United States: First To File: Issue 4

In this issue:

• Another Rule 9(b) decision (Giaquinto (N.D. W. Va.))
• Biogen's $900 million FCA settlement of allegations of AKS violations arising from physician speaker programs and other payments
• A fraud in the inducement case involving representations regarding compliance with the Ethics in Government Act (iFOS (D. Md.))
• DOJ's charging of 47 defendants across six indictments alleging fraud against the Federal Child Nutrition Program

United States ex rel. Giaquinto v. Highland-Clarksburg Hosp., Inc., 1:18-CV-220, 2022 WL 4391508 (N.D.W. Va. Sept. 22, 2022)

Industry: Healthcare

Topics: Rule 9(b), Rule 41(b)

Summary: Last week, a federal district court in West Virginia denied defendants' motions to dismiss and allowed an FCA action to proceed in another case involving an interpretation of Rule 9(b).

In United States ex rel. Giaquinto v. Highland-Clarksburg Hosp., Inc., relator Nancy Giaquinto, a CPA for Highland-Clarksburg Hospital, alleged that defendants Highland-Clarksburg Hospital, Inc., RC General Contractors, Inc., M&C Electric LLC, Associated Architects, Inc., Michael Casdorph, Paul Tennant, and Charles Nary (Defendants) "misdirected and stole over $1 million in construction funds in connection with the government-funded renovation of a community behavioral health hospital."¹

Congress and the US Department of Agriculture (USDA) initiated the Community Facilities Direct and Guaranteed Loan and Grant Program to provide funding to develop essential community facilities in rural areas. Such funding can be used for various public wellbeing measures, including health care facilities such as hospitals. The Program provides low interest direct loans, grants, and a loan guarantee program, all of which can be combined with commercial financing.²

Defendant Highland-Clarksburg Hospital (the Hospital), received $34.8 million in direct and guaranteed loans under the Program for the construction and renovation of a community behavioral health hospital. RC General was contracted to complete certain work. Defendant Michael Casdorph is an incorporator of RC General and serves as its Director, Secretary, and Treasurer; Casdorph also served as the Hospital's "Director of Facilities and Construction and/or the CEO."³ After not disclosing the conflict of interest in connection with Defendant Casdorph's involvement with RC General to the USDA, the Defendants misdirected over $1 million in government-loaned and/or guaranteed funds. The amount of $73,567.31 was paid to mechanical prime contractor Dougherty Company Inc. for work it completed, while a duplicate payment was sent to RC General for the same work, leading RC General to receive the original amount plus an 8% fee equaling $79,452.69 in total. Many other double payments were made.

Defendants Casdorph, Highland-Clarksburg Hospital, RC General, Nary, and M&L Electric filed Motions to Dismiss the Amended Complaint under Rules 9(b), 12(b)(5), 12(b)(6), and 41(b).

Defendants first requested dismissal under Rule 41(b) on the basis that the relator failed to properly serve the original complaint within the required 90 days of filing. Relator had until January 31, 2022, to serve the Defendants and comply with the timing requirement. Rather than serving the Defendants, however, on January 31, 2022, relator filed an Amended Complaint and subsequently failed to serve Defendants that same day. Relator instead served Defendants between February 4th and February 28th. Proof of service for one Defendant was not returned. Relator Giaquinto responded to Defendants' motions to dismiss under Rule 41(b) with a request for an extension of time to perfect service, claiming the delay was excusable neglect and that the First Amended Complaint related back to her original complaint pursuant to Rule 15 of the Federal Rules of Civil Procedure.

Under Rule 4(m), good cause could excuse delay in service if the delay was outside plaintiff's control, the defendant was evasive, plaintiff made reasonable efforts to serve, plaintiff is pro se or in forma pauperis, defendant would be prejudiced, or if plaintiff asked for a proper extension of time. If good cause is not present, the district court explained that in evaluating a request for dismissal for failure to prosecute, it "should consider (1) the degree of personal responsibility of the plaintiff, (2) the amount of prejudice caused the defendant, (3) the existence of a 'drawn out history of deliberately proceeding in a dilatory fashion,' and (4) the existence of a sanction less drastic than dismissal."⁴ The court did not find that good cause existed under Rule 4(m) as the relator did not meet any of the good cause requirements.

The court next considered whether it would extend time for plaintiff to effectuate service absent good cause. Because the relator's Amended Complaint would have been barred by the statute of limitations on the date it was filed, the court first had to determine if the claims related back to the original complaint under Rule 15(c). If the claims related back to the original complaint, then the suit would not be barred. The court found that the claims arose out of the same conduct, transaction, or occurrence in the original complaint because the amended claims clarify and particularize the claims made originally, such as by adding dollar values to preexisting allegations of stolen funds. Accordingly, the relator's action was not barred by the statute of limitations, and the court could consider the factors for extending time to serve process. The court found that an extension of time would not prejudice the Defendants. Additionally, Defendants had actual notice of the suit by February 28th at the latest, and finally, Plaintiff completed service, albeit outside of the 90-day window, on the Defendants who had already moved to dismiss the action. These factors weighed in favor of the relator, and the motion to dismiss on this count was denied.

Defendant RC General also asserted that relator had failed to meet the FCA's heightened pleading standard under Rule 9(b), and therefore requested dismissal under Rule 12(b)(6). The court concluded that the allegations in the Amended Complaint detailing the $79,452.69 payment (the alleged duplicate payment made to both mechanical prime contractor Dougherty Company and RC General) satisfied Rule 9(b) because pleading a specific loss amount met the heightened pleading standard for cases of fraud. Because these allegations were sufficient to meet Rule 9(b)'s pleading standards, the court held the amended complaint survived the Rule 12(b)(6) motion to dismiss.

Takeaway: This case provides further details on analyzing relation back under the FCA, which can provide an avenue for claims that are time-barred under the FCA's statute of limitations to survive dismissal where the amended complaints add more particularity to initial pleadings. Additionally, plaintiffs, so long as fair notice is given, can survive a failure to effectuate service within the required deadline so long as defendants are not unduly prejudiced. Finally, this case notes that the pleading of a transaction with details regarding the time, place, and contents of false representations, as well as the identities of the parties involved, meets Rule 9(b)'s particularity requirements.

Biogen Inc. Settlement⁵

Industry: Healthcare

Topics: Medicare and Medicaid, Anti-Kickback Statute

DOJ recently announced that it reached a $900 million settlement with pharmaceutical firm Biogen Inc. (Biogen) to resolve allegations that it had violated the FCA by causing the submission of false claims to Medicare and Medicaid through the payment of kickbacks to physicians to induce them to prescribe Biogen drugs.

The settlement resolved a lawsuit filed by a former Biogen employee who alleged that Biogen held speaker programs, speaker training meetings, and consultant programs through which it offered and paid remuneration, including speaker honoraria, speaker training fees, consulting fees, and meals, to healthcare professionals who spoke at or attended Biogen's speaker programs or consultant programs to induce them to prescribe Biogen's multiple sclerosis drugs in violation of the Anti-Kickback Statute, 42 USC § 1320a-7b.⁶ Through this conduct, Biogen also allegedly caused false claims for prescriptions for those drugs to be submitted to and ultimately paid by Medicare and Medicaid. The whistleblower filed and litigated the lawsuit against Biogen under the FCA's qui tam provisions.

Takeaway: DOJ's announcement emphasized the important role of the relator, a former Biogen employee, who pursued this case on behalf of the United States for over seven years. The relator's $250 million award from Biogen's settlement is one of the largest whistleblower awards in FCA history and highlights how FCA plaintiffs can use Anti-Kickback Statute violations to extract FCA settlements under the per se rule.

United States v. Intelligent Fiscal Optimal Solutions, LLC, No. 1:22-cv-01053, 2022 WL 4537785 (D. Md. Sept. 28, 2022)

Industry: Government Contracts

Topics: Post-Government Employment Restrictions, Fraud in the Inducement

The United States brought an FCA action against Intelligent Fiscal Optimal Solutions, LLC (iFOS), a management consulting firm, and Tawanda Smith, iFOS's incorporator and CEO.⁷ The action arises out of a contract between iFOS and the Department of Homeland Security (DHS).⁸ In November and December 2015, iFOS spoke with Dr. Kenneth Buck, a former employee of DHS, while Dr. Buck was still employed at DHS, about "potential business opportunities."⁹ Shortly thereafter, Dr. Buck informed the Deputy Director of DHS that he would be working with iFOS upon his retirement from DHS.¹⁰ The Deputy Director later identified iFOS as a potential contractor for DHS's Office of Procurement Operations.¹¹ Despite the mandatory "one-year cooling off period" imposed by federal law, the Deputy Director never informed anyone else at DHS of Dr. Buck's involvement with iFOS and the resulting contract between iFOS and DHS.¹²

The Ethics in Government Act, 18 USC. § 207(c), imposes a one-year "cooling off period" for certain former officers and employees of the executive branch, under which they are prohibited from making, with the intent to influence, any communication to or appearance before any officer or employee of the department or agency in which that person served in connection with a matter in which that person seeks official action on behalf of another by the officer or employee of the department or agency.¹³ This restriction applies for the year following the officer or employee's termination of service or employment with the executive branch.¹⁴

The complaint alleged that iFOS and its CEO, Ms. Smith, took affirmative steps to conceal Dr. Buck's involvement in the DHS Office of Procurement Operations contract, including generating invoices that falsely indicated that another iFOS employee had performed hundreds of hours of work on the contract that was actually performed by Dr. Buck, and funneling Dr. Buck's communications with DHS through other iFOS personnel's email accounts.¹⁵

iFOS and Ms. Smith argued for a dismissal on the grounds that (1) the government could not plead quasi-contract claims because an express contract between iFOS and DHS was formed and (2) that the government's knowledge of Dr. Buck's misconduct through the Deputy Director of DHS effectively barred a claim for payment by mistake.¹⁶ The court denied the defendants' motion to dismiss.

First, the court held that, although there was an express contract between DHS and iFOS, the United States may still plead quasi-contract claims.¹⁷ Even if a state's common law prohibits a party from bringing a quasi-contractual claim when an actual contract exists between the parties concerning the same subject matter, there is an exception for FCA cases where the United States alleges that the defendant fraudulently induced the government to enter into the contract.¹⁸

Second, the court found that the United States' knowledge of the particulars of the claim, through its agent, the Deputy Director, is not enough to defeat a claim of payment by mistake.¹⁹ In some cases, when the government knows and approves of the particulars of a claim for payment, the United States' knowledge effectively negates the fraud or falsity required by the FCA.²⁰ The extent to which the defendant knowingly submitted a false claim, therefore, depends on the extent and nature of the government's knowledge of the particulars of a claim prior to payment.²¹ In this case, however, the knowledge of the Deputy Director was acquired through her participation in the fraudulent scheme and thus, the court held, that this knowledge cannot be imputed to DHS.²² Therefore, the Deputy Director's knowledge does not defeat the United States' claim for payment by mistake.

Takeaways: This case emphasizes the fact that, in some instances, the United States' knowledge of the particulars of a claim may negate its falsity; however, the government's knowledge does not bar an FCA claim when the agent of the United States acquired this knowledge through participation in the fraudulent scheme.²³ It is also worth noting that, if the United States alleges fraud in the inducement, defendants will be exposed to additional liability under simultaneous contract and quasi-contract theories.²⁴

US Attorney Announces Federal Charges Against 47 Defendants in $250 Million Feeding Our Future Fraud Scheme²⁵

Industry: Non-Profit

Topics: COVID-related fraud

The DOJ announced conspiracy, wire fraud, money laundering, and bribery charges relating to the Federal Child Nutrition Program against 47 defendants across six separate indictments and three criminal informations. The Federal Child Nutrition Program reimburses sponsor organizations for the costs of serving meals to underserved children, and the DOJ alleges that defendants misappropriated millions of dollars from this program during the COVID-19 pandemic.

The Federal Child Nutrition Program is administered by the USDA's Food and Nutrition Service, which distributes federal funding to state governments. In Minnesota, the Minnesota Department of Education (MDE) oversees the program. Organizations in the state that wish to run sites where the meals are served apply to the MDE. Once approved, these sponsors are responsible for monitoring their sites and preparing reimbursement claims. Through a chain of reimbursements originating from the USDA, the sponsor receives reimbursement for each meal and retains 10-15% of the reimbursed funds as an administrative fee.

The USDA waived certain requirements at the beginning of the COVID-19 pandemic to allow sponsors to serve eligible children, such as by allowing for-profit restaurants to participate in the program and allowing off-site food distribution to children outside of educational programs. Aimee Bock, founder and executive director of Feeding Our Future, a nonprofit organization that served as a sponsor of the program, was charged with overseeing a massive fraud scheme as Feeding Our Future went from receiving and disbursing around $3.4 million in federal funds in 2019 to almost $200 million in 2021. The nonprofit recruited individuals and employees to open sites in Minnesota that then fraudulently claimed to be serving thousands of children per day within days or weeks of formation. Dozens of shell companies were created to enroll in the Federal Child Nutrition Program, and more shell companies were created to receive and launder the proceeds of the scheme.

The defendants allegedly falsified documentation, including fraudulent meal count sheets, false invoices, and fake attendance rosters with fake names using "www.listofrandomnames.com," and used an Excel formula to generate random ages between 7 and 17 in the roster. Feeding Our Future received over $18 million in fraudulent administrative fees, and employees of the organization received bribes and kickbacks, many paid either in cash or as "consulting fees."²⁶ When MDE attempted to oversee the sites, Bock and Feeding Our Future falsely assured MDE that the sites were operating properly and in compliance with regulations. When pressed further, Bock accused MDE of discrimination and unfairly scrutinizing the program, going so far as to file a lawsuit against MDE under the Minnesota Human Rights Act when MDE denied the organization's site applications. Feeding our Future opened more than 250 sites in Minnesota and fraudulently obtained more than $240 million in funds, which were used to purchase luxury vehicles, residential and commercial real estate in Minnesota, Ohio, and Kentucky, real estate in Kenya and Turkey, and to fund international travel.

The related cases are: United States v. Aimee Marie Bock, 22-CR-223 (NEB/TNL); United States v. Abdiaziz Shafii Farah, 22-CR-124 (NEB/TNL); United States v. Qamar Ahmed Hassan, 22-CR-224 (NEB/TNL); United States v. Haji Osman Salad, 22-CR-226 (NEB/TNL); United States v. Liban Yasin Alishire, 22-CR-222 (NEB/TNL); and United States v. Sharmake Jama, 22-CR-225 (NEB/TNL).

Takeaway: As pandemic-era emergency-relief programs designed to help those impacted wind down, government agencies are continuing their investigation into fraudulent uses of these federal programs for personal gain.

Footnotes

1 Omnibus Memorandum Opinion and Order Denying Motions to Dismiss at *1, United States ex rel. Giaquinto v. Highland-Clarksburg Hosp., Inc., 1:18-CV-220, 2022 WL 4391508 (N.D.W. Va. Sept. 22, 2022).

2 US Dept. of Agriculture, Community Facilities Direct Loan & Grant Program, USDA, https://www.rd.usda.gov/programs-services/community-facilities/community-facilities-direct-loan-grant-program.

3 Omnibus Memorandum Opinion at *2, Giaquinto, 2022 WL 4391508.

4 Id. at *4 (internal citations omitted).

5 DOJ Press Release, Biogen Inc. Agrees to Pay $900 Million to Settle False Claims Act Allegations Related to Improper Physician Payments (Sept. 26, 2022), https://www.justice.gov/usao-ma/pr/biogen-inc-agrees-pay-900-million-settle-false-claims-act-allegations-related-improper.

6 In an earlier decision in the case, the federal court in Biogen held that "a violation of the federal AKS is per se a violation of the False Claims Act." United States ex rel. Bawduniak v. Biogen, Inc., 1:12-cv-10601, 2022 WL 2438971, at *4 (D. Mass. July 5, 2022) (citing 42 USC. § 1320a-7b(g)). The First and Fourth Circuits have held that an AKS violation that results in a federal payment is a per se false claim under the FCA. See id. at *1 (quoting Guilfoile v. Shields, 913 F.3d 178, 190 (1st Cir. 2019). See also United States ex rel. Lutz v. United States, 853 F.3d 131, 135 (4th Cir. 2017); 42 USC. § 1320a-7b(g).

7 United States v. Intelligent Fiscal Optimal Solutions, LLC, No: 1-22-cv-01053, 2022 WL 4537785, at *1 (D. Md. Sept. 28, 2022). The action also alleges breach of contract, payment by mistake, and unjust enrichment. See id.

8 Id.

9 Id.

10 Id.

11 Id.

12 Id.; see generally 18 USC. § 207(c).

13 18 USC. § 207(c)(1).

14 Id.

15 Intelligent Fiscal Optimal Solutions, LLC, 2022 WL 4537785, at *2.

16 Id. The motion also argued for dismissal on the grounds that the government released claims against iFOS and Ms. Smith by settling its claim against Dr. Buck and that an unjust enrichment claim against Ms. Smith was improper because the payments under the DHS contract did not go directly to her. See id. The court denied the motion to dismiss on those grounds as well. Id.

17 Id. at *4.

18 Id. (quoting Cnty. Comm'rs of Caroline Cnty. V. J. Roland Dashiell & Sons, Inc., 358 Md. 83, 86 (2000) and United States v. DynCorp International, LLC, 253 F. Supp. 3d 89, 114 (D.D.C. 2017)). See also United States ex rel. Mayman v. Martin Marietta Corp., 894 F. Supp. 218 (D. Md. 1995) (explaining that parties may bring quasi-contractual claims where there is an issue as to whether a contract was formed in the first place).

19 Id. at *5.

20 Id. (quoting United States ex rel. Durcholz v. KFW Inc., 189 F.3d 542, 545 (7th Cir. 1999)).

21 Id. (quoting United States ex rel. Durcholz v. KFW Inc., 997 F. Supp. 1159, 1167 (S.D. Ind. 1998)).

22 Id. at *6.

23 Id.

24 Id. at *4.

25 Department of Justice, Office of Public Affairs, US Attorney Announces Federal Charges Against 47 Defendants in $250 Million Feeding Our Future Fraud Scheme, US Dept. of Justice (Sept. 20, 2022). https://www.justice.gov/opa/pr/us-attorney-announces-federal-charges-against-47-defendants-250-million-feeding-our-future.

26 Id.

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