moneyThe federal government has been handing out billions of dollars in stimulus money to individuals and companies. These funds have helped businesses survive the COVID-19 pandemic by providing them with low or no-cost liquidity when they are not permitted to operate as they would normally. But stimulus money, like all government money, is a double-edged sword. By applying for and accepting these funds, businesses are subjecting themselves to the specter of liability under the False Claims Act (“FCA”). Companies who never before have done business with the federal government or who never received government funds should be particularly cautious as the FCA carries significant criminal and civil exposure, including up to five years imprisonment, that might not be readily apparent to those companies that previously operated in the non-governmental environment.

The current FCA has a long, complicated history dating back to the Civil War, and it has been amended several times, including following the last financial crisis and resulting recession. The United States Supreme Court also has refined various provisions of the FCA over time. But for our purposes, there are a few aspects of the FCA that are particularly important for recipients of federal stimulus funds.

First, the FCA prohibits both false or fraudulent “claims” or “statements” (submitting an invoice to the federal government for payment that is factually false) and false “certifications” (submitting an invoice for which the amount of payment may correctly match the amount of work the company did for the government, but falsely certifying that the company followed applicable laws and regulations in performing the work).

The FCA, like most fraud-based statutes or crimes, requires proof of fraudulent intent. Specifically, the government must prove that the individual or company acted “knowingly,” or with “deliberate indifference” or “reckless disregard” to the truth. Any false statement must be material to the government.

The FCA encourages whistleblowers–known as “relators”–to present cases to the government. If the government declines to pursue the case after investigating, the relator can still pursue the case “on behalf of” the federal government, with substantial financial incentive to do so in the form of heightened damages.

Any business that applied for and received federal funds from the Paycheck Protection Program (“PPP”) is subject to the FCA. A business that applied for a PPP loan made “statements” and “certifications” to the federal government, and it does not matter that the statements may have been made to a private lender. Furthermore, when that business applies for forgiveness of the PPP loan, it is making a “claim” and offering additional “statements” and “certifications.” Each of these is actions is a potential for an FCA violation.

For these reasons, any recipients of federal stimulus funds, including PPP loan borrowers, should do their absolute best to ensure they are following the rules and regulations governing these funds. For those businesses that are for the first time transacting with the federal government, extra care should be taken to learn and understand the contours of the FCA. The DOJ and FBI have made investigating stimulus fraud a priority. They’ll be watching.

Money TrapOn June 30, 2020, the U.S. Attorney’s Office for the Northern District of Ohio filed a criminal complaint charging four Toledo City Councilmembers and a local attorney for their participation in an alleged years-long bribery and extortion scheme. These charges add to a long line of public corruption cases brought by federal prosecutors in Ohio over the last decade, including prosecutions in the Cleveland and Cincinnati areas. In Cleveland, more than 70 government officials and individuals who dealt with the Cuyahoga County government were convicted from 2008 through 2016. More recently, Cincinnati City Councilwoman Tamaya Dennard pleaded guilty to honest services wire fraud.

The Toledo Complaint, which details alleged misconduct by at least one Councilmember dating back to 2013, paints a picture of multiple local officials willing to trade their votes on zoning decisions and other legislation in exchange for payments ranging from $300 to $5,000. Councilmembers Tyrone Riley, Yvonne Harper, Garrick “Gary” Johnson, and Larry Sykes, along with attorney Keith Mitchell, were each charged with violations of 18 U.S.C. § 666(a)(1)(B) (Theft or bribery concerning programs receiving Federal funds) and 18 U.S.C. § 1951 (Interference with commerce by threats or violence), with Harper additionally charged for allegedly violating 18 U.S.C. § 875(d) (Interstate communication of a threat to injure property or reputation).

According to the Complaint, the federal investigation began in March of 2018 and it appears to come straight out of the playbook that DOJ used in Cleveland and Cincinnati.

Federal agents interviewed an individual who had been arrested for living in the U.S. illegally. That individual, referenced as SOURCE 1 in the Complaint, provided information regarding a payment she/he had made to Councilman Riley in 2013 in exchange for Riley’s anticipated support in preventing a competing business from opening near SOURCE 1’s gas station. In May of 2018, under the direction of the FBI, SOURCE 1 re-approached Riley about obtaining his support for a new special use permit. Riley brought a middleman along to a lunch meeting with SOURCE 1 where they discussed the permit. After conferring alone with Riley, the middleman indicated to SOURCE 1 that Riley’s support for the permit would cost $2,000. By December of 2018 the FBI had approached the middleman and secured his/her cooperation as SOURCE 2 in the investigation.

Over the course of the next 18 months SOURCE 1 and SOURCE 2 made or facilitated almost $35,000 in payments to Riley, Johnson, Sykes, Harper, and Mitchell for their anticipated support of a series of zoning decisions, and a legislative moratorium on internet cafes in Toledo. Along the way, Harper pressured SOURCE 1 to make a direct payment of $2,500 to a constituent from her district, after an employee of a business at a building owned by SOURCE 1 used racial slurs when interacting with the constituent.

Each of the five individuals named in the Complaint has been arrested and released on unsecured bond while awaiting trial on the charges. A conviction on both 18 U.S.C. § 666(a)(1)(B) and 18 U.S.C. § 1951 could carry prison sentences of up to 30 years, as well as fines of up to $250,000. Harper could face another two years in prison for her additional charge under 18 U.S.C. § 875(d).

The charges in Toledo came about a month after the U.S. Supreme Court’s decision in the New Jersey Bridgegate case, Kelly v. United States, in which the Court again endorsed a narrow application of federal criminal law to misconduct by public officials. The Supreme Court reiterated that fraudulent schemes by public officials do not necessarily violate federal law unless the aim of the scheme(s) is to obtain money or property. Unlike the public officials in Kelly who apparently were motivated by politics and not money or property, the Toledo Councilmembers’ alleged conduct in accepting bribes and extorting other payments may fit within the category of “fraudulent schemes…for obtaining money or property.” Given that the Supreme Court has narrowly construed federal criminal laws in recent years, however, it remains to be seen whether the Toledo Councilmember defendants will be able to rely upon the more lenient Kelly decision in their cases.

Medical MarijuanaOn July 10, 2020, the Ninth Circuit issued an unusual 2-1 decision affirming a California federal district court’s injunction against the further prosecution of two California marijuana growers, Anthony Pisarski and Sonny Moore. United States v. Pisarski, 2020 U.S. App. LEXIS 21564 (9th Cir. 2020). These defendants had pleaded guilty to federal possession and distribution charges after federal agents found multiple firearms, hundreds of unharvested marijuana plants, over $420,000 in cash, “and a treasure trove of gold and silver bars and coins” at a rural California grow site.

Medical Marijuana Appropriations Rider

Despite pleading guilty in 2012, the defendants argued that the government was precluded from proceeding with their sentencing by the terms of the 2015 Consolidated and Further Continuing Appropriations Act (“Appropriations Act”). The Appropriations Act contained a rider that prohibited the Department of Justice from using funds made available thereunder in a manner that prevents “States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” Essentially, the rider bars the Justice Department from using any congressionally allocated funds to prevent the lawful exercise of rights granted under state medical marijuana statutes. The rider has been renewed every year since 2015.

The Defendants’ McIntosh Hearing in the District Court

In United States v. McIntosh, 833 F.3d 1163 (9th Cir. 2016), the Ninth Circuit held that the Appropriations Act riders precluded federal marijuana-related prosecutions against persons acting pursuant to state marijuana laws. Even though Pisarski and Moore had pleaded guilty and were convicted prior to the initial Appropriations Act rider, they argued that, under McIntosh, the rider precluded the government from pursuing their subsequent sentencing because their marijuana growing operations were in strict compliance with California’s medical marijuana statutes. Those statutes allow growers to sell marijuana to certain qualified patients, caregivers, and collectives of qualified patients so long as the sales are not part of a “profit-making enterprise.”

The federal prosecutors argued that the weapons, large sums of cash, and precious metals found at the defendants’ grow site were “suspicious” and that, as described in guidance issued by the California Attorney General, they were indicia of the defendants’ profit-making motive. Therefore, argued the government, the defendants were not in strict compliance with California’s medical marijuana statutes.

The district court disagreed, explaining that the presence of guns, money, and silver and gold at the defendants’ grow site was “equally consistent with the operation of a rural, cash-intensive enterprise as it was with an unlawful marijuana operation.” The district court further found that the evidence presented at the McIntosh hearing showed that the defendants were planning to limit their sales to qualified medical marijuana collectives and only sought reimbursement of costs in return. In enjoining the government from spending any money in furtherance of the defendants’ sentencing, the district court further noted that there was no evidence that the defendants had made impermissible marijuana sales in the past.

The Ninth Circuit’s Decision

In the Ninth Circuit appeal, the majority saw the defendants’ strict compliance with the California medical marijuana statutes as a purely factual matter. As such, it gave great deference to the district court’s findings of fact at the McIntosh hearing and affirmed the injunction because the government had failed to establish that the district court’s decision was clearly erroneous.

The dissenter argued that the district court misapplied California’s medical marijuana statutes and that the case accordingly deserved de novo review. The dissenter took particular issue with the fact that the record demonstrated that some of the potential customers were “unidentified patients and collectives” for whom no evidence had been produced establishing their qualified status under California’s medical marijuana statutes.

Nonetheless, the majority seemed to be persuaded by the district court’s finding that the defendants had not even harvested any marijuana plants at the time of their arrest and, therefore, “any potential marijuana sale was sufficiently far into the future that, by the time of such sale, the defendants would have had ample time to ensure every aspect of it complied with [California’s medical marijuana statutes].”

The government may seek rehearing, rehearing en banc, and even Supreme Court review of the panel’s decision. But if it does not, or if the panel’s decision is not overturned, the import of this result is unmistakable – the Appropriations Act riders can be used to create insuperable obstacles to federal marijuana prosecutions in the numerous states where medical marijuana production and sales are legal.

courthouseOn July 2, 2020, a federal judge sitting in Manhattan sentenced disgraced entrepreneur Telemaque Lavidas to a year and a day in prison for insider trading. In addition to the prison term, the judge sentenced Lavidas to three years of supervised release including community service, restitution, and fines, which together could exceed $200,000. Lavidas’s conviction arose from passing secrets that he learned from his father, who sat on Ariad’s Board of Directors, to a stock broker friend about Ariad Pharmaceuticals.

Lavidas’s conviction is nothing new to the insider trading world—it is illegal for a person who possesses a company’s material non-public information either to directly trade securities on the information or “tip” the information to a secondary source who then trades securities based on the tipped information. But the COVID pandemic has heightened insider trading risks. COVID-19 has impacted supply chains, companies, and individuals worldwide. The coronavirus pandemic has also caused historic market volatility and a steady stream of potentially market-moving announcements by companies, leading to opportunities for insider trading and market manipulation. With fast-changing business conditions that can create material non-public information and significant swings in share prices, the value of inside information has rarely been higher.

Take, for example, Company A’s hostile takeover of another company, Company B. Company A publicly announces the takeover and later halts the takeover to batten down the hatches and weather the COVID-19 storm. Before the initial announcement of the takeover, the insider trading danger lay in what Company A’s insiders knew about the announcement’s effect on the price of Company B’s stock. Mere days after Company A announces the takeover, Company B’s stock price increases dramatically. An insider at Company A who bought Company B shares (or tipped someone who then bought shares) before the announcement could have landed a nice windfall if he had sold at the peak.  This danger also was present before the public announcement that Company A would abandon the bid because someone with non-public knowledge could have sold Company B stock before it dipped or tipped someone to do so, maximizing a potential profit before Company B’s stock plummeted.

The danger, therefore, is clear: insiders with material, non-public, COVID-related information who either trade securities or tip (even unwittingly) friends or family members who then trade on it. Insider trading is not new, but what is new is the danger of leaking fast-changing COVID-related non-public information. For insiders at public companies, even casually sharing their company’s approach to COVID-related business challenges can be viewed as revealing material non-public information. Insiders must take extra care with any material non-public information, not share it with outsiders, and observe trading windows in their companies. Likewise, tippees’ conduct can pose liability risks to unwitting tippers, even if the tipper never trades.

The best approach for those in companies who are being buffeted by the COVID pandemic is the same as that for dealing with the pandemic itself: be safe and take precautions and take care of your friends and family. For insiders, trade only during open windows. For those with exposure to insiders, trade only on public information.

The danger here is real. Lavidas has been detained since his October arrest and received credit for time served in his sentencing and will be released in the Fall. The tipped broker, who allegedly resides in Greece, has been charged (though not extradited); Lavidas’s father has escaped prosecution to date.

WhistlblowerWhether attributable to the pandemic effect of remote work, layoffs and furloughs, or the slew of recent substantial awards, the SEC’s whistleblower tip line is lighting up with greater frequency. Companies are understandably focused on the panoply of challenges to their businesses posed by the pandemic and its economic impacts, but they ignore heightened whistleblower risks at their peril.

Since April 1 of this year, the SEC has announced five large awards in rapid-fire succession totaling $104 million, bringing the total awarded since the beginning of this fiscal year in October 2019 to more than $114 million. This total includes an award of $50 million announced on June 4, which is the largest award to a single individual under the agency’s whistleblower program. The amount awarded so far in this fiscal year is more than the SEC has distributed in any full year.

The whistleblower program, created under the Dodd-Frank Act, authorizes bounties to be paid to individuals who provide original information that leads to successful enforcement actions that result in monetary sanctions of over $1 million. Since the program’s inception in 2011, the SEC has awarded more than $500 million to 83 individuals. Individuals who receive awards and the companies on which they “blow the whistle” are not disclosed and remain confidential. Announcements of awards, including multiple orders in which the Claims Review Staff declined to make awards to those who believed they were entitled to one, are available on the SEC’s whistleblower website.

The rate of tips coming into the SEC has soared. According to co-director of the Enforcement Division, Steven Peikin, in the first two months since remote work arrangements began spreading across the country in mid-March, the Commission received approximately 4,000 tips—35% more than it received in the same period last year. Lawyers close to the program speculate that as employees work away from the prying eyes and ears of their colleagues or have been furloughed or laid off, the reluctance to risk being ostracized or to just step forward may be easing. Another possibility is that the publicity about large awards has provided an incentive for employees to come forward to the SEC. Finally, because (according to co-director Peikin) many of the tips are COVID-19-related, it may be that there has been an uptick in the kind of conduct that employees believe is unlawful or inappropriate. The SEC’s Office of the Whistleblower is still getting tips in traditional areas such as accounting fraud, insider trading, money laundering and other types of alleged securities law violations.

So, what should companies do about this heightened risk? The answer is that they should make sure that the policies and procedures they have in place to encourage employees to report internally are well known within the company and that when concerns are raised internally, they are responded to and acted upon. The SEC’s April 16 report about the $27 million award announced that day stated that the whistleblower had repeatedly tried to get management’s attention about his or her concerns before going to the SEC. Pronouncements by SEC Enforcement Division senior leadership this year make clear that companies will not be able to use the COVID-19 crisis as an excuse for misconduct or for failing to follow compliance policies or failing to commit adequate resources to compliance.

Of course, with travel restrictions currently in place at many companies, conducting meaningful internal investigations of internal complaints poses particular challenges for companies with multiple sites, especially those with international operations. Several of the recent Whistleblower Program awards have had international dimensions, and with foreign governments regulating business openings and engaging in stimulus programs, the risks of bribery are likely heightened. Internal reports of serious misconduct should generally be investigated with careful document collection and in-person interviews, which may be challenging to undertake in the current environment.

Among the many challenges companies face in this new era is maintaining a strong commitment to compliance by making sure their policies and procedures are up to date based on best practices in the present reality. As always, prompt attention to internal reports or complaints about misconduct or fraud is a must in order to address misconduct promptly and convey to employees that the culture of compliance at the company remains strong.

 

FCPAThe Department of Justice (DOJ) just released an updated version of its Resource Guide to the Foreign Corrupt Practices Act. While the new version does not announce any groundbreaking changes, it now includes updates and references to recently issued policies, such as the DOJ’s Corporate Enforcement Policy, Evaluation of Corporate Compliance Programs, and the Corporate Monitorship Policy. The updated guidance was released with little fanfare on Friday night, July 3, 2020, as the Criminal Division at Main Justice was undergoing a change in leadership. The Guide is largely the same document and limited to a discussion of the FCPA, but it nonetheless is a useful tool for practitioners seeking to understand the government’s corporate charging policies generally. The Resource Guide is lengthy, at almost 200 pages, and the new revisions do not lengthen it further. The DOJ has mostly restructured sections and added more recent cases for discussion but largely left the Guide intact. Nevertheless, certain revisions to the Resource Guide merit emphasis and are highlighted below.

The Aftermath of Hoskins

The DOJ is careful in this guidance to characterize the reach of criminal co-conspirator and aiding and abetting liability as a result of a recent, well-publicized Second Circuit decision that limited the DOJ’s ability to pursue foreign nationals who participate in a bribery scheme.  In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018), the Second Circuit held that a foreign national who was not otherwise covered by the specifically enumerated categories in the FCPA, could not be prosecuted using co-conspirator or aiding and abetting liability. The Court held that the government could proceed on the theory that Hoskins was an “agent” of a “domestic concern” which required the government to prove that Hoskins, who was a foreign national working for a foreign subsidiary, participated in a bribe scheme and took direction from the U.S. subsidiary. The government ultimately persuaded a jury to convict Hoskins on various charges, although post-verdict, the district court acquitted Hoskins on the foreign bribery counts because there was insufficient evidence of “agency.” With these setbacks, the DOJ is now limited in pursuing its expansive view of co-conspirator liability under the FCPA, at least in the Second Circuit.

The DOJ says as much in the Guide, acknowledging the opinion and its application in the Second Circuit, but also noting that a district court in the Seventh Circuit disagreed with the holding and concluded that precedent in the Seventh Circuit would dictate that defendants could be criminally liable for violations of the anti-bribery provisions of the FCPA as co-conspirators or aiders and abettors, even if they did not fall under one of the enumerated categories of liability in the statute. United States v. Firtash, 392 F. Supp. 3d 872, 889 (N.D. Ill. 2019). Although the DOJ cites Firtash, presumably to make the point that the law is not settled, it has cautiously revised the Guide, deleting broad language in its description of the breath of the anti-bribery provisions. Previously, the DOJ stated that a foreign national who attended a meeting in the United States would be subject to the FCPA, as well as co-conspirators or aiders and abettors, “regardless of whether the foreign national or company itself takes any action in the United States.” (Emphasis added.) That reference is deleted. Similarly, in an example in the same section, the DOJ also deleted language indicating that a company and an intermediary working on behalf of an “issuer” would be liable if they had never taken action in the territory of the United States, both as co-conspirators and for substantive violations of the anti-bribery provisions, because the violations were “reasonably foreseeable” and in furtherance of the conspiracy. (Emphasis added.) Although the DOJ will continue to try to limit the applicability of Hoskins in other circuits, it appears to be taking a more restrained approach and pulling back on previously broad assertions of conspiracy liability under the FCPA. In practice, the court-imposed limitation may not mean much because DOJ has many other ways of charging defendants, including the use of money-laundering and various fraud statutes.

Defining a State-Owned or State-Controlled Entity

Before any kind of judicial guidance, practitioners were forced into their own fact-based analysis as to what constituted an “instrumentality” of the state when determining whether a target entity was a state-owned or -controlled company under the FCPA. This analysis was, and is, critical for in-house compliance personnel in determining whether their company’s interactions with employees of these entities were “foreign government officials.” A few years ago, the Eleventh Circuit issued a well-reasoned opinion that will greatly assist in this analysis. United States v. Esquenazi, 752 F.3d 912 (11th Cir. 2014) set forth factors that determined whether a Haitian telecommunications company was a state-owned or controlled company under the control of the Haitian government. The reasoning of the Circuit, including the applicable factors to analyze that question, have now been incorporated into the DOJ’s Guide.   The factors in determining whether the government controls an entity include: (1) the government’s formal designation of the entity; (2) whether the government has a majority interest in the entity; (3) the government’s ability to hire and fire principals of the entity; (4) the extent to which the entity’s profits go directly into the government’s fiscal accounts, and if the government has or will fund the entity when it is operating at a loss; and (5) the length of time these factors have existed.

In addition, factors determining whether the entity is performing a function that is essentially a governmental function include: (1) whether the entity has a monopoly over the function it seeks to carry out; (2) whether the government subsidizes the entity’s costs in providing the service; (3) whether the entity provides services to the public at large in the foreign country; and (4) whether the public and the government of the foreign country generally perceive the entity to be performing a governmental function. This second part of the analysis is also important. It is not enough for counsel to analyze whether the entity is state-owned or controlled, but counsel must also evaluate whether the pertinent function it performs has enough government characteristics to be considered a governmental action.

While the analysis in Esquenazi has already been used by FCPA practitioners, it is helpful that the DOJ adopted these factors in its new guidance to further assist outside counsel, as well as companies training their compliance staff. Moreover, the recent cases prosecuted and cited in the DOJ guidance fit squarely within that analysis. In determining whether a company was a state-owned entity in various cases, the DOJ cites factors such as the receipt of special tax advantages, the appointment of management or board members by government officials, the installation of political appointees as managers, or a government’s large ownership stake and veto power over major expenditures.

In adopting the Eleventh Circuit’s analysis and illustrating it with recent cases, the revised Resource Guide provides greater clarity in defining what companies or entities are “instrumentalities” and, as a consequence, who would be a “foreign government official” under the FCPA.

A Parent Company’s Liability for the Actions of Its Subsidiaries

The revised Resource Guide reiterates the government’s position that a parent may be liable for its subsidiary’s conduct under traditional agency principles. While there has been recent discussion about how far the government would take this concept, the outgoing AAG of DOJ’s Criminal Division has assured practitioners that the DOJ does not intend to hold parent companies liable for subsidiaries merely because of corporate ownership, but instead would evaluate each case on its own facts. AAG Benczkowski’s Remarks at ACI’s 36th Conference on the Foreign Corrupt Practices Act, December 4, 2019. The result in Hoskins shows that the government needs a strong showing of control and direction to establish agency in a criminal case.

The revised Resource Guide acknowledges that the government will evaluate the control exercised over the subsidiary, including the parent’s knowledge and direction of the subsidiary’s actions. While the guidance states that “if an agency relationship exists between a parent and a subsidiary, the parent is liable for the bribery committed by the subsidiary’s employees,” that statement is too broad and should be read along with other parts of the guidance and recent remarks by the outgoing AAG. Viewing DOJ ’s guidance in its entirety, the following questions need to be asked in evaluating parental liability: Did an agency relationship exist between the parent and subsidiary? Did the parent have knowledge of, or direct, the actions of the subsidiary generally and related to the specific transactions in question? Did the subsidiary act within the scope of authority conferred by the parent? The revised Guide is clear that DOJ will not be deterred by the formalities of the corporate structure but will focus on a fact-based inquiry into the parent’s conduct in conferring authority and providing direction to its subsidiaries, particularly with respect to the misconduct at issue.

A Nod to Internal Controls

With the emphasis the government has placed on compliance, companies are often asked detailed and specific questions about the state of their financial controls. The government notes in the revised Resource Guide that a compliance program and internal controls are not the same, but both contain a number of components that overlap and should be monitored. When reviewing internal controls, the Guide directs companies to take into account the risks of its business, including the type of products and services it provides, how products and services get to market, the nature of the company’s work force, the degree of regulation, the extent of government interaction, and the degree to which it has business in high risk countries. While these factors are not new, the government’s increasing focus on financial compliance should prompt companies to continue to integrate their compliance and audit functions.

Conclusion

The revised FCPA Resource Guide did not tackle some of the very important issues facing companies today. The Guide notes that the DOJ has coordinated resolutions with foreign governments in ten cases and the SEC has coordinated in five cases which demonstrates that the government is attempting to avoid “piling on” by imposing duplicative penalties. But for multinational companies that often face years of investigation by multiple foreign governments after the DOJ and SEC settle their cases, these statistics are not promising. Foreign authorities can be more disorganized, lack resources, or may not be bound by any statute of limitations. All of these factors can cause unacceptable delays in negotiating separate foreign resolutions and can result in duplicative penalties imposed long after the misconduct occurred. Moreover, data privacy and cyber security concerns for employee and proprietary data are top priorities for companies operating in multiple, high risk regions or in countries with a track record of trade secret theft. Moving data across borders to satisfy U.S. government requests can be problematic under these conditions, but the Resource Guide does not give guidance on these issues. Perhaps in the next set of revisions, the DOJ and SEC will give greater thought as to how companies can meet these challenges when they seek to cooperate in a government investigation.

Coronavirus CARES ActVarious federal agencies – particularly the FBI and the DOJ – have been vocal in announcing efforts to ferret out fraud and other criminal activity arising out of the COVID-19 pandemic. As described in prior blog posts on this site (here and here), the government focused on pandemic profiteering, such as price gouging and hoarding of PPE. Now, as the initial shock has dissipated somewhat, and after distributing hundreds of billions of stimulus funding, the government is shifting its enforcement focus.

Last week, in testimony provided to the Senate Judiciary Committee, FBI Assistant Director of the Criminal Investigative Division, Calvin A. Shivers, announced that the FBI had seen an uptick in individuals attempting to “fraudulently obtain funds made available through the CARES Act stimulus,” such as loans from the Paycheck Protection Program (“PPP”). [https://www.fbi.gov/news/testimony/covid-19-fraud-law-enforcements-response-to-those-exploiting-the-pandemic] While noting that other criminal activity related to profiteering, testing and treatment scams, and healthcare fraud continued to occur and remained a priority of the FBI, AD Shiver emphasized that the fraud landscape was “shifting” toward stimulus-related fraud. Specifically, he noted that the FBI has formed a “PPP Fraud Working Group in coordination with the Justice Department’s Fraud Section and the Small Business Administration Office of Inspector General” to investigate and combat PPP fraud. As of last week, the PPP Fraud Working Group had conducted almost 100 investigations, identified $42 million of potential fraud, and recovered nearly $1 million.

The government’s shift to stimulus fraud should not surprise anyone who lived through the economic recession of the prior decade. Any government stimulus – indeed, any government money – always comes with heighted scrutiny, whether civil or criminal. (See accompanying blog post on False Claims Act liability for stimulus recipients.) The emergency federal loan program of the last recession, the Troubled Asset Relief Program (“TARP”), also saw a corresponding uptick in federal and regulatory enforcement proceedings. We expect nothing different in connection with COVID-19 related stimulus.

Likewise, the FBI’s aggressive approach to investigating stimulus fraud should not be surprising and parallels the DOJ’s efforts. In March, DOJ announced its intent to closely monitor COVID-19-related fraud, and each U.S. Attorney’s Office was directed to designate a COVID-19 fraud coordinator. These efforts have resulted in PPP-related criminal charges against individuals for falsifying information to obtain stimulus funds. [https://www.justice.gov/opa/pr/two-charged-rhode-island-stimulus-fraud] While the conduct in that case, if proven, would be unquestionably fraudulent conduct, DOJ’s enforcement efforts, coupled with the FBI’s testimony before Congress, shows that we are only at the beginning of investigations and prosecutions related to stimulus fraud.

In that vein, any individual or company that recently has obtained government funds, whether in the form of a PPP loan or otherwise, should remain vigilant about avoiding unnecessary government scrutiny and possible criminal exposure. For example, the PPP loan and related forgiveness applications both expressly state that knowingly providing false or misleading information may warrant prosecution under federal fraud statutes, which includes penalties under 18 U.S.C. §§ 1001, 1014, and 3571, including fines up to $1,000,000 and imprisonment. This does not include other potential criminal charges, such as bank fraud, wire fraud, and identity theft.

While an individual who improperly but mistakenly obtains government funds is unlikely to be criminally charged – as prosecutors would have to establish that the individual had an intent to defraud to bring criminal charges – he or she may be nevertheless investigated by the government. Worse, even if there is no liability, an investigation could uncover other issues that would lead to further investigation and criminal charges for other, unrelated conduct. And any investigation will be done with the benefit–or handicap–of hindsight, depending on your perspective. Thus, it is imperative for any individual or company that is receiving stimulus money to clearly document all the steps they take with respect to that money, including keeping accurate books and records, retaining all necessary forms, receipts, invoices and paperwork, and otherwise memorializing their conduct in written memoranda.

SanctionsIn his recently published book, “The Room Where It Happened,” former national security adviser John Bolton reported that in late 2018 in Buenos Aires, President Trump assured Turkish President Tayyip Erdogan that he would stop the then-ongoing criminal economic sanctions investigation of Halkbank in the Southern District of New York. Halkbank is a bank majority-owned by the Government of Turkey. According to Mr. Bolton, President Trump opined that Halkbank was “totally innocent” and advised that “he would take care of things, explaining that the Southern District prosecutors were not his people, but were Obama people, a problem that would be fixed when they were replaced by his people.” In order to evaluate Mr. Bolton’s explosive assertion, some background is necessary.

Four years earlier, in December 2015, a Southern District grand jury handed up an indictment charging foreign nationals with evading US sanctions against Iran by funneling approximately $20 billion to the Government of Iran through Halkbank. The bank was not named as a defendant at that time. First arrested and detained on the indictment, in March 2016, was Reza Zarrab, a wealthy Iranian-Turkish gold trader. One year later, Mehmet Attila, Halkbank’s Deputy General Manager, was apprehended and held in jail pending trial.

Messrs. Zarrab and Attila pleaded not guilty, sought to have the charges dismissed, and also began preparing for trial. Zarrab’s defense team ultimately included Rudolph Giuliani, one of President Trump’s personal attorneys and a former United States Attorney for the Southern District of New York, and Michael Mukasey, a former United States Attorney General. Prior to trial, Messers. Giuliani and Mukasey attempted to achieve a self-described “diplomatic solution” purportedly involving a prisoner exchange between the United States and Turkey that would result in Mr. Zarrab’s freedom. They failed.

Mr. Zarrab, however, had had enough of pretrial detention and the prospect of a lengthy prison sentence if convicted after trial. Accordingly, on the eve of trial in the fall of 2017, Mr. Zarrab decided to plead guilty and entered into a cooperation agreement with the Southern District. He was released from custody on November 8, 2017, and has not yet been sentenced. Mr. Zarrab testified at trial against Mr. Attila, who was convicted on January 3, 2018.

In May 2018, Mr. Attila was sentenced to 32 months’ imprisonment. With credit for his 14 months in pretrial detention and his good behavior, Mr. Attila was released in July 2019 and returned to Turkey, where he was welcomed at the Istanbul airport by Turkey’s Treasury and Finance Minister, President Erdogan’s son-in-law. Mr. Atilla became the CEO of the Istanbul Stock Exchange three months later.

One week before Mr. Atilla assumed his new position in October 2019, after very lengthy settlement discussions broke down, Halkbank was indicted in the Southern District for its role in the $20 billion scheme to evade US sanctions against Iran. The bank initially refused to submit to the jurisdiction of the district court, but after a failed appeal to the Second Circuit and after being threatened with contempt by the district court, the bank entered a plea of not guilty on March 31, 2020.  At a June 30, 2020, pretrial conference, no trial date was set and the Bank’s counsel stated that the Bank would move to recuse the district judge hearing the case.  Should a trial take place, Mr. Zarrab can be expected to testify again as a government witness.

Begun in 2015 during the Obama administration and actively pursued during the Trump administration, the Halkbank prosecution is now the responsibility of Audrey Strauss, the Deputy United States Attorney for the Southern District of New York who became the Acting United States Attorney after President Trump fired her predecessor, Geoffrey Berman, on June 20, 2020. How the case ultimately is resolved will go far in determining whether or not Mr. Bolton’s account is accurate and, if so, whether President Trump meant what he said in Buenos Aires.

 

 

nursing homeWith the COVID-19 pandemic sweeping the U.S., nursing homes have been ground zero for infections and deaths. According to new data released by the Centers for Medicare & Medicaid Services (“CMS”), there were 29,457 U.S. nursing home deaths from COVID-19 through the first week of June 2020.

With COVID-19, the criminal enforcement landscape for nursing homes has drastically changed in just a few months. Here are our predictions for the coming months of enforcement and suggestions for best practices for nursing homes to remain compliant.

Background on DOJ’s National Nursing Home Initiative

In an eerie harbinger of the pandemic to come, on March 3, 2020, the Department of Justice and the Department of Health and Human Services announced the creation of the National Nursing Home Initiative (NNHI). DOJ stated that the mission of the NNHI would be to pursue criminal and civil enforcement actions against nursing homes that provide “grossly substandard care,” and that it was already investigating approximately 30 nursing facilities. Just a few days later, on March 11, the World Health Organization declared the coronavirus outbreak an official pandemic.

We expect DOJ to use the NNHI as a springboard to increase its scrutiny of nursing homes with the most severe COVID-19 problems.

Sources of Potential Criminal Referrals

DOJ and HHS will have a wealth of referral sources for criminal nursing home cases, including:

Whistleblowers. Whistleblowers (including disgruntled current or former nursing home employees, residents and their relatives) will provide a ready-made source for federal referrals. During the pandemic, many medical professionals have been fired, disciplined, sued or have threatened to sue due to their facilities’ alleged lack of personal protective equipment (PPE) creating a ready-made cadre of potential whistleblowers.

Wrongful death lawsuits. Numerous civil lawsuits filed by the estates of deceased nursing home workers and patients will provide a source of referrals. Although not a traditional source for criminal health care fraud cases, expect federal law enforcement to monitor these wrongful death lawsuits and follow up where appropriate. While many states, such as New York, have enacted laws that immunize nursing homes from COVID-19 lawsuits, state law immunity is not a bar to federal criminal enforcement.

On-site inspections and audits. The on-site inspections and audits being performed by federal and state authorities will provide a stream of referrals to DOJ and HHS-OIG. The number of non-compliant facilities is large—according to the Washington Post, 40% of the nursing homes nationwide with publicly reported cases of COVID-19 had been cited multiple times in the recent past for violating federal infection-control standards.

Expect DOJ to focus on the “worst of the worst” and those homes where there is evidence of intentional or willfully blind non-compliance.

COVID-19 reporting data. Expect DOJ and HHS-OIG to proactively comb through regulatory data from agencies, including CMS and the Centers for Disease Control and Prevention. On April 19, CMS started requiring long-term care facilities that accept Medicare and Medicaid funds to report COVID-19 cases.

Given that nursing home industry groups have acknowledged that not all coronavirus deaths have been counted, law enforcement may examine whether nursing homes have intentionally underreported mortality rates.

Scrutiny of acceptance of CARES Act relief funds. CARES Act funding presents a “second wave” of risk for nursing homes because of the significant compliance requirements. HHS announced May 22 that skilled nursing facilities will receive $4.9 billon to pay for expenses related to the pandemic. Providers who accept federal funds must submit financial records and sign certifications governing the use of the funds.

The HHS has warned that it will engage in “significant anti-fraud monitoring of the funds distributed” underscoring that accepting federal funds is never a “no-strings attached” proposition. Nursing homes that mispresent their financial data or use funds for unauthorized purposes could find themselves on HHS-OIG’s radar screen.

Best Practices for Nursing Homes

Nursing homes should prepare for heightened legal and regulatory scrutiny related to the pandemic. This is especially true for homes with COVID-19 infections or deaths, and those that accept CARES Act funds. Regulatory requirements are rapidly changing, and the federal government is releasing federal funds on a rush basis with arguably ambiguous guidance.

However, nursing homes should keep in mind that the federal criminal enforcement look-back will not be kind for facilities that are perceived as willfully noncompliant. DOJ will view nursing homes with 20/20 hindsight, so maintaining “defensive” contemporaneous documentation is key.

This need to maintain proper documentation applies to operational functions as well as financial records related to how federal funds are spent. Facilities that can prove, with an adequate documentary trail, that they have remained in compliance will position themselves favorably in the face of an HHS audit or a DOJ criminal investigation.

HydroxychloroquineOn June 15, 2020, the Food and Drug Administration (FDA) withdrew its emergency use authorization (EUA) to use hydroxychloroquine to treat COVID-19. According to the FDA, there is “no reason to believe” the drug is effective against the coronavirus, and its use increased the risk of serious side effects, such as heart problems. The FDA’s action is a stunning about-face. There are now serious questions about how state and federal regulators and enforcement agencies will view the prescribing decision-making that was done in the heated first months of the pandemic.

The Rise and Fall of Chloroquine and Hydroxychloroquine

Chloroquine and hydroxychloroquine, which have been approved by the FDA for decades to treat malaria, lupus and rheumatoid arthritis, became household words in March 2020 when President Donald Trump called chloroquine and hydroxychloroquine a “game changer” in the battle against COVID-19. On March 19, the President, discussing chloroquine and hydroxychloroquine, said, “It’s shown very, very encouraging early results, and we’re going to be able to make that drug available almost immediately.” The next day on Twitter, he exclaimed that “it” [chloroquine and hydroxychloroquine] must “be put in use IMMEDIATELY.” Shortly after the president’s statement, based on limited and now widely-discredited clinical studies, the FDA granted its now-revoked emergency authority. Then, on May 15, 2020, he raised the stakes further by stating publicly that he had started taking hydroxychloroquine to prevent being infected with coronavirus. Asked about the lack of evidence that the drug effectively treats or prevents COVID-19, the president responded, “Here’s my evidence: I get a lot of positive calls about it.”

Pharmacists and Doctors Under Pressure and Patients at Risk

Not surprisingly, the president’s statements and the FDA’s emergency authorization led to substantial public interest in using these drugs to ward off COVID-19. Over the past several months, tens of millions of doses have been distributed to pharmacies around the country and physicians wrote an enormous number of prescriptions for chloroquine and hydroxychloroquine. CBS News reported that, in March alone, “chloroquine orders spiked 3,000% . . . and hydroxychloroquine orders rose 260%.”

Prescribing chloroquine or hydroxychloroquine to treat COVID-19 is not in and of itself unlawful or unethical, as doctors in the United States are generally permitted to prescribe drugs off-label and do so in a wide variety of circumstances. However, the sharp increase in demand raised concerns that prescribers may not have been adequately considering the potentially serious side effects or applying the appropriate standard of care. News stories abound of doctors seeking the drugs for family and friends or asking pharmacists to fill orders for 1,000 pills or more at a time. In one reported case, a veterinarian tried to obtain the drugs from a local pharmacy, presumably for use by humans not animals.

The Future Compliance and Enforcement Ramifications are Unknown

Just like the course of the pandemic itself, the enforcement landscape changes by the day. As the pandemic’s impact continues to evolve, what may have seemed like a reasonable course of treatment a few short weeks ago could draw unwanted attention from federal and state regulators now. What is certain is that after the pandemic abates, law enforcement and regulators are likely to scrutinize conduct occurring during the COVID-19 pandemic: a time of crisis when many individuals, including pharmacists and doctors, were making decisions under difficult circumstances. How the mad dash to prescribe and dispense drugs now deemed ineffective against COVID-19 may be viewed in the future remains to be seen.