… and 30% of recoveries.
Click to enlargeA whistleblower or "qui tam" suit is a writ whereby private individuals who assist in a prosecution can receive all or part of a given penalty imposed. The name is an abbreviation of the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur meaning roughly "he who pursues this matter for the king as well as for himself." Private individuals can serve as whistleblowers by bringing suit on behalf of the federal government against frauds committed against it. Today, qui tam litigation under the False Claims Act/FCA is exploding.
In the 16th century, Lord Edward Coke, considered the greatest of the Elizabethan and Jacobean jurists, complained that whistleblowers were driven by either "malice or private ends" instead of the "love of Justice." In this blog, I am without malice, but will cop to a blend of "private ends" and "love of Justice".
Liability under the False Claims Act is statutory, based upon a violation of one of the seven subsections of the FCA found at 31 U.S.C. § 3729 (a) (1) through (a) (7). If a defendant is found guilty of violating one of the seven false claim subsections, 31 U.S.C. § 3729 (a) provides that the court shall assess,
"three times the amount of damages which the government sustains because of the act of that person..."
The calculation of damages, as one might expect, is simply the difference between what the government actually paid minus what the government either received or should have paid had the claim not been false. The court may, at its discretion, assess additional civil penalties. 31 U.S.C. § 3730 (d) provides that if the government intervenes in a fraud, the whistleblower received between 15-25% of the proceeds of the action or settlement. If the whistleblower's involvement was less central to a case with government intervention, awards can be 10% or less. The average is 16%. Government intervention is crucial to qui tam suits. Almost all (>95%) of those result in recoveries while few (around 5% cases when the government is not involved.
Most whistleblowers are employees of government contractors. However, they need only possess direct and independent knowledge of the false claims submitted by a potential defendant. What isn't okay? You can't be a member of the armed forces, the government can't already be pursuing the case, and the information can't be public disclosed.
Under False Claims Act suits, the government has recovered over $2 billion and paid out over $340 million to whistleblowers in fiscal year 2013. The average recovery is over $8 million and the average award for whistleblowers is over $1 million.
Auspicious industries for finding qui tam suits include defense contractors and Medicare/Medicaid contractors. One government audit estimates that around 10% of Medicare charges are fraudulent. Once you have a case, you and your qui tam counsel take it to the Department of Justice (DoJ). The DoJ investigates it under seal, which typically takes about eighteen months. Then the DoJ decides to intervene or not. You can continue without the DoJ's help, but it is quite unlikely to be worth it. If the DoJ decides to intervene, then it is extremely likely that the whole process will prove to be worth it.
Once the sealed investigation is done, qui tam suits can go to trial. The complaint is served, there is discovery, a trial, and any appeals. During discovery, the whistleblower has to disclose all relevant information. Litigation can take a few years. Other times, defendants settle without a trial.
Investors who do their own original research on primary sources may come into contact with government contractors committing fraud. This may be in the course of researching short opportunities or concerns with long investments. If in the course of such research, you come to own non-public information regarding a contractor who is defrauding the federal government, filing a qui tam suit could be one lucrative tactic.