Chicago Business Litigation Lawyer Blog

In an Illinois state qui tam lawsuit, the Fourth District Court of Appeal has ruled that an accounting company may be held liable for knowingly allowing another company to submit a fraudulent claim to the state. In Illinois Health Facilities Authority ex rel. Scachitti v. Morgan Stanley, 887 N.E.2d 601 (April 2, 2008), three individual plaintiffs brought suit against financial services company Morgan Stanley Dean Witter and accounting firm Ernst & Young for an alleged scheme to defraud the Illinois Health Facilities Authority under the Illinois Whistleblower Reward and Protection Act.

The case arose out of a bond refinancing attempt by the Authority. In order to pay off revenue bonds, it issued “advance refunding” bonds, which are normally tax-exempt. However, if the proceeds of these bonds are reinvested in securities with a higher yield, they lose their tax-exempt status unless the profits go to the U.S. Treasury. To ensure they did not lose the tax exemption, the Authority hired Morgan Stanley as an underwriter for the advance refunding bonds and Ernst & Young to verify Morgan Stanley’s work.

Defendants accuse Morgan Stanley of fraudulently “yield burning” by charging abovemarket rates for the bonds -- ensuring that they would not become taxable -- and pocketing the $21,000 difference. They also accuse Ernst of abetting this behavior by knowingly hiding it in its audit. They both companies for violating the Whistleblower Act, and Ernst for aiding and abetting Morgan Stanley’s violations. The Cook County trial court dismissed the claims against Ernst for failure to state a sufficient cause of action. The plaintiffs appealed.

In its analysis, the appeals court focused on the language of the Whistleblower Act. The first part of that law says a defendant is liable if it “knowingly presents or causes to be presented” a false claim “for payment or approval.” In this case, the court wrote, the defendants are alleging that Ernst and Morgan Stanley presented a materially false report, not a false claim for payment. Any misrepresentations were in the paperwork for the bonds, not in their invoices. Thus, the court struck down the part of the lawsuit that relied on that language.

It next moved to language making defendants liable if they knowingly make “a false record or statement to get a false or fraudulent claim paid or approved by the State.” Under the facts that the plaintiffs allege, the court wrote, this is a valid cause of action. Thus, it reversed the trial court’s decision on that part of the claim and remanded the case to trial court for more proceedings. In doing so, it dismissed arguments by Ernst that because it did not itself submit a false claim, it cannot be held liable. The “cause to be presented” language in the law clearly does not require that the defendant have submitted the claim itself, the court wrote, and caselaw cited by Ernst was not convincing.

Finally, the court disposed of the plaintiffs’ argument that it should have been allowed to continue its claim against Ernst for aiding and abetting Morgan Stanley’s fraud. Language permitting liability for aiding and abetting is simply not in the Whistleblower Act, it wrote, and it does not wish to find an implied claim for aiding and abetting. Thus, the trial court’s decision was affirmed in part, reversed in part and remanded.

The consumer rights law firm of DiTommaso-Lubin represents whistleblowers who are pursing qui tam lawsuits at any level of government, including claims under the Illinois Whistleblower Act, the Chicago whistleblower ordinance and the federal False Claims Act. Based in Chicago and Oak Brook, Ill., our Illinois and Wheaton, Waukegan, Naperville, Aurora, Elgin and Chicago area qui tam and False Claims Act lawyers stand ready to represent whistleblowers throughout the United States -- regardless of whether prosecutors have decided to join the lawsuit. If you know about fraud against a government agency and you’re ready to speak up, you can learn more about whistleblower lawsuits at a free, confidential consultation. To set one up, please contact DiTommaso-Lubin online or call 1-877-990-4990 today.

Individual whistleblowers may sue a defense contractor that allegedly defrauded the Iraqi provisional government out of millions during the early part of the Iraq war, the Fourth U.S. Circuit Court of Appeals ruled April 10. United States of America ex rel. DRC Inc. v. Custer Battles LLC, No. 07-1220 (April, 2009) was a federal whistleblower lawsuit testing whether the federal False Claims Act, which allows lawsuits against contractors defrauding the federal government, applies to the multinational interim Iraqi government set up after the U.S. invasion of that country. The Fourth Circuit found that it did, reasoning that U.S. personnel working for the CPA may still have been working in their capacity as federal employees.

The case grew out of the discovery of fraud by Custer Battles LLC, a contractor hired to help the CPA replace existing Iraqi dinars that bore Saddam Hussein’s face with dinars without his face. They were paid $15 million for this work, including a $3 million check from the U.S. Treasury and other payments from the CPA’s funds authorized by U.S. personnel. The fraud was discovered after the firm’s founders accidentally left a spreadsheet at a meeting site showing they had inflated the bills submitted to the CPA for reimbursement by many thousands of dollars.

Subcontractor DRC Inc., its managing director, Robert Isakson, and former Custer Battles employee William Baldwin sued Custer Battles on behalf of the federal government under the False Claims Act. They alleged fraud on both contracts as well as illegal retaliation against Baldwin, who said he was fired after trying to investigate the fraud. The trial court dismissed parts of the claim on summary judgment and limited the plaintiffs’ recovery to the $3 million that it could trace with confidence to the U.S. Treasury. Considering only that part of the case, the jury returned the maximum possible $3 million verdict, plus $165,000 in damages for Baldwin’s retaliation claim.

Nonetheless, the district court quickly vacated that judgment by granting judgment as a matter of law to Custer Battles, saying that the fraudulent claims for payment were not presented to the U.S. government, as required by the language of the law. Plaintiffs appealed this and the limitation of the damages to $3 million.

The Fourth Circuit took their side. Using a close reading of the False Claims Act, it pointed out that the text prohibits false claims for payment made to a “grantee or any other recipient[,] if the United States Government provides any portion of the money or property which is requested or demanded.” Thus, the justices said, the existence or amount of the alleged fraud the plaintiffs may claim does not depend on how much the U.S. government paid directly. For the same reason, it also did not matter whether the U.S. government had control of funds it granted to the CPA; accepting those funds made the CPA a grantee or recipient under the language of the law. The False Claims Act applies to all of the claims Custer Battles made under the dinar contract, the court said.

The court turned next to the judgment as a matter of law. In support of the judgment, Custer Battles argued that even though the claims were presented to U.S. government officials, those people were working for the CPA at the time -- not in their capacity as government officials. The court disagreed. It relied on “ample evidence” submitted by the relators that the CPA officials were working in their official U.S. government capacities, including evidence that they were authorized, supervised and paid by the government. There was no requirement that the claims be presented to U.S. government officials, so the district court erred in entering judgment as a matter of law.

Thus, the Fourth Circuit reversed the vacated judgment as well as the limitation on damages, and remanded the matter. It instructed the district court to offer the plaintiffs a new trial, and rule on the remaining issues if they did not choose a new trial. The decision was closely watched because it may open the floodgates for other whistleblower claims over fraudulent behavior of private contractors working for the CPA or quasi-government entities.

If you know about fraud against a government agency, you can blow the whistle on that fraud with a False Claims Act lawsuit. These lawsuits, filed under seal and away from the public eye, give you a chance to involve federal prosecutors in your claim and collect 15% to 25% of any money recovered. The Chicago and Wheaton qui tam and whistleblower attorneys at DiTommaso-Lubin stand ready to represent employees and others involved in whistleblower lawsuits. Based in Chicago and near Wheaton, Ill., we handle qui tam claims at the local, state and federal levels in Illinois, Indiana, Wisconsin and nationwide. To learn more at a free, confidential consultation, please call us toll-free at 1-877-990-4990 or contact us through our Web site.

Northrop Grumman Corporation agreed April 2 to settle a federal whistleblower lawsuit for $325 million, the New York Times reported. The lawsuit alleged that TRW Inc, a defense contractor that Northrop later acquired, intentionally suppressed evidence that certain electrical parts it manufactured did not work properly, causing the expensive failure of several defense satellites in orbit. Then, an attorney quoted in the article said, the contractor charged the federal government millions of dollars to investigate the problems with a satellite. The deal included another settlement of an unrelated case by Northrop against the government, leaving the company with no net gain or loss.

The qui tam lawsuit grew out of allegations from scientist Robert Ferro, who worked for a subcontractor to TRW. Ferro found problems with certain transistors TRW manufactured for defense satellites, the article said, and reported them to TRW. But TRW not only did not report the problems to the government, but allegedly continued to sell the parts and blocked Ferro’s attempts to include the information in a report to the Air Force later. He filed a lawsuit in 2002, but because the case was under seal (as required by federal law), his name was only revealed after the settlement. As part of the settlement, Ferro will receive $48.8 million.

Federal, state and local laws allow people like Ferro to bring whistleblower lawsuits against organizations they believe are defrauding government agencies or misusing government resources. Because this typically requires inside knowledge about an organization, the False Claims Act has two unusual features giving them a special incentive. One is the requirement that the original claim and the whistleblower’s name be kept from public knowledge. The other is that the whistleblower stands to receive 15% to 30% of any money the government wins. Prosecutors can choose to intervene under the False Claims Act, but even if they do not, the whistleblower has the right to continue the suit as a “private attorney general,” often with help from a private law firm.

If you have evidence that a company you work with is defrauding a government agency, you may be able to pursue a qui tam action, with or without help from prosecutors. DiTommaso-Lubin's Chicago and Oak Brook whistleblower and qui tam attorneys stand ready to represent whistleblowers pursuing claims under the False Claims Act, the Chicago False Claims Act and the Illinois Whistleblower Reward and Protection Act. Based in Chicago and Oakbrook Terrace, Ill., our firm handles claims throughout Illinois, Indiana, Wisconsin and the United States. To learn more about your options at a free, confidential consultation, you can contact DiTommaso-Lubin via email or call toll-free at 1-877-990-4990.

Medical testing giant Quest Diagnostics settled a whistleblower lawsuit and a related criminal fine for a total of $302 million, the New York Daily News reported April 16. Quest and a subsidiary, Nichols Institute Diagnostics, were accused of defrauding Medicare by selling medical test kits that they knew did not work. The $302 million figure includes a $262 million settlement in a civil lawsuit brought by the federal government and a $40 million fine for Nichols Institute Diagnostics, which also agreed to plead guilty to felony misbranding charges.

A separate $45 million will be paid to the whistleblower in the case, Thomas Cantor, who alerted the government to Quest’s misbehavior. Cantor is a biochemist and the president of Scantibodies Labs Inc., a competitor to Quest. He realized there was a problem with the tests after doctors came to him requesting a second test, believing the results they got from Quest weren’t right. Further tests showed that the results from Quest were consistently wrong. With help from a private law firm, he filed a whistleblower lawsuit in 2004. His efforts led to the federal investigation and eventually to this settlement.

Under the federal False Claims Act (and similar state and local laws), people who know about fraud against the federal government may sue the company committing the fraud on behalf of the public. These lawsuits are first filed under seal -- meaning they’re not public knowledge -- but a copy is served to the federal Department of Justice. The federal government can choose to step in, but if it does not, the plaintiff is free to continue, acting as a private prosecutor in the public’s interest. As an incentive to report the fraud -- which can be difficult for employees who spot wrongdoing by their employers -- the whistleblower stands to collect 15% to 30% of any money won in the suit.

The Chicago and Oakbrook Terrace law firm of DiTommaso-Lubin is proud to represent whistleblowers seeking to expose fraud against the government and taxpayers. Our Chicago whistleblower and qui tam lawyers stand ready to represent people suing under the federal False Claims Act, the Illinois Whistleblower Reward and Protection Act and the Chicago False Claims Act, as well as laws in Indiana and Wisconsin. If you know about wrongdoing by your employer or another government contractor and you’re ready to step forward, we can help. To learn more at a free, confidential consultation, please contact DiTommaso-Lubin today.

The United States Supreme Court will soon decide whether the federal government is always considered a party to False Claims Act lawsuits. The court heard oral arguments in United States ex rel. Eisenstein v. City of New York, No. 08-660, on April 21. At issue is the timeline to appeal a case’s dismissal. The Federal Rules of Appellate Procedure give private parties, including those acting as relators under the law, 30 days to file a notice of appeal, but it extends that deadline to 60 days for cases in which the federal government is a party. The court will decide which deadline applies to False Claims Act cases, in which private parties bring lawsuits on behalf of the government.

The False Claims Act allows federal prosecutors or individuals to “blow the whistle” on fraud against a federal agency. The individuals are called relators. Because relators are typically insiders who work for or with the fraudulent organization, they first file their claims under a seal that hides the complaint from public view. The Justice Department receives a copy of that complaint, however, and may choose to step in. If it does not, the relator is free to continue the suit on behalf of the United States government. If the claim is successful, the relator is eligible to collect 15% to 25% of the judgment, but most of it goes to the federal government. Thus, the plaintiff is in a sense both the relator and the government.

That unusual situation set the stage for a Second Circuit Court of Appeals decision in 2008, rebuffing the claim of a relator who it said appealed the dismissal of his case too late. In United States ex rel. Eisenstein v. City of New York, 540 F.3d 94 (2d Cir. 2008), Irwin Eisenstein and four city employees sued the City of New York for assessing a fee on its nonresident employees that was equivalent to municipal income taxes on city residents. Among other claims, they asserted that this violated the False Claims Act because it reduced their taxable income and deprived the federal government of tax revenue. The Justice Department declined to intervene.

The complaint was dismissed, and Eisenstein appealed to the Second Circuit 54 days later. The city moved to dismiss on the grounds that Eisenstein’s appeal was not timely under the 30-day time limit for claims in which the government is not a party. After ordering briefing from both sides and from the United States as amicus curiae, the Second Circuit agreed. If the government declines to intervene, it pointed out, it typically does not receive case documents, may not participate without moving to intervene and is not liable for fees and costs incurred by the relator. Thus, even though it is the real party in interest to the case, the government is not a party under the Federal Rules of Civil Procedure, the Second Circuit decided.

This exacerbated a split in the federal circuit courts. Our own Seventh Circuit, along with the Fifth, Ninth and Third Circuits, has concluded that the sixty-day rule does apply for appeals in qui tam cases. Until Eisenstein, only the Tenth Circuit applied the shorter deadline. The

Supreme Court granted certiorari in January and heard oral arguments April 21. According to SCOTUSBlog, the justices heard a lot of arguments interpreting the language of the Federal Rules of Civil Procedure, but seemed more concerned about the possible consequences of shortening the deadline in circuits where the longer one was caselaw.

Based in Oak Brook, Ill. and Chicago, the consumer rights firm DiTommaso-Lubin is proud to represent whistleblowers who expose serious wrongdoing and fraud against government agencies. Our Chicago and Naperville False Claims Act, whistlebolower and qui tam attorneys stand ready to represent people around the United States who report fraudulent and dishonest practices against the federal government and its personnel. We also handle qui tam and whistleblower lawsuits at the state and local levels, including claims under the Illinois Whistleblower Reward and Protection Act and the Chicago False Claims Act. If you believe you have a whistleblower claim and you would like to learn more about how we can help, please contact DiTommaso-Lubin today for a free, confidential consultation.