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Whistleblowers win with False Claims Act, but does it actually deter fraud?

December 21, 2014 at 3:30 PM EDT
Last year alone, the federal government and its whistleblowers -- people incentivized by the False Claims Act to expose fraud in companies that work with the government -- recovered nearly $6 billion in lawsuits that exposed wrongdoing. But some question whether the False Claims Act actually prevents fraud or merely incentivizes people with potential reward money. NewsHour's Rick Karr reports.
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RICK KARR: For most of the eighteen years that she spent working for the medical device manufacturer C.R. Bard near Atlanta, Julie Darity says she had unwavering faith in the company’s integrity. Upholding it was part of her job.

JULIE DARITY: My entire career had been compliance, and making sure that things were done appropriately, according to the regulations.

RICK KARR: You believed in this company, you thought this company was doing the right thing.

JULIE DARITY:  Oh, I did.

RICK KARR: But her faith was tested when she started working with a team that sold radioactive pellets used to treat prostate cancer. It was her job to review every transaction the team made and she began to suspect they’d developed a scheme to overcharge Medicare, which paid for most of the pellets.

She says sales reps persuaded customers to use Bard’s product — even though it was more expensive than the competition’s — by giving them free medical equipment, rebates, and grants. The incentives came at the expense of taxpayers, because Medicare was paying the higher price Bard set.

JULIE DARITY: There were instructions that I was given to do things that clearly were inappropriate, perhaps illegal, and so when those things would happen I would question management about it. My hope was that things would be resolved.

RICK KARR: She says they did nothing, so – according to court documents filed later — she reported her concerns in an ethics complaint to Bard’s corporate headquarters. The company sent investigators to visit the site and, at around the same time, she alleges her superiors began mistreating her.

JULIE DARITY: I came to feel that I was a problem employee.

RICK KARR: You came to feel that?

JULIE DARITY: Yes.

RICK KARR: After a year, C.R. Bard fired her the week before Thanksgiving. Two days later, she began preparing a civil whistleblower lawsuit. Because federal money was at stake in its allegation of Medicare fraud, she filed her case on behalf of the United States, as well as herself.

The scheme she alleged was complex. Her lawyer would need to connect all the dots and she had to provide the evidence. She spent the next seven years finding it by poring over documents and the contents of a laptop that

Bard had sold to her.

Is that like, the laptop?

JULIE DARITY: This is the laptop.

RICK KARR: It’s got a Bard sticker on it there…

JULIE DARITY: That information was only available from sales records that happened to be on this laptop.

RICK KARR: Her lawsuit was filed under a provision of federal law that Congress had strengthened twenty years earlier to encourage whistleblowers.

SEN. CHUCK GRASSLEY: We didn’t known that it was going to turn out to be the best tool that exists in government today for fighting fraud in government.

RICK KARR: Iowa Republican Sen. Chuck Grassley was a sponsor of the whistleblower reform in 1986. It came about after auditors discovered that the Defense Department had been buying four hundred dollar hammers and six hundred dollar toilet seats. Grassley thought individual Americans might be able to stop waste and fraud that the Pentagon failed to.

SEN. CHUCK GRASSLEY: It gives outside pressure and outside incentives, empowering people when government is not doing its job to do its job.

RICK KARR: The law had been on the books since the Civil War. Military contractors had supplied the Union army with sick horses and mules, faulty weapons and ammunition, and tainted rations. Congress sent President Abraham Lincoln the False Claims Act which let whistleblowers file suit on behalf of the government — and keep a portion of the penalties if a suit was successful.

The law that Lincoln signed was based on a legal concept that dates back to medieval England. Back then, lawyers used a Latin phrase to describe it that means, “one who sues on behalf of the King as well as oneself.” Today, lawyers still use the first two words of that phrase — qui tam — as the name of this kind of whistleblower lawsuit.

In the fiscal year that ended on September 30, the federal government recovered five point six nine billion dollars under the False Claims Act.

JOYCE BRANDA: You can’t argue with success. You can’t argue with close to $6 billion this fiscal year, which is the largest amount we’ve ever recovered.

RICK KARR: Joyce Branda is in charge of False Claims Act cases at the Department of Justice.

JOYCE BRANDA: I think the success of the statute breeds success. So the more cases are filed and the more we recover under the statute, it gains that much more notoriety.

RICK KARR: The suits get attention thanks to the amount of money some whistleblowers have made, typically no more than a quarter of the money that is recovered. Darity’s share was more than ten million dollars when C.R. Bard paid more than forty eight million dollars to settle the case.

There’s a self interest in this, if you’re successful, this suit is successful, you get a chunk of money out of this, you’re not doing this out of purely altruistic motives.

JULIE DARITY: My primary motivation for this was full vindication. Yes, I was compensated, but I worked very hard for the American people, who recovered almost 40 million dollars, then they got all my tax money, which was significant, my lawyers got a nice big chunk of it, and I got what was left.

RICK KARR: Did you get rich off this?

JULIE DARITY: We’re comfortable off this, but we’re living in the same home we lived in for almost eighteen years, I’m still driving my Honda Civic hybrid, it’s a 2005 model, no Maserati in my garage.

Darity’s now working for the social security administration helping people appeal disability claims.

Even though the False Claims Act worked out for her, a former deputy attorney general says it needs reforming.

DAVID OGDEN: What often follows lots and lots of money is, are problems of people who are pursuing marginal, frivolous claims, because there’s potentially a big payday at the back end, and that is an issue.

RICK KARR: David Ogden has worked on both sides of the False Claims Act, first at the Department of Justice, and now at a D.C. law firm that defends companies in whistleblower suits. He argues that the vast majority of cases are dismissed or abandoned because so many are meritless. He’s become the leading advocate in a campaign by the U.S. Chamber of Commerce to reform the law.

Ogden says the biggest problem with the False Claims Act is that it can impose penalties that are out of proportion to the fraud a company may have committed. He also says it doesn’t give companies enough opportunity to fix problems before the federal government gets involved.

DAVID OGDEN: I think the false claims act is extraordinarily useful and has really been innovative and important in helping to detect fraud after it occurs and punishing fraud after it occurs and then recovering money for the government. It’s very good at that and that’s very important. What the false claims act is not good at and what I think needs to be fixed, and I think there’s an opportunity to do it, is to prevent fraud before it occurs.

RICK KARR: He proposes amending the law … to grant immunity to a company if independent auditors certify its fraud prevention and whistleblower protection measures … and if the firm reports any fraud it finds to the government.

DAVID OGDEN: If it’s a good company that cares, and wants to comply with the law, have the companies stop it, have the companies report it, if they don’t then let’s whack them with the big penalties.

RICK KARR: Iowa Republican Senator Chuck Grassley says that would gut the False Claims Act. The only change he supports is one to prevent companies from defrauding the government a second time.

SEN. CHUCK GRASSLEY: Heads roll– you don’t do business with the federal government ever or for– a certain period of time.

RICK KARR: Hit ’em where it hurts on the bottom line, basically–

SEN. CHUCK GRASSLEY: Yes. If you like doing business with the federal government, you ought to do it in– in a honest way, not in a fraudulent way. And if you do it in a fraudulent way, there ought to be a price to be paid.

RICK KARR: For C.R. Bard, that price was nearly fifty million dollars. But Julie Darity says she paid a price, too.

Did you think, at some point, oh my god I’m one of those whistle blowers I hear about?

JULIE DARITY: I did, and it’s got such a negative connotation, but I would think most people are like me, and it’s a very painful process, it’s not easy, you’re a pariah.

RICK KARR: No regrets?

JULIE DARITY: No regrets. I would still do it again because it was the right thing to do.

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