United States: New Requirements And Increased Supervision Over Economic Stimulus And Bailout Funds May Increase Potential False Claims Act Liability For Recipients

The public outrage over the spending of bailout funds, especially in light of bonuses paid to executives at bailout fund recipients, has prompted the government to take measures to ensure recipients spend the funds for their stated use. New supervisory measures over the economic stimulus and bailout funds could increase the risk of potential civil and criminal liability for recipients, including potential claims by the United States Department of Justice (DoJ) or private whistleblowers under the False Claims Act (FCA).1 The FCA allows recovery of three times any "loss" to the government arising from false claims, plus civil penalties. Although initially, the lack of certifications or conditions imposed by the government made application of the FCA to bailout funds somewhat questionable, recent developments increase the risk of FCA liability for recipients of government funds.

What Is the False Claims Act?

The FCA provides that a person or entity may be held liable for knowingly submitting, or causing another to submit, false claims for payment of federal funds. False certifications have been the basis of FCA suits when material to the government's decision to release funds or not to seek return of funds2. The FCA generally imposes liability on any person who:

Knowingly presents, or causes to be presented, to an officer or employee of the U.S. government or a member of the armed forces of the United States a false or fraudulent claim for payment

Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government

Knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government3

Two of the primary potential theories of FCA liability for bailout fund recipients, as discussed below, are likely to be false certifications that are material to the government's decision to (1) pay funds or (2) not seek return of funds, particularly with regard to certifications before funds are received.

The FCA contains private whistleblower provisions that allow citizens with evidence of fraud to sue, on behalf of the government, in order to recover the funds paid under government contracts or programs. A private whistleblower suit initially remains under seal for at least 60 days during which the DoJ can investigate and decide whether to join the action. Private whistleblowers who sue under the FCA can share in as much as 30 percent of the government's recovery of treble damages and penalties. Since 1986, private whistleblower lawsuits have returned more than $12.6 billion to the U.S. Department of the Treasury (Treasury), with more than $2 billion of this amount being rewarded to the private whistleblowers.4

Governmental Oversight of the American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 (ARRA)5, commonly referred to as the Economic Stimulus Package, was signed into law on February 17, 2009 and aims to create and save millions of jobs through massive investments in energy, transportation, education, and health care projects, while reviving social safety-net programs. The Economic Stimulus Package allocates approximately $787 billion of federal taxpayer funds to the stimulus effort.

The ARRA requires entities receiving federal funds to file quarterly accountability reports that contain, among other things, a detailed list of projects or activities for which the recovery funds were expended. A false or inaccurate response contained in these reports could subject the recipients to liability under the FCA. In addition, an amendment to the Economic Stimulus Package, generally referred to as the McCaskill Amendment, contains broad protections for retaliation against whistleblowers. The McCaskill Amendment prohibits non-federal employers receiving stimulus funds from discharging, demoting, or otherwise discriminating against whistleblowers for making complaints to the Recovery Act Accountability and Transparency Board, an inspector general, a government agency, a court, or a grand jury if the employee reasonably believes that there has been evidence of:

Gross mismanagement of any agency contract or grant related to covered funds

A gross waste of covered funds

An abuse of authority related to the use of covered funds

A violation of a law, rule, or regulation related to (1) an agency contract (including the negotiation of the contract) or (2) a grant of covered funds6

These whistleblower protections are more expansive than those under the FCA and may serve to further encourage employees to expose their employers' abuse of the stimulus funds, potentially resulting in increased liability under the FCA.

Recipients of Economic Stimulus Package funds may face potential liability under the FCA, as recipients may be required to file certifications with the government as to the funds' use before the funds are released. In that instance, participants should expect that the DoJ and/or private whistleblowers may argue that the representations in the contract were "material" to the decision to release the funds, subjecting recipients to potential FCA liability. In addition, due to the whistleblower protections in the McCaskill Amendment, the risk of liability from disgruntled employees under the FCA is magnified.

Governmental Attempts to Establish Greater Oversight of TARP

The Troubled Asset Relief Program (TARP) was created to purchase and insure up to $700 billion of troubled assets held by banks and other financial institutions in an effort to stabilize and otherwise "bail out" the financial markets. The Emergency Economic Stabilization Act of 2008, which authorized TARP, established the Office of the Special Inspector General for TARP, which is commonly referred to as SIGTARP. SIGTARP is empowered to "conduct, supervise, and coordinate audits and investigations of the purchase, management and sale of assets" under TARP7. On December 15, 2008, Neil M. Barofsky was sworn in as SIGTARP and announced that he intended to review the use of TARP funds by recipients.

In furtherance of his commitment to review the use of TARP funds, Mr. Barofsky urged the Treasury to include language in all TARP contracts entered into after January 7, 2009 that requires the recipient to, among other things:

Account for the use of TARP funds

Set up internal controls to ensure compliance with the remainder of the TARP contract

Provide a signed certification from a senior officer as to the accuracy of the information provided8

In addition, the SIGTARP announced the plan to send letters of intent to each current TARP recipient retroactively requesting information. Entities that received TARP funds prior to Mr. Barofsky's requirement for specific language in TARP contracts will be expected to provide SIGTARP, within 30 days of the request:

A narrative response outlining their use (or expected use) of TARP funds

Copies of documentation (financial or otherwise) supporting the response

A signed certification from a senior officer as to the accuracy of the information provided9

False responses to these inquiries could subject TARP recipients to potential liability under the FCA.

Since the inception of TARP in October 2008, there has been a push for oversight over the use of the funds by recipients. As early as November 2008, Sen. Charles Grassley (R-Ohio) suggested that those found to be using TARP funds under false pretenses should be subject to liability under the FCA.10 However, the applicability of the FCA to pre-SIGTARP recipients is less certain than to those recipients certifying under SIGTARP requirements to the funds use prior to receiving the funds.

It may be argued that false certifications in response to the SIGTARP's request should not be considered "claims" under the FCA because the TARP funds that are the subject of the certifications were distributed before requirements as to their use were imposed. However, it could be argued that funds already distributed are subject to the FCA if it can be proven that there was (1) an express or implied condition on the recipient to use the funds for a specific purpose and (2) an express or implied obligation to return the funds if the condition of use was violated.

The case for FCA liability with respect to new TARP distributions is considerably stronger as the funds are typically not be distributed by the government until after the letter of intent is submitted. In that instance, recipients should expect that the DoJ and/or private whistleblowers will argue that the false certification was material to the payment decision to release the funds, subjecting the entire amount to trebling of the government's loss, plus penalties.

Legislative Initiatives

Bailout-fund recipients' potential liability under the FCA may be further increased if the Fraud Enforcement and Recovery Act of 2009 (FERA), passed by the United States Senate on April 28, 2009, is signed into law. Among other provisions, FERA would, as currently drafted:

  1. Expand the current FCA to any request or demand for payment presented to contractors, grantees, or others involving government funds to be spent on the government's behalf or to advance its interests, not just presentment to government officers or with intent that the government itself would pay the claim
  2. Allow FCA actions for any false records or statements material to submission of a false claim, not just those statements made or used to get a false claim paid11
  3. Expand the reverse FCA provision to apply to more payment obligations
  4. Expand the conspiracy provision of the FCA to include conspiracies to violate any requirement of the FCA, not just conspiracies to get false claims paid12

The bill also would authorize the appropriation of $490 million for the DoJ and other agencies to investigate and prosecute violators of the bill's provisions.13

Next Steps

In order to reduce the risk of liability under the FCA, all recipients of federal economic stimulus or bailout funds should implement oversight mechanisms for monitoring submissions and paperwork to the government as well as the manner in which funds are used. For larger institutions, a special corporate oversight committee might be recommended to ensure that funds are accounted for and being used properly. Because of the potential for private whistleblowers, particularly those afforded additional protection under the McCaskill Amendment, to report suspected non-compliance issues, participants should establish clear policies for reporting and investigating alleged violations within the company. By taking such steps, recipients of government funds may be able to reduce their risk of liability under the FCA.

Footnotes

1 31 U.S.C. § 3729, et. seq.

2 See, e.g., United States ex rel. Siewick v. Jamieson Sci. & Eng'g, Inc., 214 F.3d 1372 (D.C. Cir. 2000).

3 See FCA at § 3729(a)(1),(2) and (7).

4 Reported by the DoJ in September 2007.

5 For background information on the Economic Stimulus Package and bail-out legislation, please refer to the Foley Financial Crisis Response Team's series of publications at: http://www.foley.com/news/hottopic_detail.aspx?hottopicid=000052424324 .

6 See Section 1553 of the ARRA located at: http://www.whitehouse.gov/the_press_office/arra_public_review/ .

7 See the Emergency Economic Stabilization Act of 2008 at page 63.

8 See Mr. Barofsky's January 7, 2009 letter to the United States Senate Committee on Finance at: http://finance.senate.gov/press/Bpress/2009press/prb010709.pdf .

9 See Mr. Barofsky's January 22, 2009 letter to the United States Senate Committee on Finance at: http://finance.senate.gov/press/Gpress/2009/prg012209.pdf .

10 In addition to recipients of government funds facing potential increased FCA liability, private sector contractors and agents providing services to the Treasury in connection with TARP, known as "retained entities," may face increased potential liability under the FCA in connection with new conflict of interest and mandatory disclosure requirements under an interim rule issued by the Treasury. See Department of the Treasury, TARP Conflicts of Interest Interim Rule, 74 Fed. Reg. 3431 (Jan. 21, 2009) (to be codified at 31 C.F.R. pt. 31).

11 The intent of (A) and (B) in part is to reverse the effects of Allison Engine Co. v. U.S. ex rel. Sanders. See Foley's June 10, 2008 Legal News Alert at http://www.foley.com/publications/pub_detail.aspx?pubid=5090.

12 Senate Bill 386 (2009).

13 Congressional Budget Office Cost Estimate, March 18, 2009.

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