False Claims Act - Congressional testimony

<body bgcolor="white"> <div align="left"><table border="0" cellpadding="0" cellspacing="0" width="500"> <tr> <td colspan="2" valign="top"><p align="center"><a href="AF_frm.htm" target="_top">About the Firm</a> | <a href="fca_f.htm" target="_top">The False Claims Act</a> | <a href="wr_f.htm" target="_top">Whistleblower's reward</a> | <a href="caintr_f.htm" target="_top">Have a case?</a><a href="story_f.htm" target="_top"><br> Whistleblowers' stories</a> | <a href="resman_f.htm" target="_top">Resources</a> | <a href="what_f.htm" target="_top">What's new</a> </td> </tr> <tr> <td><font SIZE="4" COLOR="#333366">Senate, Sept. 9, 1993  </font></td> <td valign="top"><img src="../../GIF/PC_url.GIF" width="143" height="14" align="right"></td> </tr> <tr> <td colspan="2"><p align="center"><br> </p> <p align="center"><font size="4"><b>Testimony of John R. Phillips on S.841, amendments to the False Claims Act, before the Senate Subcommittee on <br> Courts and Administrative Practice<br> September 9, 1993</b></font> </p> <p>I appreciate the invitation to appear before your committee today, Mr. Chairman, to address the issues related to the qui tam provisions of the False Claims Act as amended in 1986<font size="3">. 1 </font>first appeared before this committee in 1985 when it was considering those 1986 amendments. I had the privilege of working with Senator Grassley and the members of his staff by providing technical assistance on issues related to the qui tam provisions of those amendments.</p> <p>It is now six and a half years since those amendments were adopted, a sufficient period of time in which to gauge the acts effectiveness. During this period I and members of my law firm have focused much of our professional work on representing clients who have filed lawsuits under the False Claims Act. Our law firm of 10 lawyers has screened more than 2,000 calls from people who want to explore whether they may have a potential case. Those inquiries have ultimately led to the filing of some 20 cases: Eight of these cases have now been resolved for a total recovery to the United States Treasury of $256 million. Several have been voluntarily dismissed and the rest remain in active litigation with a strong likelihood of producing another quarter billion dollars to the U.S. Treasury when they are ultimately resolved.</p> <p>Our firm has committed approximately $10 million worth of private legal resources toward implementation of the False Claims Act and have brought in other law firms who have collectively made a similar financial commitment. These cases once undertaken typically take years to resolve. The commitment of resources necessary to advance the cases can be staggering especially when opposed by a phalanx of well-paid lawyers representing the defendant accused of fraud where the cost of defense is no object.</p> <p>The sad truth is that there are too few government lawyers to adequately prosecute those who defraud the government. This law, by encouraging private lawyers to join forces with government lawyers, has gone some distance toward righting that imbalance.</p> <p>Congress, by enacting the 1986 amendments, hoped to do something more to combat fraud against the government than simply adding more lawyers, investigators and accountants to the government payroll. They wanted to try something new: enlist the citizens and the private bar to become engaged in the battle of fraud against the government. This approach had a strong appeal, using market place incentives to encourage the private sector to do the public's work, without adding to the government bureaucracy.</p> <p>More than six years later it is clear that the law is working as Congress intended. Fraud that would have otherwise gone undetected is being exposed; private legal resources are being brought to bear to assist the government in its fight against fraud; recoveries to the U.S. Treasury are up dramatically. Since the 1986<font size="1"> </font>amendments, the government has recovered more than $400 million from cases initiated under the qui tam provisions of the False Claims Act. This compares with a total of $27 million in recoveries in 1985 by the Department of Justice in all cases filed under the False Claims Act, the year before the amendments. In calendar year 1992<font size="1">, </font>more recoveries were obtained from citizen-initiated cases than those initiated by the Department of Justice. It is likely that this gap will continue to grow as the public becomes more aware of the law's existence and more cases are filed by individuals on behalf of the government.</p> <p>Perhaps the biggest benefit of this law that is difficult if not impossible to quantify is its deterrent effect. I know from my conversations with opposing counsel and representatives of defendants that companies are now changing their practices. The risks of detection have been greatly increased because of this law, which has forced many companies to re-examine and alter the way they do business with the government.</p> <p>The law is also having the effect of forcing action where it is likely that none would have been taken. For example, our client, Christopher Urda, witnessed questionable practices engaged in by a division of the Singer Corp. that made flight simulators for the military services. After he left the Singer Corp. and went to work for the government, Urda became convinced that the practice engaged in by Singer was fraudulent. On five separate occasions he contacted Government investigative offices to explain the fraud. In each instance those government officials expressed no interest in pursuing the case. Frustrated, Mr. Urda learned of the qui tam provisions of the False Claims Act from an article in the Wall Street Journal and contacted our law firm. After we completed our investigation and analysis, we were convinced that the practice did amount to fraud and filed the case. The government ultimately joined the case and more than four years later collected $50 million from the defendants.</p> <p>This case typifies what I refer to as the "action-forcing" nature of the False Claims Act qui tam provision. When a case is filed it immediately gets a docket number and an assigned federal judge. The clock starts running on the government to conduct its investigation when credible evidence of the fraud has been established. Such cases can no longer languish unattended to for years. The party filing the case has an opportunity to participate in (but not control) the litigation on the side of the government. He has the right to file objections to any proposed settlement that the court must consider in determining whether to approve it as being fair, adequate and reasonable. In our opinion, these provisions without question have resulted in cases of fraud being filed that would not have otherwise seen the light of day and higher recoveries achieved when the cases are ultimately settled.</p> <p>Our client, Mr. Carton, who is here to testify, presents further evidence of the law working well. The sophisticated cost-accounting practice engaged in by Litton Industries would never have been uncovered by government investigators or auditors acting on their own. Mr. Carton complained internally within the company about the practice and did call a government hotline but received no real encouragement or interest. He felt that there was nothing more he could do until he read about the revitalization of the "Lincoln Law" in the <i>Los Angeles Times</i> which led him to us. We retained experts and thoroughly investigated the case. We became convinced that it was a compelling, albeit complicated, case of fraud and filed the action in 1988.The government joined the case shortly thereafter and through the U.S. attorneys office in Los Angeles has been pursuing it vigorously. Our firm has thus far expended 25,000 hours of legal work (approximately two-thirds of the total time spent on the government's side) advancing the case to trial, which will occur in 1994. We have worked on a completely cooperative basis with the U.S. attorneys involved in the case, dividing up responsibilities, filing joint motion and briefs and developing an overall coordinated strategy. In our and the government's view the prospect for a substantial recovery are excellent. The point to be made here is that this case could not have been litigated nearly as well and perhaps not at all if all the work had to be done by the government attorneys alone. They simply lack the human resources to pursue such complex litigation without assistance.</p> <p>In many ways this False Claims Act case against Litton Industries represents the best example of the qui tam provisions working as Congress intended. The fraud would not have been uncovered without it; the case could not have been litigated without the substantial support provided by private counsel; and the recovery that will doubtlessly be achieved will be much greater as a result of that litigation support.</p> <p>We also represent Chester Walsh in a qui tam case brought against General Electric involving unauthorized use of foreign military sales funds through a fraudulent scheme with a rogue Israeli general, Romi Dotan. Mr. Walsh, a 25-year G.E. employee, felt that he could not report the matter internally to General Electric because management officials were already aware of the practice. He feared G.E. would retaliate against him and that a cover-up would occur were he to press internally for action.</p> <p>He read about the False Claims Act qui tam provision, did his own research and became convinced that this was the only vehicle available to him that would assure active investigation and would protect him from retaliation by G.E. At considerable personal risk, Mr. Walsh gathered documents, smuggled them out of Israel in his household goods and brought them to us for our review. Once filed, the government joined the case and ultimately collected $59.5 million in civil damages and $9.5 million in criminal fines., G.E. pled guilty to several serious felonies.</p> <p>Mr. Walsh was right to be concerned that G.E. would go after him. G.E. tried everything imaginable to retaliate against Walsh: they threatened to fire him and sue him to get back whatever money he collected under the False Claims Act for his efforts. Fortunately your 1986 amendments and a courageous federal judge put a stop to G.E.'s vicious retaliating efforts. Mr. Walsh has made the statement repeatedly that without the False Claims Act he would never have been willing to undergo the ordeal of taking on one of the world's most powerful corporations. Had he done so he felt he would have been destroyed, and I must say that in light of G.E.'s conduct, he probably would have been.</p> <p>These are just a few case examples provided to this committee to illustrate how the law is working since your amendments were adopted in 1986. There are many other cases examples too numerous to mention.</p> <p>The same cooperative attitude I have described in the Litton case while working under the direction of the U.S. attorneys office in Los Angeles has, on the whole, not been present at the Department of Justice in Washington. Residual resistance to the full and effective implementation of the qui tam provisions continues in ways we believe are completely contrary to the law and its underlying congressional policies. Repeated attempts are made to freeze out the qui tam plaintiffs and their lawyers from participating in the litigation, a practice we believe to be completely contrary to what Congress intended. The only beneficiaries of this practice are the defendants accused of fraud. We note that the new administration has publicly committed to turning the Department of Justice around on this law. We patiently await this transition.</p> <p>The amendments offered by S. 841 will improve the act's effectiveness and restore the congressional policy that underlay the "public disclosure" bar to filing a qui tam lawsuit. I concur completely in the analysis offered by Lisa Hovelson of Taxpayers Against Fraud on this issue. It is essential that the welter of conflicting federal court decisions be clarified in a way that is consistent with the congressional objectives set forth in the 1986 amendments.</p> <p>Congress has the opportunity with these amendments to expressly state that the 1986 amendments were intended to apply retroactively. Most courts which have been asked to rule on this issue have held, correctly in our view, that the amendments do indeed apply retroactively but a few have taken contrary positions. Thus, clarification is in order. Tens of millions of dollars could be lost to the U.S. Treasury on pending cases should the 1986 amendments be deemed not retroactive.</p> <p>The 1986 amendments did not create new types of liability. Conduct that was permissible prior to the amendments was not made illegal after the amendments. The amendments instead improved the procedural aspects of the False Claims Act that will increase the government's likelihood of holding those accountable who have submitted false claims to the government. Defendants who defraud the government should not be able to escape liability by arguing that these improved procedural amendments do not apply to their conduct that occurred prior to October 23, 1986.</p> <p>Section 3 of S. 841 is a wise addition to the False Claims Act. This provision requires court approval of any release given by an employee to an employer not to file a qui tam case. This is becoming a new tool that some government contractors are using to eviscerate the act. I have even heard lawyers who represent defense contractors propose at seminars that employers consider requiring all employees as a condition of employment to give up any rights they may have to file a qui tam case. Obviously this practice would completely undercut the policy underlying the False Claims Act. This amendment will make it expressly clear that such attempts would be in direct conflict with the law.</p> <p align="center">Speaking as one who has had the opportunity to work directly with the False Claims Act and the amendments you adopted in 1986<font size="1">, </font>I can state unequivocally that in my experience the amendments you are considering today will improve the act's effectiveness in ferreting out fraud against the government.<br> <br> <font size="1">� 1998 Phillips and Cohen. All rights reserved<br> <a HREF="cred_f.htm" TARGET="_top">Credits</a></font> </td> </tr> </table> </div> </body>