DELANEY KESTER ANNOUNCES $18 MILLION RESOLUTION OF QUI TAM WITH J&J’S ACCLARENT

Delaney Kester LLP Announces Client Recovery in $18 Million False Claims Act Settlement Involving Johnson & Johnson Subsidiary Acclarent, Inc.

 

BOSTON, MA— JULY 26, 2016—Delaney Kester LLP announces a multimillion-dollar whistleblower recovery for its client in connection with the U.S. government’s recent $18 million settlement with Acclarent, Inc., a subsidiary of Johnson & Johnson. The settlement brought an end to the five-year litigation brought by Melayna Lokosky against Acclarent and Johnson & Johnson for allegedly violating the federal False Claims Act.  Ms. Lokosky was represented in the settlement by Delaney Kester LLP, including attorneys Royston H. Delaney and Ilyas J. Rona of Boston, Massachusetts; and Charles F. Kester of Los Angeles, California.

 

The settlement resolved claims that Acclarent allegedly defrauded the federal government by concealing the intended use of a nasal medical device known as the Relieva Stratus MicroFlow Spacer (“the MicroFlow Spacer”). Although the MicroFlow Spacer only received FDA clearance to be used with saline solution, Ms. Lokosky – a former Acclarent sales representative – alleged that the actual intended use of the device was to deliver Kenalog-40, a corticosteroid, into the sinuses.

 

Ms. Lokosky further alleged that false and misleading marketing of MicroFlow Spacers for off-label uses caused the government to pay millions in healthcare claims that would not have been paid had Acclarent truthfully disclosed the true intended use of the product.

 

When Ms. Lokosky brought her concerns about alleged illegal marketing to Acclarent’s management team, they terminated her.

 

Ms. Lokosky’s complaint and the resulting $18 million settlement were kept under seal until July 22, 2016, following the criminal conviction of Acclarent’s former CEO, Bill Facteau, and its Vice President of Sales, Pat Fabian. A federal jury convicted Facteau and Fabian on 10 counts of introducing misbranded and adulterated devices into interstate commerce.  Ms. Lokosky’s allegations about Acclarent’s marketing practices prompted the government’s investigation into Facteau and Fabian and the resulting criminal prosecution.

 

“Both the $18 million settlement and the guilty verdicts against Acclarent’s former executives are significant wins for whistleblowers everywhere,” said attorney Rory Delaney of Delaney Kester LLP.  “Moreover, these are hard-fought and long-awaited vindications for Ms. Lokosky, who courageously stood up to Acclarent for more than five years.”

 

 

 

Nurse’s qui tam case to go forward.

United States v. CMC II, LLC et al 8:11 CV 1303 SDM-TBM (M.D. Florida)

This is one of our qui tam cases which has been unsealed and is being litigated in Florida. The Middle District of Florida is part of the 11th Circuit which sets a very high bar on False Claims Act cases when challenged with a motion to dismiss under “rule 9(b).” This rule requires that any False Claims Act case alleging fraud against the defendant should describe the “who, what, where and when” of the fraud. The Court ruled that the whistleblower had provided enough detail and that the complaint is sufficient to meet the exacting standard of the 11th Circuit.

This relator alleges the wholesale upcoding of reimbursement claims to Medicare and Florida Medicaid. The whistleblower, a nurse who worked at the defendants’ medical facilities, alleges that they provided substandard care and inflated billing codes submitted to government health care programs.  Discovery will now proceed on the relator’s allegations that:

• Defendants falsified paperwork (MDS Assessments) for residents covered by Medicare and TRICARE by overstating residents’ medical needs and the amount of care provided to them.

• Defendants fraudulently inflated the Resource Utilization Group (“RUG”) levels reported in MDS Assessments in order to increase their Medicare and TRICARE reimbursement rates.

• Defendants routinely falsified MDS Assessments to report that they had completed care plans for their Medicaid residents, when in fact no such care plans even existed.

• To avoid detection of this fraudulent scheme, Defendants would routinely create generic, boilerplate care plans for residents many months after their admission, but shortly before scheduled audit periods.

• Defendants routinely falsified the identities of the persons submitting MDS Assessments to facilitate their fraudulent scheme.

Ranbaxy, Good Manufacturing Practices and the False Claims Act for Whistleblowers

When drug manufacturers fail to observe the FDA’s Good Manufacturing Practices (“GMP” standards), the result can be liability to the government for false claims under the False Claims Act through a qui tam suit.  Here is an example from yesterday, where the whistleblower was awarded $48 million for bringing this to the federal government’s attention.

In court filings yesterday, Ranbaxy the Indian generic drug manufacturer admitted it sold batches of drugs that were improperly manufactured, stored and tested. The company also plead guilty to making fraudulent statements to the Food and Drug Administration about how it tested drugs at two of its Indian plants. FDA inspections of facilities in Paonta Sahib and Dewas in India, beginning in 2006, found incomplete record-keeping, testing failures and other quality-control issues. Earlier, lapses in manufacturing procedures made it impossible to ensure the drugs were of the required purity, according to the criminal information.

Drugs cited in criminal charges as failing to meet FDA standards include the antibiotics ciprofloxacin, cefaclor and amoxicillin, the acne drug Sotret, and Gabapentin, a compound used to treat epilepsy and certain kinds of nerve pain.  The whistleblower a former Ranbaxy executive, will receive $48.6 million from the federal government’s share, which totals $231.8 million.

Here is the link to the FDA’s GMP guidelines:

http://www.fda.gov/cosmetics/guidancecomplianceregulatoryinformation/goodmanufacturingpracticegmpguidelinesinspectionchecklist/default.htm

SEC year end report

The SEC year end report can be found here: http://www.sec.gov/about/offices/owb/annual-report-2012.pdf

Here is a highlight:

“During Fiscal Year 2012, the Commission made its first award under the whistleblower program. On August 21, 2012, a whistleblower who had helped the Commission stop an ongoing multi-million dollar fraud received an award of 30 percent — the maximum percentage payout allowed by law — of the amount collected in the Commission’s enforcement action against the perpetrators of the scheme. The award recipient in this matter submitted a tip concerning the fraud and then provided documents and other significant information that allowed the Commission’s investigation to move at an accelerated pace and ultimately led to the filing of an emergency action in federal court to prevent the defendants from ensnaring additional victims and further dissipating investor funds. The whistleblower’s assistance led to the court ordering more than $1 million in sanctions, of which approximately $150,000 had been collected by the end of the fiscal year. In accordance with the 30 percent award determination, on August 21, 2012, the whistleblower was paid nearly $50,000.

  • Motions for additional judgments are currently pending before the court and any additional collections or increase in the sanctions ordered and collected will increase the amount paid to the whistleblower.”

The award was pretty modest by qui tam or whistleblower standards, but it’s importance lies in how quickly it came about: roughly one year after the SEC program started.  That is very fast. Now watch this space as bigger frauds get exposed!

Posted in SEC

2013 – The Year of the Whistleblower

The Economist predicted that 2012 would be “The Year of the Whistleblower.”  That prediction has come true in many ways.  If attendance at this year’s annual whistleblowers’ convention is any guide, I predict the same thing for 2013.

This year, I could hardly find a seat at the Taxpayers Against Fraud (“TAF”) conference in Washington,DC, and it was not because there were fewer chairs.  Attendance was up 20% and it is easy to see why.  Awards to whistleblowers (and their lawyers) have been skyrocketing.  Since its rebirth in 1986, recoveries under the False Claims Act (“FCA”) have topped $36 billion, with $9 billion collected this year alone.

In a successful FCA case, the whistleblower is eligible for a share of the government’s recovery.  For example, GlaxoSmithKline paid $750 million to the federal government to settle allegations that products from its manufacturing plant inPuerto Rico, such as Paxil, were dangerously adulterated. The whistleblower in that case, Cheryl Eckard, was awarded $96 million (until recently the largest award to a single whistleblower in history).

The success of the FCA has begotten more than thirty similar acts at the state level, and now three additional programs run by the IRS, the SEC, and the CFTC.  The IRS program has been around since 2006, but, in the words of its director Steven Whitlock, the program has been largely “unblemished by success.”  The SEC program is just over a year old, but it has already announced its first award to a Wall Street insider who has remained unidentified.  The Commodities Future Trading Commission (“CFTC”) program is essentially the same as the SEC program except that it covers fraud in relation to the sale of commodities rather than securities.

Thus, when the TAF conference presented a panel hosted by all three directors of the new programs, the place was packed to capacity.  Steve Whitlock (IRS), Sean McKessy (SEC), and Vincente Martinez (CFTC) discussed the ways in which their programs operate and how they can be used to augment recovery efforts on behalf of the taxpayer.

The SEC and CFTC programs appear to be moving efficiently.  So far, the SEC has received about 3000 “tips.”  The process is pretty simple and, unlike a formal False Claims Act case, does not require the filing of a lawsuit.  Though it may dismay readers of this newspaper to know, you do not even need a lawyer to file a tip and to claim a reward (although the tipster must be represented by counsel to proceed anonymously).  Vincent Martinez, perhaps conscious of not yet completing a successful prosecution, joked that because no one knows what the CFTC does, they have seen fewer cases than the SEC.  Still, it is only the IRS program which has come in for any real criticism.

The IRS program is now six years old, and so far, it has made just four awards in its lifetime, despite the fact that in the last five years more than 1300 cases have been filed.  Having said that, the second of those awards broke Ms. Eckard’s record.  Earlier this year the IRS announced that it had awarded $106 million to the former UBS banker, Bradley Birkenfield.  Mr. Birkenfield had approached the IRS with information about secret Swiss accounts.  The IRS now has recovered more than $2 billion based on Mr. Birkenfield’s information and implemented an amnesty scheme for wealthy Americans to avoid the harshest penalties.  So far, more than 14,000 individuals have signed up for the amnesty program netting a further $3 billion for the IRS.

So, what the IRS program has lacked in turnover, it has made up for in magnitude, at least to the satisfaction of Bradley Birkenfield.  Even so, Senator Grassley a longtime champion of the False Claims Act and author of the 2006 IRS reforms has written repeatedly to the director of the program seeking an explanation for the glacial pace of turnover.  The Senator also has been very critical of the “black box” approach to communicating with whistleblowers, inasmuch as the program has been noted for its secrecy.  Indeed, so secretive is the program that, in the case of last month’s $38 million dollar award, neither the identity of the whistleblower, nor the Fortune 500 tax-dodger, has been made public.

This inscrutability has created a trapdoor in the IRS program that may also make lawyers cautious to bring tax cases.  Although the IRS whistleblower program is a distinct function of the IRS, the general rules limiting communication of taxpayer information still apply. Therefore, to pursue a case, an attorney needs her client’s power of attorney to be able to file documents relating to the claim – and even then, the attorney will not receive any communications from the IRS about the status of the claim.  Indeed, TAF panelist Steve Whitlock confessed that, “We make our decisions in a closed box we don’t invite you in” – adding, “you will not know what is going on with an IRS case; it is just a fact of life.”  The real problem comes if the client revokes the power of attorney.  The ensuing radio silence could be business as usual at the IRS or it might be because you are now “out of the loop.”  The client might reap the rewards of a successful prosecution and skip abroad.   With such large incentives, it has been known to occur!

At the same time, there are those who criticize the incentives.  For example, when the contours of the SEC program were being debated, industry lobbyists tried to include a rule that the would-be whistleblowers would have to report fraud internally before going to the SEC directly.  Opponents argued that such a rule would chill the reporting of fraud and “insiders” would quickly find themselves “outsiders” and looking for unemployment benefits.  In the end, the final rule does not require whistleblowers to put themselves at risk of retaliation for reporting fraud up the chain.  They can now go directly to the SEC and the CFTC.

Others have tried to cap the awards that may be made under these programs.  Controversially, Michael Loucks, the former acting U.S. Attorney for the District ofMassachusetts, has called for the introduction of a $2 million cap on awards.  Loucks now defends whistleblower cases at Skadden Arps, and some say that has colored his thinking; Loucks has countered that he has always advocated for caps even while at the U.S. Attorney’s Office.  Either way, there are many in industry, particularly the pharmaceutical industry, who would like to see these incentives diminished.

So, if 2013 is going to be another Year of the Whistleblower, what will it look like?  I see two trends.  The first is a more rapid processing and turnover of cases.  Department of Justice statistics indicate that for most years in the last decade, there were between 300 and 400 new FCA cases.  Last year, that number jumped more than 50% to 638.  The national average for the length of the court seal is thirteen months, but there is now rumored to be an unofficial nine-month policy at the Department of Justice.  These shorter seal deadlines in conjunction with increased caseloads are pressuring government lawyers to make a decision to intervene in a case or cut it loose.  Accordingly, cases will be churned more rapidly for good or bad, and as a result, a greater number of these cases will be litigated by private lawyers rather than settled by the government.

The second trend is globalization.  The SEC and CFTC programs offer a reward following successful enforcement actions.  One of those laws that the SEC seeks to enforce is the Foreign Corrupt Practices Act.  If a publicly-tradedU.S.company succumbs to the pressure to pay off government officials overseas, anybody aware of that bribery may file a tip in theUnited States.  Indeed, of the 3000 or so tips filed in the last twelve months, the whistleblowers represent more than forty-five foreign nations.

The hot topics in 2013 will be Forex manipulation; “allocating” company income to low tax jurisdictions; mishandling of customer funds; and inadequate market disclosures.  It will be a busy year for practitioners in the area.  In fact, I think I need to book my seat at the next TAF conference today.

SEC clarifies foreign corrupt practices

The SEC has now published a formal guide to what constitutes bribery under the Foreign Corrupt Practices Act (“FCPA”).  Why is that important for whistleblowers? Because the new SEC whistleblower program, established last year, allows those who come forward with enforcement information to share in any penalty imposed.   The SEC enforces, among other things, the Foreign Corrupt Practices Act.  So, if you know of a publicly traded company making suspect payments to foreign officials, you may be rewarded for bringing that to the attention of the SEC.

So who is a “foreign official”? Employees of companies that are majority owned or controlled by foreign governments, that is to say the definition goes beyond the obvious like ministers of state or political appointees.  The SEC has also clarified that items of nominal value such as cab fare, reasonable meals and entertainment are unlikely to result in enforcement action.

The report is available here http://www.sec.gov/spotlight/fcpa.shtml

Posted in SEC

2011 National Business Ethics Survey

The 2011 National Business Ethics Survey is the seventeenth in a series of reports that began in 1994, an ongoing research initiative of the Ethics Resource Center.  All work in this effort is funded by charitable contributions.  In this year’s survey,  the author’s expressed great surprise at the results. Here is a sample of the data:

To begin with there are 138 million workers in United States over the age of 18.[1]

13% of employees, or nearly 18 million people, felt pressure to compromise their standards at work.

45% of workers, that’s 62 million, have witnessed misconduct at work.

65%, or 40 million, reported the misconduct within their company.

8% of American workers, or more than 11 million people, have witnessed misconduct that could lead to a whistleblower bounty under federal law.

40% of those who reported misconduct, or 16 million, say that, as far as they know, the fraud was never investigated.

22% of those who reported fraud internally, nearly 9 million workers, suffered some form of retaliation.  Fortunately for today’s whistleblowers you need not report fraud internally before approaching a lawyer to help you.

We see a very clear message in this data.  Insiders need protection.


[1] All statistics quoted on this page are from the 2011 National Business Ethics Survey “Workplace Ethics in Transition” – 7th Longitudinal Study of US workplace ethics.