Monthly Archives: February 2016

Why Do Certain Companies Routinely Have Problems With Fraud?

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The Washington Post published a recent story about a new working paper from researchers at the Harvard Business School that contained this interesting fact:

At least one previous study has found that unethical workers actually have longer tenures at companies than ethical ones.

Why? Because they tend to be “more productive” by skirting the law. The article gives this example: A firm might be tempted to look away when a rogue trader who is making millions is found to be overstepping legal boundaries. Of course, that “productivity” is not only not real, it is short term. Once the illegality is discovered, that productivity not only vanishes but becomes a huge liability.

It is not hard to think of examples of companies that are particularly susceptible to this type of short-term profit focus at the expense of long-term goals, like avoiding liability. Companies in the financial-services industry, companies looking to inflate their profits for various reasons, and publicly traded companies come to my mind.

The root of the problem is the willingness to “look past” transgressions for short-term financial gain–you know, the “greed is good” mindset. Until that culture is upended in American business, we should expect more fraud, not less.

Where Were the Whistleblowers? Case Study: Washakie Renewable Energy

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Washakie Renewable Energy Has Been Accused of a Massive Fraud Scheme

While there is a lot of reasonable debate about whether the current version of the False Claims Act strikes the right balance to deter fraud against the government, I’ve never heard anyone really make the case that the qui tam provisions of the False Claims Act–which allow private citizens to earn a reward for reporting fraud–should be abandoned. Although there are certainly examples of whistleblowers abusing the system, the role that whistleblowers have played in exposing some of the country’s biggest frauds has cemented their place in the enforcement scheme.

I have argued for some time that one of the primary shortcomings in the current enforcement efforts is the general lack of awareness about how to report fraud against the government. Fraud against the government is rampant, but the current laws designed to encourage whistleblowers to come forward catch only a tiny fraction of that fraud.

Take as an example the recent news that Washakie Renewable Energy, a Utah company that received millions of dollars from the government for renewable energy grants, never produced a single drop of biofuel. Instead, news reports suggest that the company, which has ties to a local polygamous sect and many local politicians, used 9 year-old kids to create fake forms showing the company in compliance.

The kind of massive fraud alleged to have occurred means that dozens of people had to have known–but nobody said anything. Just one well-placed insider with some integrity could have saved taxpayers millions of dollars, but instead no one said anything and the fraud was allowed to continue.

If those with knowledge of what was going on had known of the avenues available to them to report the fraud, and the possible rewards for doing so, I have to believe that at least one person would have stepped forward to alert the government. But so often, I believe, people who know that what’s going on is wrong don’t know where to turn to report it. We need to make sure that potential whistleblowers know of their rights and where they can go to stop the frauds they witness. Otherwise, we’ll continue to see more fraud against the government.

In short, we don’t need more punishment for wrongdoers, we need more consistent enforcement. And the history of the False Claims Act seems to suggest that whistleblowers are the key to that strategy.

The Rise of the Whistleblower Phase 2

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For years, much has been made about the general rise in False Claims Act cases nationwide. Although Forbes magazine called 2014 the “year of the whistleblower,” Forbes may have spoken a little too soon.

In December, the Department of Justice released its False Claims Act statistics for FY 2015. Although “overall recoveries were down” and “the government and relators filed fewer FCA cases,” a new and interesting trend has emerged: the willingness of relators to pursue cases where the DOJ has declined to intervene. And the numbers show that relators willing to take on defendants without the government’s help are receiving huge dividends.

The numbers tell the tale: not only was 2015 a record year for relator awards in declined cases ($334 million), but relators in declined cases received more in awards than relators in cases in which the government intervened in 2015. 

The willingness of the relators’ bar to pursue declined cases represents nothing less than a paradigm shift. It wasn’t that long ago that the government’s intervention decision was “make or break.” Defendants would heavily lobby the DOJ to stay out of cases, recognizing that a declination would more often than not result in the relator abandoning the case or a quick dismissal. Times have changed–and rather quickly.

These statistics show that not only are relators willing to take declined cases forward, they are having success doing so. Although these numbers don’t tell the whole story, it is possible that relators’ counsel are doing a better job distinguishing between declined cases, recognizing which ones are worth pursuing and which aren’t. Or perhaps the relators’ bar is just taking more cases forward generally, resulting in an overall upward trend.

These numbers should also be a wake-up call for defendants facing qui tam suits, who will no longer be able to assume that a declined case is a slam dunk. Although a declination is still better than an intervention (probably), the value of a declination is reduced. Defendants must re-calibrate their expectations and realize that a declination is just the first hurdle, not the last.

Looking back at the explosive growth of qui tam suits under the False Claims Act in the last decade, perhaps this outcome was inevitable. With twice as many qui tam suits being filed but basically the same number of government lawyers to handle them, the sheer number of declined cases was bound to go up–there are, after all, only so many hours in a day. But a lack of resources to pursue meritorious claims should not–and apparently has not–prevented those claims from going forward. Basically, the relators’ bar is picking up the slack for the DOJ’s inability to devote more resources to the larger pool of claims. The numbers seem to suggest that the arrangement is working out well–except, perhaps, for defendants.