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Law360 (March 30, 2020, 7:29 PM EDT) --
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| Andrew Schilling |
Here are five things to watch for:
Expect a substantial increase in U.S. Department of Justice civil enforcement.
We are likely to see a substantial increase in the level of FCA enforcement in the months and years ahead, reversing what has been a downward trend under the current administration.
The stimulus bill commits the federal government to spending or otherwise making available an unprecedented $2 trillion. The pressure on law enforcement to police these new programs — and recoup money from those who are perceived as misusing it — will be powerful.
The DOJ will prosecute individuals criminally when it can, but history suggests that it will rely heavily on its civil enforcement authority when it comes to policing fraud in recovery efforts. Indeed, the DOJ's first enforcement action to combat fraud related to the coronavirus pandemic was a civil enforcement action, with the head of the Civil Division declaring that the DOJ "will not tolerate criminal exploitation of this national emergency for personal gain."[1]
We've seen this script play out before, most notably following the 2008 financial crisis. Back then, the government likewise responded to a financial crisis by committing colossal amounts money. And then, as now, the law itself built in significant oversight mechanisms.
The Emergency Economic Stabilization Act of 2008, or EESA, not only established the Troubled Asset Relief Program, it also established the office of the special inspector general for TARP, or SIGTARP, a new federal law enforcement agency designed to target financial crime related to TARP.
The CARES Act does almost exactly the same thing, in almost exactly the same way: Section 4018 of the act establishes, within the U.S. Department of the Treasury, the office of the special inspector general for pandemic recovery, or SIGPaRc. The president will appoint a special inspector general to head that office, subject to the advice and consent of the Senate.
The nomination must be made on "the basis of integrity and demonstrated ability in accounting, auditing, financial analysis, law, management analysis, public administration, or investigations."[2] If that sounds familiar, it's because Congress used the very same language when it established the SIGTARP, who was likewise expected to be a person with "integrity and demonstrated ability in accounting, auditing, financial analysis, law, management analysis, public administration, or investigations."[3]
Although agency inspectors general police their own agency, the inspectors general established under the EESA and the CARES Act are special precisely because their mission is not just to monitor the agency itself (which already has its own inspector general) but to investigate the expenditure of federal dollars under particular programs.
Specifically, Congress gave the office of the SIGPaRc the duty to oversee "the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury under any program" established under the act.[4]
But, as with the EESA, the act goes further, and grants the new inspector general the same authority that other agency inspectors general have under the Inspector General Act of 1978, including subpoena power.[5] That investigative authority extends to third parties in a position to impact federal programs.[6]
Thus, while nominally housed within the U.S. Department of the Treasury, this newly established special inspector general will inevitably scrutinize anyone, and any entity, involved in the sale of loans, loan guarantees, and other investments made under the programs established by the CARES Act.
And the SIGPaRc can be expected to prioritize the investigations of private actors outside of government because they are in position to help the government recoup some of the money that the government has committed to spend under the act.
Like the SIGTARP, the new SIGPaRc will likely end up working closely with the criminal and civil divisions of the DOJ and local U.S. attorney's offices.
Indeed, one of the earliest enforcement actions by SIGTARP saw that office team up with the U.S. attorney's office in Manhattan to sue Countrywide Home Loans Inc. for selling allegedly defective mortgage loans to Fannie Mae and Freddie Mac, which had received bailout money.[7] Other civil enforcement actions against banks followed, relying on both the FCA and the Financial Institutions Reform, Recovery and Enforcement Act.[8]
Accordingly, the establishment of a new special inspector general is just one reason to expect a slew of new FCA investigations under the CARES Act.
Expect more FCA investigations in nontraditional areas.
It is also reasonable to expect that a higher percentage of new FCA investigations will target companies and industries not typically within the crosshairs of DOJ enforcement.
Traditionally, FCA enforcement has focused on two sectors: health care and defense contracting. According to the DOJ's statistics, the DOJ recovers far more in health care fraud cases than in any other kind of FCA case, with defense contracting cases following in a distant second.
In fact, recognizing the dominance of these two areas as compared with all others, the DOJ breaks down its annual statistics into only three buckets: health care, defense and "other."
For fiscal year 2019, the Justice Department touted just over $3 billion in FCA recoveries, with 85% of the total arising out of the health care industry. And for fiscal year 2018, the DOJ reported $2.8 billion in recoveries, with 89% paid by health care defendants.
The CARES Act is likely to upend that trend. After the last financial crisis led to an enormous federal bailout, FCA enforcement outside of health care and defense expanded dramatically.
In 2012, the DOJ announced total FCA recoveries of more than $5 billion — its highest annual recovery in history — with $1.7 billion recovered outside of health care and defense.[9] And in 2014, the DOJ recovered $6 billion in FCA cases — twice what it recovered in fiscal year 2019 — with fully half ($3.1 billion) derived from the mortgage industry.
While the crisis faced by the country today is a health care crisis first and foremost, the CARES Act is also designed to rescue an economy in free fall. Today's crisis is not concentrated within one or even a handful of industries or sectors of the economy; it touches every industry and every aspect of national life.
The reach of the CARES Act reflects the breadth of the impact. Thus, while the health care industry will see a substantial increase in federal spending, federal assistance will also flow to businesses and institutions that are not traditional FCA targets, like banks, airlines and universities, just to name a few.
In addition, as the administration flexes its authority under the Defense Production Act, more companies may find themselves in the position of General Motors Co., being asked to manufacture goods for use by the federal government.[10]
In short, expect the "other" category in the DOJ's annual FCA statistics to begin reflecting the more diverse range of companies and industries on the receiving end of federal largesse.
Expect enhanced coordination among federal law enforcement agencies.
Following the 2008 crisis, the relationship between the DOJ and the SIGTARP was only one of the many law enforcement partnerships forged as enforcement efforts expanded.
In November 2009, for example, the president established the Financial Fraud Enforcement Task Force,[11] an interagency task force led by the DOJ that included more than 25 federal agencies. Its mission included investigating crimes relating to the economic recovery efforts and recovering the proceeds of those crimes. That task force continued for another nine years.
With a new national crisis at hand, and an even bigger commitment of federal assistance to combat it, expect a plethora of federal and state agencies to join the effort to police recovery spending. Indeed, oversight mechanisms in the act go beyond establishing the special inspector general and include establishing a Pandemic Response Accountability Committee, which is also charged with oversight.
The committee will include the inspectors general of the U.S. Department of Defense, the U.S. Department of Education, the U.S. Department of Health and Human Services, the U.S. Department of Homeland Security, the Department of Justice, the U.S. Department of Labor, the Treasury and the U.S. Small Business Administration.
Congress gave this new committee not only the same powers as an inspector general under the Inspector General Act of 1978, but also the power to subpoena testimony of persons who are not federal officers or employees, a significant power that even the IGA does not confer.
The new accountability committee will thus have substantial oversight authority, which in turn can be expected to lead to enhanced enforcement efforts as the inspectors general continue to work with their partners in law enforcement.
Expect a heightened focus on individuals and small businesses.
FCA enforcement will also likely continue the DOJ's focus on holding individuals accountable, with new efforts to scrutinize small businesses.
The DOJ recently restated its "commitment to use the False Claims Act and other civil remedies to deter and redress fraud by individuals as well as corporations."[12] While enforcement efforts can be expected to target large corporations, the CARES Act makes assistance available to individuals, small business and nonprofits on an unprecedented scale.
Indeed, the feature of the act receiving perhaps the most attention is its direct payments of $1,200 to individuals, plus another $500 per child. In addition, under the Paycheck Protection Program in the act, small business loans are made available to sole proprietorships, independent contractors and self-employed individuals.
The loans can be used to cover payroll, salaries, rent, utilities and other expenses necessary to keep people employed. The government will back loans issued by private lenders under these programs.
While pursuing individuals and small businesses may seem like a low priority, the DOJ hasn't shied away from pursuing smaller cases when there is perceived abuse of a significant federal program.
For example, the DOJ used the FCA to pursue individuals accused of defrauding the September 11th Victim Compensation Fund.[13] And the FCA has been deployed against individuals who collected social security payments meant for their deceased relatives.[14] The DOJ also has a long history of using the FCA to pursue borrowers who submit fraudulent loan applications.
Given the vast sums being provided to individuals, and the extensive federal guarantees being extended for small business loans, expect the DOJ to use the FCA to police these new and expanded programs.
Expect an increased focus on false certification FCA cases.
While the DOJ has used the FCA to target individual borrowers who lie on federal loan applications, it has been even more aggressive in pursuing the private lenders that participate in those programs, such as by extending the loans that are insured or guaranteed by the federal government.
In these cases, the government often relies upon a certification theory of liability, under which "a claim for payment is false when it rests on a false representation of compliance with an applicable federal statute, federal regulation, or contractual term."[15] A certification can be express, such as when the defendant signs a certification attesting to compliance with certain standards, or implied.[16]
The DOJ can be expected to deploy these same theories in pursuing fraud under the CARES Act. Indeed, the act has a number of certification requirements built in.
For example, small business borrowers who apply for a guaranteed loan under the Paycheck Protection Program are required to certify to the facts establishing their eligibility for the program. [17] Similarly, applicants for loan forgiveness under the act are required to certify to their eligibility for that relief.[18]
Also, borrowers applying for direct loans under a program for mid-sized businesses must certify to a laundry list of requirements, including not only that the recipient will use the funds to retain 90% of its workforce but also that it will remain neutral in union-organizing efforts.[19]
Other certifications will be established by regulation and in federal guidance as these programs are rolled out. For example, applicants for certain loans, loan guarantees and other investments for eligible businesses will be required to submit forms (yet to be developed) that contain covenants, representations, warranties and requirements (including requirements for audits).[20]
Finally, private lenders participating in guaranteed loan programs will certainly be required, as they are already, to make certifications of their own in connection with all these new loans.
The DOJ used these types of certifications to pursue record-breaking recoveries from lenders after the 2008 crisis. Because the CARES Act will lead to a host of new certifications by those who participate in all these newly available loans, grants, and investments, the DOJ can be expected to look to these certifications to establish a basis to recover its losses under these programs.
Conclusion
The DOJ emphasized earlier this year that the FCA remains the government's "primary civil tool" to redress false claims for federal funds.[14] And when it comes to the FCA, the DOJ is not constrained by the heightened requirement in criminal cases to prove intentional fraud, relying instead on the more forgiving civil standards of "deliberate indifference" and "reckless disregard." In these cases, the DOJ is fond of citing U.S. Supreme Court Justice Oliver Wendell Holmes Jr.'s expectation that "[m]en must turn square corners when they deal with the Government."[15]
As with the EESA before it, the CARES Act broke all records in the amount of federal assistance it committed to rescue the economy. Accordingly, the DOJ will be expecting those who receive that money to "turn square corners" when dealing with the government, and pursue aggressively those who do not.
Andrew Schilling is a partner and head of the New York office at Buckley LLP. He formerly served as chief of the Civil Division at the U.S. Attorney's Office for the Southern District of New York.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] DOJ Press Release, Justice Department Files its First Enforcement Action Against COVID-19 Fraud (March 22, 2020), available at https://www.justice.gov/opa/pr/justice-department-files-its-first-enforcement-action-against-covid-19-fraud.
[2] CARES Act, § 4018(b)(2).
[3] 12 U.S.C.§ 5231(b)(2).
[4] CARES Act, § 4018(c)(1).
[5] CARES Act, § 4018(c)(1)(3) & (d)(1).
[6] See, e.g., Inspector General of U.S. Dep't of Agriculture v. Glenn
, 122 F.3d 1007, 1011 (11th Cir. 1997).[7] See SIGTARP Press Release, Bank of America Sued for Over $1 Billion For Multi-Year Mortgage Fraud Against Fannie Mae and Freddie Mac (Oct. 25, 2012), available at https://www.sigtarp.gov/Press%20Releases/BAC_complaint_press_release.pdf.
[8] https://www.sigtarp.gov/Pages/investigations.aspx.
[9] DOJ Press Release, Justice Department Recovers Nearly $5 Billion in False Claims Act Cases in Fiscal Year 2012 (Dec. 4, 2012), available at https://www.justice.gov/opa/pr/justice-department-recovers-nearly-5-billion-false-claims-act-cases-fiscal-year-2012.
[10] Memorandum on Order Under the Defense Production Act Regarding General Motors Company (March 27, 2020), available at https://www.whitehouse.gov/presidential-actions/memorandum-order-defense-production-act-regarding-general-motors-company/.
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[11] Executive Order 13519 (Nov. 17, 2009), Establishment of the Financial Fraud Enforcement Task Force, available at https://obamawhitehouse.archives.gov/the-press-office/executive-order-financial-fraud-enforcement-task-force.
[12] https://www.justice.gov/opa/pr/justice-department-recovers-over-3-billion-false-claims-act-cases-fiscal-year-2019.
[13] e.g., United States v. Mastellone
, 2011 WL 4031199 (S.D.N.Y.) (Sept. 12, 2011).[14] https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-obtains-judgment-against-bronx-pastorretired-assistant-principal; https://www.justice.gov/archive/usao/nys/pressreleases/December11/mendozasettlementpr.pdf.
[15] United States v. Science Applications Int'l Corp.
, 626 F.3d 1257, 1266 (D.C. Cir. 2010).[16] Universal Health Services v. United States
, 136 S. Ct. 1989 (2016).[17] CARES Act, § 1102.
[18] CARES Act, § 1106.
[19] CARES Act, § 4003(d)(i).
[20] CARES Act, § 4003(c)(1)(A).
[21] https://www.justice.gov/opa/pr/justice-department-recovers-over-3-billion-false-claims-act-cases-fiscal-year-2019.
[22] Rock Island A. & L. R. Co.
, 254 U.S. 141, 143 (1920).For a reprint of this article, please contact reprints@law360.com.
