCA liability.

Should Whistleblower Suits Lead to Fraud Prosecutions of Individuals?

August 8, 2012 | Greene LLP

Lawsuits brought in qui tam actions under the federal False Claims Act (“FCA”), as well as other government investigations, will lead to an estimated $8 billion this year alone in recoveries this year to resolve allegations of fraud against the government. The staggering amount, more than double the total from last year, is indicative of both more vigorous government pursuit of fraud claims and important changes in the law that have increased incentives for whistleblowers to come forward with information. Under the FCA, the government may collect penalties of between $5,500 and $11,000 per violation, as well as treble damages. Since whistleblowers (also called relators) under the FCA receive a percentage of any final judgment or settlement awarded to the government, the incentives to blow the whistle can be compelling. As the efficacy of the FCA and other federal whistleblower programs (including programs administered by the SEC, the IRS, and OSHA) increases, some observers have begun to raise the question of whether or not settlements with large corporate defendants create an adequate general deterrent, and whether individuals who are complicit in fraudulent schemes against the government ought not be prosecuted. Many FCA settlements entail guilty pleas by corporations, but rarely are individuals charged with crimes.

President Obama, some members of Congress, and watchdog groups have advocated holding more individuals accountable, particularly in the arena of securities fraud. Numerous high-profile cases, many of which resulted from FCA qui tam lawsuits, have settled recently, including a historic $3 billion settlement with GlaxoSmithKline which included civil and criminal penalties in connection with the drug manufacturer’s alleged off-label drug promotion and pricing fraud. Despite the need for individual accountability, private whistleblower suits under the FCA may represent a more effective means of redressing the pervasive problems of fraud and abuse against the government. Last week, for example, a Citigroup manager was acquitted of all charges in a high-profile securities fraud case tried in New York City. Since it is often much more difficult to prove that an individual acted with an intent to defraud and in fact did participate in a corporate fraud scheme, civil suits provide a more feasible way of protecting taxpayer dollars and deterring future wrongful conduct. Moreover, investigations of individuals’ conduct may ultimately lead to criminal charges irrespective of any settlement in a civil lawsuit. The S.E.C. says it has charged 55 chief executives and other senior officers with violating securities law in relation to the financial crisis. The commission has collected $2.2 billion in penalties, disgorgement, and other monetary damages from cases related to the crisis. Proving individual guilt beyond a reasonable doubt in a criminal trial, however, remains difficult and highly costly.

Recent changes to the FCA to increase whistleblower incentives, particularly in the wake of passage of the Fraud Enforcement and Recovery Act (“FERA”) in 2009, as well as the Dodd-Frank Bill and the Patient Protection and Affordable Care Act (“PPACA”) in 2010, have contributed to a rising tide of qui tam lawsuits under the FCA. The FCA allows relators to sue on behalf of the government for fraud. The law imposes liability for the submission of a false claim in connection with payment from the government or in order to reduce or evade a liability owed to the government. After a relator files suit, the government reviews the allegations and may elect to intervene in the litigation. Even if the government does not intervene, relators may proceed with their claims. Relators stand to recover between 15% and 30% of any final judgment or settlement.

Fourth Circuit: Employees May Copy Computer Data Employers Allowed Them to See

August 1, 2012 | Greene LLP

In a decision handed down on July 26, 2012 in WEC Carolina Energy Solutions, LLC v. Miller, the United States Court of Appeals for the Fourth Circuit ruled that the Computer Fraud and Abuse Act (“CFAA”), a federal law which primarily consists of criminal penalties directed at computer hackers, does not apply to employees who capture electronic information from computers to which their employers allowed them access in the course of their employment. The ruling is an important victory for all whistleblowers who seek to gather evidence of fraud or other illegal conduct on the part of their employers. While the CFAA is primarily a criminal statute, it allows the victims of computer hacking to privately seek injunctive and monetary relief.

The facts of the Miller case involve allegations of unfair competition rather than whistleblowing. Nonetheless, the decision will have very important implications for whistleblowers gathering data to document fraud. In Miller, an employee of WEC Carolina Energy Solutions, Mike Miller, resigned his post and accepted an offer from a competitor; allegedly, Miller shared WEC proprietary information at the behest of the competitor firm. WEC sued for, inter alia, violating the CFAA. The relevant statutory language states that a CFAA violation occurs when information is taken from a computer “without authorization.” In 2007, the Chicago-based Seventh Circuit held that an employee who erased information on a company laptop prior to returning it breached a duty of loyalty to the employer, terminating the relationship upon which the “authorization” of use of the computer was based. An en banc panel of the Ninth Circuit, however, held just this year that “without authorization” should be interpreted narrowly in a manner consistent with the plain meaning of the statute. According to the Ninth Circuit’s reading, “without authorization” means that the employee did not have permission to use the computer from which the information was taken. With its ruling in Miller, the Fourth Circuit joins the Ninth in adopting the narrower reading of the “without authorization” language of the CFAA.

Whistleblowers in the Ninth and Fourth Circuits are thus able to utilize information obtained from their former employers’ computers so long as they had authorization, without fear of liability under the CFAA. Because fraudulent conduct is highly difficult for investigative authorities to detect, the government often relies on information from whistleblowers in prosecuting fraud claims. Under the qui tam provisions of the False Claims Act (“FCA”), a federal whistleblower statute, private whistleblowers (known as relators) may sue on behalf of the government for fraud. When a relator files an FCA complaint, the government reviews the allegations and may elect to intervene in the litigation. Whether or not the government intervenes, relators may bring their claims privately. If successful, relators stand to recover between 15% and 30% of any final judgment or settlement. Individuals and contractors face FCA liability when they knowingly or recklessly submit false claims for payment to the government or fail to return overpayments from the government. Passage of the Fraud Enforcement and Recovery Act (FERA) in 2009 and the Dodd-Frank Bill and the Patient Protection and Affordable Care Act (PPACA) in 2010 have resulted in major changes to the FCA. Taken together, the recent changes to the law have increased the number of actionable claims under the FCA and strengthened the law’s protections against employer retaliation.

As Student Debt Increases, For-Profit Colleges Investigated For Recruiter Pay Practices

July 23, 2012 | Greene LLP

The for-profit college is industry has come under heavy scrutiny in recent years, resulting in litigation under the federal False Claims Act (“FCA”) and investigations into the recruiter payment schemes of for-profit higher educational institutions. Recently, a federal district court judge in Pittsburgh allowed an FCA whistleblower lawsuit against Education Management Corporation (EDMC), the second-largest for-profit educational company in the U.S. and partly owned by Goldman Sachs, to proceed. The whistleblowers in the EDMC case allege $11 billion in fraudulently-obtained student loans. In 2009, Apollo Group, which owns the University of Phoenix, settled claims under the FCA for $78.5 million. In each case, whistleblowers and the government allege that these for-profit educational entities instruct recruiters to attract as many students as possible, particularly low-income students eligible for high amounts of student loans, regardless of the students’ qualifications. Federal law prohibits such so-called “incentive-based” compensation, but, until 2010, a safe harbor provision permitted colleges to take into account the number of students recruited as long as other, qualitative, factors were considered. When a college submits a claim for federal student loan money, it must be in compliance with federal recruiter compensation laws. A college’s failure to comply with federal law, then, renders any claim for student loans fraudulent and may result in liability under the FCA.

According to the Government Accountability Office (GAO), for-profit colleges constitute a $30 billion a year industry, with as much as 90% of its revenue coming from student loans and grants. Critics of such colleges argue that they are concerned chiefly with turning a profit for the shareholders of their publicly-traded parent companies rather than providing a quality education to their students. While students of for-profit schools make up roughly 10% of the nation’s college enrollment, they take out about a quarter of all student loans and grants. Critics also point to the fact that nearly half of all students who default on their student loans come from for-profit colleges. Since for-profit colleges cater to a primarily low-income student body, the massive debt loads accumulated by low-income students can wreak havoc on their credit and inhibit their ability to achieve financial stability in the future. Total student debt in the United States has reached the $1 trillion mark.

Insight into the practices of for-profit colleges has come thanks in large part to information provided by whistleblowers in suits under the FCA. A federal statute dating back to 1863, the FCA allows private whistleblowers (known as qui tam “relators”) to sue on behalf of the government for fraud. Liability under the law comes from the submission of a false claim for payment from the government, or the submission of a false claim to reduce a liability owed to the government (so-called “reverse false claims”). The statute contains provisions to protect against employer retaliation; after the passage of a 2009 law, the FCA protections against retaliation have been fortified. Any employee, agent, or contractor who takes lawful efforts to stop a violation of the FCA, regardless of whether or not the individual has filed an FCA complaint, may avail themselves of the anti-retaliation provisions. The government may intervene in a private qui tam action, but does not always do so. Regardless of whether or not the government intervenes, relators may move forward with their claims; if successful, relators may recover between 15% and 30% of any final judgment or settlement.