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Democratic control of Congress undoubtedly will mean more oversight and a dramatic increase in congressional hearings into financial expenditures for Iraq and Katrina relief and reconstruction. In light of the increased protection afforded to whistleblowers by the more receptive audience in Congress, a bevy of government fraud cases is likely in the near future. Add to that mixture the federal Deficit Reduction Act’s new incentives for states to pass their own false claims statutes � laws that award whistleblowers a share of the recovery � and we have a legal and political cocktail that will put the Civil War-era statute front and center in the war on fraud and government waste. In the fiscal year ending Sept. 30, 2006, the U.S. Department of Justice recovered a record $3.1 billion in settlements and judgments involving government fraud, bringing recoveries since 1986 to $18 billion. The largest share of the recoveries � 72% � was in the health care industry; 20% was in the defense industry; and the remaining 8% in “other” industries. See Justice Department, Press Release, “Justice Department Recovers Record $3.1 Billion in Fraud and False Claims in Fiscal Year 2006″ (Nov. 21, 2006), available at www.usdoj.gov/opa/pr/2006/November/06_civ_783.html. The government’s primary weapon for fighting fraud is the False Claims Act (FCA). Id. Originally enacted in 1863, the federal FCA gives the government, as well as any person who qualifies as a “relator,” a cause of action against a person who knowingly submits a false claim to the government. 31 U.S.C. 3729 et seq. Violators are liable for three times the government’s damages plus a mandatory penalty of between $5,500 and $11,000 per claim. Id.; 28 C.F.R. 85.3 (adjusting civil penalty for inflation). The relator, or whistleblower, is entitled to a share of the recovery whether or not the government intervenes, typically ranging from 15% to 30%, depending upon intervention. During the 2006 fiscal year, whistleblower actions accounted for $1.3 billion of the $3.1 billion in Department of Justice fraud recoveries. For their roles, whistleblowers received $190 million. See Department of Justice press release, supra. As of December 2006, the special inspector general for Iraq reconstruction (SIGIR), had identified $38.28 billion in total U.S. appropriated Iraq “relief and reconstruction” funds. See SIGIR, Quarterly and Semiannual Report to Congress (Jan. 20, 2007). Although enforcement efforts are in their early stages, media and congressional allegations of fraud, waste and abuse have been extensive. Clearly, whistleblowers are providing some foundation for these allegations. From March 2004 to December 2006, SIGIR, which fields the largest number of fraud investigations in Iraq, received more than 540 reports of fraud through its various hotlines. See SIGIR Report. Other statistics include approximately 300 dismissals or referrals to other agencies; almost 150 inspections and/or investigations; five arrests with four convictions and another 23 matters awaiting Justice Department action; recovered or seized assets worth $9.5 million; and 14 individuals and companies suspended with another eight debarred and four others proposed for debarment. Id. Supplementing their referrals to SIGIR, whistleblowers are actively policing Iraq reconstruction spending in qui tam lawsuits. For example, in 2004, a Custer Battles LLC subsidiary and its principal, along with a former Custer Battles employee, filed a qui tam complaint alleging that Custer Battles submitted fraudulent invoices with inflated profit margins in the amount of $3 million to the Coalition Provisional Authority (CPA). Following a lengthy trial, a jury returned a $10 million verdict. In August 2006, U.S. District Judge T. S. Ellis III threw out the verdict, ruling that the company could not be sued because the degree of U.S. control over the CPA did not raise the organization to the level of a U.S. agency under the FCA. U.S. ex rel. DRC Inc. v. Custer Battles LLC, No. 1:04cv199 (E.D. Va.). The case is on appeal. Congress gears up Meanwhile, Congress clearly expects more reports of fraud, waste and abuse. On Feb. 12, representatives Henry Waxman, D-Calif.; Todd Russel Platts, R-Pa.; Chris Van Hollen, D-Md.; and Tom Davis, R-Va., introduced the Whistleblower Protection Enhancement Act of 2007, which would extend protections to national security officials and employees of federal contractors. See H.R. 985. In addition, Waxman, chairman of the House Committee on Oversight and Government Reform, has established a Web site for whistleblower reports of fraud, waste and abuse: www.oversight.house.gov. As of September 2006, in addition to state and local prosecutions, more than 400 individuals had been federally charged with hurricane-related fraud. See Hurricane Katrina Fraud Task Force, Department of Justice, First Year Report to the Attorney General (September 2006), available at www.usdoj.gov/katrina/Katrina_Fraud/links/progress_reports.html. Most of the cases involve allegations of fraudulently obtaining individual assistance, although a number involve identity theft, procurement fraud and public corruption. Id. In addition, one congressional investigation has identified 19 contracts � collectively worth $8.75 billion � that allegedly have been “plagued by waste, fraud, abuse, or mismanagement.” See Minority Staff Special Investigations Division for the U.S. House of Representatives Committee on Government Reform, Waste, Fraud and Abuse in Hurricane Katrina Contracts (August 2006), available at http:// oversight.house.gov/story.asp?ID=1097&Issue= Hurricane+Katrina+Response. As part of the Deficit Reduction Act of 2005 (DRA), Congress amended certain health care statutes in a renewed effort to combat Medicaid fraud, waste and abuse. The Congressional Budget Office estimates that the Medicaid program integrity provisions contained in the DRA would lower Medicaid payments by $822 million over five years and by $2.8 billion over 10 years. See Congressional Budget Office Cost Report, S. 1932 Deficit Reduction Act of 2005 (Jan. 27, 2006). Two DRA provisions � increased recoveries for states that pursue Medicaid fraud and mandatory employee education policies � are certain to increase awareness and enforcement of fraud, waste and abuse in the health care industry. With the passage of the DRA, states received an added financial incentive to enact their own false claims acts. A key DRA component provides a 10% increase in false claim recoveries for states that enact their own false claims acts. See Deficit Reduction Act of 2005, Pub. L. No. 109-171, � 6031 (amending 42 U.S.C. 1396h). To qualify, the state must enact a law that: • Imposes liability to the state for false or fraudulent claims, as described in the federal FCA, submitted to the state’s Medicaid program. • Is “at least as effective” in rewarding and facilitating qui tam actions for false or fraudulent claims as those described in the federal FCA. • Requires filing an action under seal for 60 days pending review by the state attorney general. • Imposes a civil penalty that is not less than the amount of the civil penalty authorized under the FCA. Id. Under the DRA, the Office of Inspector General for the Department of Health and Human Services (OIG), in consultation with the attorney general, determines whether the state’s false claims act meets the requirements. DRA � 6031. On Aug. 21, 2006, OIG published its guidelines for evaluating whether a state’s false claims act meets the new requirements. See 71 Fed. Reg. 48552. As of December 2006, OIG had evaluated a number of state false claim acts, with mixed findings. States found not to be “at least as effective” as the federal FCA included California, Florida, Indiana, Louisiana, Michigan, Nevada and Texas. See Letters from Daniel R. Levinson, Office of Inspector General, Department of Health and Human Services (Dec. 21, 2006), available at http://oig.hhs.gov. States determined to have false claims acts that pass the DRA include Illinois, Massachusetts, and Tennessee. Id. Health care fraud As part of the DRA, Congress imposed, as a condition of participation in the Medicaid plan, education requirements on entities that receive or make annual payments of at least $5 million under a Medicaid plan. DRA � 6032 (amending 42 U.S.C. 1396a). The law, which became effective on Jan. 1, requires written policies aimed at educating employees � including management and contractors � and agents about false claims and whistleblower protection. The policies must include detailed provisions regarding the policies and procedures for detecting and preventing fraud, waste and abuse. An employee handbook must contain a specific discussion of the laws, the rights of employees to be protected as whistleblowers and the entity’s policies and procedures for detecting and preventing fraud, waste and abuse. Id. Although there currently are no sanctions against entities that do not enact these educational provisions, the requirements became a condition of Medicaid participation. And while a recent Center for Medicare and Medicaid Services letter to state Medicaid directors provides some guidance, many ambiguities and uncertainties regarding compliance remain. See Letter from Dennis G. Smith, Director, Center for Medicaid and State Operations to State Medicaid Directors, SMDL #06-024 (Dec. 13, 2006), available at http://oig.hhs.gov/fraud/falseclaimsact.html. Companies that do business with the government must be wary of potential congressional investigations, particularly in high-profile areas such as Iraq or Katrina reconstruction. Numerous House and Senate panels hold jurisdiction over federal contracting, including the committees on Homeland Security and Governmental Affairs; Commerce, Science and Transportation; Armed Services; and Health, Education, Labor and Pensions. Congressional investigations present unique problems with false claim allegations because, unlike prosecuting agencies such as the Justice Department or a state attorney general, congressional committees are not limited to enforcing or investigating violations of existing statutes. Rather, congressional committees can and often do exercise their investigative authority to highlight the need for additional or amended legislation. Thus, for example, a company using federal funds for Hurricane Katrina relief may face, notwithstanding full compliance with then-existing federal contracting requirements, a congressional inquiry or subpoena because the committee has the goal of pointing out necessary reforms. While such an investigation may not establish a violation of law, a company still faces the risk of negative publicity indicating that the company has somehow misused government funds. Additionally, the risk of congressional investigations has increased due to changes in political control. Democratic-controlled committees are much more likely to use committee time and resources to point out perceived weaknesses and failures in a Republican-controlled executive branch. In this regard, congressional oversight hearings can spur executive branch investigation and prosecution in response to these criticisms. The Iraq reconstruction and post-Katrina relief efforts are examples of issues in which political differences between Republicans and Democrats intersect with potential legal claims related to misuse of government funds, presenting a heightened risk to those who operate with federal funding. Even companies with extensive government contracting experience and familiarity with false claims litigation need to be particularly wary of congressional investigations. Unlike conventional enforcement proceedings, congressional committees are not restricted by traditional litigation rules. Limitations as to the scope of a congressional subpoena, for example, must be negotiated with committee staff rather than litigated, and confidentiality of documents turned over to a committee generally cannot be assured. In addition, witnesses before congressional committees receive few of the protections associated with traditional litigation. Indeed, many observers have noted that congressional inquiries often seem more focused on questions and statements by congressional members than the answers given by witnesses. The key distinction that companies must keep in mind when involved with congressional investigations is that the goal of the legislative branch is different from the Justice Department’s goal. Early determination of the investigation’s purpose is paramount. Is it to highlight the need for reform in a certain area or to mount an attack on a particular government agency? Once it knows the panel’s goals, a company can position itself to cooperate � by volunteering an executive to testify in support of the need for a particular governmental reform, for example, and avoiding an adversarial process likely to generate not only adverse publicity but document discovery and creation of sworn testimony that could lead to the civil and criminal enforcement proceedings discussed above. Consultation with experienced counsel familiar with the personnel and procedures of congressional investigations, the specifics of which are beyond the scope of this article, is essential. Adapting to a changed climate Given the growing media attention, the rising incentives for state enforcement and the increase in whistleblower education, along with the change in the political climate, companies receiving government funds should act now to mitigate exposure under the federal and state false claims acts. Companies should verify that their government-contracting compliance policies are effective and that their controls are being enforced and are well documented. Contractors should verify that they are identifying and investigating complaints about noncompliance or fraud in their compliance programs and are effectively encouraging their employees to step forward with concerns. Companies responding to congressional investigations need to appreciate the differences between committees and develop a comprehensive strategy that accounts for the possibility of agency action or follow-on enforcement proceedings. Moreover, whistleblowers and their counsel will want to act quickly but thoroughly. Only the first to file gets paid in these cases. Winning the Justice Department’s attention is the most important goal in securing a recovery. The most carefully presented cases will get the benefit of the government’s limited resources.

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