Whistleblower

The integrity of the securities and financial markets is critical to the growth and stability of the U.S. economy. Whistleblowers play an important role in reporting fraud to the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) to assist in their mission of protecting investors and regulating U.S. financial and commodities markets.

The SEC enforces the federal securities laws, primarily contained in the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act and the Dodd-Frank Act. It has broad jurisdiction over the U.S. financial markets and regularly brings enforcement actions against public and private companies, banks, investment advisers, asset managers, and individuals. 

Common examples of securities fraud include:

• False or misleading disclosures regarding a company’s financial results or condition, its products, or its business risks
• Improper securities trading practices
• Charging hidden fees to investors
• Ponzi schemes
• Bribery of foreign officials
• Failing to register securities, including digital tokens and other crypto assets

Similarly, the CFTC enforces the Commodity Exchange Act, the primary federal law regulating transactions in commodities, such as oil, gas, agricultural products, and metals. The CFTC also has jurisdiction over financial derivatives such as commodity futures and certain types of option or swap agreements. It frequently brings enforcement actions against commodity market participants for fraudulent disclosure, market manipulation, and trading violations. 

Health care fraud has generated large numbers of false claims cases and most of the government dollars recovered from false claims lawsuits each year.

Health Care Provider Fraud: Health care providers, including hospitals, ambulatory surgical centers, skilled nursing facilities, dialysis, or pain management centers, and/or home health care and hospice providers may commit fraud related to government health programs such as Medicare and Medicaid and TRICARE, the health care program for uniformed service members, veterans and their families.

Fraud can be perpetrated by: 1) misrepresenting on claims for government reimbursement that services were performed when they were not, 2) fraudulently charging for medical services such as skilled therapy or medical procedures that were unnecessary, 3) “upcoding” medical services, meaning that a provider fraudulently bills for a patient visit, or medical procedure, at a rate reserved for  longer, more complex services than those actually performed, 4) “unbundling” a set of inter-related procedures that are required to be bundled together for billing purposes in order to falsely increase reimbursement or 5) having nurses or other personnel perform services which only physicians can lawfully perform.

Individual health care providers such as physicians, dentists, or hospital executives who play a decision-making role in engineering or orchestrating the fraud, can also violate the False Claims Act.

Managed Care Fraud: Unlike the traditional Medicare fee-for-service model, Part C of Medicare allows participants to receive their health insurance from Medicare Advantage Organizations. These private companies (“MAOs”), receive a fixed sum of money annually per patient (the amount of which depends on the health of each member patient), make payments to providers for that patient’s covered services, and keep the difference as their profit. Medicaid Managed Care programs operate in a similar way under state Medicaid programs.

Capitated payments provide a profit motive to MAOs to operate efficiently and rein in overall health care spending. In practice, though, this payment structure can provide incentives for companies to unlawfully increase their profits by manipulating cash flows on both ends of the equation. At one end, they can represent to the government that their patient population is less healthy than it is, thereby increasing the patient’s “risk score” and obtaining artificially increased capitation payments. At the other end, they can pay providers less than they are entitled to unlawfully inflate profits. In recent years DOJ has intervened in a number of qui tam lawsuits alleging that MAOs have tampered with member patient’s medical records to make them appear sicker than they are to increase capitated payments. One tactic MAOs have used to game the system is to hire third parties to conduct one-sided patient file reviews –. meaning inaccurate patient risk scores are only corrected when they are too low, but too high.

Pharmaceutical and Medical Device Fraud: Allegations of FCA violations arising from overcharging the government health care programs for drugs and medical equipment have led to sizeable recoveries against drug manufacturers and medical device companies.

Often drug price schemes involve situations in which the price the government pays for the drug is derived from the commercial price the drug company reports to the government. By misrepresenting that commercial price, the government is tricked into paying a fraudulently high amount. Drugs and medical devices must be reasonable and necessary to be eligible for government reimbursement. When a provider seeks reimbursement for a drug or device which was not, false claims act liability can attach. Similarly, although a physician can prescribe a drug for an “off-label” use (meaning a use which has not been FDA approved for safety and efficacy), the drug manufacturer is generally prohibited from promoting a drug for such an off-label use. If such promotions result in prescriptions for off-label use, particularly when drug manufacturers have paired these promotions with false statements about the drug, the false claims act may well be violated. The use of invalid drug patents to block generic entry is beginning to receive attention as a potential violation of the false claims act. The harm wrought by the anti-competitive behavior is obvious – by fraudulently blocking generic entry with bogus patents, the brand manufacturer unlawfully maintains a monopoly and inflated, monopolistic prices which the government ends up paying.

The FDA recognizes three separate classes of medical devices: Classes I, II, and III. The individual classes take into consideration a product’s intended use, indications for use, and the level of risk associated with the product. The circumstances giving rise to false claims violations in this context parallel those of the pharmaceutical fraud. Class III devices are generally invasive and carry the most risk. The potential for patient harm, always an important consideration in assessing the merits of a false claims case, is a particularly urgent one when evaluating fraud and Class III devices.

Pharmacy Benefit Manager Fraud: Pharmacy benefit managers (PBMs), are companies that manage prescription drug benefits on behalf of government funded programs such as MAOs, Medicare Part D drug plans, and government employee health benefit plans. In exercising this role, PBMs routinely negotiate with drug manufacturers and pharmacies. Although the contractual relationships between PBM’s and the numerous parties with whom they conduct business are generally not made public, a PBM is as a general matter obligated to pass along the cost savings it negotiates on behalf of the program it represents. To the extent it conceals this benefit, and pockets it for itself, the PBM is opening itself up to liability under the FCA for causing false claims to be submitted to the government. Additionally, PBM’s sometimes wear several hats while operating within the complicated matrix of the pharmaceutical distribution chain. This means there may well be situations in which the PBM has financial interests which conflict, and thus may be incentivized to negotiate for something less than the best deal possible for the government program.  Should this happen, the false claims act has potentially been violated.

Durable Medical Equipment (DME) Fraud: DME is equipment which can be used repeatedly, such as beds, wheelchairs, and back braces. This realm of health care is subject to less regulation and has fallen victim to some of the most egregious examples of billing the government for items which were induced by kickbacks, unnecessary, never provided or, as has occurred with items such as back braces, hearing aids and glucose monitors, were never prescribed by a provider.

Anti-Kickback Statute and Stark Laws Violations:  The Anti-Kickback Statute (“AKS”) is a criminal law that prohibits the knowing and willful payment of “remuneration” to induce or reward patient referrals or the generation of business involving any item or service payable by federal health care programs (e.g., drugs, supplies, or health care services for Medicare or Medicaid patients). Remuneration, defined broadly, includes anything of value. It can take many forms besides cash, such as free or reduced rent, expensive hotel stays and meals, and excessive compensation for medical directorships or consultancies. A health care provider can be guilty of violating the AKS even if they rendered a medically necessary service.

Electronic Health Records Fraud: EHRs are electronic versions of the information contained in paper charts in your doctor’s or other health care provider’s office. An EHR may include your medical history, notes, and other information about your health including your symptoms, diagnoses, medications, lab results, vital signs, immunizations, and reports from diagnostic tests such as x-rays. The federal government has long recognized that EHRs have the potential to improve health care but can also cause harm to the provision of safe and effective health care if they do not function properly.

To encourage hospitals to invest the millions of dollars needed to purchase and use a foundationally sound EHR system, in 2010 the government established programs under Medicare and Medicaid to pay significant Incentive Payments to hospitals and physicians for owning and using EHRs certified against a federal standard. This goal, albeit extremely worthwhile, created the potential for fraud in a least two respects. First, to qualify for Incentive Payments the EHR software must be “certified” meaning that it was tested by a government approved body and found to be capable of performing a set of specific criteria. If the software manufacturer cheats during the testing, the software will falsely receive certification causing hospitals and other providers to unwittingly apply for Incentive Payments using unqualified software. Second, to receive Incentive Payments, providers must demonstrate that they are using the software in a “meaningful manner” by satisfying certain objectives. If the provider falsely represents that these objectives have been satisfied, FCA liability will attach.

Telemedicine Fraud: Prior to the Covid pandemic, Medicare and Medicaid programs had been repeat targets of telefraud, as had unsuspecting patients in their homes. When the coronavirus pandemic began in 2020, Congress acted quickly to ease restrictions on telemedicine through the CARES Act. This expanded the circumstances under which doctors could bill Medicare and Medicaid for seeing patients and providing services remotely. The law also allowed providers to charge for seeing patients in other states for the first time. This led to an explosion of telemedicine fraud.

Federal and state governments enter into a great many types of contracts with private companies for the provision of goods or services, and when companies commit fraud to obtain public contracts or commit fraud in the performance of those contracts, they can violate the federal and state false claims acts. 

Government contracting can – and often does – occur in nearly every area in which public funds are expended.  These areas include defense contracting, infrastructure, information technology, building construction and maintenance, and the purchase of all manner of tangible goods. 

Common forms of contracting fraud include:

• Providing non-compliant or substandard goods or services, or failing to provide the required goods or services at all
• Billing for more expensive goods or services than were provided
• Making false certifications as to the quality or attributes of the goods or services provided, or the manner in which they were provided
• Engaging in bribery or other misconduct related to a public bidding or procurement process
• Fraud in connection with government set aside programs for minorities, women and the disabled

Individuals with information regarding government contracting or procurement fraud may be able to bring qui tam lawsuits under the federal or state false claims acts and be eligible for a financial award of 15-30% of the government’s recovery.

Tax fraud and illegal tax avoidance costs the federal and state governments billions of dollars each year. In 2020 alone, the IRS’s criminal enforcement arm identified over $2 billion in federal tax fraud.  A failure to pay taxes owed undermines the fair and equitable enforcement of our tax laws and deprives the government of resources needed to fund important public programs. 

There are countless ways in which a business or individual can improperly avoid their tax obligations.  Some of the most common are:

• Failure to report all sources of taxable income
• Claiming improper deductions or credits
• Engaging in illegal tax shelters
• Failure to forward withheld employee taxes to the IRS
• Failure to pay appropriate taxes on investment activity or cryptocurrency transactionsFailure to properly account for intercompany transfers
• Failure to identify income that is attributable to U.S. business activity

The primary manner through which whistleblowers can report tax fraud is through the IRS Whistleblower Program, which covers underpayments of federal taxes and related penalties and proceeds.  Certain states allow for whistleblowers to pursue state tax-related claims through their false claims act statutes or through other statutory or administrative mechanisms. 

The IRS Whistleblower Program 

In 2006, the IRS Whistleblower Program was established to administer a system that encourages individuals to come forward with information regarding the underpayment of federal taxes by offering financial awards when that information leads to a successful government recovery.  Since its creation, the IRS Whistleblower Program has led to the collection of over $6 billion in underpaid taxes, and has made over $1 billion in awards to whistleblowers.

Individuals who follow the procedures of the IRS Whistleblower Program and whose information leads to the recovery of over $2 million in proceeds may be eligible for financial awards equal to 15-30% of the proceeds collected.  In order to qualify for a whistleblower award, an individual must present information regarding the underpayment of tax to the IRS Whistleblower Office according to specific procedures.  The IRS will take all appropriate measures to protect the anonymity of whistleblowers, and does not personally identify whistleblowers even when making and announcing its whistleblower awards. 

Our attorneys have extensive experience representing individuals who submit claims under the IRS Whistleblower Program and working collaboratively with the IRS to facilitate its recovery of underpaid taxes and to obtain awards for our clients. We handle a range of matters involving sophisticated tax issues, such as the U.S. tax liability of international corporate transactions, Ponzi-like tax fraud schemes, and the taxation of complex financial instruments. We will not hesitant to engage tax consultants when expertise regarding a particular aspect of the U.S. Tax Code is called for.

Please contact us directly, at whistleblower@cohenmilstein.com, if you believe you’ve witnessed any tax fraud.