The FCA began as a response to procurement fraud by military contractors during the Civil War.  In the intervening years, its reach has extended and increasingly the government is using the FCA as a tool in the context of grant programs.  A recent civil complaint filed by the U.S. Attorney’s Office for the Eastern District of Kentucky is a good example.

DOJ sued the medical device maker Telehealth Holdings, LLC, and its owner, Jerome Hahn alleging false certifications and the misuse of federal grant funds. Hahn recently pleaded guilty to criminal fraud against government grant programs for two false claims submitted by Telehealth to the National Institutes of Health, was sentenced to four months in prison, and ordered to pay $222,000 in restitution to the National Institutes of Health.  The civil complaint builds on the criminal case and seeks treble damages and civil penalties for two counts under the FCA for false statements and conspiracy to violate the FCA as well as claims for payment by mistake and unjust enrichment.

Specifically, the civil complaint alleges FCA violations for defendants’ conduct in relation to federal grants Telehealth received from the SBIR and Qualifying Therapeutic Discovery Project programs, claiming defendants “engaged in a pattern of fraudulent conduct to improperly obtain over $600,000 in federal grants from the United States.” (United States v. Hahn, E.D. Ky., 5:16-cv-00273, filed 7/26/16).  The complaint alleges Hahn made false statements in grant applications such as verifying Telehealth had a field research office in Springfield, Massachusetts housed within Baystate Medical Center when no such office ever existed and claiming an employee who had ceased working for the company years earlier would perform software programming tasks.  The complaint also alleges defendants made false certifications, including that it maintained a project ledger recording expenditures by required cost categories and maintained supporting documentation for accounting entries as required by the grants when in fact defendants’ accounting was chaotic, grant funds were pooled with other business and personal funds, they did not maintain a contemporaneous or accurate grant cost ledger by the required cost categories, and did not keep supporting documentation.  The complaint alleges each time defendants drew grant money they recertified that they complied with the grants’ project ledgers and supporting source documentation requirements.

The complaint also focusses on defendants’ use of the funds and alleges defendants defrauded the government by charging for unallowable costs—such as products and services from foreign sources, personal credit card interest, and marketing and travel expenses­—while simultaneously certifying the costs were made for the purposes and in compliance with the conditions of the grants. In addition, the complaint claims defendants falsified invoices and made false entries in the grants ledger for expenses that defendants never actually incurred.

The outcome of the case is yet to be determined, but United States v. Hahn provides a vivid reminder that grantees are not above regulatory scrutiny and may be subject to significant criminal and civil penalties for grant non-compliance and false certifications.