algorithimIn The Wealth of Nations, Adam Smith famously wrote, “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”[1] Although now nearly 250 years old, Mr. Smith’s observation about merchants and businessmen remains timeless. But is the same statement true of computers? As we near the 2020 election, both parties are considering changes to the antitrust laws in response to seemingly unstoppable growth by marketplace leaders such as Facebook and Amazon. Particularly in light of the COVID-19 pandemic, consumer shopping is increasingly moving to online platforms and away from traditional bricks-and-mortar retailers. Are the antitrust laws – designed to combat the so-called robber barons of the late 19th Century – sufficient to keep up with a changing marketplace?

Amazon and other online merchants increasingly use a pricing model called dynamic pricing. First introduced on a large scale by American Airlines in the 1980s,[2] dynamic pricing utilizes computers to adjust pricing according to real-time factors, such as supply and demand. Today, this model remains dominant in the airline industry: the prices of a seat on a flight may change from day to day depending on number of seats remaining, route demand, and competitors’ pricing. For dynamic pricing to work properly, a company must rely on a sophisticated inventory management system, like those used by airlines and hotels. Today, advances in computer technology have made dynamic pricing widely available to e-commerce companies. These algorithms, in the blink of an eye, scan prices across the web and adjust its sales price accordingly.[3] Can artificial intelligence learn from the market and, without human interaction, conclude that the best strategy to maximize profits is to collude with other AI merchants? The answer, increasingly, is yes.[4] These computers learn to collude by trial and error and without communicating with each other. Does antitrust law have an answer to robots that learn parallel pricing?

A well-known alternative to traditional taxi cabs is Uber Technologies, Inc. (“Uber”).[5] Uber utilizes a form of dynamic pricing that it refers to as a “surge fare.” Surge fares are prices that increase during periods of high demand. The surge pricing calculated as a multiplier of the standard fare; the higher the demand, the larger the surge multiplier.[6] Surge fares will change in real time from moment to moment according to demand. The amount of the surge fare is calculated by Uber’s algorithms, so the drivers and passengers each see the same price during a period of high demand. Uber claims that its surge pricing is simply an application of supply and demand. It incentivizes its drivers, who are independent contractors, to take additional fares, thereby better ensuring that Uber can meet increased demand.

In 2016, an Uber customer brought an antitrust suit against Uber, alleging that surge pricing algorithm created a conspiracy between Uber and its drivers that was managed by Uber’s AI software. Meyer v. Kalanick,[7] 174 F. Supp. 3d 817, 820, 822-823 (S.D.N.Y. 2016). Although the case was ultimately sent to arbitration, where the arbitrator found in favor of Uber, the AI collusion theory caught the attention of Judge Rakoff, who, before sending the case to arbitration, denied Uber’s motion to dismiss. He wrote that the plaintiff had alleged that each Uber driver agreed with Uber to charge certain fares “with the clear understanding that all other Uber drivers are agreeing to charge the same fares.” 174 F. Supp. 3d at 824.

Although the hundreds of thousands of Uber drivers around the world have never once met together, (as Adam Smith might wryly note) this is the “genius” of Uber, Judge Rakoff held. Id. at 825. By utilizing the “magic of smartphone technology,” Uber was able to invite agreements “hundreds of thousands of drivers in far-flung locations. . . . The advancement of technological means for the orchestration of large-scale price fixing-conspiracies need not leave antitrust law behind.” Id. at 825-826.

The theory that computer algorithms can facilitate, or even implement, price-fixing schemes has not gone unnoticed in the world of criminal antitrust. As far as we are aware, there has been only one criminal antitrust case involving a computer algorithm, but in that case, the algorithm was only the mechanism by which a human-led conspiracy was implemented. In 2015, David Topkins, an art dealer from California, pleaded guilty to coordinating with other art dealers to use price-fixing algorithms for the sale of movie posters on Amazon.com.[8] Unlike the price-fixing AI that could operate without human involvement, Mr. Topkins’s case was decidedly more hum-drum: he admitted to agreeing with his competitors to use the algorithm to set the price of the artwork.[9] What is still unclear five years later, despite the explosion of online pricing algorithms and e-commerce, is how enforcers will view machine learning and where does liability stop? Can programmers be held liable for writing pricing algorithms?

The cases at each end of the spectrum are simple. The ones in the middle, however, may not be so easy. In a 2017 white paper from the OECD, the drafters wrote that “[f]inding ways to prevent collusion between self-learning algorithms might be one of the biggest challenges that competition law enforcers have ever faced[.]”[10] Regardless of the scope of the challenge, this issue will increasingly become one that enforcers and retailers can no longer ignore simply by refusing to play.

[1] The Wealth of Nations, Book I, Chapter X (1776).

[2] See R. Preston McAfee and Vera te Velde, Dynamic Pricing in the Airline Industry, Economic and Information Systems (2006).

[3] A Northeastern University research paper found that in 2015, algorithmic sellers covered one-third of the best-selling products offered by third party merchants on Amazon, and that algorithmic sellers’ pricing was 10 times more volatile than human-priced sellers. Le Chen, Alan Mislove, and Christo Wilson, An Empirical Analysis of Algorithmic Pricing on Amazon Marketplace, available at https://mislove.org/publications/Amazon-WWW.pdf.

[4] Emilio Calvano, Giacomo Calzolari, Vincenzo Denicolo, and Sergio Pastorello, Artificial Intelligence, Algorithmic Pricing, and Collusion, available at https://www.ftc.gov/system/files/documents/public_events/1494697/calzolaricalvanodenicolopastorello.pdf.

[5] Uber uses a smartphone application to match private drivers with passengers. The Uber app calculates and collects the fare, which it remits to driver, minus a licensing fee that the driver must pay for the driver’s use of the Uber app. Drivers and passengers cannot negotiate the price of a fare; it is set by the Uber app.

[6] See Uber Help – How Surge Pricing Works, https://www.uber.com/us/en/drive/driver-app/how-surge-works/

[7] 174 F. Supp. 3d 817 (S.D.N.Y. 2016). The plaintiffs sued Travis Kalanick, Uber’s CEO and founder personally in the complaint; however, for ease of reference, the defendant will be referred to in this article as Uber.

[8] United States v. Topkins, CR-15-201, at Dkt. 7 (N.D. Cal. 2015).

[9] Id. at ¶4(c).

[10] Big Data: Bringing Competition Policy to the Digital Era, at ¶84, available at https://one.oecd.org/document/DAF/COMP(2016)14/en/pdf (last accessed February 19, 2017).

On September 30, 2020, the Department of Justice (“DOJ”) announced its latest health care fraud take down, which was its first since the pandemic hit in March 2020. DOJ charged 345 doctors, medical professionals, owners/operators, and others with criminal health care fraud schemes implicating more than $6 billion in total alleged loss amount. Arriving six months into the COVID-19 pandemic, this health care fraud take down was DOJ’s largest to date, sweeping across the 51 judicial districts shown in this DOJ graphic:

2020 National Health Care Fraud and Opioid Takedown

Telemedicine: the COVID-19 Healthcare Fraud Flavor of the Pandemic

With $4.5 billion of the aggregate take down amount connected to alleged telemedicine fraud and only $800 million linked to opioids, DOJ shows that it is both focusing on COVID-19 related health care fraud and “following the money” as the pandemic continues. Telemedicine has obviously been a lifeline for patients during the pandemic as people are sheltering in place and avoiding leaving their homes. History shows that fraud schemes follow “opportunities” created by crisis and DOJ has now shown that it recognized early on that telemedicine fraud would explode during COVID-19.

As to be expected during a pandemic where telemedicine accelerated in relevance and billings to Medicare, opioid enforcement took a back seat during this take down. Two years ago, in October 2018, DOJ stood up the Appalachian Regional Prescription Opioid (ARPO) Strike Force to combat the opioid epidemic in parts of the country that have been particularly harmed by addiction.  As the fraud arising out of COVID-19 has taken priority, opioid enforcement efforts have been scaled back.

Lack of Access to Grand Juries

Also notable for this take down was DOJ’s reliance on charging via Complaint and Information. With grand juries not operating during much of the past six months, or only operating on a limited basis more recently, prosecutors were unable to present their cases to grand juries to obtain indictments. Instead, DOJ turned to charging via Complaint (which does not require the use of a grand jury) and also filed many Informations, which require the consent of the defendant and accompany a plea deal. While charging by Complaint is fairly straightforward, reaching the dozens of plea deals (as evidenced by the Informations) requires much more behind the scenes work and shows that DOJ was pressing to cut deals during the pandemic.

DOJ Announces Creation of “National Rapid Response Strike Force”

Concurrent with the announcement of the take down, the Health Care Fraud Unit of the Criminal Division’s Fraud Section announced the creation of National Rapid Response Strike Force (“NRRSF”). The NRRSF’s mission is to investigate and prosecute fraud cases involving “major health care providers” operating in multiple jurisdictions. The NRRSF will focus on “complex national schemes” and will coordinate with the Civil Division’s Fraud Section and Consumer Protection Branch, as well as its traditional partners in the local U.S. Attorney’s Offices, state Medicaid Fraud Control Units, the FBI and HHS-OIG. The NRRSF appears to be the new version of the prior sub-unit referred to as the Corporate Health Care Fraud Strike Force.

Examples of the types of matters under the NRRSF’s purview include a large-scale rural hospitals billing fraud matter indicted in the Middle District of Florida and the prior global resolution with Tenet Healthcare Corporation. Look for the NRRSF to be the new go-to DOJ unit to investigate corporate health care fraud.

Look for “Pay and Chase” to Continue Indefinitely 

While no one can quibble with the stats the Health Care Fraud Unit has amassed since its inception in 2007 – 4,200 defendants charged for over $19 billion in losses to Medicare – the current federal health care fraud law enforcement strategy is one of “pay and chase”. In other words, Medicare pays out claims quickly, and then DOJ tries to police fraudulent activity once the money has left federal coffers. Given that most of the fraudulent pay outs are never recouped through criminal forfeiture or restitution, this “pay and chase” system is inherently flawed as a method of preventing bad actors from fleecing the Medicare system. But don’t look for this to change anytime soon. But given the non-partisan appeal of fighting health care fraud, we expect increasingly more federal and DOJ resources to be committed to health care fraud investigations and prosecutions.

Department of JusticeRecoveries and settlements in False Claims Act (FCA) cases by the U.S. Department of Justice (DOJ) have accelerated in recent months and appear to be poised to rise dramatically as DOJ follows spending related to the pandemic recovery and federal stimulus efforts and bring additional resources to bear. Thus far in FY 2020 (which closes at the end of this month), health care FCA recoveries take up the lion’s share of these recoveries, although other types of federal spending have also led to significant recoveries.

Since March, DOJ enforcement efforts have resulted in quick actions related to health care, the pandemic response, and funding under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). DOJ has launched a task force focused on price gouging and hoarding of personal protective equipment (PPE), and DOJ has directed U.S. Attorneys’ offices to prioritize and prosecute criminal conduct related to pandemic spending, including fraud connected to the CARES Act’s Paycheck Protection Program.

The CARES Act created additional oversight authority residing with the Special Inspector General for Pandemic Recovery (“SIGPR”) and the Pandemic Response Accountability Committee (“PRAC”) composed of federal Offices of Inspector General. These new enforcement entities will provide additional oversight of federal funds to prevent and detect fraud, waste, abuse and mismanagement, which in turn may lead to additional enforcement actions by DOJ.

DOJ’s FCA Health Care Recoveries in FY 2020

As in recent years, a majority of DOJ’s FCA recoveries in FY 2020 have been in the health care field. Several of the year’s largest settlements were announced in July, as stated by DOJ:

  • A pharmaceutical company agreed to pay more than $642 million in settlements, resolving claims that it violated the FCA regarding the company’s alleged illegal use of foundations as conduits to pay the copayments of Medicare patients, and alleged payments of kickbacks to doctors (July 1 DOJ announcement).
  • A health care company and its parent companies agreed to pay a total of $600 million to resolve criminal and civil liability associated with the marketing of an opioid-addiction-treatment drug (July 24 DOJ announcement).
  • A major health services company and related care centers agreed to pay $122 million to resolve allegations of billing for medically unnecessary inpatient behavioral health services and paying illegal inducements to federal healthcare beneficiaries (July 10 DOJ announcement).
  • A specialty hospital in Oklahoma and a related management company and physician group agreed to pay $72.3 million to resolve allegations of improper relationships between the hospital and the physicians group, in violation of the Stark Law or “physician self-referral law,” resulting in violations of the FCA (July 8 DOJ announcement).

DOJ announced additional multimillion-dollar settlements in the health care field throughout the year. For example, on September 9, 2020, DOJ announced that a West Virginia hospital agreed to pay $50 million to resolve allegations concerning the Stark Law and Anti-Kickback Statute. And, in April, two testing laboratories agreed to pay $43 million and $41 million respectively to resolve allegations of medically unnecessary tests.

DOJ also reached settlements in the nursing home industry, which will face new scrutiny relating to the pandemic response and pre-existing DOJ initiatives. On July 13, 2020, DOJ announced that a nursing home management company and 27 affiliated facilities had agreed to pay $16.7 million to resolve allegations that they submitted false claims to Medicare for rehabilitation therapy services that were not reasonable or necessary. In April and February, health services companies agreed to pay $10 million and $9.5 million respectively, to resolve similar allegations.

On April 6, 2020, DOJ announced that a biopharmaceutical company based in Georgia that manufactures human tissue grafts would pay $6.5 million to resolve allegations that it submitted false commercial pricing disclosures to the U.S. Department of Veterans Affairs (VA). On March 12, 2020, DOJ announced that a Cincinnati-based company would pay $1.85 million to resolve allegations that it failed to schedule veterans’ medical appointments in a timely manner at two outpatient clinics, resulting in the submission of false claims to the VA.

Finally, earlier this month, DOJ announced a $10 million recovery from The Scripps Research institute, which settled claims that it had improperly charged NIH-funded research grants for time spent by researchers on non-grant related activities, including writing new grant applications.

DOJ’s FCA Government Contract Recoveries in FY 2020

This year’s settlements relating to government contracts illustrate the many enforcement perils to companies that violate laws or regulations during their performance of government contracts. For example:

Contract Specifications and Substandard Materials

On June 16, 2020, DOJ announced that a company had paid $10.9 million to resolve allegations it had sold substandard steel components for use by other contractors on U.S. Navy vessels and that a company employee had falsified test results for the components.

On September 10, 2020, DOJ announced that an asphalt contractor had agreed to pay $4.5 million to settle claims that it violated the FCA by misrepresenting the materials in the asphalt mix that it was using to pave federally funded roads in Indiana. These settlements illustrate the potential application of the federal FCA when substandard materials are provided in the federal supply chain, or whenever federal funds are involved.

Disaster Recovery

Enforcement efforts relating to disaster relief and government actions in response to the current pandemic may be expected based on similar enforcement that has followed past disaster recovery funding. On June 3, 2020, DOJ announced that it had intervened in a whistleblower lawsuit against an engineering company and certain disaster relief applicants, alleging that they submitted false claims to the Federal Emergency Management Agency (FEMA) for the repair or replacement of facilities damaged by Hurricane Katrina. DOJ announced that a university in Louisiana had agreed to pay $12 million to resolve related allegations.

Small Business Contracting

DOJ settlements each year also illustrate the perils to companies that violate small business contracting rules. On June 2, 2020, DOJ announced that a Tulsa, Oklahoma-based construction contractor had agreed to pay $2.8 million to settle allegations that it had improperly obtained federal set-aside contracts reserved for disadvantaged small businesses. And, on May 27, 2020, DOJ announced that an Illinois construction company had agreed to pay $1 million to resolve allegations that it had misrepresented its use of a small disadvantaged business to obtain a federally-funded construction contract.

Collusion and Bribery

In January 2020, several companies agreed to pay $29 million to resolve allegations that they violated the FCA by colluding to rig the bidding of an auction to purchase a U.S. Department of Energy’s non-performing loan to other companies. The government alleged that the defendants exerted pressure on the two other competing bidders to suppress their bids during the live auction.

And earlier this month, on September 15, DOJ announced that QuantaDyn Corporation and its CEO resolved criminal and False Claims Act liability from allegations that they engaged in a bribery scheme to steer government contracts for training simulators to the company. The company paid nearly $38 million in restitution, and its CEO separately paid $500,000 to resolve his personal FCA liability.

The Value of Corporate Compliance

The False Claims Act is a potent weapon for the government in its policing federal spending, contracts and grants. A final tally of DOJ’s FCA recoveries for the fiscal year will not be available for some time, but as of the end of the last fiscal year DOJ reported that FCA recoveries since 1986 totaled more than $62 billion. Each year, DOJ’s FCA cases are driven primarily by whistleblower filings. In January 2020, DOJ reported that of the $3 billion in recoveries in FCA cases in FY 2019, more than $2.1 billion were from lawsuits filed by relators under the FCA’s qui tam provisions, and during the same period, the government paid out $265 million to whistleblowers. DOJ reported that 633 qui tam suits were filed last fiscal year, averaging more than 12 new cases per week.

DOJ’s settlements each year highlight the value, from both a law enforcement and corporate perspective, of a robust corporate compliance program. Such a program is mandatory for anyone involved in the receipt of federal funds. FCA enforcement is constant and corporations must take proactive measures to ensure that their compliance efforts also remain constant, robust, and effective.

Spoofing

Two former commodities traders at a major global bank were convicted on federal wire fraud charges late Friday in a high profile – but rare partial win– for the government in a spoofing case. We previously discussed the theory of “spoofing” advanced by the Department of Justice against commodities traders, as well as the difficulty the government has faced in obtaining convictions in such jury trials. To recap, spoofing is the trading practice of bidding or offering with the intent to cancel such bids or offers before the orders are executed. A trader engages in spoofing by placing a large number of bids or offers on one side of the market (i.e., a buy order) that the trader will almost immediately cancel, thus moving the market in a desired direction. Then, the trader places orders on the opposite side of the market (i.e., a sell order) that the trader will execute to take advantage of the artificially high or low price the spoofed orders created. Although DOJ had previously been able to prosecute spoofing as a type of market manipulation under the wire fraud statute, The Dodd-Frank Act specifically identified spoofing as an illegal act in 2010.

In the instant case, the two traders, James Vorley and Cedric Chanu, were charged in 2018 not under Dodd-Frank, but under the wire fraud statute and with conspiracy to commit wire fraud under a spoofing theory. Later, the government tacked on sixteen additional counts of wire fraud affecting a financial institution. On Friday, Vorley and Chanu were acquitted of the wire fraud conspiracy but were convicted of the substantive wire fraud charges.

The government’s case, and partial win, is notable for at least three reasons.

First, the “compromise verdict” returned by the federal jury (which was comprised of only 11 members during deliberations due to COVID-19 related concerns) may provide the traders with colorable grounds for appeal.

Second, the government’s theory of the case was that the traders’ conduct was fraudulent and based on an intent to deceive, not that the traders made any particular false statement or representation (apart from the placing of the orders themselves). The defense has indicated they will appeal, and likely this issue will be revisited on appeal.

Third, the jury’s rejection of the government’s conspiracy charges underscores once again the difficulty the government has had in bringing fully successful spoofing cases. On the other hand, the jury’s rejection of the conspiracy charges may simply represent a reasoned rejection of the government’s evidence that the two traders worked together to spoof the market. As noted in our prior article, referenced above, the last spoofing case the government tried resulted in a mistrial; before then, the government had only obtained one conviction after a jury trial for spoofing. Of course, the government has been able to recently obtain pleas from defendants in several other cases.

A year ago, we discussed the government’s continued aggressive approach to spoofing prosecutions even after the last mistrial, both against traders and financial institutions.   Incidentally, it may be that one of the reasons the government has faced difficulty in successfully prosecuting spoofing cases is that the defendants are typically employees (or former employees) of large, multinational banks, with access to sizeable resources to finance their defenses, allowing their attorneys to leave no stone unturned in attacking the government’s case. This is rarely the case when defendants proceed to trial, even white-collar defendants. Although it achieved a partial victory, the government should expect defendants who are former traders at large financial institutions to continue to mount well-financed, sophisticated defenses in future cases.

As we have seen, the government’s previous setbacks did not deter it from bringing additional spoofing cases. There is no reason to think that the split verdict in Vorley and Chanu’s case on Friday will lead DOJ to back away from investigating and prosecuting spoofing cases. Indeed, DOJ undoubtedly views this result as a resounding victory. We expect to see the government continue to pursue commodities traders and their employers for spoofing.

White HouseThe Executive Office of the President issued a remarkable, yet little noticed Memorandum recently that has the potential to revolutionize the way justice is carried out in enforcement proceedings at federal agencies.

The Memorandum directs agencies to provide much greater due process to individuals and companies investigated by these agencies and addresses specific procedural and substantive revisions to civil and administrative proceedings that are long overdue.

Thompson Hine partners Joan Meyer and Norman Bloch co-authored an article entitled “White House Due Process Memo Could Reform Enforcement,” published in Law360.

Click here to view article:  https://www.thompsonhine.com/uploads/1137/doc/White_House_Due_Process_Memo_Could_Reform_Enforcement.pdf

 

 

Recording IndustryIn our last post on www.doescrimepay.com, former federal prosecutors Steven A. Block and Sarah M. Hall summarized the legal saga of indicted R&B star R. Kelly, one of the world’s best-selling music artists. Kelly’s legal troubles are far from the world of non-violent white-collar crime; indeed, Kelly stands charged with offenses that include racketeering, kidnaping, aggravated criminal sexual abuse, and child pornography. Several of his associates have been charged with intimidating witnesses by offering bribes and threatening acts of violence.

We ask our readers, Did You Ever Think that Kelly’s charges could relate to the staid world of white-collar criminal defense? In today’s Part 2, we are One Step Closer to answering that question by presenting lessons learned from these non-white collar cases for the white-collar practitioner and client.

Don’t Believe You Can Fly (Public statements seldom help)

Anyone who watched Kelly’s March 2019 interview with Gayle King will never forget it. Kelly apparently thought that he could use his celebrity and charisma to shape the public’s perception after the Cook County State’s Attorney charged Kelly with aggravated criminal sexual abuse. To the contrary, reviews described Kelly as “embattled,” “bizarre,” and “unhinged.” Though Kelly should have known better because this was not his first brush with the law, white-collar defendants usually find themselves in unfamiliar territory when facing criminal charges. These defendants, though they may not be celebrities, often have respectable careers, loving families and friends, and previously untarnished reputations. They often have an instinct to defend themselves in the court of public opinion before trial by speaking to the media or others in their community. This is almost always a bad idea. White-collar defendants should be counseled to save their defense for the courtroom in order to prevent making a bad situation worse. Moreover, misleading public statements may impact a white-collar defendant’s ability to accept responsibility later and seek a reduction in the total offense level at sentencing.

Beware the 3-Way Phone Call (Wiretap evidence is extraordinarily powerful)

The August 2020 federal obstruction of justice charges against Kelly associate Richard Arline are partially based on Title III wiretaps in which Arline is heard speaking with an alleged conspirator about coordinating a bribe payment to a witness against Kelly in exchange for her silence. In the white-collar world, the government also regularly utilizes wiretaps, and they may be incredibly damaging to a defendant. Many white-collar cases hinge on the defendant’s intent, (i.e., what is in his or her mind at the time the government alleges a crime occurred). As prosecutors like to tell jurors, wiretaps are powerful because they allow jurors to hear a defendant’s own words when he or she thought no one else was listening. If a white-collar case involves wiretaps, the defense attorney must have a carefully thought out plan to address the evidence in order to try the case—or decide the defense is Barely Breathin’ and seek the best plea deal possible.

Money Makes The World Go Round (Following the money is not just for prosecutors)

Though most of the charges against R. Kelly are based on witness testimony and other evidence, federal prosecutors in Brooklyn reportedly used financial and other public records to support their claim that Kelly gave Dollar Bills to an Illinois government employee to obtain fake identification that allowed him to marry the then-15-year-old singer Aaliyah in 1994. White-collar cases are often built upon the government’s financial investigators following a money trail to uncover alleged wrongdoing. But financial investigations are also critical tools of the defense. A defense financial investigator or expert (oftentimes a retired IRS agent or forensic auditor) can poke holes in the government’s financial summary, help the defense attorney prepare for cross-examination of the government’s financial analysts, and undercut the government’s damages calculations, thereby impacting the quality of the evidence presented by the Government, and, if it gets that far, the potential sentence.

Let’s Be Real Now (Honestly assess the evidence)

The cases against Kelly are not slam dunks for prosecutors. The cases mostly involve difficult witnesses and conduct that dates back many years where corroborating evidence may no longer be available. Moreover, the racketeering charges brought in New York involve complicated legal theories that may be difficult for prospective jurors to understand. On the other hand, because he faces charges in several jurisdictions, Kelly’s current legal troubles are compounded by the multiple bites at the apple prosecutors may get should his first trial result in acquittal or a hung jury. Though white-collar defendants are not likely to be charged with four separate criminal cases as Kelly is, they may face parallel civil proceedings, such as from the SEC or CFTC. White-collar defense attorneys must devote the time and attention to carefully assessing the evidence in each case to advise clients how to achieve the best outcome possible. Perhaps even more important than assessing the evidence is having the objectivity and confidence to reassess the evidence as the facts develop. What may have seemed like an impossible case at the outset may be triable with further investigation; similarly, the opposite could also be true.

If the 12 Won’t Play, Prepare to Say it’s All My Fault (Think ahead to sentencing when it’s inevitable)

Kelly has no choice but to go to trial. In light of the serious nature of the charges and Kelly’s history and notoriety, prosecutors are not going to offer Kelly a plea deal that would significantly shorten the decades-long sentence he would receive after a guilty verdict. White- collar defendants, however, are often in a far different position. Sometimes after assessing (and reassessing; see above) the evidence, the defense attorney comes to the conclusion that a case is not triable and a plea may result in an opportunity to pursue a far shorter sentence. Assuming the client agrees, the white-collar attorney’s job is nowhere near finished. Long before the decision to plead guilty is made, the conscientious white-collar attorney should advise the client regarding the importance of being in the best position possible at sentencing should that day come: if the defendant is out on bond, is he trying to find work or make other efforts to better himself or his community? Has the defendant maintained his relationships to encourage friends and family to write and speak on his behalf at sentencing? Has he considered setting aside even a nominal amount of money each month in order to show up at sentencing with restitution in hand? Finally, well in advance of sentencing, the white-collar attorney needs to counsel the client regarding allocution to avoid Fireworks. Ideally, when the defendant speaks, the judge should be thinking that he Just Can’t Get Enough, not that he wants to send the defendant away Forever More…

Recording IndustryThis week on www.doescrimepay.com, former federal prosecutors Sarah M. Hall and Steven A. Block take the blog in a new direction. We will look back on the legal saga of indicted R&B star R. Kelly and present lessons learned from this non-white collar case for the white collar practitioner.

In today’s Part 1, we review the years of criminal cases involving R. Kelly. But first, a quick primer on the superstar singer, songwriter and record producer. Kelly is known for songs including “I Believe I Can Fly”, and has sold over 75 million records worldwide, making him one of the world’s best-selling music artists. Billboard Magazine named Kelly as the most successful R&B artist in history and, some say, The World’s Greatest.

Kelly was born in Chicago in 1967. His mother was a professional singer, and Kelly was a gifted singer in his own right from early childhood. An undiagnosed and untreated learning disability, perhaps dyslexia, left Kelly unable to read or write. But his musical Genius was beyond question. His professional music career was in full swing by 1993/1994 with the release of his first solo album, 12 Play, which went platinum six times. Fast forward about eight years to 2002 to his first major criminal charges – by then, Kelly was a Red Carpet-worthy world-wide superstar

Here are Kels’ greatest legal hits:

2002 Chicago indictment on child pornography charges. Although there had been prior allegations and civil lawsuits as far back as 1996 alleging that Kelly had engaged in statutory rape of underaged girls, this was Kels’ first set of criminal charges. The Illinois state case was based on the infamous videotape of Kelly and an allegedly underaged girl. In a theme that would recur throughout the intervening years, the child victim refused to testify at the trial, and a Chicago jury acquitted Kelly on all counts in 2008. After this bombshell acquittal, Kelly would remain on the Down Low of criminal charges for the next 11 years.

2019 Cook County State’s Attorney’s Office aggravated criminal sexual abuse charges. Seventeen years after the first set of charges, and after a BBC documentary that explored allegations that Kelly ran an abusive sex cult, the Cook County State’s Attorney’s Office charged Kelly again. The storm wasn’t over – this time, the charges alleged that from 1998 to 2010, Kelly sexually abused four females, three of whom were minors at the time. In a strange twist, the evidence included a video provided by now-disgraced lawyer Michael Avenatti. Kelly pleaded not guilty and was released. Two weeks after these charges were announced, Kelly went on CBS This Morning to tell his story and proclaim his innocence To the World. Though his attorneys would later wish they Could Turn Back the Hands of Time, Kelly unleashed on national TV an emotional outburst where he stood up, pounded his chest, and yelled during The Interview.

July 2019 Federal Charges in Chicago and Brooklyn. On July 12, 2019, Kelly had his wings clipped in a serious way. Federal prosecutors in Brooklyn and Chicago Doubled Up by bringing two separate indictments against Kelly. The Brooklyn U.S. Attorney’s office charged Kelly with RICO predicated on criminal conduct including sexual exploitation of children, kidnapping, forced labor and Mann Act violations. The federal Chicago charges include child pornography and obstruction. Kelly is Not Feelin’ the Love from the feds, and remains detained in Chicago.

August 2019 Minnesota piles on. A month after the federal indictments, a Minnesota state prosecutor, perhaps believing that Kelly was Guilty Until Proven Innocent, charged Kelly with soliciting a minor and prostitution stemming from an incident 18 years prior, in 2001. Kelly’s attorney stated that the case is a “pure publicity grab by the prosecutor,” apparently a real Go Getta.

August 2020 – Three Kelly Associates Charged with Federal Witness Intimidation. A friend, manager and former publicist of Kelly’s were charged by the U.S. Attorney’s Office in Brooklyn with conspiring to pay off victims, threatening victims and setting fire to a victim’s father’s car. Though Kelly was not charged in this new indictment, the indictment alleges that Kelly knew his associates were Spendin’ Money to get him out of the Gotham City charges.

We will be Right Back for Part 2 of this blog post, coming later this week. In Part 2, we will break down the lessons learned from the R. Kelly saga for the white collar practitioner. And That’s That.

courthouse and moneyOn September 4, 2020, the Eighth Circuit affirmed Reuben Goodwin’s conviction for his role in a Medicare/Medicaid kickback scheme. Goodwin’s conviction was supported by evidence of his knowledge of the conspiracy and willful participation in the conspiracy. The Eighth Circuit’s decision serves to remind everyone the risks a conspiracy charge pose to even a potentially nominal co-conspirator.

Goodwin Loses His Trial

In July of 2017, a grand jury indicted three defendants, including Goodwin, with healthcare fraud-related crimes concerning the individuals’ involvement with AMS Medical Laboratory, Inc. (“AMS”). AMS tests blood, urine, and other bodily specimens for markers of symptoms to help physicians diagnose potentially dangerous diseases. Southwest Disability Services (“SDS”) is a non-profit agency that provided services to adults with developmental disabilities or alcohol abuse problems; Goodwin was its executive director.

The charges against AMS alleged Stark law anti-kickback violations, 42 U.S.C. § 1320a-7b, prohibiting obtaining “remuneration” in return for referring a person for a medical good or service or purchasing a medical good or service. Similarly, anyone who offers to remunerate another for such referrals or purchases violates the statute.

The indictment alleged that AMS paid a portion of money received from Medicare and Medicaid back to referring individuals, including SDS and Goodwin, in exchange for referrals. The Government claimed that SDS collected specimens without a physician’s prior examination—a prerequisite to collect insurance dollars—while convincing those same physicians to sign off on these unexamined samples. SDS then sent those samples to AMS in exchange for a kickback.

The indictment charged Goodwin with one count of conspiring to defraud the United States by accepting the AMS kickbacks, making fraudulent statements, and eleven counts of healthcare fraud related to specific transactions involving kickbacks. Importantly, there were no allegations that Goodwin himself ever lied to Medicare or Medicaid directly; Goodwin operated entirely through SDS and AMS. Still, Goodwin was convicted of all charges.

The Eighth Circuit Affirms the Conviction Using Classic Conspiracy Principles

Goodwin appealed and argued his conviction was against the manifest weight of the evidence. The Eighth Circuit disagreed and affirmed the conviction. In so affirming, the Eighth Circuit demonstrated the far-reaching implications of even nominal involvement in a conspiracy.

In the Eighth Circuit, conspiracy requires the government prove a conspiracy existed with an illegal purpose, the defendant was aware of the conspiracy, and the defendant knowingly became part of the conspiracy. Goodwin challenged that the government could not establish that he knew his conduct was wrongful or that he intentionally participated in the conspiracy with the intent to further its criminal objectives. Instead, he laid blame at the feet of two co-conspirators who Goodwin alleged were the “primary bad actors.”

The Eighth Circuit disagreed with Goodwin’s arguments. The evidence showed that AMS entered into agreements with Goodwin in violation of the anti-kickback statute, that Goodwin was aware of the agreement, and that Goodwin himself thought of the plan to collect specimens from individuals without a physician. Goodwin even tracked the kickbacks to ensure payment on specimens. The Eighth Circuit also weighed Goodwin’s significant experience working in federal healthcare programs heavily and found that his experience made it more likely he knew about the kickback scheme’s illegality. Notably, the Eighth Circuit also considered Goodwin’s knowledge that his conduct violated a federal statute. While it is generally unnecessary to prove a defendant knows their conduct violates a statute—ignorance of the law is no defense—here, that evidence weighed in favor of finding a conspiracy where an element was that Goodwin knowingly became part of a conspiracy understanding its illegal purpose.

Goodwin’s challenge to the conspiracy charge was the linchpin in his appeal. That is because the Pinkerton Doctrine premised Goodwin’s eleven substantive healthcare fraud convictions on his participation in the conspiracy. Put simply, under Pinkerton, a defendant is responsible for his or her co-conspirators’ substantive crimes which the defendant could reasonably foresee as a necessary or natural consequence of the conspiracy which are committed within the scope and in furtherance of the conspiracy. In Goodwin’s case, that means that his participation in the conspiracy tied him to the foreseeable acts of the other two “bad actors,” including their healthcare fraud. If Goodwin could have overturned the conspiracy charge, he would also overturn the substantive convictions. But, because the Eighth Circuit affirmed the conspiracy conviction, the other convictions stood as well, and the Eighth Circuit affirmed the conviction on all counts.

Conspiratorial Conclusions

Federal conspiracy law is a powerful tool in the Government’s arsenal. The Pinkerton Doctrine permits the government to put great pressure on even a nominal alleged co-conspirator, because, if the government can prove the defendant’s participation in the conspiracy, the government can blame the defendant for his or her co-conspirators’ reasonably foreseeable actions in furtherance of the conspiracy as well. This is a hefty bargaining chip for the government in seeking favorable plea and immunity deals. The Eighth Circuit’s decision in United States v. Goodwin is a textbook example of this practice in action.

The nation is slowly reopening. Businesses showcase signs that proudly announce “OPEN” in bright neon letters. But the legal landscape is different from the pre-COVID-19 days, and businesses should be aware of the inherent risks involved with re-opening and take the utmost care to ensure employee and customer safety to avoid or minimize government intrusion, investigation, and prosecution for running afoul of the post-COVID-19 legal landscape.

Ohio started reopening in April of 2020, but Ohio’s approach to reopening is not novel: the State wields potential prosecutorial punishment for businesses in violation of the appropriate regulations. Thus, examining Ohio’s investigative and enforcement mechanisms provides helpful insight to how other jurisdictions will handle reopening when it occurs.

A New Normal: Responsible RestartOhio Regulations

On April 27, 2020, Ohio Governor Mike DeWine announced Ohio’s “Responsible RestartOhio” campaign.[1] The campaign focuses on guiding businesses—from restaurants to daycares—on safely reopening their doors to customers based on each business’s specific business sector.[2]

The Ohio Department of Health (“ODH”) promulgated the RestartOhio Regulations (“RestartOhio Regulations”).[3] Therefore, the RestartOhio Regulations carry the force of an order by the ODH.[4] These regulations provide advisory best practices, but also include mandatory practices that certain businesses must adopt.[5]

All-Access Investigation

RestartOhio focuses on compliance, using an “all-access” investigation approach to further that goal.

First, law enforcement enforces the RestartOhio Regulations. Under Ohio law, “police officers [and] sheriffs . . . shall enforce quarantine and isolation orders, and the rules” adopted by the ODH and may be the primary method of ensuring compliance with the RestartOhio Regulations.[6]

Second, with respect to certain businesses,[7] Governor DeWine created an enforcement team under Ohio’s Department of Public Safety’s Ohio Investigative Unit (“OIU”) to enforce the regulations.[8] “OIU agents are fully-sworn plainclothes peace officers responsible for enforcing Ohio’s alcohol, tobacco and food stamp fraud laws.”[9]

Third, citizens are encouraged to report non-compliance to the ODH. The ODH relies on citizens’ and law enforcement agencies’ complaints. Thus, a business not complying with the RestartOhio Regulations could be reported to the ODH at any time by anyone.[10]

Amicable Resolutions and Mitigating Government Intrusion

First-time offenders are unlikely to suffer harsh sanctions, but criminal prosecutions are possible. The ODH prefers to call or visit a business to investigate alleged non-compliance and advise it of best practices instead of penalizing it. Therefore, a business’ first sign of governmental scrutiny could be interacting with the ODH.[11] Businesses within the OIU’s oversight, however, could face steeper penalties. The OIU regularly hands out citations for violations of Ohio liquor laws[12] and for “improper conduct” occurring at a bar or restaurant.[13] In fact, dozens of Ohio restaurants have already suffered such a fate in metropolitan areas like Cleveland and Cincinnati.[14] Such “improper conduct” may include violations of the RestartOhio Regulations,[15] and cited businesses may be prosecuted[16] or become embroiled in “show cause” hearings to explain why their liquor license should not be revoked by the Ohio Liquor Control Commission.[17]

Governor DeWine tasked the ODH, the OIU, and local law enforcement with referring habitual offenders for criminal prosecution. Defiance of a lawful order by the ODH is a Second-Degree Misdemeanor which carries a maximum fine of $750 per violation.[18] An OIU agent walking into a crowded, habitually-offending bar could document ten violations of employees not wearing face coverings and refer the matter to a prosecutor. That bar could suffer a $7,500 penalty from a single OIU visit.

Conclusion

Ohio businesses operating in a post-COVID-19 world must be aware of the RestartOhio Regulations. Law enforcement and citizens will be watching for violations. Ohio businesses must implement at least the minimum RestartOhio Regulations and should consider implementing optional best practices as well. Adopting these best practices will further an argument that any violation was a one-time mistake rather than an example of habitual non-compliance and will help each business do its part to protect its community.

Ohio’s paradigm may be the roadmap of other jurisdictions. As more states enter reopening stages and embrace varying degrees of open and closed, citizens and businesses will see similar investigative and enforcement mechanisms nationwide. Businesses must familiarize themselves with their state’s regulations and ensure compliance to avoid government intrusion.

[1]  See Governor DeWine Announces Details of Ohio’s Responsible RestartOhio Plan, https://governor.ohio.gov/wps/portal/gov/governor/media/news-and-media/covid19-update-april-27

[2]  The campaign may be found at https://coronavirus.ohio.gov/wps/portal/gov/covid-19/responsible-restart-ohio/

[3]  See, i.e., Director’s Dine Safe Ohio Order, June 5, 2020 (https://coronavirus.ohio.gov/static/publicorders/dao-Reopens-Restaurants-Bars.pdf). This is an example of the RestartOhio Regulations governing bars and restaurants. Other sectors of business have their own RestartOhio Regulations which are located online at the ODH’s website and the Governor DeWine’s website.

[4]  See Director’s Stay Safe Ohio Order, April 30, 2020 (https://coronavirus.ohio.gov/static/publicorders/Directors-Stay-Safe-Ohio-Order.pdf); see also R.C. § 3701.13; see also R.C. § 3701.56.

[5]  See, i.e., Restaurants, Bars, and Banquet & Catering Facilities/Services, https://coronavirus.ohio.gov/static/responsible/Restaurants-and-Bars.pdf

[6]  See R.C. 3701.56

[7]  These businesses include all businesses that either possess an Ohio liquor license, accept food stamps, or sell tobacco products.

[8]  See https://www.fox19.com/2020/05/18/watch-live-gov-dewine-gives-update-states-coronavirus-response/

[9]   https://www.oiu.ohio.gov/oiu-about.aspx#gsc.tab=0

[10]  See https://www.cincinnati-oh.gov/health/covid-19/business-compliance/ (Cincinnati’s local Department of Health’s citizen’s complaint resource)

[11]  See Scant Follow-Through on COVID Complaints; Authorities Rely Mostly on Voluntary Compliance, Cinn. Enq. June 2, 2020, p. A1

[12]  See R.C. §§4301 et seq. and 4303 et seq.

[13]  See O.A.C. § 4301:1-1-52 (prohibiting, inter alia, actions which “harass, threaten or physically harm another person.”

[14]  Twelve bars and restaurants in Cleveland recently saw the OIU in action when the OIU cited bars and restaurants, including Put-in-Bay, for violations of the RestartOhio Regulations. See https://www.wkyc.com/mobile/article/news/health/coronavirus/12-businesses-cited-for-not-enforcing-coronavirus-safety-guidelines/95-c7d2e311-c355-4fa9-a961-7307d87f9bd8

[15]  OIU agents have cited at least two bars with “improper conduct” for violations of the RestartOhio Regulations. See https://www.13abc.com/content/news/Investigators-issue-citations-for-restaurantbar-COVID-violations-570778821.html.

[16]  See R.C. § 4301.10(A)(4) (the Ohio Division of Liquor Control shall “[e]nforce the administrative provisions of [R.C. §§ 4301 et seq. and 4303 et seq.], and the rules and orders of the [L]iquor [C]ontrol [C]ommission and the superintendent relating to the manufacture, importation, transportation, distribution, and sale of beer or intoxicating liquor. The attorney general, [and] any prosecuting attorney . . . shall, at the request of the division of liquor control or the department of public safety, prosecute any person charged with a violation of any provision in those chapters. . . .”).

[17]  See R.C. § 4301.252 (options to pay forfeitures in lieu of suspending operations of liquor sales in certain circumstances); see also O.A.C. § 4301:1-1-65 (proceedings before the Liquor Commission).

[18]  See R.C. 3701.571.

FraudOn March 20, 2020, the Attorney General ordered the Department of Justice (“DOJ”) to prioritize oversight, investigation, and prosecution of misuse of federal funds distributed in response to the COVID-19 pandemic.[1] Now, almost six months later, the DOJ continues to examine instances of “COVID-19 Fraud” for possible civil or criminal prosecution. The DOJ’s prioritization of such investigations is of significant concern to any business or entity that received federal funds from any COVID-19 federal assistance program.

In a recent round-table discussion, a federal prosecutor discussed two federal loan programs, the Paycheck Protection Program (“PPP”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Provider Relief Fund and explained how the DOJ is investigating potential frauds arising out of the receipt of funds from those programs. The prosecutor’s discussion provides valuable insight as to how the government will prosecute fraud in connection with these programs. Since many businesses have received government loans to keep operating, it is important to understand the red flags the DOJ will be looking for to determine if fraud has occurred. Ensuring that these loans were properly documented was made more challenging for companies because guidance from the government was revised multiple times at the same time it was encouraging them to participate in these programs.

Stimulus Program Fraud: Well-Known Pitfalls for Companies in Fraud Prosecutions

Enacted as part of the CARES Act, the PPP is one of the largest loan programs intended to stimulate the economy. The PPP presents various potential pitfalls for businesses seeking such a loan, any one of which could put the business on the DOJ’s short list of investigation targets. Entities should be wary of making a false certification in any of the following categories:

  • Whether the individual or entity is a convicted felon;
  • Whether the entity has already received a PPP loan;
  • Reporting fictitious or inflated numbers of employees;
  • Using a fictitious business name to acquire PPP loans;
  • Using fraudulent or forged documents in connection with acquiring a PPP loan;
  • Creating a business after February of 2020 to acquire a PPP loan;
  • Purchasing unauthorized goods or services with PPP loan funds;
  • Funneling PPP loans to other organizations or entities; and
  • Perpetuating pre-existing fraud schemes.

Additionally, the PPP prohibits certain affiliations with private equity firms during the application process.

In addition to the PPP, the CARES Act Provider Relief Fund, administered through the Department of Health and Human Services (“HHS”), is a separate fund which has paid $110 billion as of August 14, 2020 to healthcare providers who have been hit hardest by the COVID-19 pandemic. Any healthcare provider who, after January 21, 2020, diagnosed or provided testing or care to individuals with possible or actual cases of COVID-19 are eligible for certain payments for expenses or lost revenues attributable to the coronavirus. The funds cannot be used to reimburse expenses or losses reimbursed from other sources.

Pitfalls also exist with respect to the CARES Act Provider Relief Fund. Prosecutors are placing a special focus on provider participation in telehealth kickback schemes. A telehealth kickback scheme is one in which a lab company pays a telemedicine company to forward completed coronavirus test kits to it, and the telemedicine company forwards a portion of that payment to the physician or patient broker call center who initially provided the patient to the telemedicine company. Government healthcare programs like Medicare and Medicaid pay for the testing of the kits at the lab company but require that funds not be directed to the referring physician or patient broker in exchange for referring patients to the telehealth provider. These funds are intended solely to be used for coronavirus testing and treatment and cannot be used to reimburse referrals.

Other health care fraud schemes originate from two main sources: “upcoding” and asserting factually false claims. First, “upcoding” occurs when the patient’s symptoms are coded as more severe or differently from how the patient presents. For example, coding a common cold as coronavirus to obtain federal funds is inappropriate. Second, claiming federal funds under factually false pretenses, such as by using a fictitious patient identity or documenting a “telehealth” appointment which did not occur, is, of course, unlawful. Healthcare providers should be aware that reimbursement for telemedicine services requires both an audio and visual encounter, so a simple call with a healthcare professional is not a telehealth encounter; coding it as such is inappropriate. Care must continue to be taken to ensure proper coding and documentation of telehealth appointments.

While telehealth fraud involving the coronavirus is a primary focus, the DOJ is also interested in identifying areas of telehealth fraud in combination with non-telehealth issues not involving the coronavirus. For example, another of the DOJ’s current areas of focus is the opioid epidemic. The DOJ will investigate and potentially prosecute telehealth kickback schemes that are being used as a cover to over-prescribe controlled substances.

The DOJ Will Prosecute Applicants Despite Challenges in the Application Process

The DOJ rarely opines on whether certain scenarios will provoke government regulatory scrutiny or prosecution with certainty. However, at a recent virtual round-table discussion hosted nationwide, the DOJ identified various scenarios as potentially problematic and ripe for government investigation or prosecution under the PPP and the CARES Act Provider Relief Fund.

The DOJ identified the following scenarios:

  • A company applies for a PPP loan and includes independent contractors in the workforce calculation;
  • A parent company counts employees employed by its subsidiaries as its own in its PPP loan application, and the subsidiary later applies for a PPP loan using the same employees;
  • A private equity firm requires a portfolio entity to apply for a PPP loan;
  • A company applies for multiple loans via different business entities at different banks;
  • A company applies for loans despite having capital reserves or high net worth in ownership;
  • A pre-pandemic insolvent company applies for a PPP loan;
  • A company uses PPP loans for executive compensation where the executives did not previously draw compensation or bonuses;
  • A company invents or modifies descriptions of channels of funds to spend PPP money to qualify for loan forgiveness; or
  • A bank prepares or substantially participates in the preparation of PPP loan applications, especially if the bank knowingly falsely certifies loan documents.

These are far from cut-and-dried examples, and every case will depend on its unique facts and circumstances and on the documentation submitted in support of the loan application. But recent examples show that businesses can expect the DOJ will be aggressively seeking cases to bring for mishandled federal loans.

DOJ Will Use the False Claims Act and Anti-Fraud Injunction Statute

Any business or individual who receives a federal loan or payment should be aware of the arsenal of statutes the DOJ is using to prosecute fraudulent activity. Recent DOJ prosecutions demonstrate that it is scrutinizing the very scenarios discussed at the round table discussion. Newly-filed criminal complaints and indictments[2] describe conduct that involves fraudulently misrepresenting the number of employees on a payroll in an application, misrepresenting whether the applicant has pending criminal charges or has been convicted, misrepresenting whether the applicant had already received PPP funds, and using PPP funds for personal, rather than business purposes. The DOJ has charged loan applicants in a number of districts with wire fraud, mail fraud, bank fraud, major fraud against the United States, identity theft, and making false statements.

The DOJ has also expressed its intent in the roundtable discussion to use the False Claims Act (“FCA”).[3] The FCA generally prohibits defrauding government programs. A person or company is liable under the FCA if they knowingly submit or cause another to submit a false claim to the government, or knowingly make a false claim or statement to obtain government funds. In addition to authorizing suits directly by the federal government, the FCA permits citizens to step in on behalf of the government in a qui tam action while giving the government an opportunity to intervene. Without doubt, the FCA is the DOJ’s primary tool for combatting fraudulent statements made in furtherance of a claim on federal funds.

The second statute discussed at the round-table event was the Anti-Fraud Injunction Statute (“AFIS”).[4] The DOJ has acknowledged using AFIS more frequently during the COVID-19 pandemic because it permits the DOJ to step in quickly and request a court to issue a preliminary order requiring a company to cease certain allegedly fraudulent activities immediately. The AFIS requires an underlying predicate criminal act to be the triggering event and, by statute, that underlying criminal act may include “Federal health care offenses.”[5] While grand juries in some jurisdictions remain on hold, federal prosecutors may use the AFIS to move quickly to prevent fraudulent activity and freeze fraudulently acquired proceeds.

The government has already used AFIS with preliminary success. For example, on June 1, 2020, the DOJ successfully enjoined Fort Davis, Texas resident Marc “White Eagle” Travalino from alleged fraudulent activity related to phony COVID-19 cures. Travalino’s cures allegedly “are proven to work and destroy” the coronavirus. However, no such cure for the coronavirus exists. Travalino was caught when he sold his alleged “cures” to an undercover federal agent. Instead of initially prosecuting Travalino criminally, the DOJ opted to use the AFIS to obtain a preliminary injunction, halting the activity quickly. Based on the DOJ’s allegations against Travalino in the injunctive action, criminal charges are likely forthcoming. The criminal investigation is ongoing while Travalino’s business is shuttered under the restraining order.

Conclusion

The Small Business Administration has allocated $660 billion of federal funds to businesses during the coronavirus pandemic, and the CARES Act Provider Relief Fund, distributed to hospitals and healthcare providers by HHS, has allocated an additional $175 billion to healthcare providers. Businesses and health care providers who have taken these federal funds should have documented what the funds are being used for, and when and how the funds are being used. If loan documentation is missing, incomplete or incorrect, a company could be subject to a government investigation long after the loan was received. Attempting to document what happened possibly years later will be difficult, so if the loan file is incomplete, companies should make an effort to remediate now. Recipients of pandemic-related funding should also be reviewing the DOJ’s enforcement efforts regularly to determine whether they are vulnerable to an investigation and consult counsel to formulate a strategy if and when the government comes knocking at the door.

[1] Attorney General Barr’s memorandum may be found here: https://www.justice.gov/ag/page/file/1258676/download

[2] See U.S. v. Sheng-Wen Cheng, No. 20 MAG 8698 (S.D.N.Y., 2020); U.S. v. Ameet Goyal, No. 19-cr-844 (S.D.N.Y., 2020); U.S. v. F. Shah, No. 4:20-CR-156 (E.D. Tex., 2020); U.S. v. Bostic et al., 0:20-mh-06317 (S.D. Fla., 2020); U.S. v. R. Shah, No. 20-CR-293 (E.D. Ill., 2020).

[3] See 31 U.S.C. §§ 3729-3733.

[4] See 18 U.S.C. § 1345.

[5] See 18 U.S.C. § 1345(a)(1)(C) (“[C]ommitting or about to commit a Federal health care offense” is a predicate offense to AFIS).