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Archive for August, 2012

Johnson & Johnson Settles Risperdal Case For $181 Million

Friday, August 31st, 2012

Johnson & Johnson has agreed to pay $181 million to resolve allegations of inappropriate marketing of the drug Risperdal.  Thirty-six states and the District of Columbia will share in the settlement money.

The lawsuit alleges that Janssen Pharmaceuticals Inc., a subsidiary of Johnson & Johnson, marketed Risperdal for off-label uses, targeting patients with Alzheimer’s disease, dementia, depression, and anxiety.  These uses aren’t FDA-approved and Janssen never established that the drug was safe and effective for them.

Along with the District of Columbia, the following states participated in the settlement: Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Vermont, Washington, Wisconsin, and Wyoming.

This agreement is separate from a continuing federal investigation that could lead to criminal charges against the company.  Reports suggest a settlement of that investigation could reach $2 billion.

For more information, please see:
http://bit.ly/Pwl9e5

Feds Notify Hospitals Of Liability For Wrongly Implanted Heart Devices

Friday, August 31st, 2012

On August 30, 2012, the Department of Justice (DOJ) began emailing hospitals across the country with strict instructions to examine questionable implantable defibrillator surgeries on Medicare patients and estimate potential penalties under the False Claims Act.  Prosecutors of the DOJ have been investigating for over two years as to whether or not some Medicare patients have received implanted defibrillators outside of CMS rules on when these devices can be used.  Not every device that falls outside the 2005 CMS National Coverage Determination rules for preventive ICD use will be penalized.

The email states that hospitals must “self-audit and estimate damages, with the severity of penalties based on whether the hospital had medical reasons to violate CMS rules; if patient harm resulted; if the hospital had prior knowledge or a statistical pattern of non-guideline implants; and if a hospital compliance program was in place.”

For more information, please see:
http://bit.ly/PCfT7z

SEC’s Bull Market For Whistleblowers

Thursday, August 30th, 2012

Within the past year, whistleblowers inside of American corporations are divulging information about employers that could give them part of multi-million dollar penalties won by financial regulators under a Securities and Exchange Commission program.  Whistleblowers are exposing more than simply names; they are turning over documentation including e-mails and audio recordings because they are motivated by cash and the turning in of wrongdoers.  The director of the SEC’s whistleblower’s office, Sean McKessy, stated, “We are getting very, very high-quality information from whistleblowers.”  As of August 12, about 8 tips per day for the past year, 2,870 tips total, have come in.  On August 21, the first payout of $50,000 was given to a whistleblower who alerted regulators to investment fraud.  Some observers question whether the SEC has enough resolve or resources to pursue difficult cases.  Tipsters under this program, who have crucial information to a case, could get 10% to 30% of penalties over $1 million.  The SEC has put aside $452 million from past fines and penalties in an investor protection fund to provide payouts to whistleblowers.

For more information, please see:
http://www.philly.com/philly/business/20120825_SEC_s_bull_market_for_whistle-blowers.html#ixzz24sIWXD88

Omnicare Agrees To Settle Suit Over Reimbursement Claims

Tuesday, August 28th, 2012

Omnicare, Inc., based in Covington, Kentucky, agreed to settle a lawsuit alleging it submitted false claims for reimbursement to government health insurers and paid a “kickback” when it bought the pharmacy company, Total Pharmacy Services, LLC.  Omnicare is a company that supplies drugs to nursing homes.  The 2007 lawsuit was filed by whistleblower, Maureen Nehls.  A hearing is set on September 25, 2012 by U.S. District Judge John J. Tharp, Jr.  A complaint was initially filed in 2006 by Nehls and an additional whistleblower, Adam Resnick.  Resnick plead guilty and was sentenced in 2007 to 42 months in prison for “siphoning $10.2 million from Universal Federal Savings Bank in 2001 and 2002.”  As a result, Universal had to fold and Resnick was eventually paid a settlement of 19.9 million for this suit.

Omnicare, Nehls claimed, purchased Total Pharmacy Services LLC in 2004 for $25 million which included a kickback to Philip Esformes, one of the owners, and Morris Esformes, Philip’s father.  According to the complaint, the payment provided Omnicare with thousands of elderly and disabled clients through successful contracts with nursing homes controlled by Morris Esformes.  Omnicare was also accused of supplying nursing home residents medicine without prescriptions or with missing prescription documentation.  On May 11, the case was settled with the Justice Department for $50 million.  The DOJ stated it was the “largest controlled substance settlement in history.”  Furthermore, Omnicare agreed to pay $98 million, in November 2009, to settle the civil claims by the U.S. government and assorted states that it received kickbacks from Johnson and Johnson.

For more information, please see:
http://www.businessweek.com/news/2012-08-24/omnicare-agrees-to-settle-suit-over-reimbursement-claims

Paducah False Claims Act Settled, More Anticipated

Tuesday, August 28th, 2012

In Paducah, Kentucky, a False Claims complaint has been settled regarding landfill operations.  The qui tam complaint, United States ex rel. Vander Boegh v. Bechtel Jacobs Company, LLC, was filed by C. Dean Furman, Esquire on behalf of the United States of America, in addition to filing by Relator, Gary Vander Boegh, President of Commonwealth Environmental Services, LLC and Lockheed Martin project manager for Paducah Gaseous Diffusion Plant landfill operations.  The original action filed by Attorney Furman was amended twice and alleged that Bechtel Jacobs’ removal of waste was improperly handled as “nonhazardous” when the company should have been aware that the waste was F-listed hazardous during the period of April 1998 to January 2002.  In addition, it was alleged that Bechtel Jacobs improperly stored “no rad added” waste at the Paducah Plant and disposed of it at the Nevada Test Site, which is designated for radioactive waste, when it could have been disposed of less costly at the plant’s sanitary landfill.  Lastly, Bechtel Jacobs is alleged to have “disposed of waste at the plant’s sanitary landfill even though those wastes contained excessive amounts of free liquids in February, May, June, and July 2004.”  The total settlement amount was $230,000 for both actions, although this amount was less than Vander Boegh had expected.

Vander Boegh has now had two successful qui tam actions as a Relator and stated he and his company will be encouraging other Paducah Gaseous Diffusion Plant employees to file such “profitable” actions.  To avoid retaliation and maximize future settlements, Vander Boegh encourages former and current PGDP workers to contact him before filing a complaint.  Vander Boegh stated he is looking forward to working with Attorney General Jack Conway in prosecuting future qui tam cases and also in educating nuclear workers.  Vander Boegh stated, “It is always extremely gratifying to be a part of returning money to the United States Treasury.”

For more information, please see:
http://www.huntingtonnews.net/41802

Ninth Circuit Rules Relator’s Share Is Ordinary Income

Tuesday, August 28th, 2012

In U.S. v. Alderson, 686 F.3d 791 (9th Cir. July 18, 2012), a case of first impression, the Ninth Circuit Court of Appeals found that a relator’s share should be treated as ordinary income for tax purposes rather than as capital gain.  Given the lack of authority for both the qui tam relator and the Government’s positions, the Ninth Circuit analyzed the correct treatment of relator’s share based on the text of the Internal Revenue Code.  Under the Internal Revenue Code, a capital gain is a gain from the sale or exchange of a capital asset.  Using this analysis, the Ninth Circuit found that (1) the information provided to the Government by a relator was not a “sale or exchange” and (2) that neither the information provided to the Government nor the relator’s share itself constituted a capital asset.  Finally, the Ninth Circuit also found that the increase in value of the relator’s share did not amount to a capital gain from when the relator filed the qui tam action in 1993 to when the case was settled in 2003.

Background 

In 1993, James Alderson, the former CFO of North Valley Hospital in Montana, filed a  qui tam suit under the False Claims Act against Quorum Health Group (Quorum) as well as other entities including the Hospital Corporation of America (HCA).  After litigating the cases on his own for five years, the United States intervened in 1998 and settled the case against HCA for $631 million and the case against Quorum for $85.7 million.  After accounting for attorney’s fees and expenses, Alderson received $27.1 million as his share of the HCA settlement.  Prior to receiving the settlement, Alderson transferred 40% of his interest of the potential share to a family partnership he established.  He then gave his two children 49% interests in the partnership, his wife a 1% interest, and retained a 1% interest for himself.  In 2003, Alderson and his wife filed a joint tax return for both the 60% relator’s share Alderson retained as well as the 2% interests they kept in the family partnership as ordinary income.  Additionally, both Alderson’s son and his wife, and Alderson’s daughter and her husband, filed tax returns for their 49% interests in the partnership as ordinary income.

In 2007, all three couples filed amended returns for tax year 2003, in which they re-characterized their portion of the relator’s share as capital gain.  Such a re-characterization would reduce their tax liability significantly – Alderson and his wife sought a refund of $3.2 million and his son and daughter sought refunds of just over $1 million each.  After the IRS denied their refund requests in 2008, all three couples filed suit in district court for refunds.  The district court denied the requests, finding the relator’s share was ordinary income.  The three couples (“Appellants”) then filed for appeal to the Ninth Circuit. 

As a matter of first impression, the Ninth Circuit analyzed whether the relator’s share under the FCA would constitute a “capital gain,” which is defined in the Internal Revenue Code as a “gain from the sale or exchange of a capital asset.”  26 U.S.C. § 1222(1),(3).  To make this determination, the Ninth Circuit considered whether the relator’s share would satisfy the requirements of both “sale or exchange” and “capital asset.”

Sale or Exchange

Noting that capital gains treatment only applies to gains from sales or exchanges, the Ninth Circuit addressed Appellant’s arguments that Alderson’s exchanging documents, information, and know-how to the government in exchange for a relator’s share, was a sale or exchange.  The Ninth Circuit rejected this argument, finding that Alderson did not “sell” or “exchange” the information that he provided to the Government in his qui tam suit.  The Court noted that if Alderson had offered to sell the information he had to the Government they would almost certainly reject this offer.  Rather, the Ninth Circuit found that Alderson provided the information to the Government as a precondition for pursuing his qui tam suit, as required by the statute. 

Further, Alderson did more than simply “hand information over to the Government” in exchange for payment.  Instead, he performed numerous and extensive acts to persuade the Government to intervene in the case, such as reviewing the thousands of documents the Government had obtained through subpoenas and preparing a spreadsheet based on his analysis of these documents.  Thus, the Ninth Circuit found that Alderson’s actions could not constitute a “sale or exchange” for purposes of capital gains treatment.

Capital Asset

The Ninth Circuit next addressed Appellant’s arguments that Alderson’s relator’s share constituted a “capital asset.”  Specifically, Appellants argued (1) that the information supplied by Alderson to the Government was a capital asset and (2) that the relator’s share itself was a capital asset.  The Ninth Circuit rejected both arguments. 

First, the Ninth Circuit found that the information supplied by Alderson to the Government was not a capital asset as it was not his “property” as required by 26 U.S.C. § 1221(a).  The Ninth Circuit recognized that general principles of property law require the owner to have a legal right to exclude others from use and enjoyment of that property.  In this case, the Ninth Circuit found that Alderson had no legal right to exclude others from the information he obtained through discovery and subsequently provided to the Government.  Rather, the information was known to other officials in the company and Alderson had no right to prevent those officials from providing it to others.  Although the FCA required Alderson to file his complaint and accompanying evidence under seal to allow the Government to investigate the case, this requirement did not alter the fact that Alderson could not prevent others who knew of the information from revealing it.  Thus, because the information Alderson provided to the Government was not his “property,” it could not be considered a capital asset. 

Next, the Ninth Circuit rejected Appellants’ argument that the relator’s share itself was a capital asset and that the increase in value of the relator’s share between 1993 (when Alderson filed the case) and 2003 (when he actually received it) was a capital gain.  The Ninth Circuit recognized that a relator’s share could constitute property for some purposes such as for assignment to others.  However, the Ninth Circuit rejected the notion that because a relator’s share could be property for some purposes, that it could be a capital asset.  Notwithstanding the Appellant’s argument, the Ninth Circuit found that neither of the factors used to identify capital assets applied to the relator’s share. 

First, Alderson did not receive his right to a realtor’s share in return for an underlying investment of capital.  The Ninth Circuit found that Alderson’s uncovering of HCA’s fraud and receiving documents revealing the fraud during discovery were not activities that constitute an “investment of capital”.  Although Alderson incurred expenses in furtherance of his acquisition of the documents he provided to the Government, taxpayers routinely incur expenses in the production of ordinary income.  Next, the Ninth Circuit found that the increase in value of the realtor’s share between 1993 and 2003 did not reflect an “accretion in value over cost to the underlying asset.”  Alderson was not an investor who bought and held an asset that increased in value, but rather a relator who worked “intensively” to increase the likelihood that his qui tam suit would be successful. 

Finally, the Ninth Circuit rejected Appellants argument that the increase in value of the relator’s share between 1993 and 2003 itself was a capital gain under 26 U.S.C. § 1234A.  That provision allows gain from property constituting a “capital asset” to be treated as capital gain.  Because the Ninth Circuit already rejected the notion that the relator’s share was a capital asset, it found that the increase in value of the relator’s share from 1993 to 2003 was not a capital gain.

Conclusion

This decision has important tax implications for successful qui tam whistleblowers.  Following this decision, successful qui tam relators must be careful to pay taxes on their relator’s share as ordinary income rather than as a capital gain.

SEC Makes First Whistle Blower Payment

Friday, August 24th, 2012

After just one year of operation, the SEC made the first payment under its Whistleblower Program.  The program was established in August 2011 as part of the 2010 Dodd-Frank Act.  The whistleblower will receive nearly $50,000, representing 30% of the amount collected in an SEC enforcement action against the perpetrators of a securities fraud scheme.  The whistleblower’s assistance resulted in a court ordering more than $1 million dollars in sanctions.  Robert Khucami, Director of the SEC’s Division of Enforcement, praised the whistleblower for providing “the exact kind of information and cooperation” that the SEC hoped the Whistleblower Program would attract. 

For more information, please see:
http://www.sec.gov/news/press/2012/2012-162.htm

Court Grants $40 Million Judgment For Qui Tam Plaintiffs

Friday, August 24th, 2012

On August 13, 2012, a U. S. District Court in Dallas, Texas entered a final judgment in the amount $40,472,759 for Qui Tam plaintiffs against a defendant for violations of the False Claims Act.  The violations stemmed from fraudulently inflated charges that were submitted by a government subcontractor to Lockheed Martin Corporation and then passed on to the United States government.  The judgment was entered against the former President and CEO of the subcontractor, who had previously pleaded guilty to conspiracy to defraud the government and been sentenced to a prison term of 7 ½ years.  The amount of the judgment represented the government’s actual damages multiplied by three consistent with the treble damages provision of the False Claims Act.

For more information, please see:
http://law.justia.com/cases/federal/district-courts/texas/txndce/3:2005cv00627/145567/215

29 States Collect $151 Million from McKesson For Overcharging Medicaid

Friday, August 17th, 2012

On July 27, 2012, it was announced that the McKesson Corporation agreed to pay $151 million to 29 states to settle allegations that the company artificially raised Medicaid drug prices, resulting in excess charging for prescription medications.  More specifically, it was alleged that McKesson provided inflated prescription-drug information for a wide variety of brand-name drugs and the knowledge that the information would be given to First DataBank, which published drug market pricing information, would substantially inflate Medicaid drug prices throughout the United States.  This announcement follows the May 2012 announcement wherein McKesson paid the federal government over $190 million to settle a false claims act case based on related allegations.

McKesson is one of the nation’s largest drug wholesalers and is responsible for the sales of popular drugs like Pfizer’s Lipitor and Eli Lilly’s Prozac.  The settlement resolved claims that McKesson inflated approximately 1,400 brand-name drugs between 2000 and 2009 by as much as 25% which resulted in millions in inflated costs paid by Medicaid programs.

Of the 29 states involved in the state settlements, New York will receive $64 million and California will receive $23 million.  The remainder will be apportioned among the remaining states and the District of Columbia. 

For more information, please see:   
http://online.wsj.com/article/BT-CO-20120727-712802.html

Senate Report Finds That For-Profit Colleges Shortchange Taxpayers

Friday, August 17th, 2012

A recent Senate report stated that for-profit colleges mismanage taxpayer money despite their reliance on federal financial aid which accounts for as much as 90% of their revenue.  The report was issued by U.S. Senate Committee on Health, Education, Labor and Pensions which is chaired by Iowa Senator Tom Harkin.  Senator Harkin offered these comments, “In this report, you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and manipulation.  These practices are not the exception – they are the norm.  They are systematic throughout the industry, with very few exceptions.” 

The investigation of the for-profit colleges spanned two years and examined 30 companies.  The report found that the 30 companies had an average of 22.4% of their revenue went into marketing, 19.4% to profit, and 17.7% into instruction.  Chief executives were paid an average of $7.3 million, and the companies spent $8 million on lobbying in 2010 and the same amount in the first nine months alone in 2011. 

For more information, please see: 
http://www.businessweek.com/news/2012-07-30/for-profit-colleges-shortchange-taxpayers-senate-report-finds

 

 
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