Author Archives: Brad Geyer

CCC’s: Supreme Court Rules on Chinese Vitamin C Case

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Yesterday the Supreme Court handed down a decision in the long running Chinese Vitamin C price-fixing case.  Plaintiffs had won a verdict in the district court, which when trebled, was $147 million.  The Second Circuit reversed, however, holding that the district court should have dismissed the complaint on the grounds that the defendants’ price fixing actions were mandated by Chinese law.  The Chinese government had filed declarations to that effect.  The Supreme Court reversed the Second Circuit and held that a foreign government’s interpretation of its own law is not “binding” on U.S. courts.  ANIMAL SCIENCE PRODUCTS, INC., ET AL. v. HEBEI WELCOME PHARMACEUTICAL CO. LTD. ET AL.   The decision can be found here.

According to the Second Circuit, federal courts are “bound to defer” to the foreign government’s construction of its own law, whenever that construction is “reasonable.”  The Chinese government had submitted an official statement on the meaning and interpretation of its domestic law [supporting the defendants’ argument that their actions were compelled by Chinese law].  Because the Second Circuit found the Chinese government’s interpretation “reasonable” the district court was required to dismiss the complaint.  In re Vitamin C Antitrust Litigation, 837 F. 3d 175, 189 (2016).

SUPREME COURT DECISION EXCERPTS

We hold otherwise. A federal court should accord respectful consideration to a foreign government’s submission but is not bound to accord conclusive effect to the foreign government’s statements. Instead, Federal Rule of Civil Procedure 44.1 instructs that, in determining foreign law, “the court may consider any relevant material or source . . . whether or not submitted by a party.” As “[t]he court’s determination must be treated as a ruling on a question of law,” Fed. Rule Civ. Proc. 44.1, the court “may engage in its own research and consider any relevant material thus found,” Advisory Committee’s 1966 Note on Fed. Rule Civ. Proc. 44.1, 28 U. S. C. App., p. 892 (hereinafter Advisory Committee’s Note). Because the Second Circuit ordered dismissal of this case on the ground that the foreign government’s statements could not be gainsaid, we vacate that court’s judgment and remand the case for further consideration.

As the Court of Appeals correctly observed, Rule 44.1 does not address the weight a federal court determining foreign law should give to the views presented by the foreign government. See 837 F. 3d, at 187. Nor does any other rule or statute. In the spirit of “international comity,” Société Nationale Industrielle Aérospatiale v. United States Dist. Court for Southern Dist. of Iowa, 482 U. S. 522, 543, and n. 27 (1987), a federal court should carefully consider a foreign state’s views about the meaning of its own laws. See United States v. McNab, 331 F. 3d 1228, 1241 (CA11 2003); cf. Bodum USA, Inc. v. La Cafetière, Inc., 621 F. 3d 624, 638–639 (CA7 2010) (Wood, J., concur- ring). But the appropriate weight in each case will depend upon the circumstances; a federal court is neither bound to adopt the foreign government’s characterization nor required to ignore other relevant materials.

Relevant considerations include the statement’s clarity, thoroughness, and support; its context and purpose; the transparency of the foreign legal system; the role and authority of the entity or official offering the statement; and the statement’s consistency with the foreign government’s past positions.

Judged in this light, the Court of Appeals erred in deeming the Ministry’s submission binding, so long as facially reasonable.

The case will now go back to the Second Circuit for ruling in light of the standards set forth by the Supreme Court.

No one should expect a stampede of price-fixing cases against Chinese sellers.  This was an unusual case in that much of the evidence the plaintiffs relied on was posted on the Internet. Otherwise, there are obvious high hurdles to obtaining sufficient evidence to prove a Chinese cartel, even assuming there are others.

CCC’s: The Bid Rigging Whistleblower –Part 2

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Should the Antitrust Division Have a Whistleblower Czar?

Well, no.  Without legislation to create a criminal antitrust whistleblower statute, the Czar might have little to do.  But, the Antitrust Division should make some effort, short of Czardom, to encourage bid rigging whistleblowers.  As I noted in Part I (here), there is already a mechanism for a whistleblower to claim a reward for prosecuting collusion among contractors/vendors on government contracts.  The bid rigging whistleblower can file a False Claims Act (qui tam) case on behalf of the government alleging that the government was ripped off by illegal collusion among the bidders.  If the government recovers damages, the person who brought the suit (the Relator) can receive a percentage (10-25%) of the recovery.

As I mentioned in Part I, the Antitrust Division has brought both criminal and civil suits as a result of filed whistleblower cases. This is a pretty well-kept secret because as far as I know, the Division has never encouraged anyone to come forward as a bid rigging whistleblower or done anything to publicize the fact that whistleblowers of collusion on government contracts can and have recovered a portion of the government’s damages.  The government should make some effort to attract bid rigging whistleblowers.  Doing so would benefit the Antitrust Division in obvious and non-obvious ways.  Below are a few ideas I think are worth discussing.

  1. Welcoming Bid Rigging False Claims Act cases
  • Special Counsel for False Claims Act Cases

Over the years there has been a proliferation of counselors to the Assistant Attorney General for the Antitrust Division.  One counsel, with a criminal and civil background, could be designated as the Special Counsel for False Claims Act cases.  This would at least be a message to the bar that the Antitrust Division does have an interest in promoting whistleblowing on collusion on federal government contracts.  This special counsel could also oversee whatever efforts the Antitrust Division does take to encourage bid rigging whistleblowing.

  • Create a False Claims Act web page

The Antitrust Division has a page on its website for the Leniency Program.  The Antitrust Division promotes the heck out of leniency.  This page is an excellent source of information about everything one would need to know about the Corporate and Individual Leniency Programs.   There is also a Report Violations page on the Antitrust Division’s website. A False Claims Act page would signal the Division’s interest in possible False Claims cases as well as provide information a potential whistleblower might need to begin.

  • Better Coordination with Civil Division and United States Attorney’s Offices

 When a False Claim Act case is filed, notice of the case and the evidence supporting it must be filed with the Attorney General of the United States.  From there, the case will be assigned according to the subject matter of the alleged fraud: (i.e. health care, defense, antitrust).  Perhaps this is already being done, but the Antitrust Division might be more aggressive in claiming its seat at the table for bid rigging on government contracts.  A whistleblower will not file a Sherman Act case if she has information about collusion on a government contract—because there is no provision for antitrust whistleblowers.  The case will be filed as a Conspiracy to Defraud the United States with the bid rigging constituting the fraud.  A review of cases False Claims Act Cases on the Department of Justice website indicates that there have been a variety of False Claims Act matters that involved bid rigging yet were handled by local United States Attorney’s offices and the Civil Division of the Department of Justice, instead of the Antitrust Division.[1]

It would be good public policy to have all potential government bid rigging cases be referred to the Antitrust Division. Pardon the institutional pride (I worked there for 34 years), but nobody can spot, investigate and prosecute a viable criminal antitrust violation (i.e. bid rigging) better than an experienced Antitrust Division Attorney.  What may look like a bid rig too small for government intervention, may be spotted as the tip of the iceberg by an Antitrust Division prosecutor.  Likewise, a case that may appear weak to someone else, may look quite viable to a Division prosecutor that has experience investigating cartels—and tools like the leniency program.  A special counselor for False Claims Act cases would raise the profile within the Antitrust Division, the Department of Justice (and the outside bar) and may spur additional viable False Claim Act cases being referred to the Antitrust Division for a decision on whether the government should intervene and take over the prosecution.

     2.      The Benefits to the Antitrust Division of a Higher Profile for False Claims                                      Act Cases

The Antitrust Division could benefit in both obvious and non-obvious ways from a higher profile on False Claim Act cases.

  • The Obvious

Filing a False Claims Act case is a risky proposition for any potential whistleblower.  The blowback from being a whistleblower will likely be severe and the chances for success, especially if the government does not intervene, are far from certain.  Modest changes like these suggestions are not going to lead to an avalanche of new cases.  (Thus, the need for an SEC like criminal antitrust whistleblower statute as I argue in this article (here)).  But, it is certainly worth a try.  Nothing suggested above, and others may have additional/better suggestions, costs the government a nickel and the return on the investment may be substantial, even if just one additional cartel is uncovered.  Also, while a different subject, many believe that the value of leniency has been decreasing and the number of viable leniency applications is down. While this may be coincidence, not causation, the Antitrust Division’s statistics for cases and jail sentences and fines are way down.  It may be an opportune time to launch a new, if modest, initiative.

  • Good Cases

One benefit of publicizing the potential benefits of being a bid rigging whistleblower is that even if only one new case emerges, these are great cases for staff to work on.  Here I speak from personal experience and my views may not be universally held, but I’m pretty sure they are held by most trial attorneys in the Antitrust Division. Government bid rigging cases are great cases to work on.  They are much lower profile than say a Forex or Libor or other international cartel matters.  These “big” cases have their own allure, but the front office, the Criminal Division, SEC, CFTC, foreign agencies, Batman and Robin and others all have a hand in these investigations.  While it is exhilarating to work on a matter that makes the front page of the Wall Street Journal, a staff member is a small cog in the big wheel. On a government contract matter, generally speaking, the staff has more responsibility and more ownership of the matter, including possible trial experience on manageable cases. It’s a great way to learn how to investigate, take chances and take ownership.  These cases also involve working with agents across the federal spectrum.  These relationships can last a career and produce results over a long period of time.

  • Deterrent Effect

Finally, one of the most important reasons for robust antitrust prosecutions is deterrence. If the Antitrust Division starts whistleblowers and prosecuting bid rigging cases, it should have a deterrent effect on all the bid riggers out there that are not currently being detected. Whistleblower awards on bid rigging matters should be well-publicized. There is great satisfaction in seeing taxpayer money restored (with appropriate penalties) if a successful case is brought.  In a cartel case like capacitors the price of an input is raised but the impact on the final cost to consumers is small.  The cumulative harm is great (and should be prosecuted), but it is very diffused.  With bid rigging on government contracts the harm is focused and the recovery can be significant with both criminal and civil penalties.  Also, many government bid rigging investigations can lead to finding more bid rigging and what often looks like a small matter can proliferate into a major investigation.  Road construction, school milk, Defense Department contracts are just a few of the government contract cases that led to uncovering “way of life” collusion in certain industries.

Part III

 Special Issues with A Big Rigging Whistleblower

 Thanks for reading. Please come back for Part III.

Bob Connolly

CCC’s: The Bid Rigging Whistleblower–Part 1

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I have been writing, along with my co-author Kimberly Justice, about the desirability of a criminal antitrust whistleblower statute.  Besides many blog posts, we have written a few articles such as It’s a Crime There Isn’t an Antitrust Whistleblower Statute, Wolters Kluwer, Antitrust Law Daily, April 8, 2018.

A principle objection to an antitrust whistleblower statute is that it would undermine the credibility of a witness if she received compensation for exposing a cartel.  Superficially that sounds right but doesn’t hold up when you consider the success of the Antitrust Division’s Corporate Leniency Program. Simply change “leniency applicant” to “whistleblower” and one can see that the Antitrust Division already has a form of whistleblowing; the Corporate Leniency Program which bestows rich rewards on the whistleblower.  As the Antitrust Division has stated repeatedly, the value of leniency is the tens of millions of dollars it can save a company.   Leniency/whistleblowing saves not only the leniency company money, but it can save multiple culpable executives from jail time in return for their cooperation: “When Calculating The Costs And Benefits Of Applying For Corporate Amnesty, How Do You Put A Price Tag On An Individual’s Freedom?” So, the government is rightfully not skittish about paying for information. It’s a necessary evil to breaking up secret cartels and hopefully deter their inception.

The reward of leniency does, of course, undermine the credibility of witnesses just as a whistleblower reward will ding the credibility of any whistleblower who testifies.  If the government has only the cooperation of a leniency applicant, it is likely to: a) not bring a case; or b) lose the case it brings.  But, that flaw in leniency that does not outweigh the benefits!  Leniency whistleblowing almost always leads to cooperation from other subjects of the investigation.  The value of leniency whistleblowing is that it starts the dominos falling of companies/individuals coming in to cooperate for the next best deal available. You don’t see many criminal antitrust trials based on a grant of leniency, because the grant of leniency to one company leads to many guilty pleas and an overwhelming case against whomever is left.[1] A criminal antitrust whistleblower statute for individuals will work the same way.

Pardon the advertisement for a criminal antitrust whistleblower statute because this post is not about that.  In writing about the need for a whistleblower statute, I may have given the impression that it is not currently possible to be a whistleblower on cartel cases.  This is not true.  An individual whistleblower already has a way to help the government recover damages from bidding collusion, while at the same time getting some reward for the great expense and risk in doing this.  If there is bid rigging or price-fixing and the federal government is a victim of the collusion, a qui tam(whistleblower) suit can be brought seeking damages on behalf of the government.  A whistleblower can file a False Claims Act case alleging that a defendant (or group of defendants as in a cartel) obtained a federal contract by means of making a material false statement.  If a bid was rigged, the false statement would likely be the non-collusion affidavit filed with a vendor’s bid package.  This is typically referred to as a Certificate of Independent Price Determination, or something similar.  But, even without such a certification, in the context of a competitive bidding situation, there would be an implied certification that each vendor submitted his bid independently and without collusion with the other bidders, or even non-bidders if the scheme involved payoffs to a potential competitor to not bid).

A couple of things to note. To get a reward for this type of whistleblowing, it is not sufficient to simply go into the prosecutor’s office and lay out the evidence you have.[2]  Under the False Claims Act, the “Relator” [as the whistleblower is called] must file a qui tamsuit on behalf of the government alleging the government suffered damages as a result of the fraud.[3]  If damages are awarded as a result of the qui tamsuit, the Relator is entitled to between 15-25% of the amount the government recovers as a result of the bid rigging.  As an example, if a Relator files a qui tamaction alleging bid rigging on a $50 million contract and the contractor repays the government $10 million in overcharges, the whistleblower should recover between $1.5 million and $2.5 million.[4]

Once a qui tam suit is filed, the Relator’s attorneys must present the evidence they have to the government.  The government will decide whether they want to intervene and take over prosecution of the fraud.  If the government declines to intervene, (and the reason for declination can range from the government thinks your case is weak, or your case is fine, but they are just too busy with other matters).  Even if the government declines to intervene, the Relator can still prosecute the case, and some do, but it is obviously more difficult without the government’s assistance.  And in some fairly rare instances, the government can seek to have the Relator’s case dismissed if they believe it is without evidentiary merit or based on a legal theory the government doesn’t agree with.

The Antitrust Division has actually had successful criminal prosecutions that began based on evidence provided by a whistleblower who had filed a False Claims Act suit. The Antitrust Division neither publicizes the fact that whistleblowing rewards are available for exposing bid rigging on government contracts (and most states have similar False Claims Act statutes) and does not publicize when a whistleblower has successfully recovered damages for the government or himself.  When I was Chief of the Philadelphia Office of the Antitrust Division we prosecuted several cases where the investigation began as a result of a whistleblower False Claims Act case.  A publicly documented example of this was in 2012 when the Antitrust Division settled a civil bid rigging case where two companies were charged with rigging contracts for Bureau of Land Management gas leases.[5]  Because of the collusion, SG Interests and Gunnison Energy Corp. overcharged the government for leases by bidding less than they would have if they bid competitively. Each company paid a settlement of $550,000 in a civil case brought by the Antitrust Division.  The government’s case was based on a qui tamcase filed in 2009 by a former vice president of one of the companies.[6]  See, Justice Department Settlement Requires Gunnison Energy and SG Interests to Pay the United States a Total of $550,000 for Antitrust and False Claims Act Violations.

Also, there was a False Claim Act case filed in the Puerto Rican ocean shipping cartel matter.  That investigation resulted in the longest jail sentence ever received by an individual convicted of a Sherman Act violation–5 years[7].  Again, the fact that a whistleblower case was filed is not well known, but the following is an excerpt from an Antitrust Division appellate brief as Mr. Peake appealed his conviction:

Stallings, a former Sea Star executive, was the government’s first cooperator in its investigation into the shipping conspiracy, although he did not testify at Peake’s trial. Stallings’s [whistleblower] lawsuit sought damages for “injuries to the United States Government resulting from Defendants’ fraudulent course of conduct and conspiracy to allocate customers, rig bids, fix rates, surcharges and other fees for Puerto Rican Cabotage which resulted in the submission of false or fraudulent claims to the Government. [8]

The Antitrust Division noted in its brief:

The qui tam provisions of the False Claims Act permit whistleblowers (known as “relators”) to bring certain fraud claims on behalf of the United States. 31 U.S.C. § 3730(b). These actions “are filed under seal and remain that way for at least 60 days” to give “the government an opportunity to assess the relator’s complaint and decide whether to intervene and assume primary responsibility for prosecuting the case.” United States ex rel. Heineman-Guta v. Guidant Corp., 718 F.3d 28, 30 (1st Cir. 2013) (citing 31 U.S.C. § 3730(b)(2), (b)(4), (c)(1)). Regardless of whether the government intervenes, a relator is entitled to a portion of the proceeds from the lawsuit. 31 U.S.C. § 3730(d).

Coming Next in Part II:  Should There Be an Antitrust Division “Whistleblower Czar?”

Thanks for reading.  Please come back.  Bob Connolly  

[1]  To be honest, another reason there are so few criminal antitrust trials is the prohibitive cost and the draconian “trial penalty” a convicted defendant is likely to face for demanding his day in court.

[2]     It would be far more efficient if a whistleblower could simply provide the information he has to the government and cooperate in the investigation.  This is among the reasons Ms. Justice and I are advocating an SEC style whistleblower statute.

[3]     It is unquestioned that a scheme to rig bids not only violation the Sherman Act, but is a conspiracy to defraud the government where the government’s money is at stake.

[4]     31 U.S. Code § 3730 (d)Award to Qui Tam Plaintiff. — (1) If the Government proceeds with an action brought by a person under subsection (b), such person shall, subject to the second sentence of this paragraph, receive at least 15 percent but not more than 25 percent of the proceeds of the action or settlement of the claim, depending upon the extent to which the person substantially contributed to the prosecution of the action. Where the action is one which the court finds to be based primarily on disclosures of specific information (other than information provided by the person bringing the action) relating to allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government  Accounting Office report, hearing, audit, or investigation, or from the news media, the court may award such sums as it considers appropriate, but in no case more than 10 percent of the proceeds, taking into account the significance of the information and the role of the person bringing the action in advancing the case to litigation. Any payment to a person under the first or second sentence of this paragraph shall be made from the proceeds. Any such person shall also receive an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys’ fees and costs. All such expenses, fees, and costs shall be awarded against the defendant.

[5]     https://www.justice.gov/atr/case-document/file/510616/download.

[6]     https://www.justice.gov/opa/pr/justice-department-settlement-requires-gunnison-energy-and-sg-interests-pay-united-states.

[7].   https://www.justice.gov/opa/pr/former-sea-star-line-president-sentenced-serve-five-years-prison-role-price-fixing-conspiracy.

[8]      US v. Frank Peake, Antitrust Division brief available at,https://www.justice.gov/atr/case-document/file/936611/download.

Utah Financial Advisor Sentenced To Prison For Tax Evasion, Securities Fraud And Wire Fraud

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June 8, 2018

A St. George, Utah, financial advisor was sentenced to 72 months in prison on June 4th for his role in selling fraudulent tax-avoidance and investment strategies to his clients, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney John W. Huber for the District of Utah.

According to documents and information provided to the court, Henry Brock, pleaded guilty to tax evasion, securities fraud and wire fraud.  Brock founded a financial services company in 2009 and served as the president from 2009 through 2017.  As President, he marketed and sold a fraudulent tax scheme, called “IRA Exit Strategy,” to potential investors.  Brock promised investors that he could provide a way for them to avoid paying taxes on IRA withdrawals, which would otherwise be subject to Internal Revenue Service (IRS) penalties and taxes.  To implement his scheme, Brock caused his business to issue tax forms to his clients falsely representing that they were investors in his business who incurred losses, which served to offset the clients’ tax liabilities.  As a result, Brock caused clients to file fraudulent income tax returns claiming a total of approximately $3.8 million in bogus business losses and resulting in a tax loss of over $1.1 million.

During this period, Brock fraudulently raised more than $10.8 million in investments by making false representations to investors regarding the “IRA Exit Strategy,” the financial condition of his company and other matters.  On at least one occasion, Brock also transferred $196,323 of a client’s investment funds and used the money for his own personal and business expenses.

In addition to the term of imprisonment, U.S. District Court Judge Ted Stewart ordered Brock to serve three years of supervised release and to pay restitution in the amount of $12 million.

Principal Deputy Assistant Attorney General Zuckerman and U.S. Attorney Huber thanked special agents of IRS Criminal Investigation and the Utah Division of Securities, who conducted the investigation, and AUSA Trina Higgins and Trial Attorney Matthew Hoffman of the Tax Division, who are prosecuting this case.

Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.

Former Charity Executive Pleads Guilty to Bribery and Embezzlement Scheme

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June 7, 2018

A former executive of a Springfield, Missouri charity, who was also an Arkansas lobbyist, pleaded guilty in federal court today to bribing Arkansas elected officials in a multi-million-dollar scheme, and then along with other charity executives, embezzling millions of dollars from the Springfield health care organization.

Acting Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division and U.S. Attorney Timothy A. Garrison for the Western District of Missouri made the announcement.

Milton Russell Cranford, aka “Rusty,” 57, of Rogers, Arkansas, pleaded guilty before U.S. Magistrate Judge David P. Rush to one count of federal program bribery.  Cranford was an executive at Preferred Family Healthcare Inc. (formerly known as Alternative Opportunities Inc.), a nonprofit corporation headquartered in Springfield, and oversaw the charity’s operations and lobbying efforts in the state of Arkansas. Cranford also operated three lobbying firms: The Cranford Coalition, The Capital Hill Coalition and Outcomes of Arkansas.

By pleading guilty today, Cranford admitted that he and other Preferred Family Healthcare executives paid bribes to Arkansas State Senator Jonathan Woods, Arkansas State legislator Henry Wilkins IV, a person identified in court documents as “Arkansas Senator A,” and others, to provide favorable legislative action for Cranford, his clients, and Preferred Family Healthcare. In exchange for the bribes paid by Cranford, the officials identified in the Information steered Arkansas General Improvement Fund (GIF) money to Preferred Family Healthcare and other Cranford clients; held up agency budgets; requested legislative audits; and sponsored, filed and voted for legislative bills that favored the charity and Cranford clients.

The additional income gained by Preferred Family Healthcare from Cranford’s bribes enabled Cranford and other executives of the charity to engage in multiple schemes to embezzle, steal, and unjustly enrich themselves at the expense of the charity, including, but not limited to, diverting charity funds to for-profit companies owned by the executives, causing the charity to make rental payments to properties owned by Cranford and the executives; paying for their personal expenses using corporate credit cards; and causing the charity to lend significant funds to Cranford personally, and to for-profit companies owned by other charity executives.  The executives also caused the charity to misapply its funds for unlawful contributions to the campaigns of elected public officials and causing the charity to spend substantial amounts of funds on lobbying and political advocacy.

In addition, Cranford entered into an illegal kickback scheme whereby Cranford paid over $600,000 in illegal kickbacks to a charity executive in exchange for more than $3.5 million in payments made to The Cranford Coalition.  Cranford also acknowledged his role in a second illegal kickback scheme involving the charity’s contract with Philadelphia, Pennsylvania-based political operative Donald Andrew Jones, also known as “D.A.” Jones, and another charity employee, former Arkansas State Representative Eddie Wayne Cooper.  In exchange for Cranford’s role in facilitating the charity’s contract with Jones for lobbying and political advocacy, under which the charity paid Jones almost $1 million, Cranford received kickbacks totaling $219,000 from Jones, $18,000 of which Cranford provided to Cooper, and Cooper received another $45,000 directly from Jones.  In separate but related cases, both Jones and Cooper previously entered guilty pleas acknowledging their roles in that kickback scheme.

A sentencing hearing will be scheduled after the completion of a presentence investigation by the U.S. Probation Office.

The case was investigated by IRS-Criminal Investigation, the FBI and the Offices of the Inspectors General from the Departments of Labor, Health and Human Services, Housing and Urban Development, Veterans Affairs, and the Federal Deposit Insurance Corporation. This is a combined investigation with the Western District of Arkansas, the Eastern District of Arkansas, and the Eastern District of Pennsylvania.  This case is being prosecuted by Assistant U.S. Attorney Steven M. Mohlhenrich of the Western District of Missouri and Trial Attorneys Marco A. Palmieri and Sean F. Mulryne of the Criminal Division’s Public Integrity Section.

Mississippi Physician Sentenced to Over Three Years in Prison for Role in $3 Million Compounding Pharmacy Fraud Scheme

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June 7, 2018

A Biloxi, Mississippi physician was sentenced today to 42 months in prison for his involvement in a $3 million compounding pharmacy fraud scheme.

Acting Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division; U.S. Attorney D. Michael Hurst Jr. of the Southern District of Mississippi; Special Agent in Charge Christopher Freeze of the FBI’s Jackson, Mississippi Field Division; Acting Special Agent in Charge Thomas J. Holloman III of IRS Criminal Investigation’s (IRS-CI) New Orleans Field Office and Special Agent in Charge John F. Khin of the Defense Criminal Investigative Service’s (DCIS) Southeast Field Office made the announcement.

Albert Diaz, M.D., was sentenced by U.S. District Judge Keith Starrett of the Southern District of Mississippi.  Restitution to TRICARE and other insurance companies will be determined at a later date. On March 2 after a five-day jury trial, Diaz was convicted of one count of conspiracy to commit health care fraud and wire fraud, four counts of wire fraud, one count of conspiracy to distribute and dispense a controlled substance, four counts of distributing and dispensing a controlled substance, one count of conspiracy to falsify records in a federal investigation and five counts of falsification of records in a federal investigation.

According to evidence presented at trial, between 2014 and 2015, Diaz participated in a scheme to defraud TRICARE and other insurance companies by prescribing medically unnecessary compounded medications, some of which included ketamine, a controlled substance, to individuals he had not examined.  The evidence further demonstrated that, based on the prescriptions signed by Diaz, Advantage Pharmacy in Hattiesburg, Mississippi, dispensed these medically unnecessary compounded medications and sought and received reimbursement from TRICARE and other insurance companies totaling more than $3 million. The trial evidence further demonstrated that in response to a TRICARE audit, Diaz falsified patient records to make it appear as though he had examined patients before prescribing the medications.

The FBI, IRS-CI, the Defense Criminal Investigative Service, the U.S. Department of Health and Human Services Office of Inspector General, the Mississippi Bureau of Narcotics and other government agencies investigated the case.  Trial Attorneys Kate Payerle and Jared Hasten of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Mary Helen Wall of the Southern District of Mississippi are prosecuting the case.

The Fraud Section leads the Medicare Fraud Strike Force, which is part of a joint initiative between the Department of Justice and HHS to focus their efforts to prevent and deter fraud and enforce current anti-fraud laws around the country.  The Medicare Fraud Strike Force operates in nine locations nationwide.  Since its inception in March 2007, the Medicare Fraud Strike Force has charged over 3,500 defendants who collectively have falsely billed the Medicare program for over $12.5 billion.

Signature HealthCARE to Pay More Than $30 Million to Resolve False Claims Act Allegations Related to Rehabilitation Therapy

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June 8, 2018

Signature HealthCARE, LLC (Signature), a Louisville, Kentucky based company that owns and operates approximately 115 skilled nursing facilities, including 7 in middle Tennessee, has agreed to resolve allegations that it violated the False Claims Act by knowingly submitting false claims to Medicare for rehabilitation therapy services that were not reasonable, necessary and skilled, the Department of Justice announced today.  The settlement also resolves allegations that Signature submitted forged pre-admission certifications of patient need for skilled nursing to the state of Tennessee’s Medicaid program.  Under the settlement agreements, Signature has agreed to pay more than $30 million.  As part of the resolution, the State of Tennessee will receive a portion of the overall settlement.

“Today’s settlement demonstrates our continuing efforts to protect patients and taxpayer by ensuring that the care provided to beneficiaries of government-funded healthcare programs is dictated by clinical needs, not a provider’s fiscal interests,” said Acting Assistant Attorney General Chad A. Readler for the Justice Department’s Civil Division.  “Nursing home facilities provide important services to our elderly, and those facilities must uphold the trust placed in them by billing the government only for reasonable and necessary services.”

The government alleged that Signature engaged in various practices that resulted in the submission of claims for unreasonable, unnecessary, and unskilled services to Medicare patients, including: (1) presumptively placing patients in the highest therapy reimbursement level, rather than relying on individualized evaluations to determine the level of care most suitable for each patient’s clinical needs; (2) providing the minimum number of minutes required to bill at a given reimbursement level while discouraging the provision of additional therapy beyond that minimum threshold; and, (3) pressuring therapists and patients to complete the planned minutes of therapy even when patients were sick or declined to participate in therapy.

“Health care providers who engage in deceptive practices place patients at unnecessary risk and contribute to the financial distress of our federal healthcare programs,” said U.S. Attorney Cochran for the Middle District of Tennessee.  “Our dedicated teams of civil enforcement attorneys will work tirelessly with the relators who report fraud such as this and with our law enforcement partners who investigate healthcare fraud.  When we determine that companies are cheating the taxpayers, we will hold them accountable as we have in this case.”

“Our most vulnerable citizens are put at risk when healthcare providers put their financial interests above their patients’ needs and valuable federal funds are diverted from where they are surely needed,” said U. S. Attorney Byung J. “BJay” Pak for the Northern District of Georgia. “This settlement demonstrates our commitment to pursuing healthcare providers who provide unnecessary care to advance their bottom line.”

“Signature was charged with illegally boosting profits by providing excessive amounts of therapy to patients whether they needed it or not,” said Special Agent in Charge Derrick L. Jackson for the U.S. Department of Health and Human Services, Office of Inspector General. “The decision to provide therapy should never be based on corporate financial considerations rather than a patient’s medical needs.”

The settlement resolves allegations filed in a lawsuit by Kristi Emerson and LeeAnn Tuesca, former Signature therapy employees, in federal court in Nashville, Tennessee.  The lawsuit was filed under the qui tam, or whistleblower, provisions of the False Claims Act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery.  The Act also allows the government to intervene and take over the action, as it did in this case.  Ms. Emerson and Ms. Tuesca will receive a portion of the recovered funds.

The settlements were the result of a coordinated effort by the Civil Division of the Department of Justice, the United States Attorney’s Offices for the Middle District of Tennessee and the Northern District of Georgia, the Office of Inspector General of the Department of Health and Human Services, the Tennessee Bureau of Investigation. Department of Defense, Office of Inspector General, the Defense Criminal Investigative Service, and the Department of Health and Human Services, Office of the Inspector General.  Trial Attorneys Christelle Klovers and Denise Barnes of the Civil Division of the Department of Justice, Assistant United States Attorney Sarah K. Bogni of the Middle District of Tennessee, and Assistant United States Attorney Lena Amanti of the Northern District of Georgia represent the United States.  Assistant Attorney General Philip Bangle represents the State of Tennessee.

  The case is captioned United States ex rel. Emerson and Tuesca v. Signature HealthCARE, LLC, et al., Case No. 1:15-cv-00027 (M.D. Tenn.).  The claims resolved by the settlements are allegations only, and there has been no determination of liability.

Jury Convicts Former CIA Officer of Espionage

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June 8, 2018

Today, a federal jury convicted Kevin Patrick Mallory, 61, a former Central Intelligence Agency case officer of Leesburg, Virginia, on espionage charges related to his transmission of classified documents to an agent of the People’s Republic of China.

Assistant Attorney General for National Security John C. Demers, U.S. Attorney G. Zachary Terwilliger for the Eastern District of Virginia and Assistant Director in Charge Nancy McNamara of the FBI’s Washington Field Office made the announcement after Senior U.S. District Judge T.S. Ellis III accepted the verdict.

“It is a sad day when an American citizen is convicted of spying on behalf of a foreign power,” said Assistant Attorney General Demers.  “This act of espionage was no isolated incident.  The People’s Republic of China has made a sophisticated and concerted effort to steal our nation’s secrets.  Today’s conviction demonstrates that we remain vigilant against this threat and hold accountable all those who put the United States at risk through espionage.”

“There are few crimes in this country more serious than espionage,” said U.S. Attorney Terwilliger.  “This office has a long history of holding those accountable who betray their country and try and profit off of classified information. This case should send a message to anyone considering violating the public’s trust and compromising our national security by disclosing classified information. We will remain steadfast and dogged in pursuit of these challenging but critical national security cases.”

“This trial highlights a serious threat to U.S. national security,” said Assistant Director in Charge McNamara.  “Foreign intelligence agents are targeting former U.S. Government security clearance holders in order to recruit them and steal our secrets. This case should send a message to foreign intelligence services and those caught up in their web: we are watching and we will investigate and prosecute those who willfully violate their obligations to protect national security secrets. I want to start by thanking the prosecutors of the U.S. Attorney’s Office, the trial attorneys of the Justice Department and particularly the special agents, analysts and professional staff of the FBI’s Washington Field Office for their hard work.”

According to court records and evidence presented at trial, in March and April 2017, Mallory travelled to Shanghai and met with an individual, Michael Yang, whom he quickly concluded was working for the People’s Republic of China Intelligence Service (PRCIS).  During a voluntary interview with FBI agents on May 24, 2007, Mallory stated that Yang represented himself as working for a People’s Republic of China think tank, however Mallory stated that he assessed Yang to be a Chinese Intelligence Officer.

Mallory, a U.S. citizen who speaks fluent Mandarin Chinese, told FBI agents he travelled to Shanghai in March and April to meet with Yang and Yang’s boss.  After Mallory consented to a review of a covert communications (covcom) device he had been given by Yang in order to communicate covertly with Yang, FBI agents viewed a message from Mallory to Yang in which Mallory stated that he could come in the middle of June and he could bring the remainder of the documents with him at that time.  Analysis of the device, which was a Samsung Galaxy smartphone, also revealed a handwritten index describing eight different documents later determined to be classified.  Four of the eight documents listed in the index were found stored on the device, with three being confirmed as containing classified information pertaining to the same U.S. government agency.  One of those documents was classified TOP SECRET, while the remaining two documents were classified SECRET.  FBI analysts were able to determine that Mallory had completed all of the steps necessary to securely transmit at least four documents via the covcom device, one of which contained unique identifiers for human sources who had helped the U.S. government.

Evidence presented at trial included surveillance video from a FedEx store in Leesburg where Mallory could be seen scanning the eight classified documents and a handwritten table of contents onto a micro SD card.  Though Mallory shredded the paper copies of the eight documents, an SD card containing those documents and table of contents was later found carefully concealed in his house when it was searched on June 22, 2017, the date of his arrest.  A recording was played at trial from June 24, 2017, where Mallory could be heard on a call from the jail calling his family to ask them to search for the SD card.

Mallory has held numerous positions with various government agencies and several defense contractors, including working as a covert case officer for the CIA and an intelligence officer for the Defense Intelligence Agency.  As required for his various government positions, Mallory obtained a Top Secret security clearance, which was active during various assignments during his career.  Mallory’s security clearance was terminated in October 2012 when he left government service.

Mallory was convicted of conspiracy to deliver, attempted delivery, delivery of defense information to aid a foreign government, and making material false statements.  He faces a maximum penalty of life in prison when sentenced on Sept. 21.  The statutory maximum penalty is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

Assistant U.S. Attorneys John T. Gibbs and Colleen E. Garcia of the Eastern District of Virginia, and Trial Attorney Jennifer Kennedy Gellie of the National Security Division’s Counterintelligence and Export Control Section are prosecuting the case.

Mississippi Real Estate Investors Plead Guilty to Conspiring to Rig Bids at Public Foreclosure Auctions

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April 10, 2018

Real estate investors Kevin Moore, Chad Nichols, and Terry Tolar pleaded guilty today for their roles in a conspiracy to rig bids at public real estate foreclosure auctions in Mississippi, the Department of Justice announced.

Including Moore, Nichols, and Tolar, five real estate investors have pleaded guilty in this conspiracy. Separate felony charges against Moore, Nichols, and Tolar were filed on April 3, 2018, in the U.S. District Court for the Southern District of Mississippi.

“Today’s guilty pleas send a strong signal that the Division will prosecute and hold accountable those who conspire to corrupt the competitive process and harm the American consumer,” said Assistant Attorney General Makan Delrahim of the Department of Justice’s Antitrust Division. “We extend our thanks to our law enforcement partners, with whom we will continue to investigate bid-rigging crimes in Mississippi—and throughout the United States.”

“Individuals who harm homeowners and defraud companies by cheating our foreclosure system to enrich themselves will face swift and certain criminal prosecution in Mississippi,” said United States Attorney D. Michael Hurst, Jr. for the Southern District of Mississippi. “I applaud the FBI and the Antitrust Division for their tenacity and perseverance in pursuing these criminal actions and shutting this illegal scheme down.”

“Violations of the Sherman Act not only impact America’s financial institutions and distressed homeowners but also damage our free market society as a whole,” said Special Agent in Charge Christopher Freeze of the FBI in Mississippi. “We hope that others participating in this type of corruption understand that the FBI and Department of Justice will continue to protect Americans from price fixing and bid rigging that harm our economy.”

According to court documents, from at least as early as January 12, 2012, through at least as late as April 19, 2017, Moore conspired with others to rig bids, designating a winning bidder to obtain selected properties at public real estate foreclosure auctions in the Southern District of Mississippi. Nichols participated in the conspiracy from as early as April 14, 2010, through as late as February 25, 2015, and Tolar’s participation began as early as January 12, 2012, through as late as March 31, 2017. Co-conspirators made and received payoffs in exchange for their agreement not to bid.

The Department said that the primary purpose of the conspiracy was to suppress and restrain competition in order to obtain selected real estate offered at public foreclosure auctions at non-competitive prices. When real estate properties are sold at these auctions, the proceeds are used to pay off the mortgage and other debt attached to the property, with any remaining proceeds paid to the homeowner. According to court documents, these conspirators paid and received money in connection with their agreement to suppress competition, which artificially lowered the price paid at auction for such homes.

A violation of the Sherman Act carries a maximum penalty of 10 years in prison and a $1 million fine for individuals. The maximum fine for a Sherman Act charge may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime if either amount is greater than the statutory maximum fine.

The investigation is being conducted by the Antitrust Division’s Washington Criminal II Section and the FBI’s Gulfport Resident Agency, with the assistance of the U.S. Attorney’s Office for the Southern District of Mississippi. Anyone with information concerning bid rigging or fraud related to public real estate foreclosure auctions should contact Antitrust Division prosecutors in the Washington Criminal II Section at 202-598-4000, or visit https://www.justice.gov/atr/report-violations.

Two Tennessee Health Care Executives Charged for Role in $4.6 Million Medicare Kickback Scheme

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April 9, 2018

Two Tennessee health care executives were charged in an indictment unsealed today for their alleged participation in a $4.6 million Medicare kickback scheme involving durable medical equipment (DME).

Acting Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division, U.S. Attorney Don Cochran of the Middle District of Tennessee, Special Agent in Charge Derrick Jackson of the U.S. Department of Health and Human Services Office of Inspector General’s (HHS-OIG) Atlanta region, Special Agent in Charge John F. Khin of the U.S. Department of Defense Criminal Investigative Service’s (DCIS) Southeast Field Office and Director Mark Gwyn of the Tennessee Bureau of Investigation (TBI) Medicaid Fraud Control Unit made the announcement.

John Davis, 40, of Brentwood, Tennessee, and Brenda Montgomery, 69, of Camden, Tennessee, were each charged with one count of conspiracy to defraud the United States and to pay and receive health care kickbacks, and seven counts of paying and receiving health care kickbacks.  Davis is the former CEO of Comprehensive Pain Specialists (CPS), a large, multi-state pain management company.  Montgomery is the owner, founder and CEO of CCC Medical Inc., a DME company with five locations in Tennessee and headquartered in Camden.  Davis and Montgomery were arrested this morning and appeared this afternoon before U.S. Magistrate Judge Alistair E. Newbern of the Middle District of Tennessee.

“The charges against John Davis and Brenda Montgomery, alleging almost three quarters of a million dollars in illegal health care kickbacks and the submission of over $4.6 million in fraudulent claims to Medicare, demonstrate the Department of Justice’s commitment to protect taxpayer dollars and to hold corporate executives accountable for fraudulent and abusive conduct,” said Acting Assistant Attorney General Cronan.  “Kickbacks such as those alleged in the indictment distort markets and undermine public trust.  The Criminal Division and our law enforcement partners will continue to root out fraud, waste and abuse in our health care programs, no matter how complex the schemes.”

“Our Medicare program is designed to help those who are most vulnerable and in need of medical services and equipment,” said U.S. Attorney Cochran.  “Stealing funds from our health care system places the vulnerable at greater risk and diverts public funds into the pockets of the greedy individuals who exploit those with the greatest need.  We will be un-relenting in our efforts to bring to justice, those individuals and corporations who choose to profit at the expense of the health of those individuals with the greatest need.”

“Kickback schemes like this one do not benefit patients or the Medicare program,” said Special Agent in Charge Jackson.  “These arrangements are simply designed to line the pockets of the defendants at the expense of the taxpayer.”

“In concert with our partner agencies, DCIS aggressively investigates fraud and corruption that undermines the integrity of Department of Defense programs,” said DCIS Special Agent in Charge Khin.  “These defendants selfishly put greed and personal gain before the safety and well-being of our military members, their families, and retirees, who deserve the best medical care available.”

“Having the support and cooperation of our partner local, state and federal agencies is critical in our combined efforts to protect Tennesseans from individuals attempting to derive a personal benefit at the expense of patients and taxpayers,” said TBI Director Gwyn.

The indictment alleges that from at least June 2011 until at least June 2017, Montgomery agreed to pay Davis, the CEO of CPS, illegal kickbacks in exchange for Medicare referrals for DME ordered by CPS employees that Davis referred to CCC Medical.  As alleged in the indictment, Montgomery agreed to pay Davis 60 percent of Medicare proceeds collected on claims billed for DME ordered by CPS providers and referred by Davis.  In addition, the indictment alleges that Davis and Montgomery took a number of steps to conceal their illegal agreement, including making kickback payments through a nominee, creating and filing false tax documents, and, for Davis, intervening as CEO to prevent the owners of CPS from obtaining their own Medicare DME supplier numbers that would have allowed CPS to bill for its own Medicare DME orders.

Beginning in or around May 2015, according to the indictment, Davis and Montgomery renegotiated their illegal agreement to further obscure their personal contract from Medicare and from CPS owners and employees.  The indictment alleges that from approximately May 2015 until approximately November 2015, Montgomery agreed to pay Davis $200,000 for the sham purchase of a shell entity known as ProMed Solutions LLC (ProMed).  Davis and Montgomery renegotiated the sham transaction after Montgomery complained that her referrals from CPS had been lower than expected, and Montgomery ultimately paid $150,000 for the shell, ProMed, according to allegations in the indictment.  The true purpose of this payment was to induce Davis to continue driving CPS referrals to CCC Medical, the indictment alleges.

The indictment alleges that Montgomery, through CCC Medical, submitted over $4.6 million in fraudulent claims to Medicare, and that Medicare paid a total of $2.6 million on those claims.  Further, the indictment alleges that Montgomery paid more than $770,000 in illegal kickbacks to Davis.

An indictment is merely an allegation and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

This case was investigated by HHS-OIG, DCIS and the Tennessee Bureau of Investigation Medicaid Fraud Control Unit.  Trial Attorney Anthony Burba of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Ryan Raybould of the Middle District of Tennessee and are prosecuting the case.

The Fraud Section leads the Medicare Fraud Strike Force, which is part of a joint initiative between the Department of Justice and HHS to focus their efforts to prevent and deter fraud and enforce current anti-fraud laws throughout the country.  The Medicare Fraud Strike Force operates in nine locations nationwide.  Since its inception in March 2007, the Medicare Fraud Strike Force has charged over 3,500 defendants who collectively have collectively billed the Medicare program for over $12.5 billion.