President Obama signed the Federal Enforcement and Recovery Act (“FERA”) into law on May 21, 2009. Ostensibly designed to enable the federal government to better pursue mortgage and securities fraud and those who might misuse TARP funds, the FERA also contains provisions that have gone largely unnoticed that expand the ability of private plaintiffs to bring whistleblower and other suits under the federal False Claims Act (“FCA”).
First, FERA does provide government prosecutors with more weapons to pursue mortgage fraud and securities fraud. For example, the legislation broadens the definition of “financial institution” under a series of criminal statutes to include private mortgage brokers and other non-bank lenders.[1] The new law also amends the criminal securities fraud statute at 18 U.S.C. § 1348 to specifically prohibit fraud schemes involving “any commodity for future delivery, or any option on a commodity for future delivery.”[2] The change expressly expands the reach of the statute to cover schemes involving the derivative and other financial products that contributed to the current distress in the banking and securities markets.
FERA also provides substantial amounts of new funding for federal fraud prevention, investigation and enforcement efforts. The legislation authorizes a total of up to $330 million in new spending by the Attorney General over the years 2010 and 2011, and an additional $140 million for financial fraud investigation and prosecution by other federal agencies, including $20 million per year to the Securities and Exchange Commission.[3] These agencies undoubtedly will use the extra funds to pursue to increase the number of fraud investigations and prosecutions.
For companies that do business with the federal government, that is not the end of the FERA story, however. FERA also amended the FCA to make it easier for: (1) private plaintiffs to bring suits on behalf of the federal government to recover monies allegedly wrongly paid to individuals and entities; and (2) government attorneys to obtain the authority they need to investigate and prosecute these claims.
Under the FCA, private persons may bring suit as
qui tam relators in an attempt to prove that monies were wrongly paid to companies by the government and to recover that money on behalf of the government. Often, these
qui tam relators are whistleblower ex-employees of the companies that allegedly violated the FCA.
Once the
qui tam relator files suit, the government has 60 days to decide whether to intervene in the case and prosecute the matter.[4] During this time, which is often extended well beyond the 60 day statutory period, the government conducts an investigation into the allegations, which can be very burdensome and costly for the accused company. FCA liability carries with it treble damages and other very onerous penalties.[5] The private plaintiff
qui tam relator shares in any recovery by the government.[6]
Prior to the FERA amendments, the FCA imposed liability on any person who knowingly used a “false record or statement
to get a false or fraudulent claim paid or approved
by the Government.”[7] A plaintiff had to prove that a defendant had the specific intent to make the federal government pay a false claim directly.[8] Without that specific intent to defraud the government, no FCA liability could attach.[9]
Under the new FCA language from FERA, however, plaintiffs no longer will have to prove that a company submitted a false claim or invoice with the specific intent “to get” the federal government to pay a fraudulent claim directly. Rather, a plaintiff only will have to prove that a defendant “knowingly presents, or causes to be presented a false or fraudulent claim for approval” or “knowingly makes, uses or causes to be made a false record or statement material to a false or fraudulent claim.”[10]
In addition, under the new, expanded definition of an FCA “claim” in FERA, the false invoice or statement no longer must be presented to the federal government to establish liability. An FCA claim will lie if the false statement is presented to the government or to a “contractor, grantee or recipient” if “the money or property is to be spent or used on the Government’s behalf or to advance a government program or interest.”[11]
This new language specifically overrules the 2008 Supreme Court decision in the
Allison Engine case, in which a unanimous Court held that to prove FCA liability, a plaintiff must show that a defendant intended specifically “to get” the government "itself" to pay that claim.[12] In fact, Congress was so intent on overruling
Allison Engine that it made the amended FCA language effective retroactive to the date of the
Allison Engine decision. The retroactivity provision certainly will come under attack.
The
Allison Engine Court had held that if a subcontractor makes a false statement to a private entity and does not intend the federal government to rely on that statement as a condition of getting paid, then no FCA liability can exist.[13] Otherwise, the Court stated, the FCA and its treble damages and onerous penalties could be awarded in a garden variety fraud case, as opposed to a case of a fraud perpetrated on the federal government.
Under the FERA amendments, however, that is arguably exactly what has happened. With the FERA amendments in place, the Court’s subcontractor could be liable under the FCA even if the subcontractor did not intend to defraud the government and did not present the claim to the government directly.
In addition to making it easier to bring and prove FCA claims, the FERA also makes it easier for government attorneys to obtain CIDs, which give them the authority they need to investigate potential FCA claims through subpoenas, requests for documents, interrogatories and sworn depositions.[14]
Prior to FERA, government attorneys could acquire CIDs only from the Attorney General of the United States and the CID had to bear the AG’s signature.[15] FERA provides that government attorneys now will be able to obtain CIDs from “the Attorney General, or a designee.”[16] Undoubtedly, the AG will designate this authority down the line. While the CID process will be less cumbersome for government attorneys, it likely will prove more onerous for targeted companies. FERA also makes it easier for government attorneys and private plaintiff
qui tam relators to share claim investigation information with each other and with affected State and local officials.[17]
Companies doing business with the federal government directly, or on federally funded projects or arguably with entities that just receive federal funds, now face a seriously increased risk of FCA liability, with its attendant risk of treble damages and severe penalties. Companies in this position would be well-advised to quickly update their FCA compliance materials and training to inform employees of the broader, more dangerous reach of the FCA.
[1]FERA § 2 (a-d).
[2]FERA § 2 (e).
[3]FERA § 3(e).
[4] 31 U.S.C. § 3730 (b).
[5] Id. § 3731(b)(2-3).
[6] Id. § 3730(d).
[7]