Department of Justice Criminal Division Assistant Attorney General Leslie Caldwell announced a new process signaling a heightened effort to bring criminal prosecutors into the loop regarding False Claims Act referrals and other whistleblower complaints.
This newly articulated policy highlights significant legal issues surrounding complex parallel civil and criminal investigations.
The Department of Justice (DOJ) has signaled a heightened effort to bring criminal prosecutors into the loop regarding False Claims Act referrals and other whistleblower complaints. In recent remarks at a conference comprised primarily of plaintiffs' lawyers for whistleblowers, DOJ Criminal Division Assistant Attorney General (AAG) Leslie Caldwell announced the following:
"We in the Criminal Division have recently implemented a procedure so that all new qui tam complaints are shared by the Civil Division with the Criminal Division as soon as the cases are filed. Experienced prosecutors in the Fraud Section are immediately reviewing the qui tam cases when we receive them to determine whether to open a parallel criminal investigation."1
This newly articulated policy should get the attention of every government contractor, physician, hospital, nursing home and other healthcare provider billing Medicare or Medicaid, as well as companies doing business overseas and those regulated by the Securities and Exchange Commission (SEC). It also highlights significant legal issues surrounding complex parallel civil and criminal investigations.
The venue for AAG Caldwell's remarks was a conference for the "Taxpayers Against Fraud Education Fund (TAFEF)," which is largely funded by whistleblowers and their lawyers.2 The organization's mission, according to its website, includes working "to maintain the integrity and advance the effectiveness of whistleblower reward and private enforcement provisions in federal and state laws" and working to "advance public and government support for whistleblower cases."
While AAG Caldwell's announcement focused on False Claims Act qui tam lawsuits – wherein a private whistleblower files a civil enforcement action on behalf of the federal government, which then has the option to intervene – she also highlighted the Fraud Section's experience in a variety of whistleblower cases that are also a focus for TAFEF, such as the following:
The False Claims Act, 31 U.S.C. §3729 et seq., prohibits knowingly making (or causing someone else to file) a false claim to get the government to pay that claim. The act offers qui tam whistleblowers with up to 30 percent of the government's recovery funds and provides a private right of action to the whistleblower to pursue a case even when the government declines to do so. The act initially was intended to address fraudulent suppliers to the Union Army during the Civil War but is now used to address fraud across the spectrum of government contracting and other industries that bill the government. The "false" claims can be based on any number of certifications and other statements made by contractors or claimants. The government has also aggressively employed the statute in the healthcare sector against doctors and hospitals billing Medicare and Medicaid, as well as medical device manufacturers and pharmaceutical companies that the government claims offer improper "kickbacks" to induce healthcare providers to use their products – which are then billed to Medicare or Medicaid.
The Securities and Exchange Commission's whistleblower program is relatively new. It was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed by President Obama in 2010. The SEC provides 10 to 30 percent of the money collected when an SEC enforcement action leads to over $1 million in sanctions. Those efforts are coordinated by the SEC's Office of the Whistleblower.3 SEC whistleblower cases often involve mortgage and other kinds of loan fraud and Ponzi schemes. They can also relate to unlawful bribes paid to foreign government officials that are prohibited by the Foreign Corrupt Practices Act, which is jointly investigated by the DOJ and the SEC when a company is publicly traded or otherwise SEC-regulated. SEC whistleblowers can come in the form of a company's own audit and compliance personnel, as evidenced by a recent $300,000 reward.4
The Dodd-Frank Act also contained whistleblower provisions for matters regulated by the Commodity Futures Trading Commission. Like the SEC, the CFTC has a Whistleblower Office,5 which announced its first award in May 2014.6 The guidelines mirror those of the SEC, with awards of 10 to 30 percent for actions resulting in over $1 million in sanctions.
Internal Revenue Service whistleblowers can also obtain 10 to 30 percent of the government's recovery in cases involving more than $2 million in unpaid tax liability. Like the SEC and the CFTC, the IRS has its own Whistleblower Office.7
There can be a fine line between civil violations – knowingly submitting false claims to the government under the False Claims Act, for example – and violations of the criminal statutes that the government uses to prosecute fraud. These include making false statements in connection with federal healthcare programs;8 healthcare fraud;9 giving or receiving kickbacks to physicians providing services under federal healthcare programs;10 securities and commodities fraud;11 defrauding the government in connection with grants, contracts, loans, etc.;12 and basic false statements13 as well as mail and wire fraud14 violations. The difference is that criminal statutes require knowing and willful misconduct or a knowing intent to defraud the government.
In her recent remarks, AAG Caldwell explained that criminal prosecutors will "coordinate swiftly with the Civil Division and the U.S. Attorney's Offices about the best ways to proceed in the parallel investigations." She touted the Criminal Division's "wealth of experience in successfully bringing parallel investigations" and said "... We know how to make it work." AAG Caldwell then encouraged the whistleblower lawyers to discuss their cases with criminal prosecutors as they do with their civil counterparts.
The government's efforts to coordinate parallel civil and criminal investigations are nothing new. In 1970, the Supreme Court upheld the government's authority to conduct parallel proceedings without violating due process provided it acts in good faith.15 The current U.S. Attorney's Manual was revised in 1997.16 Both Section 9-42.010, which governs "Coordination of Criminal and Civil Fraud Against the Government Cases,"17 and Section 9-42.440, which contains "Provisions for the Handling of Qui Tam Suits Filed Under the False Claims Act,"18 advise coordination of efforts between the DOJ's Civil Division Commercial Litigation Branch and its Criminal Division and U.S. Attorney's Offices.
What is new is the expanded scope of the internal referral policy. AAG Caldwell's announcement about sharing qui tam complaints is more than the latest implementation of the DOJ's effort to pursue parallel civil and criminal investigations of alleged financial fraud affecting the federal government. On Jan. 30, 2012, Attorney General Eric Holder issued a memorandum instructing civil and criminal investigators to share information "to the fullest extent appropriate to the case and permissible by law."19 The memorandum instructs all litigating components, including the Criminal Division, to create policies and procedures to ensure coordination at the intake, investigation and resolution phases of investigations. The Criminal Division has now apparently finalized its policies and procedures to include a review of all qui tam complaints.
What does this mean for those who may find themselves in the investigative crosshairs of the government? Clients and their counsel need to navigate the potential troubled waters of a parallel investigation carefully. Parallel civil and criminal investigations present unique issues that can complicate matters for both the government and the subject of the investigation. Clients should be aware, for example, that the government – both the civil and criminal sides – has no obligation to disclose the existence of a parallel investigation or whether a referral has been made. In addition, while criminal prosecutors and agents cannot disclose grand jury information to their civil counterparts without a court's permission, they can share evidence obtained through other means, including search warrants and undercover operations. Counsel needs to watch for the possibility that criminal prosecutors are directing a civil investigation for the purpose of obtaining information through civil means that they might not be able to obtain through criminal processes. Civil DOJ attorneys need to avoid affirmatively misleading parties in civil investigations into believing that a parallel criminal investigation does not exist. Counsel in civil investigations needs to weigh an individual's Fifth Amendment right not to incriminate themselves against the potential for a court-ordered "negative inference" jury instruction in a civil case for refusing to answer questions. Both the government and private litigants need to evaluate how a resolution in one arena — and the timing of that resolution — might affect a resolution in the other.
Two cases illustrate some of those complications. The 2012 Attorney General Memorandum contains the following footnote:
"When conducting parallel investigations, Department attorneys should be mindful of arguments like those raised in Stringer20 and United States v. Scrushy, 366 F.Supp. 2d 1134 (N.D. Ala. 2005), that civil, administrative, or regulatory proceedings are being used improperly to further a criminal investigation . . . ."
In the Stringer case, the Ninth Circuit reversed a U.S. District Court's ruling that the government violated a criminal defendant's due process rights when it shielded the existence of a criminal investigation during an SEC investigation. The court held that the SEC did not affirmatively mislead the defendant about the existence of a criminal investigation, as evidenced by warnings in the form that the SEC provides to persons supplying information to the SEC that say it may share information with other agencies, including criminal authorities.
The Scrushy case, however, went the other way. The District Court dismissed the defendant's civil SEC deposition testimony and related perjury counts of the indictment because the civil and criminal investigations became "inescapably intertwined" after the criminal prosecutor manipulated which questions were and were not asked at the civil deposition and influenced where the deposition occurred so as to create venue for the criminal perjury case.
In short, while the coordination by the Justice Department's Civil and Criminal Divisions to investigate whistleblower allegations under the False Claims Act's qui tam provision and other statutes is not new, the DOJ clearly has refocused its efforts. Organizations, individuals and attorneys involved in civil investigations should therefore be aware of the real possibility of a parallel criminal investigation and the issues that will arise.
8 42 U.S.C. §1320b(a)
9 18 U.S.C. §1347
10 42 U.S.C. §1320b(b)
11 18 U.S.C. §1348
12 18 U.S.C. §1031
13 18 U.S.C. §1001
14 18 U.S.C. §§1341, 1343
15 United States v. Kordel, 397 U.S. 1 (1970)
16 Similar language is contained in the 1988 version at §9-42.010 (http://www.justice.gov/archive/ usao/usam/1988/title9criminaldivisionchapters41-60.pdf)
18 Id. See also DOJ's Criminal Resources Manual §932 (http://www.justice.gov/usao/eousa/foia_reading_room/usam/title9/crm00932.htm)
19 The Memorandum is contained in DOJ's Organization and Functions Manual at §27 (http://www.justice.gov/usao/ eousa/foia_reading_room/usam/title1/doj00027.htm). It is incorporated into the U.S. Attorney's Manual at §1-12.000 (http://www.justice.gov/usao/eousa/foia_reading_room/usam/title1/12mdoj.htm)
20 United States v. Stringer, 535 F.3d 929 (9th Cir. 2008)