Bulllish on Fraud...and Whistleblowing

Time.com recently reported on "The Reasons Fraud Spikes in a Recession." Fraud related calls to a compliance and corporate-governance hotline this year increased by 14% over the same period in 2007. A poll of members of the Association of Certified Fraud Examiners showed that the number of company fraud cases grew over the previous twelve months.

Time.com opines that one reason for the increase in interest in fraud reporting during hard times is because corporate management cuts back on its middle tier to save money. The job of controlling fraud - rechecking for accuracy, for example - typically falls to the middle manager. When middle managers are forced out, the remaining middle managers feel the pinch. They can't keep up with the demand to do more with fewer resources, and fraud mechanisms fall by the wayside.

Those inclined to commit fraud sense new opportunities in recession as well. Last fall, Senator Chuck Grassley loudly complained about the lack of oversight accompanying the distribution of bailout monies, for example. Fraudsters are nimbly trying to determine where they can make money from the bailout and stimulus programs. Today, the new administration is scrambling to put proper controls in place, but bailout dollars have been misspent in the interim.

Along with the new opportunities for fraud comes new interest in whistleblowing. A good many people are frustrated by the economic downturn, and they aren't as willing to tolerate fraud schemes as they were a few years ago. People want to report fraud and are tired of seeing scam artists take advantage of the tax paying public. Thanks to the newly updated False Claims Act and the IRS Rewards Program, whistleblowers are having an easier time reporting fraud and finding it more lucrative than it used to be.

Congress Updates False Claims Act

Last night, Congress updated the False Claims Act through its passage of FERA.

Jeb White, President of Taxpayers Against Fraud (TAF) had this to say:

"In 1986, with fraudsters draining the U.S. Treasury with impunity, Congress acted by revitalizing the False Claims Act. Once again, Congress strengthened the False Claims Act, when it passed the Fraud Enforcement & Recovery Act of 2009. President Obama has promised to quickly sign this bipartisan legislation, which seeks to remove many of the judicially created limitations and qualifications to the False Claims Act.

This much-needed legislation will modernize the Act, allowing the False Claims Act to reach modern-day fraud schemes. It will also remove many of the impediments to the Government's investigative powers, strengthen anti-retaliation protections, and clarify many of the procedural questions that have derailed qui tam actions in recent years.

This is a giant first step forward for our country's fraud-fighting efforts. The bipartisan support for this legislation demonstrates, once again, that when it comes to fighting fraud, politics takes a back seat to doing the right thing. Now that Congress has plugged the False Claims Act liability loopholes, we look forward to Congress addressing the rest of the problems identified in the False Claims Act Corrections Act of 2009."

Stay tuned. We'll provide ongoing discussion of the changes in the FCA and how they affect whistleblowers.

Got Fraud? What Kind?

Fraud comes in different types. To figure out how you should hold someone legally accountable for fraud, you need to figure out what kind of fraud is being committed.

Is the government paying the bill? Then you might have a False Claims Act case. The next question asks which government. If the feds are paying, either directly or ultimately, you may have a viable FCA case because there is a federal law that allows individuals to bring a claim on behalf of the federal government. If the state government is paying, without the involvement of the feds, we need to ask which state. Almost half of the states have some form of state False Claims Act, allowing whistleblowers to bring fraud claims on behalf of the state. Some of those state Acts are limited to Medicaid claims; others focus on kickbacks; lots of states have none at all.

If the fraud consists of lying to the IRS about taxes, then you may have a tax fraud claim under the IRS Rewards Program. If the fraud consists of lying about sales or franchise taxes or some other state tax, then you may be able to file a whistleblower claim depending on the particular state.

If the lies take advantage of the general public, meaning average citizens are being bilked out of their dollars, you can make a complaint to the Attorney General in your state because they usually handle "consumer fraud."

If the fraud targets an individual or small group of folks, you may be able to file locally alleging a "common law fraud claim." Common law means the laws of the state will determine what needs to be proven.

KEMY focuses on whistleblower claims in the tax and government payer arenas, but we are more than happy to hear your stories of fraud and help you figure out where and how to get the fraud resolved. Call and ask. We know fraud is complicated and would like to help.

E&Y Employees Found Guilty for Tax Shelters

Former and current employees of one of the Big Four accounting firms, Ernst & Young, were found guilty in federal court on May 7 for selling illegal tax shelters to their clients.

Prosecutors issued indictments against E&Y employees in 2007. The group called themselves "VIPER." VIPER included accounting executives, a former IRS lawyer, and a financial consultant. The former IRS lawyer, Peter Cinquegrani, pled guilty in September 2008. Prosecutors said Cinquegrani drafted legal opinion letters vouching for the legality of the tax shelter. The VIPER group used clients' letters and other documents to obscure the fact that the sole purpose of the tax shelter was to create tax losses.

The shelter was referred to as a Contingent Deferred Swap, or CDS. The CDS shelter targeted wealthy investors with more than $10 million in taxable income. VIPER sold the shelters from 1998 through 2004. Each count of conspiracy, tax evasion, and false statements carries a minimum sentence of five years in prison.

"Tax shelter" usually means a product or strategy that brings together different elements of the tax code for a useful purpose, and many are acceptable. The IRS refers to improper tax shelters as "abusive." Abusive tax shelters are those in which a significant purpose is the avoidance or evasion of federal, state, or local tax in a manner not intended by the law.

Low Hanging Fruit: Psychiatry ripe for fraud

Last week, the New York Times reported on subpoenas naming psychiatrists, one of whom is Dr. Joseph Biederman, the so called father of the childhood bipoloar movement. Biederman's financial ties to drug manufacturers have caught the attention of long time whistleblower champion, Senator Charles Grassley. The Times noted that psychiatrists make less in base salary than other medical specialists, and many supplement their income with speaking engagements and consulting gigs. Biederman receives large amounts of funding from drug manufacturers and simultaneously conducts research on bipolar medications. Also last week, Grassley requested that the American Psychiatric Association give an accounting of its finances.

Grassley, like most people, seems to have been previously unaware of the relationship between pharma dollars and everyday psychiatric decisions. In his letter to the APA last week, Grassley said, "I have come to understand that money from the pharmaceutical industry can shape the practices of nonprofit organizations that purport to be independent in their viewpoints and actions." He's talking about the role the APA plays in influencing its members about the effectiveness of certain drugs. People assume that the APA and its counterparts are neutral, but they often have a financial stake in what they recommend.

Hopefully, Grassley's timing will derail Biederman's push to medicate and label very, very young children with bipolar disorder.

Watching that effort reminds one of the ADD movement in the 1990s. Pharma manufacturers funded parent support groups for ADD; those groups organized to lobby the APA hard for less stringent diagnostic criteria in the DSM (Diagnostic and Statistical Manual of Mental Disorders). The result - tons of kids qualified under the less stringent guidelines and were labeled with ADD. Another result - lots of new customers and mega sales for ADD drugs.

Prediction - Despite this current flurry of interest, people with mental health issues will continue to be ripe fruit for fraudsters. Docs want dollars; pharma wants customers. People with disabilities don't have the resources or the political clout to demand the kind of scrutiny required to keep the APA and its counterparts vigilant. Grassley makes a good start here, but a few subpoenas are not going to make enough of a lasting change to keep people with disabilities safe.