‹#› 1 United States Commercial Law Seminar Masaryk University April 11-21, 2011 Lecture Six: Internal investigations, Special Committees, and directorduties to investigate and disclose possible wrongdoing: a case study Joseph D. Lee Munger, Tolles & Olson LLP ‹#› 2 Readings 1.A hypothetical factual scenario to be drafted 2.Larry D. Lahman, "Bad Mules: A Primer on the Federal False Claims Act", 76 Okla. B. J. 901, 901 (2005) 3.http://www.okbar.org/obj/articles_05/040905lahman.htm ‹#› 3 False Claims Act pCivil War era statute pPenalizes submitting false statements (claims) to the U.S. government nTo obtain more money from the government than it owes nTo reduce the amount owed to the government pClaim must be “knowingly” submitted to violate the FCA pFCA contains both civil and criminal penalties ‹#› 4 False Claims Act Procedure pFiled by a “relator” – a private citizen – on behalf of the government pPre-suit “disclosure statement” pCase filed initially under seal nGovernment (DOJ Civil Division) reviews case nDecides whether to intervene“Original source” requirement pRelator receives a percentage of the recovery n15-25% if government intervenes n25-30% if government does not intervene pPotential recovery nPenalties per false claim ($11,000) nTreble damages pAttorney’s fees recoverable ‹#› 5 Largest False Claims Act Cases 1.Pfizer 1,000,000,000 Sep-09 2.Tenet Healthcare 900,000,000 Jul-06 3.HCA 731,400,000 Dec-00 4.Merck 650,000,000 Jan-08 5.HCA 631,000,000 Jun-03 6.GlaxoSmithKline 600,000,000 Oct-10 7.Serono Group 567,000,000 Oct-05 8.TAP Pharmaceuticals 559,483,560 Oct-01 9.NY State and NYC 540,000,000 July-09 10.Astra Zeneca 520,000,000 April-10 ‹#› 6 HCA Case p$731,000,000 recovered (via settlement) pAlleged frauds nBilling for lab tests that were not ordered by physicians n“Upcoding” medical problems to get higher reimbursements nBilling for advertising (called “community education”) nBilling for non-reimbursable costs ‹#› 7 U.S. ex rel Robinson & Patterson v. Northrop pQui tam relators nWalter Robinson nErma Patterson pAlleged fraud in multiple programs n747 (Air Force One) nF/A-18 nOther programs pF/A-18 allegations – tubing nSkipping required tests and inspections – false certifications nFalsifying test and inspection results ‹#› 8 Jet Fighter Video MC900432687[1] ‹#› 9 How the Case was Won pProminent plaintiffs’ counsel nHistory of suing Northrop n“NDSI” cases pDepositions of the Plaintiffs pSummary judgment motion nNo material disputed facts nNorthrop entitled to judgment as matter of law ‹#› 10 Here we go again pJoe’s Bike Co. sold 10,000 bikes to U.S. government pBikes included certification that they were 100% carbon fiber pIn fact, 2,000 of the bikes were made in China and included aluminum pThe JBC employee (Xander Dumass) who signed the certification knew about the aluminum p25 different invoices included Chinese bikes ‹#› 11 Potential False Claims Act Exposure p2,000 bikes x $5,000 = $10 million nTrebled = $30 million pPenalties of $11,000 x 25 invoices = $275,000 pTotal exposure: $30,275,000 nPlus attorneys’ fees to the Relator’s counsel ‹#› 12 Qui Tam Lawsuit pIn February 2011, JBC discloses the China bike issue in an SEC filing pIn March 2011, a JBC employee (Jane Turncoat) files a qui tam lawsuit against JBC pGovernment declines to intervene pTurncoat is a poor performer who was going to be fired pTurncoat alleges that she was punished (poor reviews) for reporting false claims internally pTurncoat settlement demand: n$12 million to government nAttorneys’ fees n$1 million for retaliation plus promotion pAnticipated defense costs: $2 million ‹#› 13 Questions for the Board 1.Should we fight the case or attempt to settle? 2.If we attempt to settle, what should we counter-offer as to: a.$12 million demand (false claims) b.$1 million demand (retaliation) c.Promotion demand (retaliation) 3.What other terms should we propose in settlement? 4.What should we do to improve our internal controls for sales to government? ‹#› 14 The Rule of Law “For 500 years the West patented six killer applications that set it apart. The first to download them was Japan. Over the last century, one Asian country after another has downloaded these killer apps—competition, modern science, the rule of law and private property rights, modern medicine, the consumer society and the work ethic. Those six things are the secret sauce of Western civilization.” Harvard historian Niall Ferguson Civilization: The West and the Rest