Daniel J. Kelly Thomas J. Finn Paula Cruz Cedillo Violations of the False Claims Act and The Importance of a Timely and Proper Response to Whistleblower Allegations Daniel J. Kelly Thomas J. Finn Paula Cruz Cedillo

Overview Trends In Claims Asserted Under the False Claims Act and Rise in Qui Tam Actions Responding to Potential Violations Potential Criminal Implications

False Claims Act Oldest But Most Powerful Tool Used to Combat Fraud Against the Federal Government FCA Prohibits Anyone from Knowingly Presenting a False Claim to the Government

False Claims Act What is a False Claim? What Does “Knowingly” Mean? Actual Knowledge Deliberate Ignorance Reckless Disregard for the Truth No Specific Intent to Defraud is Required

False Claims Act Penalties Range from $5,000 to $10,000 per False Claim Government can Recover Treble Damages $3 Billion in Settlements & Judgments in 2010 Contractors Face Suspension & Debarment

The Qui Tam Action Allows Relator (i.e., whistleblower) to Stand in the Government’s Shoes and Commence Litigation Against a Government Contractor Relator Receives a Percentage of the Recovery 15% to 25% if Government Intervenes 25% to 30% if Government Does Not Intervene, as well as Attorneys Fees and Costs

The Qui Tam Action Unique Procedure of Qui Tam Actions Creates Unique Issues for Government Contractors Complaint is Filed Under Seal Allegations Are Investigated by Government Government Then Determines Whether to Intervene Relator May Pursue Lawsuit Even if Government Does Not Intervene Relator Entitled to Receive Portion of Recovery

The Qui Tam Action Competing Interests & Complex Dynamic All Working Against Government Contractor Department of Justice (DOJ) or U.S. Attorney’s Office The Fight Against Fraud & Restoring Public Faith Recouping Funds for the Government The Defrauded Government Agency Maintain Long-Standing & On-going Relationship with Government Contractor The Relator Personal Financial Interest

Recent Trends in FCA Claims and Qui Tam Actions Congress Looking to Increase Efforts to Combat Fraud by those Receiving Government Funds Fraud Enforcement and Recovery Act of 2009 Patient Protection and Affordable Care Act Amendments Expected To Have Serious Impact on Government Contractors

Recent Trends in FCA Claims and Qui Tam Actions Significant Rise in Litigation Given the Recent Amendments to the FCA 709 New FCA Actions in 2010 144 Increase Over 2009 573 New Qui Tam Actions in 2010 140 Increase Over 2009 1,246 Matters Under Investigation Source: Andy Liu & W. Stanfield Johnson of Crowell & Moring LLP, West's Government Contracts Year in Review Conference (November 2011). 

Fraud Enforcement and Recovery Act of 2009 (FERA) “Claim” Means Any Request for Money – Whether Presented Directly to Government or Anyone Else – that is Ultimately Spent or Used by the Government or to Advance a Government Program Effect? FCA Applies to Anyone Who Touches Federal Funds May Subject Any Person or Entity to an FCA Claim Regardless of Whether Actually Intended to Submit a False Claim to the Government Regardless of Whether Contractor Knew Government was the Ultimate Purchaser of Goods

Fraud Enforcement and Recovery Act of 2009 (FERA) Increased Government’s Investigative Ability to Use Civil Investigative Demands (CIDs) Attorney General Can Delegate Authority to Issue CIDs U.S. Attorneys Have Authority to Issue CIDs Effect? Increased Use and Impact of CIDs Contractors Can be Compelled to Turn Over Requested Documents, Respond to Interrogatories, and Depositions Can be Taken of Company Personnel Very Early On Even Before Government Intervenes Information Can Now be Shared with Whistleblowers

Patient Protection and Affordable Care Act (PPACA) Weakened the Public Disclosure Bar Before: Whistleblower Could Not Maintain a Lawsuit if the Underlying Facts were Publicly Disclosed Now? Relator Can Bring Qui Tam Action Even if Underlying Facts Were Already Public, if Government Approves “Public Disclosure” Means Disclosure by the News Media or a Federal Source – Not Disclosure by a State Source

Responding to Suspected or Potential Violations of the FCA How Do Contractors Receive Notice of Purported Misconduct? Internally Employee Hotlines or Reporting Procedures Internal Company Audits Traditional Government Investigative Tools Grand Jury Subpoena Search Warrant

Responding to Suspected or Potential Violations of the FCA Government Investigative Tools Unique to Government Contractors Inspector General Subpoena Civil Investigative Demand The Qui Tam Call

Responding to Suspected or Potential Violations of the FCA Unique Considerations for Contractors Significant Investigation Already Completed by Government and Whistleblower Prior to Contractor’s Awareness of Claim Contractor May Want to Settle Before Qui Tam Action is Unsealed in Order to Minimize Bad Publicity

Responding to Suspected or Potential Violations of the FCA Maintain or Salvage Business Relationship with “Defrauded” Government Agency Convince Government Not to Intervene Because Claims are Meritless

Responding to Suspected or Potential Violations of the FCA In this Climate, Government Contractors Must: Have Heightened Sensitivity to Allegations of Wrongdoing Be Quick to Conduct Internal Investigation and Thoroughly Investigate Purported Wrongdoing Determine Whether Violation Exists in Order to Minimize Consequences Take Great Care When Responding to Government Inquiries

Internal Investigation Internal Investigations are Critical To Determine Credibility of Allegations To Assess Scope of Alleged Wrongdoing To Help Mitigate Resulting FCA Liability To Convince the Government Not to Intervene in Qui Tam Action

Internal Investigation Importance of No Government Intervention The Government Has Significant Resources Has Significant Institutional Knowledge & Expertise Government’s Decision Not to Intervene Strengthens Contractor’s Position Relator’s Resources are Likely Limited

Self Reporting Obligations Contractor Must Decide Whether to Report Results of Internal Investigation Voluntary Disclosure Formal Voluntary Disclosure Program Cooperation May Result in Reduction of FCA Damages Mandatory Disclosure Nondisclosure Itself Would Constitute a Crime

Business Ethics New Requirement Since December 24, 2008 Written Code of Business Ethics and Conduct Internal Controls System Employee Compliance Training Program Mandatory for Contracts and Subcontracts Valued over $5 Million with a Performance Period of 120+ Days But Best Practice for All Contractors and Subcontractors to Follow

Business Ethics Written Code of Business Ethics and Conduct Written Standards of Conduct Stating Company’s Values and Commitment to Compliance with All Relevant Laws, Regulations, and Contract Provisions Must Include Periodic Review and Self-Audit Must Provide a Written Copy to Each Employee DCAA Empowered to Review Ethics Compliance Merely Having a Plan on the Shelf is not Enough Review of Written Code, Employees’ Acknowledgement of Receipt of Code, List of Any Violations, and Open Internal Investigations, etc.

Business Ethics Internal Control System Facilitate the Timely Discovery and Disclosure of Improper Conduct Must Include an Internal Reporting Mechanism (Hotline) Ensure that Corrective Measures are Promptly Instituted and Followed Must Include Disciplinary Actions for Violations Must Include Periodic Reviews and Self-Audit Does Not Apply to Commercial Item Contractors or Small Businesses (But Again, Good Practice for All Companies)

Business Ethics Employee Compliance Training Program Awareness Program Should Include Written Materials and Interactive Training Topics to be Covered: Conflicts of Interest - Export Controls Gifts and Gratuities - Defective Pricing Kickbacks - Record-Keeping Lobbying Restrictions - Contract Compliance Collusive Bidding - Revolving Door Restrictions Labor Charging - Price Reductions Protection of Proprietary Information

Mandatory Disclosures New Requirement Since December 12, 2008 What Must be Disclosed? Certain Crimes: Fraud, Conflict of Interest Violations, Bribery, Improper Gratuities By a Principal, Employee, Agent, or Subcontractor False Claims Act Violations Significant Overpayments When Must a Disclosure be Made? “Credible Evidence” / Actual Knowledge Standard Must Make Disclosure to OIG & Contracting Officer Until 3 Years After Final Payment

Mandatory Disclosures Two Separate Sources of Obligation to Disclose: 1. Disclosure Required to Avoid Suspension or Debarment (FAR 3.1001) Applies to All Contractors Disclosure Must Only be Made to CO 2. Disclosure Required by Contract (FAR 52.203-13 and Payment Clauses 52.212-4(i)(5); 52.232-25(d), 52.232-26(c) and 52.232-27(l)) Mandatory for Contracts Over $5 Million with a Performance Period of 120+ Days (52.203-13); Payment Clauses Require Remittance of Overpayments for All Contracts Disclosure Must be Made to OIG and CO

Guidance by Government on Disclosures DoD’s Disclosure Form: Date, Full Description, Names, Report on Internal Investigation, Records, Remedial Actions, Financial Impact, Certification on Truth and Accuracy Disclosure to be in Writing Through Online Submissions Privileges and Exemptions to FOIA to Apply

Credible Evidence and Timing Credible Evidence is Not a Defined Term Work in Progress Disclosure Must be Timely Government Talks in Terms of 6 to 8 Weeks Question as to Whether Partial Disclosures Inoculate Contractor No Suspensions and Debarments Due to Failure to Disclose or Incomplete/Misleading Disclosure

Operation of MDR Program Most Made to DoD; 320 by November 2010; 10% to GSA Abundance of Caution Disclosures Aggregation Common Source: Stuart (Stu) B. Nibley & David Nadler of Dickstein Shapiro LLP, West's Government Contracts Year in Review Conference (November 2011). 

What Happens to Disclosures DoD Gives to DOJ, DCAA, CO and Suspension and Debarment Authority If Disclosure is a “Top 100” DoD Contractor, Referred to DCIS and Agency Investigative Service CO has Authority to Negotiate Settlement IG sends Closure Notice

DCAA Role DCAA Empowered to Review Compliance Review of Any Disclosures Made Confirmation that All Disclosures Were “Timely” Made Review of Any Corrective Action Taken by Contractor Examination of Internal Control System Auditors will Review to Make Sure Policy Includes a Reasonable Definition of “Credible Evidence” and Reasonable Timeframes for Disclosure

Potential Criminal Implications High Probability that Allegations Against Government Contractor Will Also be Reviewed for Possible Criminal Prosecution If Government Pursues a Civil Fraud Investigation, Will Likely Also Conduct a Parallel Criminal Investigation

Effect of Parallel Criminal Investigation Information from Internal Investigation or Civil Proceedings Used in Criminal Matter Contractor’s Choice to Voluntarily Self Report Demonstrate Good Faith and Cooperation Disclosure of Internal Investigation to Escape Indictment Beneficial in Prosecutor’s Charging Decisions and Sentencing

Daniel J. Kelly Thomas J. Finn Paula Cruz Cedillo Violations of the False Claims Act and The Importance of a Timely and Proper Response to Whistleblower Allegations Daniel J. Kelly Thomas J. Finn Paula Cruz Cedillo