Petition for Writ of Certiorari — Hays v. Hoffman
Supreme Court brief2003
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{ \ } Supreme Geurt, U.S.
FILED
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03 -92 yu 7-208
No.
In the
Supreme Court of the United States
Patrick M. Hays,
Petitioner,
VS.
Luverne Hoffman, et al.,
Respondents,
and
United States of America,
Intervenor.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
Brian Wojtalewicz
Counsel of Record ©
139 North Miles, Box 123
Appleton, MN 56208-0123
(320) 289-2363
Attorney for Petitioner
Filed July, 2003
2003 — Bachman Legal Printing @ (612) 339-9518 @ 1-800-715-3582 @ Fax (612) 337-8053
=r nome ILL OLE IGGL EOL TOIL IE A PLT TIL TI el as
” 5 ET
QUESTIONS
A nursing home manager reported Medicaid fraud by
the owning conglomerate to the state agency administering
Medicaid. He had discovered one of the fraud schemes, and
learned of other fraud schemes from the company CFO, who
refused to report it and left the company. The manager was
fired. His letters on the schemes caused a state agency audit,
which “disallowed” many of the claimed Medicaid
reimbursements. He prosecuted this federal False Claims Act
(FCA) lawsuit. The DOJ declined to intervene. The jury
found that the company committed 11 different fraud
schenies. The Eighth Circuit reversed the verdict on 10 of the
fraud schemes as lacking jurisdiction under 31 USC
§3730(e)(4)(A) and (B), which was intended to deny
unworthy parasites as qui tam relators. The questions
presented are:
: As an issue of first impression, what is the
correct analysis or interpretation of “original source” and the
“direct knowledge” jurisdictionally required of a
whistleblower for a qui tam suit?
2. Does the Eighth Circuit’s holding conflict with
other circuits and the rule in United States v. Bornstein, 423
U.S. 303 (1976) that the number of civil penalties imposed
should be based upon the number of claims made?
3. The federal circuits are divided over whether a
state audit is a “public disclosure” under the FCA jurisdiction
clause.
4. The federal circuits are divided over whether
the definition of “based upon the public disclosure” in the
FCA jurisdiction clause means “derived from.”
LIST OF PARTIES
PLAINTIFFS:
1. Patrick Hays
2. United States of America
DEFENDANTS:
1. Luverne Hoffman
2. Kay Knock
3. St. Francis Health Services of Morris, Inc.
4. Villa of St. Francis Nursing Home, Inc.
5. Browns Valley Center, Inc. :
6. Franciscan Health Center, Inc.
7. Leisure Hills Health Center, Inc.
8. Prairie Community Services, Inc.
9. Prairie Community Waivered Services, Inc.
0. Prairieland Management Services, Inc.
1. St. Louis Riverview Homes, Inc.
INTERVENOR ON EIGHTH CIRCUIT APPEAL:
1. United States of America
ii
TABLE OF CONTENTS
Page
chk aiden sis slnnioncbaioncnnesniniators i
I 65th ccetiosinnsnnesnansonsvesesssveserse i
TABLE OF AUTHORITIES ........:ssssssssssssssssscscsssesees v
CITATIONS TO OPINIONS BELOW .......:sssseesseen
JURISDICTION..........++++ Be Maa iceek tcc on
STATUTORY AND
CONSTITUTIONAL PROVISIONS .....:::s+ssss000000
STATEMENT OF THE CASE .....ssssssssssssssssssssssneen 2
REASONS FOR GRANTING THE PETITION .......... 5
I. The Eighth Circuit interpretation of the
“original source” clause, 31 U.S.C.
§3730(e)(4)(A)(B), conflicts with the
better Ninth Circuit analysis. ...............::06 5
II. The Eighth Circuit’s holding conflicts
- with other circuits and the rule in
United States v. Bornstein, 423 U.S.
303 (1976) that the number of civil
penalties imposed should be based
upon the number of claims made. ............ 12
III. A state audit is not a public disclosure
that may bar a qui tam relator under
the FCA jurisdiction clause...............::0+ 15
IV. The Fourth Circuit is correct that
“based upon” in the FCA jurisdiction
clause should have its plain language
meaning of “derived from.” ..............::++++ 17
ill
~
CONCLUSION ........::csssssseceessreeeeeseresoneeeeesessseneescnes 19
APPENDIX A: Eighth Circuit Opinion..........-..-+-s00+ A-1
APPENDIX B: Minn. Federal (istrict Court Opinion .. B-1
APPENDIX C: Jury Verdict .......::cscccseeeseeseneseeeeeenenees C-1
APPENDIX D: Morris Tribune Article ............:.++see0+ D-1
APPENDIX E: Expert Burns Affidavit ..........-:-s-ss0+0+ E-1
APPENDIX F: Expert Burns Testimony ..........--++:++0+++ F-1]
APPENDIX G: Expert Rau Testimony .........-.:sseesee00+ G-1
APPENDIX H: Hays Whistleblowing Letters .............. H-1
APPENDIX I: Berman-Grassley Congressional Record I-1
iv
:
TABLE OF CITED AUTHORITIES
Cases
A-1 Ambulance Service, Inc. v. California,
202 F.3d 1238 (9 Cir. 2000) ........csesesseseseseees 15
Ass’n. of Nurse Anesthetists v.
Allina Health Sys. Corp.,
276 F.3d 1032, 1034-47 (s" Cir. 2000),
Cert. denied, 123 S. Ct. 345 (2002)..... 17, 18, 19
Barth v. Ridgedale Elec., Inc., 44 F.3d 699, 703
BE FI viinisuiisnsceireectulasceestieemaalien 9,10
Biddle v. Board of Trustees of the
Leland Stanford, Jr., Univ.,
161 F.3d 533, 536-40 (9" Cir. 1998)... 18
Brown v. United States
524 F.2d 693, 705-6 (Ct. Cl. 1975).............0 13
Cooper v. Blue Cross & Blue Shield of Florida,
19 F.3d 562 (11 Cir. 1994) .......eeeeeeee 8,9, 18
Doe v. John Doe Corp.,
960 F.2d 318, 324 (2nd Cir. 1992)..............0e 18
Dunleavy v. County of Delaware, :
123 F.3d 734, 745 ee Cir. 1997) ......... 8, 15, 16
FPC-Boron Employees’ Club,
Be Fe TEE cccincssaduuncdcdoscanasueuiencseunamaanee 18
Fallon v. Accudyne Corp., 921 F.Supp. 611, 626
CW. WER. FFBS) ccecrsevesssovcesescecconsersseoocers Ie he
Findley v. FPC-Boron Employees’ Club,
105 F.3d 675, 682-85 (D.C. Circ. 1997)......... 18
Vv
Fine v. MK-Ferguson Co., 99 F.3d 1538, 1541-2
(10™ Cir. 1996)....sssscssessssssessssssscensecssensvenenseess 15
Lamers v. City of Green Bay, 168 F.3d 1013, 1017
(7th Cir. 1999),......ccssesssesesesseessenenenenensesensnsnens i8
Miller v. United States,
550 F.2d 17 (Ct. Cl. 1977)......secesereereeereeeseeenes 13
Mistick PBT v. Housing Auth.,
186 F.3d 376, 385-88 (3™ Cir. 1999),
Cert. denied, 120 S.Ct. 1418 (2000).......... 18, 19
McKenzie v. BellSouth Telecom.., Inc.,
123 F.3d 935, 940(6™ Cir. 1997) .....esesseseseesees 18
Precision Co. v. Koch Indus., Inc..,
971 F.2d 548, 552-53 (10th Cir. 1992) ........... 18
Rabushka v. Crane Co.,
40 F.3d 1509 at 1511 (8™ Cir. 1994)... 10
Schumer v. Hughes Aircraft Co.,
63 F.3d 1512, 1519 (9™ Cir. 1995).....:eseeeeee 16
Schwedt v. Planning Research Corp., Inc.,
39 F.Supp. 2™ 28, 31-33 (D.D.C. 1999)......... 15
Seal v. Seal, 255 F.3d 1154 co" Cir. 2001)......... 8,9, 10
Siller v. Becton Dickenson & Co., -
21 F.3d 1339 (4™ Cir. 1994) .....sesseceeeeseene 17, 18
Springfield Terminal Ry. Co. v. Quinn,
14 F.3d 645, 649 (D.C. Cir. 1994)... 6,7
vi
i th il i i i a i i el ee
Stinson, Lyons, Gerlin &
Bustamante, P.A. v. Prudential,
944 F.2d 1149, 1160 (3 Cir. 1991).......... 10, 11
United States v. Bank of Farmington,
166 F.3d 853, 863 (7™ Cir. 1999) ........csceeeeeeee 17
United States v. Bornstein,
ZB US. SES CUFT) .-rcecrececesevescse 11, 12, 13, 14
United States ex rel. Brown v. Merant, Inc.,
(E.D. Pa. 2002) (citing treatise) ..............ee 5
United States v. Ehrlich,
643 F.2d 634 (9™ Cir. 1981) .........sscssssesseseeees 13
United States ex rel. Findley v.
FPC-Boron Employees’ Club,
105 F.3d 675, 681 (D.C. Cir. 1997) ............200- 5
United States v. Grannis,
172 F.2d 507, 515-16 (4" 3, | eer 13
United States v. Woodbury,
359 F.2d 370, 377-8, Cn > eee 13
Wang v. FMC Corp.,
975 F.2d 1412, 1417 cg" es ee 9,10
Woodard v. Country View Care Center, Inc.,
797 F.2d 888 (10™ Cir. 1986) ........cseeeeeee 12, 14
Statutes
2B U.S.C. SIZSEC1) ...0...cerrersvecssoroversceesseosonsoess l
2B U.S.C. SSB .....crccccrcccrsceroosssescsrecersssseosnsoss 2
31 U.S.C. $3729.......ccccrrscrseccsersceesseennevevonesneees 2
31 U.S.C. §3729 (a)(1).........-crererccserscercsesesasees l
Vii
6 S000 CIE onniicstenicieinenion 2
31 U.S.C. §3730(e)(4)(A) and (B).. 2, 5, 6, 7, 15
Constitutional Amendments
g" Amendment, United States Constitution
Other Authorities
Congressional Record ............ssssseeeeeees 6, 8, 10, 11
Vii
PETITION
Petitioner Patrick Hays prays that the Supreme Court
grant a writ of certiorari to review the judgment of the Eighth
Circuit Court of Appeals of April 9, 2003, where it partially
reversed the judgment of the Federal District Court,
Minnesota district, the Honorable James Rosenbaum
presiding.
CITATIONS TO OPINIONS BELOW
The opinion of the Court of Appeals (App. A-1 to A-
18) is reported at 325 F.3d 982. The opinion of the District
Court (App. B-1 to B-7) is not reported.
JURISDICTION
The judgment of the United States Court of Appeals
for the Eighth Circuit was entered on April 9, 2003. The
jurisdiction of this Court is invoked under 28 U.S.C.
§1254(1).
STATUTES AND CONSTITUTIONAL PROVISIONS
False Claims Act
The False Claims Act provides, in relevant part: “Any
person who (1) knowingly presents, . . . a false or fraudulent
claim for payment . . . is liable to the United States
Government for a civil penalty of not less than $5,000 and not
more than $10,000. . .” 31 U.S.C. §3729(a)(1).
7
The False Claims Act also provides a jurisdiction
barring provision, which provides in relevant part:
“(4)(A) No court shall have jurisdiction over an action
under this Section based upon the public disclosure of
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, unless the action is
brought by the Attorney General or the person bringing the
action is an original source of the information.
(B) For purposes of this paragraph, “original
source” means an individual who has direct and independent
knowledge of the information on which the allegations are
based and has voluntarily provided the information to the
Government before filing an action under this section which
is based on the information.” 31 U.S.C. §3730(e)(4)(A), (B).
Eighth Amendment, United States Constitution
Excessive bail shall not be required, nor excessive
fines imposed, nor cruel and unusual punishments inflicted.
STATEMENT OF THE CASE
The jurisdiction of the district court was invoked
under the False Claims Act, 31 U.S.C. §3729 et seq., and
under 28 U.S.C. §1331 (general federal question jurisdiction).
Patrick Hays discovered a fraud scheme relating to
apples. He discovered 9 more fraud schemes in discussions
with the conglomerate’s chief financial officer (CFO). The
CFO refused to blow the whistle and left the company. Hays
first attempted to discuss the fraud with board members of the
company. He was fired as a manager within a month. He then
was put cn as a new personnel director at the main office of
2
———
the conglomerate. At his first day on the job, defendant CEO
Hoffman immediately fired him when Hays revealed letters -
he had written to the Minnesota Department of Human
Services (DHS) alleging Medicaid fraud. These letters
informed the DHS auditors of ten areas for fraud: (1) gift
apples being claimed as food; (2) maintenance workers of
non-profit Medicaid homes being used in for-profit homes;
(3) a defendant for-profit company, Specialized
Transportation, hauling residents in a captured market setting;
(4) overcharging on dietary consulting by a defendant for-
profit on the Medicaid reimbursement home that Mr. Hays
managed; (5) expense of a condominium being paid by the
non-profit company and being personally used by defendant
CEO Hoffman; (6) defendant’s for-profit Specialized
Transportation using a Medicaid funded Lakewood Home
van; (7) fraud on the construction of a group home involving
built-in extra costs of Everstrong Construction Co. on a fire
| loss payment; (8) non-profit group home Medicaid money
being claimed on a van that was purchased with state DOT
money; (9) a $413,000 payment-from Kenneth Steiger, owner
of a Medicaid funded nursing home, after he sold it to the
conglomerate; and (10) defendant CEO Hoffman’s personal
use of company vans (Hays Letters, App. H-1 to H-16). Fraud
in all 10 of these areas alleged by Hays was ultimately found
by the jury. (Verdict, App. C-1 to C-10).'
Medicaid funds are joint federal and state monies.
Hays’s information caused a field audit by the State DHS,
| which disallowed Medicaid expense claims of the defendants
in all 10 of these areas and a number of others. The DHS
audit supervisor testified at the jury trial, consistent with his
pre-trial affidavit, that if it hadn’t been for Hays’s written
complaints, the more rare, intensive field audit, which
' Ultimately, twelve schemes were presented by plaintiff at trial. The jury
found fraud in one more area, and rejected another alleged scheme as
fraud.
3
discovered the “incorrect claims,” may not have occurred for
years. The audit also included information gathered from
personal interviews of Hays. (App. E-2.) Hays received a
copy of the DHS audit. Before he filed this qui tam lawsuit, a
small town weekly reporter obtained the audit and published
an article. It discussed only four of the areas where DHS had
disallowed claimed expenses, made no mention of fraud, and
concluded that the company “has not been accused of any
wrongdoing.” (App. D-1 to D-6.)
Hays filed this suit alleging fraud schemes and
attached the DHS audits. The District Court rejected defense
jurisdiction and summary judgment motions. The jury
awarded Hays damages for FCA retaliation, and found 11
different fraud schemes had been committed. The district
court then found, based on testimony of plaintiffs’ experts
who had examined the defendants’ cost reports and audits,
that defendants had submitted 336 claims for payment based
on the 11 fraud schemes. It assessed the minimum $5,000
statutory penalty per claim, imposing the $1,680,000 fine.
(App. B-6.) It rejected a defense g'" Amendment excessive
fine claim that the penalty was disproportionate to the
offense. It held that the defense conduct involved 11 different
fraud schemes, “broad in both scope and duration,” and
attempts to conceal their illegal billing practices. . .” (App. B-
5.)
The Eighth Circuit upheld Hays retaliation judgment. |
However, it also held that the State DHS audit was a prior
public disclosure under the jurisdiction clause, thus barring
Hays from a qui tam case unless he was an “original source,”
having “direct and independent knowledge of the information
on which the allegations are based.” It held that Hays was an
original source only on the apples scheme. It then held that
the number of civil penalties imposed on the defense would
be eight, because eight of the defendants’ facilities had
4
submitted claims on the fraudulent apples. It rejected the
District Court’s basing the number of penalties upon the
number of claims for payment submitted on the sclieme. (8
Cir. Op. at App. A-2 to A-18)
REASONS FOR GRANTING PETITION
I. The Eighth Circuit interpretation of the “original
source” clause, 31 U.S.C. §3730(e)(4)(A)(B), conflicts with
the better Ninth Circuit analysis.
The FCA’s jurisdiction bar clause is notorious for its
lack of clarity. United States ex-rel. Brown v. Merant, Inc.
(E.D. Pa. 2002) (citing treatise); and United States ex rel.
Findley v. FPC-Boron Employees’ Club, 105 F.3d 675, 681
(D.C. Cir. 1997).” It provides:
“(4)(A) No court shall have jurisdiction over an action
under this Section based upon the public disclosure of
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, unless the action is
brought by the Attorney General or the person bringing the
action is an original source of the information.
(B) For purposes of this paragraph, “original
source” means an individual who has direct and independent
knowledge of the information on which the allegations are
based and has voluntarily provided the information to the
Government before filing an action under this section which
is based on the information.” 31 U.S.C. §3730(e)(4)(A)(B).
‘ Potential whistleblowers across America, and many
lower federal courts, thirst for clarity or guidelines on these
? Hereafter, case citations shall omit the “United States ex rel.” part of the
case name, for brevity.
5
two clauses of the federal statute. In 1999, Senator Grassley
and Congressman Berman, authors of the bipartisan 1986
changes to the FCA, criticized the federal courts in the
Congressional record:
“With dismay, however, we have watched the
federal courts interpret several sections of the
Amendments [1986] in ways that directly
contravene Congressional intent, and, of even
greater significance, discourage and foreclose
potential relators from bringing meritorious
cases. In particular, we are extremely
concerned with the courts’ crabbed
interpretations of the public disclosure bar --
Sec. 3730(e)(4)(A) and (B). That provision,
which was drafted to deter so-called
“parasitic” cases, has been converted by
several circuit courts into a powerful sword by
which defendants are able to defeat worthy
relators and their claims. If this trend
continues, we fear that the very purpose of the
Amendments -- ‘to encourage more private
enforcement suits’ -- ultimately will be
undermined. See Rep. No. 99-345, at 23-24
(1986).” (App. I-1 to 1-2.)
Patrick Hays has faced a “case study” in needless use of this
sword, which has thwarted many citizens attempting to
enforce the qui tam statute -- “Lincoln’s Law.”
The FCA reflects Congress’s attempt to find “the
golden mean between adequate incentives for whistleblowing
insiders with genuinely valuable information and
discouragement of opportunistic plaintiffs who have no
significant information to contribute of their own.”
Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 649
(D.C. Cir. 1994). Mr. Hays is clearly on the positive side of
| 6
this “golden mean,” as a whistle-blowing insider who
provided “genuinely valuable information.” He saw blatant
elements of one fraud scheme (apples), and when the CFO of
the company refused to report other schemes, he ended his
career by whistleblowing the schemes to the government.
In Springfield, the relator was an employer involved
in an arbitration. It caused him to suspect fraud, and his
interviews with persons whom the arbitrator had worked with
were essential to the relator learning of the fraud scheme.
Similarly, Mr. Hays had special knowledge as a manager of a
Medicaid financed home, saw one blatant scheme, and talked
with the company’s CFO to discover other schemes.
The court in Fallon v. Accudyne Corp., 921 F.Supp.
611, 626 (W.D. Wisc. 1995), observed: “This [state agency]
investigation, however, was instigated at the request and
based upon information provided by a relator. It would be
fundamentally contrary to the provisions of the statute to
preclude such an individual from commencing an action
based upon this information. Indeed, such a person is no
doubt precisely contemplated by §3730(e)(4)(B).”
Hays was unquestionably the in-fact original source to
the government. Should this count for nothing? Because he
received his information on most of the fraud schemes from a
co-worker, the Eighth Circuit held that he did not have “direct
and independent knowledge of the information.” (App. A-9
to A-12) The Supreme Court should clarify the analysis of
direct knowledge for the courts and potential whistleblowers.
Under the Eighth Circuit stance, few but the crooks
themselves could be original sources. Auditors and other
professionals, who had access and the ability to investigate,
could qualify. Why should this very crabbed interpretation be
imposed to reject true whistleblowers? The Eighth Circuit
ignored the concerns and goal of Congress. “Ordinarily, the
party accused of defrauding the federal government is in
. 7
control of most of the sources of information that would
effectively reveal wrongdoing. This information dynamic
was, in large part, a motivating factor behind the 1986
amendments. Congress emphasized its belief that ‘detecting
fraud is usually very « ficult without the cooperation of
individuals who are ei. 2r close observers or otherwise
‘nvolved in the fraudulent activity.’ S. Rep. 99-345, gg"
Cong., 2d Sess. 4, reprinted in 1986 U.S.C.C.A.N. at 5269.
Additionally, the Reporting Committee perceived the
existence of ‘a conspiracy of silence’ to defraud the federal
government. Id. at 6, reprinted in 1986 U.S.C.C.A.N. at
5281.” Dunleavy v. County of Delaware, 123 F.3d 734, 745
(3"* Cir. 1997). Hays was indeed a “close observer,” who
broke the silence. See the Congressional authors’ critique of
“original source” interpretations. (App. I-10 to I-12.)
Even if Hays had wanted to investigate the company
books surreptitiously, and risk alerting the CEO or other
perpetrators, he wasn’t trained in accounting or auditing. In
that he is similar to the relator in Couper Vv. Blue Cross &
Blue Shield of Florida, 19 F.3d 562 (1 1" Cir. 1994). Cooper
was deemed an original source, even though he clearly
obtained essential information for understanding the fraud
from federal government officials! He had direct knowledge
of his own medical bills being shoved onto Medicare when
they were supposed to be paid by BCBS. He never had
access, or financial audit training, to investigate the BCBS
transactions. The Cooper court held that it is not necessary for
a relator to have all of the relevant information. It favorably
cited FCA author Senator Grassley that “a party with
knowledge of fraud against the government should be able to
maintain a qui tam action as long as he had some of the
information in advance of the public disclosure.” 1990
implementation hearing, at 3. Cooper, 19 F.3d at 564, 568.
In Seal v. Seal, 255 F.3d 1154 (9" Cir. 2001), the 9"
Circuit recently provided a helpful four-factor analysis to
determine if a whistleblower is an original source, with direct
and independent knowledge: (1) the degree to which the
relator’s information helped uncover the later allegations; (2)
the degree to which other private actors helped uncover those
allegations; (3) the degree to which the government played a
role in uncovering those allegations; and (4) whether any later
discovered allegations are brought against the same entity as
the earlier allegations. If this analysis had been used for Mr.
Hays, he, the jury and the government would not have been
barred from bringing justice to the perpetrators on 10
different fraud schemes.
A Seal case type analysis would cure the glaring
injustice that occurred to Mr. Hays and that Congress
specifically critiqued: “Indeed, one court held that even if it
was the relator him or herself who had reported the fraud to
the federal government, their case was precluded on the
theory that the government had knowledge of the fraud before
the relator filed their case.” (App. I-3.)
The 8" Circuit pointed to its decision in Barth v.
Ridgedale Elec., Inc., 44 F.3d 699, 703 (8™ Cir. 1995), where
it claimed that “direct” knowledge is knowledge “marked by
the absence of an intervening agency.” But what is an
“intervening agency?” If it is a federal agency that had
already discovered the fraud, such a rule would be
appropriate. If, however, an “intervening agency” is taken to
mean any human or entity supplying any of the information or
schemes, it can lead to ludicrous, unjust results. The
successful relator in Cooper may have been rejected because
he clearly obtained valuable information from federal
government officials. The court in Barth also favorably cited
the statement: “A relator is said to have direct knowledge of
fraud when he ‘saw [it] with is own eyes.’” Wang v. FMC
9
Corp., 975 F.2d 1412, 1417 (9" Cir. 1992). However, if this
was the standard, relators seldom would be anyone but the
crooks themselves. Congress never adopted these very
restrictive definitions. There is a danger in the courts adopting
blanket statements in the first look at an issue, and applying
them in a blanket fashion to unfairly bar relators in different
fact contexts. The Ninth Circuit obviously stepped away from
this trap by not letting the blanket statement in Wang stop it
from adopting the more common sense and just analysis in
Seal.
Could anyone seriously question that Congress’s
intent was to reward whistleblowers who worked in a
company, learned of the fraud, and came forward with the
schemes to the government, when no one else would?
Especially in the instant case, where prior state DHS audits
had failed to discover the schemes? (See Aff. of DHS audit
supervisor Burns, para. 3 and 4: App. E-2 to E-3) The gi"
Circuit’s crabbed definition of “direct knowledge” here
makes a mockery of its earlier view of the FCA jurisdiction
clause: “The acts jurisdictional scheme is designed to promote
private citizen involvement in exposing fraud against the
government, while at the same time prevent parasitic suits by
opportunistic latecomers who add nothing to “he exposure of
the fraud.” Rabushka v. Crane Co., 40 F.3d 1509 at 1511 cs"
Cir. 1994). Its Hays holding also flies in the face of
Congressional intent: “The Act rewards those brave enough to
speak in the face of a “‘conspiracy of silence,’ and not their
mimics.” (Senate Report, at 6, 1986 U.S.C.C.A.N. 5271)
(Quoted in Wang, 975 F.2d at 1419).
The 8" Circuit in Hays also misused the requirement
of “independent knowledge” that has been apparently agreed
upon by it and other circuits. In Barth v. Ridgedale Elec. Inc.,
44 F.3d 699 at 703 (s® Cir. 1995), it held: “‘independent
knowledge’ has been consistently defined as knowledge that
10
is not dependent on public disclosure.” (Citing Stinson,
Lyons, Gerlin & Bustamante, P.A. v. Prudential, 944 F.2d
1149, 1160 (3 Cir. 1991)) Yet in its reasons for barring
Hays, it criticizes him for not having information
“independent” of the CFO, who was not willing to report the
fraud. (App. A-11.)
Congressional intent would be much better served by
a multi-factor analysis to determine what whistleblowers have
“direct” knowledge. Even if this Court declined such an
analysis, a rule that any employee who reports fraud schemes
to the government from within the company is an original
source fits squarely with Congress’s goal. The Third Circuit
aptly observed: “The paradigmatic ‘original source’ is a
whistleblowing insider. This covers those the Senate Report
specifically referred to: ‘individuals who are close observers
or otherwise involved in the fraudulent activity.’ S. Rep. No.
345, at 4, reprinted in U.S. Code Cong. & Admin. News
5269. Other relators may also qualify if their information
results from their own investigations.” Stinson v. Prudential
Ins., 944 F.2d 1149, 1161 (3" Cir. 1991).
In these times where massive corporate frauds are
coming to light, resolution of this issue by the Supreme Court
is extremely important for the American public. Potential
insider whistleblowers will go to lawyers in the future.
Holdings like the Eighth Circuit’s in Hays, and blanket
language like “intervening agency” will undoubtedly cause
some insiders to decline the risk of reporting to the
government or initiating a qui tam suit. If they aren’t the
crooks themselves, or don’t have access or training to “see it
with their own eyes,” they and their lawyers may ultimately
be thrown out of court. The “conspiracy of silence” will be
promoted.
1]
Il. The Eighth Circuit’s holding conflicts with other
circuits and the rule in United States v. Bornstein, 423
U.S. 303 (1976) that the number of civil penalties imposed
should be based upon the number of claims made.
United States v. Bornstein, 423 U.S. 303 (1976)
rejected a theory that the number of FCA civil penalties
should be based upon the number of contracts involved in a
case. “The language of the statute focuses on false claims, not
on contracts.” 423 U.S. at 311, 96 S. Ct. at 528-529. Justice
Rehnquist authored a dissent, joined by Chief Justice Burger
and Justice White. They criticized the majority for imposing
only taree civil penalties upon the frauding company, a
subcontractor, that caused the prime contractor to submit 35
false claims to the government. While agreeing that the
number of actual claims made was the statutory focal point
for number of penalties, they stressed that there may have
been factual ties of the frauding company to the 35 prime
contractor’s claims submitted. Bornstein, 423 U.S. at 317-25.
The Eighth Circuit here ignored this clear law, basing the
number of civil penalties upon the number of the company’s
facilities that submitted the false claims, only 8! If this stands
as law, any adroit Medicaid fraud purveyor could reduce its
exposure by funneling all of its fraudulent claims through one
facility!
“If a nursing home includes unjustified expenses in
its cost report, the reimbursement rate will be inflated and its
application to the monthly claim for reimbursement will result
in an overpayment from the medicaid fund.” Woodard v.
Country View Care Center, Inc., 797 F.2d 888-9 (10" Cir.
1986). One of plaintiff's expert witnesses at trial of this case,
Robert Rau, a former government Medicaid auditor and
current private home manager, testified that he followed the
fraud through 27 annual cost reports of the defendants’ homes
and the audits, and found 200 monthly payment claims made
12
on the apples fraud scheme. (App. G-1 to G-4.) DHS audit
supervisor Burns verified that payment claims were made
monthly. (App. F-1 to F-2.) Both the magistrate and the
district court judge, who witnessed experts Rau and Burns at
trial, concluded that their testimony was sufficient to establish
the number of claims made through the multiple homes and
on the 11 fraud schemes. Even if the Eighth Circuit was right
in using the jurisdiction clause to slash the jury’s findiuig of
10 other fraud schemes, it should have followed Bornstein in
imposing 200 civil penalties, instead of 8, on the apples
scheme. At the least, it could have remanded for further
hearing or evidence.
The Eighth Circuit is also in conflict with other
federal courts. In Brown v. United States, 524 F.2d 693, 705-
6 (Ct. Cl. 1975), the 14 civil penalties were based upon the
claims made (14 purchase orders), rejecting the contractor’s
argument that the FCA penalty should only be assessed for
each project or house that he worked on. In Miller v. United
States, 550 F.2d 17 (Ct. Cl. 1977), the court uphe!d the
number of claims being the five monthly billings by the
violator, even though 11 fraudulent invoices were
consolidated into those five billings. In Uiiited States v.
Grannis, 172 F.2d 507, 515-16 (4 Cir. 1949), the court held
that the many scheduled papers that went in with each
payment voucher request should not serve as individual FCA
claims. In United States v. Woodbury, 359 F.2d 370, 377-8,
(9" Cir. 1966), the court held that there were 10 claims
subject to the penalty, rejecting the government’s claim of 32
false claims. The actual requests for payment totaled 10, and
the court refused to count the number of false papers attached
to each particular claim submitted. In United States v.
Ehrlich, 643 F.2d 634 (9 Cir. 1981), a HUD contractor
argued that because he really only did one fraudulent act,
inflate construction costs, he shouldn’t suffer 76 civil
penalties, one for each monthly voucher that he submitted for
13
payment. The court rejected the argument, specifically
referring to Bornstein. In the instant case, defendants did not
simply conduct one scheme, like inflating construction costs.
The jury found that they had committed 11 different false
claim schemes. Yet the 8" Circuit has ignored Bornstein and
imposed only 8 civil penalties! In Woodard, liability was
found against the nursing home and its managers for false
Medicaid expense reimbursement claims, like the Hays case
here. The trial court’s imposition of penalties on “25 false
claims” and “4 cost reports” was apparently uncontested. 797
F.2d 888, 891.
It is apparent from the g" Circuit’s Opinion that its
goal was to lower the amount of the civil penalties on the
defendants here. (Opinion, App. A-16 to A-17) This shouldn’t
excuse ignoring the statutory and Supreme Court mandate of
Bornstein. In contrast to the 8" Circuit, the District Court, the
Honorable James Rosenbaum, took on the real issue that
bothered the 8 Circuit, whether the total civil penalty
imposed was excessive. In holding that it was not, Judge
Rosenbaum observed that it is not clear whether the -
Amendment Excessive Fines Clause protects corporations, or
whether it applies to qui tam actions. (Dist. Ct. Op., App. B-
3.)
Allowing the g" Circuit decision in Hays to stand,
contrary to Bornstein, would leave a conflict within the
circuits. It would also leave uncertainty in the district courts
on what basis should be used to count the number of FCA
penalties. Lastly, the 8" Circuit position would cause ongoing
injustice in that circuit, and perhaps across the country,
exemplified by this case. Mr. Hays is deprived of any reward
for exposing 10 different fraud schemes through the risk and
work of a jury trial and appeal, and the fraud perpetrator
evades responsibility for 10 schemes.
14
Ill. A state audit is not a public disclosure that may
bar a qui tam relator under the FCA jurisdiction clause.
Section 3730(e)(4)(A) provides that the source of a
public disclosure must be a “criminal, civil, or administrative
hearing. . . a congressional, administrative or Government
Accounting Office report, hearing, audit, or investigation, or .
. . the news media.” In Dunleavy v. County of Delaware, 123
F.3d 734, 745 (3™ Cir. 1997), the court reasoned that because
the second use of the word “administrative” in this clause is
surrounded by “congressional” and “Government Accounting
Office,” Congress must have meant to include only federal
agency reports, hearings, audits or investigations. The court
concluded that a state agency disclosure may never be a
jurisdictional bar under this FCA clause. Indeed, as the 9""
Circuit has pointed out, “one may presume that Congress
acted intentionally in including the modifying language in one
clause, but omitting it in another.” A-] Ambulance Service,
Inc. v. California, 202 F.3d 1238 (9" Cir. 2000). Why include
“administrative hearing” twice unless one was meant for
federal and one non-federal?
In Fallon v. Accudyne Corp., 921 F. Supp. 611 (W.D.
Wisc. 1995), the court held that a State DNR investigation
should not be a public disclosure: This case was praised by
the Congressional authors of the 1986 Amendments (App. I-
8) In Fine v. MK-Ferguson Co., 99 F.3d 1538, 1541-2 (10"
Cir. 1996), reiator was barred by a federal audit, not the prior
state audits, even though they were given to the federal
government. In Schwedt v. Planning Research Corp., Inc., 39
—¥F'Supp. 2"? 28, 31-33 (D.D.C. 1999) the parties never
disputed that a federal OIG report was a “public disclosure.”
The report was prepared for OIG by a contracted private
accounting firm. In Dunleavy, the court held that a Grantee
Performance Report, required by federal law to be prepared
by a county and provided to HUD, was not an “administrative
15
report” under the jurisdiction bar clause, because it was not
prepared by a federal agency. The court aptly pointed out that
“expansion of the FCA’s definition of ‘administrative report’
to state and local government reports would in effect return us
to the unduly restrictive ‘government knowledge’ standard” . .
_ that “barred all actions where it could be shown, no matter
how attenuated the case, that the information on which the qui
tam suit was based had passed into the possession of the
federal government prior to the suit’s filing.” 123 F.3d at
745-6.
The Eighth Circuit in this case held that because the
federal government delegates the administration of Medicaid
to state agencies, including investigation of fraud, the state
audit in this case was tantamount to a federal audit for
jurisdiction bar purposes. (App. A-6 to A-9) This is a faulty
construction. It is a resurrection of the old government
knowledge bar. Also, Congress specified only the enumerated
public disclosures because it felt that they would clearly alert
the federal government to investigate the fraud. There is no
evidence that state DHS Medicaid audits that discover
disallowed claimed expenses ever reach a federal
investigative agency or the local U.S. attorney office. Even
speculating that they do, there is no evidence that these
federal offices are capable of or pursue the annual thousands
of such discoveries across the 50 states. It takes an inside
whistleblower like Mr. Hays to point out the fraud schemes.
The “1986 amendments also reflected Congress’s recognition
that the government simply lacks the resources to prosecute
all viable claims, even when it knows of fraudulent conduct.”
Schumer v. Hughes Aircraft Co., 63 F.3d 1512, 1519 (Ch Cir.
1995).
Congress specifically has criticized non-media
disclosures that were not clearly federal: “Disclosure in a
16
state proceeding of any kind should not be a bar to a
subsequent qui tam suit.” (App. I-5.)
The public importance is clear. Allowing a state audit
as a bar would promote the ugly situation where
whistleblowers’ attorneys would advise clients not to report
fraud to an appropriate state investigating agency; instead
start the lawsuit right away and try to do your own
investigation, regardless of how incompetent. The conflict
between the circuits begs for clarity that could end years of
litigation in the courts. It is also important to prevent the law
from forcing absurd, unfair results -- barring whistleblowers
who caused the state audits in the first place, and allowing
companies to escape any penalty for fraud schemes.
IV. The Fourth Circuit is correct that “based upon” in
the FCA jurisdiction clause should have its plain language
meaning of “derived from.”
The circuits are also in conflict over what “based
upon” means in the FCA jurisdiction clause.’ In Siller v.
Becton Dickenson & Co., 21 F.3d 1339 (4*" Cir. 1994), the
Court interpreted it to mean “derived from.” One panel of the
Seventh Circuit agreed in United States v. Bank of
Farmington, 166 F.3d 853, 863 (7" Cir. 1999). This would
comport with the common sense or plain language meaning
of the statute. It would also comport with the obvious intent
of Congress - - barring true parasites of prior public
disclosure.
However, the Eighth Circuit has chosen to adopt a
“substantially similar to” definition of “based upon.” The
same “crabbed” interpretation has been adopted by a majority
* This issue was not briefed at the Eighth Circuit as it had just decided the
Nurse Anesthetists case after the Hays jury trial. The issue was briefed in
the district court jurisdiction motions.
17
of the circuits: “A qui tam suit is ‘based upon’ a public
disclosure whenever the allegations in the suit and in the
disclosure are the same, ‘regardless of where the relater
obtained his information.’” Minn. Ass’n. of Nurse
Anesthetists v. Allina Health Sys. Corp., 276 F.3d 1032,
1034-47 (8" Cir. 2000), cert. denied, 123 S. Ct. 345 (2002);
Doe v. John Doe Corp., 960 F.2d 318, 324 (2nd Cir. 1992);
Findley v. FPC-Boron Employees’ Club, 105 F.3d 675, 682-
85 (D.C. Circ. 1997); Mistick PBT v. Housing Auth., 186
F.3d 376, 385-88 (3 Cir. 1999), cert. denied, 120 S.Ct. 1418
(2000); McKenzie v. BellSouth Telecom., Inc., 123 F.3d 935,
940 (6" Cir. 1997); Lamers v. City of Green Bay, 168 F.3d
1013, 1017 (7th Cir. 1999); Biddle v. Board of Trustees of the
Leland Stanford, Jr., Univ., 161 F.3d 533, 536-40 (9 Cir.
1998); Precision Co. v. Koch Indus., Inc., 971 F.2d 548, 552-
53 (10th Cir. 1992); and Cooper v. BlueCross and BlueShield,
19 F.3d 562, 567 (11" Cir. 1994).
This majority rule distorts the plain meaning of
“based upon the public disclosure.” The phrase obviously is
intended to mean a causal connection. The Fourth Circuit
aptly observed: “We are unfamiliar with any usage, let alone
a common one or a dictionary definition, that suggests that
‘based upon’ can mean ‘supported by.” Siller, 21 F.3d at
1349. The majority view also causes a return to the broad
“government knowledge” bar that was a major reason for the
1986 changes by Congress. The D.C. Circuit in the majority
view admitted: “Our interpretation of the jurisdictional bar
may on occasion prevent qui tam lawsuits that may not be
truly ‘parasitic’.” FPC-Boron Employees’ Club, 105 F.3d at
685. This is what happened to Mr. Hays, and is happening to
other true whistleblowers across America.
Even the Eighth Circuit, in adopting the majority
view, admitted that it was “not free of strain.” Nurse
Anesthetists, 276 F.3d at 1047. The analysis is this: “Ifa suit
18
is only based upon a public disclosure if it results from the
disclosure, . . . then the statute’s additional provision allowing
suit if the relator is ‘an original source’ of the underlying
information is of no effect, because no one could be an
original source if his knowledge was derived from public
disclosure.” Nurse Anesthetists, 276 F.3d at 1045. However,
this analysis ignores the common situation where the relator
reports some of the fraud schemes or information, and 4
resulting federal audit or investigation provides more. Chief
Judge Becker of the Third Circuit, in his dissent, raised this
very plausible scenario. Mistick PBT, 186 F.3d at 399. Also,
even if there is a contradiction, it is plausible that Congress
never saw or intended it. Nevertheless, we have a majority of
the circuits using this strained analysis to impose yet another
unfair roadblock to true whistleblowers from all over
America, contrary to the goal of Congress.
In sum, the authorities are in substantial disarray on
matters of importance to American whistleblowers, the public
and the courts. America is currently embroiled in exposing
corporate fraud. The nation deserves to have “Lincoln’s Law”
clarified for our times. This case presents a rare opportunity
for this Court to address disputed jurisdiction and statutory
interpretation issues for much-needed certainty in this area.
CONCLUSION
The petition for a writ of certiorari should be granted.
Respectfully Submitted,
Brian Wojtalewicz
Counsel of Record
139 No. Miles Street, Box 123
Appleton, MN 56208-0123
320-289-2363
Counsel for Petitioner
July, 2003
19
United States Court of Appeals
FOR THE EIGHTH CIRCUIT
No. 01-3888
No. 01-3891
Patrick M. Hays; United States *
ex rel. Patrick M. Hays, °
*
Plaintiffs - Appellees/ .
Cross Appellants, .
*
United States of America, * Appeals from the
* United States District
Intervenor on Appeal, * Court for the District
* of Minnesota.
V. 2
Luverne Hoffman, et al., .
*
Defendants - Appellants/ *
*
Cross Appellees.
Submitted: November 4, 2002
Filed: April 9, 2003
Before WOLLMAN, FAGG, and LOKEN, Circuit Judges.
LOKEN, Circuit Judge.
Patrick M. Hays was fired by St. Francis Health Services
of Morris, Inc. (SFHS), the day after Luverne Hoffman, the
* The Honorable James B. Loken became Chief Judge of the
United States Court of Appeals for the Eighth Circuit on Apmil
1, 2003.
A-}
chief executive officer of SFHS, learned that Hays had sent
whistleblower letters to the Minnesota Department of Human
Services (DHS), the agency that administers the Medicaid
program in Minnesota. Prompted by Hays's letters, DHS
conducted a field audit of the numerous nursing homes and
intermediate care facilities operated by SFHS. The audit
resulted in several downward adjustments to SFHS's payment
rates because of noncompliance with the Medicaid
reimbursement rules. Hays obtained copies of the audit
reports and commenced this action under the federal False
Claims Act (FCA), 31 U.S.C. §§ 3729-3733, asserting a claim
for retaliatory discharge, see 31 U.S.C. § 3730(h), and qui
tam! claims seeking damages and civil penalties for false or
fraudulent claims for Medicaid payments, see 31 U.S.C. §§
3729(a), 3730. Hays sued SFHS, eight of its operating
subsidiaries, Hoffman, and Kay Knock, another SFHS
corporate officer.
Defendants moved to dismiss the qui tam claims, arguing
the district court lacked subject matter jurisdiction by reason
of the FCA's public disclosure bar. See 31 U.S.C. §
3730(e)(4). The district court denied that motion, later
explaining its analysis during the jury instructions conference.
After trial, the jury found that defendants had submitted false
claims regarding eleven different items, but that these false
claims caused no measurable damages to the United States.
The district court then determined that defendants submitted a
total of 336 false claims and imposed the statutory minimum
$5,000 fine for each false claim resulting in a total fine of
$1,680,000. The jury also found that SFHS and Hoffman
' qui tam action is one in which a private plaintiff sues on
behalf of the government under a statute that awards part of
any penalty recovered to the plaintiff and the remainder to the
government.
A-2
unlawfully retaliated when they fired Hays and awarded him
$771,736 for lost wages and benefits on that claim. The court
entered judgment for $1,680,000 plus $771,736 plus interest
on the back pay component of the retaliation award plus costs
and attorney's fees.
Defendants appeal the qui_tam portion of the judgment,
raising numerous issues.” The United States intervened on
appeal to oppose defendants’ contention that the total penalty
violates the Excessive Fines Clause of the Eighth Amendment
and to express its views regarding the public disclosure bar
issues. We conclude that the DHS audit reports were relevant
public disclosures of the allegations underlying the qui tam
claims, and that Hays was an original source of only one of
those disclosures. Therefore, the district court lacked
jurisdiction over most of the qui tam claims. We also decline
to apply the district court's method of determining the number
of false claims to the remaining claims and substantially
reduce the total fine imposed.
I. The Public Disclosure Bar.
First enacted in 1863, the FCA provides cash bounties to
private citizens who successfully bring suit against those who
defraud the federal government. The public disclosure bar at
issue was part of the 1986 FCA amendments. See False
Claims Amendments Act of 1986, Pub. L. No. 99-562,100
* In response to a question at oral argument, defense counsel
suggested that the appeal includes the question whether
defendants are entitled to a new trial on the retaliation claims.
But that question was not included in their statement of the
issues, see F.R.A.P. 28(a)(5), nor was it argued in their briefs.
Accordingly, it was not preserved for appeal. That portion of
the district court's judgment is affirmed.
A-3
Stat. 3153, 3157 (1986). These extensive amendments were
intended to encourage private enforcement suits by legitimate
whistleblowers while barring suits by opportunistic qui tam
plaintiffs who base their claims on matters that have been
publicly disclosed by others. See generally United States ex
rel. Minn. Ass'n of Nurse Anesthetists v. Allina Health Sys.
Corp., 276 F.3d 1032,1040-43 (8th Cir.), cert. denied, 123 S.
Ct. 345 (2002); United States ex rel. Springfield Terminal Ry.
Co. v. Quinn, 14 F.3d 645, 649-51 (D.C. Cir.1994); United
States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v.
Prudential Ins. Co., 944 F.2d 1149,1152-54 (3d Cir.1991); S.
REP. No. 99-345, 99th Cong., 2nd Sess., reprinted in 1986
U.S.C.C.A.N. 5266.
The FCA's public disclosure bar, which Congress
expressly declared to be jurisdictional, is found in 31 U.S.C. §
3730(e)(4)(A):
No court shall have jurisdiction over an action under
this section based upon the public disclosure of
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, unless ... the
person bringing the action is an original source of the
information.
The operative words in this statute have prompted extensive
litigation and divergent judicial interpretations. "Virtually
every court of appeals . . . agrees on one thing, however: the
language of the statute is not so plain as to clearly describe
which cases Congress intended to bar." United States ex rel.
Findley v. FPC-Boron Employees’ Club, 105 F.3d 675,
681(D.C. Cir.), cert. denied, 522 U.S. 865 (1997). The circuits
A-4
also agree that the jurisdictional inquiry turns on four
questions:
(1) whether the alleged "public disclosure" [was made by
or in] one of the listed sources; (2) whether the alleged
disclosure has been made "public" within the meaning of
the FCA; (3) whether the relator's complaint is "based
upon" this "public disclosure"; and if so, (4) whether the
relator qualifies as an "original source" under §
3730(e)(4)(B).
United States ex rel. Holmes v. Consumer Ins. Group, 318
F.3d 1199,1203 (10th Cir. 2003) (en banc). Hays, as the party
invoking federal jurisdiction, bears the burden of establishing
the district court's jurisdiction under the FCA. See Kokkonen
v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994).
In this case, the second and third questions are beyond
dispute. Hays obtained copies of the DHS audit reports
through a phone call to the official in charge of the SFHS
audit. That was sufficient publication of the reports. See
United States ex rel. Fine v.. MK-Ferguson Co., 99 F.3d
1538, 1545 (10th Cir. 1996). Hays virtually concedes he
drew the factual allegations in his qui tam complaint from the
DHS audit reports. Indeed, his complaint restated the findings
of the audit and attached copies of the audit reports. A suit is
"based upon" a public disclosure if the allegations are
"derived from" or "supported by" the disclosure. Nurse
Anesthetists, 276 F.3d at 1045,1047. Thus, the fighting
jurisdictional issues in this case are whether the DHS audit
reports fall within the enumerated sources of public
disclosure, and whether Hays was an original source of some
or all of the allegations and transactions disclosed in those
audit reports.
A-5
A. The DHS Audit Reports Were Public Disclosures.
Section 3730(e)(4)(A) provides that the source of a public
disclosure must be a "criminal, civil, or administrative hearing
...a congressional, administrative, or Government Accounting
Office report, hearing, audit, or investigation, or ... the news
media." Only public disclosures from one of these
enumerated sources may give rise to the FCA jurisdictional
bar. See e.g., United States ex rel. Rabushka v. Crane Co., 40
F.3d 1509, 1513 n.2 (8th Cir. 1994), cert. denied, 515 U.S.
1142 (1995). Hays and the United States as intervenor argue
that the DHS audits and audit reports do not fall within the
category of "administrative . . . report [or] audit" because they
were not conducted and prepared by an agency of the federal
government. They rely upon United States ex rel. Dunleavy v.
County of Delaware, 123 F.3d 734, 745 (3d Cir.1997), where
the court reasoned that because the second use of the word
"administrative" in § 3730(e)(4)(A) is surrounded by
"congressional" and "Government Accounting Office,"
Congress must have meant to include only reports, audits, and
investigations of federal government agencies. The district
court noted but did not address this issue. We reject the Third
Circuit's textual approach and conclude that Medicaid
compliance audits and audit reports conducted and prepared
by the state agency authorized to administer this cooperative
federal/state program are public disclosures within the
meaning of § 3730(e)(4)(A).
In the first place, applying the Third Circuit's contrary
ruling to the federal Medicaid and Medicare programs would
produce anomalous results. When Congress amended the
FCA in 1986, it defined "claim" to include requests for money
made to grantees of the federal government, see 31 U.S.C. §
3729(c). The legislative history explained this was done to
clarify that false claims for FCA purposes include claims
A-6
submitted to state agencies under the Medicaid program and
other "State, local, or private programs funded in part by the
United States where there is significant Federal regulation and
involvement.” S. REP. No. 99-345 at 22,1986 U.S.C.C.A.N.
at 5287. It would be an inconsistent interpretation of the 1986
amendments to conclude that a fraudulent payment request
submitted’ to DHS is a false claim against the United States
for purposes of § 3729(c), but a DHS audit is not an
"administrative audit" for purposes of § 3730(e)(4)(A)
because DHS is not a federal agency.
In the second place, this subpart of § 3 73 O(e)(4)(A) has
not been rigidly limited to disclosures by federal agencies or
legislative bodies in other contexts. For example, under
Medicare, Congress has delegated many administrative tasks
to private insurance companies. In Nurse Anesthetists, 276
F.3d at 1043-44, we described an audit performed by an
insurer for the federal Department of Health and Human
Services (HHS) as an "administrative audit" that could trigger
the jurisdictional bar. Similarly, in United States ex_rel.
Schwedt v. Planning Research Corp., 39 F. Supp. 2d 28, 31-
33 (D.D.C.1999), the court held that public disclosures in an
audit report prepared for the federal government by an outside
accounting firm satisfied the jurisdictional bar. These cases
suggest that anti-fraud compliance audits conducted by state
or local agencies or private contractors should qualify as
public disclosures if they are prepared by or at the behest of
the relevant federal agency, or by or at the behest of a state
agency that administers the federal grant program under
"significant Federal regulation and involvement."
Construing the term" administrative . . . report [or] audit"
in this fashion, we conclude that the DHS audits here in
question, like the private Medicare audits at issue in Schwedt,
clearly qualify. Medicaid, codified at 42 U.S.C. §§ 1396 et
A-7
seq., is a cooperative federal-state program through which the
federal government provides financial assistance to assist
States in furnishing health care to the poor. See Wilder _v.
Virginia Hosp. Ass'n, 496 U.S. 498, 502 (1990). State
governments administer Medicaid, but they function under
detailed federal statutory and regulatory contio!s in exchange
for -fifty percent federal financing. Participating States must
develop a state plan for medical assistance, develop cost-
based payment rates to reimburse medical providers for
services rendered to eligible recipients, and designate a single
agency to evaluate cost reports submitted by private vendors
of health services and reimburse vendors for allowed
expenses. See 42 U.S.C. § 1396a(a); 42 C.F.R. §
431.10(b)(1). The designated agency, here DHS, must audit
records that support cost-based payments to vendors. 42
C.F.R. § 447.202. And it must adopt a Fraud Detection and
Investigation Program meeting strict federal standards. The
agency must conduct a preliminary investigation whenever it
receives a complaint of Medicaid fraud or abuse "from any
source.” It must request a full investigation by the state's
Medicaid Frauc Control Unit "[i]f the findings of [the]
preliminary investigation give [LHS] reason to believe that an
incident of fraud or abuse has occurred in the Medicaid
program.” 42 C.F.R. §§ 455.14, 455.15(a); see also MINN
STAT. § 256B.04, subd.10. And it must report the findings of
those investigations to HHS, 42 C.F.R. § 455.17(b), setting
the stage for either federal or state criminal or civil
enforcement actions. See MINN RULES § 9549.0041,
subp.15.C.
Viewed from this perspective, the Third Circuit's decision
in Dunleavy is readily distinguishable on the facts. The
alleged public disclosure in that case was a county Grantee
Performance Report submitted to the Department of Housing
and Urban Development by the unit of local government
A-8
accused o; violating the FCA. As the Third Circuit noted,
"those reports have been compiled and produced by a party
whose principal motivation. (assuming the truth of the fraud
claim) is the elimination of the paper trail of fraud." 123 F.3 d
at 745. Moreover, under the federal grant program at issue in
Dunleavy -- the Housing and Community Development Act
of 1974 -- grantee compliance audits are conducted by federal
agencies, HUD and the General Accounting Office. See 42
U.S.C. § 5304(e), (f). Congress did not delegate that function
to a state agency, <3 is the case with Medicaid. Thus, while
we do not disagree with the Third Circuit's decision in
Dunleavy, we conclude the court ruled more broadly than
necessary in stating that a state agency disclosure may never
be an "administrative ... report [or] audit" for purposes of §
3730(e)(4)(A).
B. Hays Was Not an "Original Source" of Most Claims.
Though we conclude all of Hays's false claim allegations
were publicly disclosed in the DHS audit reports, his FCA qui
tam claims are not barred by § 3730(e)(4)(A) to the extent he
is an original source of the publicly disclosed information. In
the 1986 amendments, Congress defined "original source" as
"an individual who has direct and independent knowledge of
the information on which the allegations are based and has
voluntarily provided the information to the Government
before filing an action...based on the information.” §
3730(e)(4)(B). Thus, the original source doctrine limits the
rewards of a qui tam action to one who has direct knowledge
of the alleged false claims that is independent of the public
disclosure, and who has functioned as a true whistleblower by
volunteering his direct and independent knowledge to the
government before filing suit. "A whistleblower sounds the
alarm; he does not echo it." Hagood v. Sonoma County Water
A-9
Agency, 81 F.3d 1465, 1475 (9th Cir.) (quotation omitted),
cert. denied, 519 U.S. 865 (1996).’
Hays argues that he was an original source of all the
information in the DHS audit reports because his
whistleblower letters were the reason DHS conducted its field
audit. The district court agreed, commenting: :
If a man is able to discern a small amount of fraud and
there is in fact a seething snake pit ... and he is the one
who tips off the government to it, the fact that it comes
out in the investigation ought not to be a penalty against
the person who made the [whistleblower] call.
On appeal, defendants and the United States as intervenor
argue that this ruling is contrary to the plain language of §
3730(e)(4)(B), which requires that an original source have
"direct and independent knowledge of the information on
which the allegations are based." We agree. Indeed, we
squarely rejected this "catalyst" theory in United States ex rel.
Barth v. Ridgedale Elec., Inc., 44 F.3d 699, 703 (8th Cir.
1995), when we stated that "direct" knowledge is knowledge
"marked by the absence of an intervening agency." Other
circuits agree. See United States ex rel. Merena v. Smithkline
Beecham Corp., 205 F.3d 97,102 (3d Cir. 2000) ("each claim
in a multiclaim [qui tam] complaint must be treated as if it
stood alone"). As the Supreme Court recently held in another
context, a catalyst theory may not be adopted for policy
reasons if it is contrary to the plain meaning of the governing
3 Hays bases his claim of voluntary disclosure on his
whistleblower letters to DHS, a state agency. In our view, that
is further support for our conclusion that the resulting DHS
audit reports were public disclosures for purposes of §
3730(e)(4).
A-10
statute. Buckhannon Board & Care Home, Inc. v. W. Va.
Dept. of Health & Human Resources, 532 U.S. 598, 605-10
(2001).
Thus, we must resolve the original source issue on a
claim-by-claim basis. The jury found that defendants
committed eleven types of false claims. On appeal,
defendants concede that Hays was the original source of one
allegation that was then confirmed by the DHS audit --
defendants falsely claimed that apples given as gifts to SFHS
employees were a Medicaid-reimbursable food expense.
However, Hays has failed to establish that he was an original
source as to the other ten claims.
Most of the other claims were not volunteered by Hays in
his whistleblower letters to DHS; he cannot be an original
source of those claims under § 3730 (e) (4)(B). As to the
other claims arguably referred to in his letters, Hays argues
that he was a "close observer" of the information provided
because he obtained that information from Thomas Conner,
SFHS's former finance director who was himself unwilling to
come forward as a whistleblower. But such knowledge is
neither direct nor independent. "[A] person who obtains
secondhand information from an individual who has direct
knowledge of the alleged fraud does not himself possess
direct knowledge and therefore is not an original source."
Barth. 44 F.3d at 703. "[T]o be independent, the relator's
knowledge must not be derivative of the information of
others, even if those others may qualify as original sources."
United States ex rel. Fine v. Advanced Sciences, Inc., 99 F.3d
1000, 1007 (10th Cir.1996).
We conclude that Hays was the original source only of the
apples allegation. Therefore, applying § 3730(e)(4)(A), the
district court lacked subject matter jurisdiction over the
A-ll
remaining types of false claims found by the jury. That
portion of the $1,680,000 total fine attributable to those
claims must be vacated. In addition, as the jury verdict
absolved Kay Knock of any liability for the claim concerning
apples, the complaint against defendant Knock must be
dismissed.
IJ. What About the Apples?
In addition to challenging the district court's subject
matter jurisdiction, SFHS and Hoffman appeal the adverse
judgment on the apples claim, raising both liability and
penalty issues.
A. Defendants level a three-pronged attack on the jury
verdict that SFHS and Hoffman violated the FCA by
claiming employee gift apples as a reimbursable
Medicaid expense. First, although the DHS audit
reports established that improper apple claims were
made,’ defendants argue that Hays failed to prove that
any person knowingly submitted false claims. A
person acts knowingly for purposes of the FCA if he
has actual knowledge of the false information, or acts
in deliberate ignorance or reckless disregard of the
information's truth or falsity. 31 U.S.C. § 3729(b). But
merely erroneous OF negligent claims are not
actionable under the FCA. See United States ex rel.
Quirk _v. Madonna Towers, Inc., 278 F.3d 765, 767
(8th Cir. 2002).
4 The DHS regulations expressly include as non-allowable
costs for nursing and intermediate care facilities "activities
not related to resident care such as flowers or gifts for
employees.” MINN RULES § § 9549.00361, 9553.0036F
A-12
After careful review of the trial record, we conclude there
was sufficient evidence on this issue. Viewed most favorably
to the jury's verdict, the evidence established that (i) Hoffman
and the SFHS internal accountants knew employee gifts were
not reimbursable under the applicable Medicaid rules; (ii) gift
apple invoices for a number of years were entered on SFHS
general ledger accounts as "resident food"; and (iii) Hays and
at least one other employee asked whether these purchases
should instead be entered as employee gifts and were told by
Hoffman to continue entering them as food. Defendants
countered this showing with evidence that employees who
prepared the Medicaid cost reports submitted to DHS were
expected to exclude any non-reimbursable items entered in
multi-purpose general ledger accounts such as the food
account. But there was also evidence this was a haphazard,
unsupervised process, permitting the jury to infer that, when
Hoffman told employees to enter gift apples in the general
ledger as resident food, he knew this would result in Medicaid
cost reports that improperly included this item as a
reimbursable food expense.”
> The knowing violation issue in this case is very close. On
appeal, Hays relies primarily on his proof that SFHS
personnel initially entered the apples as resident food in the
facilities’ general ledger accounts. But standing alone, that
was clearly insufficient. Food purchased to feed residents is a
reimbursable expense, while food purchased for other uses,
such as employee gifts, is not. Hays's expert testified that, to
properly exclude non-resident food, a facility "either can put
it in that raw food column, and then adjust it out, or . . . put it
in a nonreimbursable area.” Thus, it required proof of a
knowing failure to "adjust it out,” or reckless disregard of the
need to do so, to prove a knowing violation.
A-13
Second, defendants argue the district court erred in
refusing to instruct that materiality is an element of an FCA
violation. We recently confirmed that a showing of
materiality is implicit in the FCA, though we did not define
"the precise contours" of this requirement. United States ex
rel. Costner v. United States 317 F.3d 883, 887 (8th Cir.
2003). In their reply brief, defendants concede that the false
claims were material if they "were capable of influencing the
government's payment decision." The district court's
instructions included that concept in a - definition of
materiality. Moreover, the record is clear that the reporting of
employee gift apples as a reimbursable food expense was
capable of influencing, and did in fact influence, the
government's Medicaid reimbursement decisions. Thus, the
instructions "taken as a whole and viewed in light of the
evidence and the applicable law, fairly and adequately
submitted the issues in the case to the jury.” Gray v. Bucknell,
86 F.3d 1472, 1485 (8th Cir.1996).
Third, defendants argue they were prejudiced by a number
of the district court's evidentiary rulings. After carefully
reviewing the record, we find no clear and prejudicial abuse
of discretion. See Anheuser-Busch, Inc. v. John Labatt, Ltd.,
89 F.3d 1339, 1345 (8th Cir.1996) (standard of review), cert.
denied, 519 U.S. 1109 (1997). Limited to the apples claim,
the evidentiary contentions are without merit. B. Turning to
more difficult issues, defendants argue that Hays failed to
introduce evidence supporting the district court's conclusion
that 336 false claims were submitted, and that the $1,680,000
penalty violates the Excessive Fines Clause of the Eighth
Amendment. We agree with the first contention. ‘Therefore,
we need not decide the second, though we agree with the
Ninth Circuit that FCA penalties are punitive in nature and
therefore fall within the reach of the Excessive Fines Clause.
A-14
See United States v. Mackby, 261 F.3d 821, 829-31 (9th Cir.
2001).
The FCA. provides that any person who knowingly makes
a false claim (or causes one to be made) "is lable to the
United States Government for a civil penalty of not less than
$5,000 and not more than $10,000." 31 U.S.C. § 3729(a). In
determining the number of false claims for which this
statutory penalty should be assessed in a particular case, the
Supreme Court has cautioned that "we are actually construing
the provisions of a criminal statute. Such provisions must be
carefully restricted, not only to their literal terms but to the
evident purpose of Congress in using those terms." United
States v. Bornstein, 423 U.S. 303, 313 n.8 (1976) (quotation
omitted). In Bornstein, a subcontractor made three shipments
of falsely marked electron tubes to a general contractor who
incorporated the tubes into radio kits billed to the government
in thirty-five invoices. Rejecting the government's claim that
the subcontractor committed thirty-five FCA violations, the
Court held "that the focus in each case [must] be upon the
specific conduct of the person from whom the Government
seeks to collect the statutory forfeitures" and concluded that
the subcontractor’s three shipments constituted three
violations. 423 U.S. at 312-13.
In this case, though the inquiry is fact-intensive, the
district court treated the number of false claims as a question
of law, which means we review its conclusion de novo. The
court made its determination based upon the tnal record,
which was focused on other issues and is woefully inadequate
for this purpose. Hays relied primarily on the testimony of
Robert Rau, a former DHS auditor who had no firsthand
knowledge of how SFHS facilities prepared and submitted
requests for Medicaid reimbursement. Based upon his review
of the DHS audit reports, Rau opined that the treatment of
A-15
employee gift apples as a reimbursable food expense resulted
in two hundred false claims for FCA purposes. He arrived at
that number by concluding that the apples expense impacted
twenty-seven annual Medicaid cost reports, and by assuming
that each SFHS facility submitted monthly requests for
payment to DHS using "residential service invoice” (RSI)
forms. But the trial record contained no SFHS cost reports or
RSI forms. Rau admitted that the RSI form is prepared on a
per-resident basis, not a per-facility basis. No witness
explained the manner and frequency in which SFHS facilities
submitted payment requests to DHS in the years in question.
And Hays failed to include in the record on appeal the exhibit
showing Rau's calculations. On this record, Rau's opinion as
to the number of false claims was simply an unsubstantiated
guess.
In addition, we have a more fundamental problem with
the district court's decision to accept Rau's opinion as to the
number of false claims. Bornstein instructs us to focus on "the
specific conduct of the person from whom the Government
seeks to collect the statutory forfeiture." 423 U.S. at 313.
Here, the misconduct was to purchase approximately $6,000
worth of apples, give them to employees during the holiday
season, and then falsely claim Medicaid reimbursement for
this expense. Medicaid reimbursement is a rate-based regime.
A facility's historical costs are recorded on an annual cost
report. DHS then uses that report to calculate a payment rate
or rates which are applied to all covered services over the
following year (disregarding necessary time lags in the
complex system). See 42 U.S.C. § 1396a(a)(13)(A); MINN.
RULES chs. 9549 (nursing facilities), 9553 (intermediate care
facilities). Under this system, a one-time expense for a multi-
facility provider may be reimbursed over hundreds or many
thousands of claims for reimbursement of services provided
to individual residents. Under Rau's analysis, this protracted
A-16
’
method of government reimbursement produces a $1,000,000
penalty (200 claims times $5,000 per claim) that bears no
rational relationship to the false claim misconduct -- seeking
improper reimbursement for spending $6,000 to purchase
apples. Thus, we reject layman Rau's approach to deciding a
legal question laced with Excessive Fines Clause
implications. "It is [the] conduct of the medical practitioner,
not the disposition of the claims by the government, that
creates FCA liability." United States v. Krizek, 111 F.3d 934,
940 (D.C. Cir.1997) (rejecting a government number-of-
claims theory that produced "an astronomical $81 million
worth of [penalties] for alleged actual damages of $245,392").
There remains the question of how we should dispose of the
number-of-claims issue. The district court's determination of
336 false claims obviously cannot be upheld because ten of
the eleven categories of claims were beyond its jurisdiction.
As we have explained, Rau's opinion that there were two
hundred false claims relating to apples is unsupportable as a
matter of law. In reviewing the documentary portion of the
record on appeal,” we noted DHS audit reports showing that
employee gift apples were claimed by eight SFHS facilities
and subsequently disallowed by DHS. The decision to falsely
and knowingly claim those apples as a reimbursable expense
for each facility was clearly eight false claims for FCA
purposes. Therefore, taking into account the district court's
judgment that defendants engaged in serious misconduct, we
will impose the maximum $10,000 penalty per violation and
reduce the total FCA penalty to $80,000.
The judgment of the district court is reversed in part, and
the case is remanded with directions to enter a modified final
° The record on appeal apparently omits many trial exhibits,
but any blame for that must fall on Hays, who has the burden
of proof on this issue.
A-17
judgment in which (i) the penal set forth in paragraph 1 of the
court's order for judgment dated August 20, 2001 1s changed
from $1,680,000 to $80,000, and (ii) plaintiff s claims against
defendant Kay Knock are dismissed with prejudice.
Appellants' motion to strike is denied as moot.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS,
EIGHTH CIRCUIT.
A-18
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
97-CV-1656 (JMR/FLN)
Patrick M. Hays, and United )
States of America ex rel. )
Patrick M. Hays )
)
v. - ) ORDER
)
Luverne Hoffman; Kay Knock; )
St. Francis Health Services )
of Morris, Inc.; Villa of )
St. Francis Nursing Home, )
Inc.; Browns Valley Health )
Center, Inc.; Franciscan )
Health Center, Inc.; Leisure )
Hills Health Center, Inc )
Prairie Community Services, )
Inc.; Prairie Community )
Waivered Services, Inc.; )
Prairieland Management )
Services, Inc.; and St. Louis )
Riverview Homes, Inc. )
After a trial by jury, defendants were found to have
submitted false claims in an effort to defraud the United
States.’ Although the jury determined the factual question of
whether false claims were submitted, it did not determine the
legal question of how many false claims were involved.? That
' The jury rendered its verdict on December 5, 2000.
* The-False Claims Act ("FCA"), 31 U.S.C. 3729-3733,
mandates a fine between $5,000 and $10,000 for each false
B-1
question was referred to the Honorable Franklin L. Noel,
United States Chief Magistrate Judge, who issued a Report
and Recommendation on April 26, 2001, finding that
defendants submitted 336 false claims. Defendants timely
filed their objection to the Report, pursuant to Local Rule
72.1(c)(2).
The Court has made a de novo review of the record
herein, and finds the Magistrate correctly applied prevailing
law to the facts of this case. Accordingly, the Court adopts the
Magistrate's calculation of the number of false claims.
By doing so, a concern of constitutional dimension is
raised: whether a fine ranging from $1.68 million to $3.36
million violates the Excessive Fines Clause of the Eighth
Amendment to the United States Constitution.’ Defendants,
understandably, claim that it does. Plaintiff, equally
understandably, is confident that even the maximum fine
passes constitutional muster.
The FCA requires the Court to impose a fine ranging
between $5,000 and $10,000 for each false claim. 31 U.S.C. §
3729(a). Imposition of the fine is not discretionary. See
"United States v. Advance Tool Co., 902 F. Supp. 1011, 1018
(W.D. Mo. 1995). However, constitutional concerns trump
even statutory mandates, and this Court must independently
ensure that any fine imposed comports with the demands of
the Eighth Amendment. Id.; see also United States ex _rel.
claim, making the precise number of false claims involved in
this case a necessary question.
3 "Excessive bail shall not be required, nor excessive fines
imposed, nor cruel and unusual punishments inflicted." US.
Const. amend. VIII.
B-2
Smith v. Gilbert Realty Co., 840 F. Supp. 71 (E.D. Mich.
1993).
As an initial matter, the Court notes it is not at all certain
that the Excessive Fines Clause even applies. The history of
the Clause reveals it "was intended to limit only those fines
directly imposed by, and payable to, the | government.”
Browning-Ferris Industries v. Kelco Disposal, Inc., 492 U. S.
257, 268 (1989). This comports with the Eighth
Amendment's overall purpose: to limit "the steps a
government may take-against an individual, whether it be
keeping him in prison, imposing excessive monetary
sanctions, or using cruel and unusual punishments.” Id. at
275.
Certainly the Excessive Fines Clause protects individuals
against the government's prosecutorial power; but whether its
protection extends beyond individuals to corporations, and
whether it extends beyond direct government action to private
qui tam actions, is less certain. Id, at 276 n.21 (leaving open
the question whether the Excessive Fines Clause applies to
qui tam actions); Id. at 283-85 (O'Connor, J., concurring in
part and dissenting in part) (addressing the open question of
whether the Eighth Amendment applies to corporations).
Here, the Court faces a qui tam action brought by an
individual on behalf o f the government, against a variety of
individual and corporate defendants. The government, after
being given the option, declined to intervene, and allowed the
entire case to be assumed and tried by the individual plaintiff.
Whether the Excessive Fines Clause actually applies to any
fine imposed under these circumstances, is murky at best. The
Court need not resolve the scope of the Eighth Amendment's
reach, however, for whether or not the Excessive Fines
B-3
Clause applies, the presumptive fine is not excessive as a
matter of law.
A fine is excessive under the Constitution if two
conditions are met: (1) the payment to the government
constitutes punishment for an offense; and (2) the payment 1S
grossly disproportionate to the gravity of that offense. United
States v. Bajakajian, 524 U.S. 321, 327-27, 334 (1948). Fines
imposed under the FCA are recognized, at least in part, to be
punitive. United States v. Bornstein, 423 U.S. 303, 309 n.5
(1976) ; see also United States v. Mackby, 243 F.3d 1159 cg"
Cir. 2001). The Court thus focuses its inquiry on the
second prong -- whether the presumptive fine here would be
grossly disproportionate to defendants offense.
"The touchstone of the constitutional inquiry under the
Excessive Fines Clause is the principle of proportionality:
The amount of the [fine] must bear some relationship to the
gravity of the offense that it is designed to punish.”
Bajakajian, 524 U.S. at 334. The jury here weighed the
evidence and found defendants had engaged in 11 separate
schemes to defraud the government, each involving multiple
false claims. The jury further decided defendants retaliated
against plaintiff by firing him for reporting the intended
fraudulent activities. Although the jury found the schemes did
not result in any actual loss to the government, it awarded
plaintiff $771,736 for lost income resulting from his
retaliatory discharge.*
Defendants now contend a fine exceeding one million
dollars, in a case where the government has suffered no loss,
‘ The jury awarded plaintiff $171,736 in past lost wages and
benefits, and $428,264 in future lost wages and benefits.
Under the FCA, plaintiff's back: pay damages are doubled. 31
U.S.C. 3730(h).
B-4
:
:
i
>
is grossly disproportionate to the offense. Defendants are
wrong. Their argument ignores the reality of the harm caused
to plaintiff and the attempted harm to the United States. It
also ignores the fact that monetary harm would have
redounded to the government but for plaintiff's
whistleblowing, which alerted government auditors to
defendants' activities.
The jury determined that defendants engaged in a
deliberate scheme, broad in both scope and duration, to pilfer
from the government fist for their own benefit. They
attempted to conceal their illegal billing practices by
discharging plaintiff when he reported their financial
improprieties. Defendants’ illegal conduct forced the
government to engage in a lengthy audit process to reconcile
the various irregularities, and forced plaintiff to pursue legal
recourse for his retaliatory discharge. The jury awarded
plaintiff substantial personal damages as recompense for the
harm caused by defendants as they pursued their scheme to
defraud the government. The jury's verdict makes clear that
defendants’ conduct resulted in harm both real and substantial.
Admittedly, the bulk of the injury was suffered by plaintiff,
not the government. But the fact that there was no actual
dollar loss to the government does not preclude a fine being
imposed on defendants. The FCA does not require monetary
loss as a prerequisite to the imposition of a fine. See U.S. ex
rel. Haaood v. Sonoma County Water Agency, 929 F.2d
1416, 1421 (9thCir. 1991). Defendants' situation is
equivalent to a bank robber being apprehended before
departing the bank -- while there is no dollar loss, the full
force of the criminal law applies, and a fine can
constitutionally be imposed as part of the penalty. The Court
cannot find the mandated fine disproportioriate to the gravity
of defendants’ offense. Defendants’ wrong consisted of
submitting false claims, and they did so repeatedly. The fact
B-5
that the false claims did not succeed does not ameliorate the
offense.
Defendants will be assessed $5,000 per false claim,
resulting in a total fine of $1,680,000.° The Court has
assessed the least amount allowed by statute in recognition of
the de minimus loss to the government, which was deprived
of time, but not money, as a result of defendants’ fraud. The
Court awards to plaintiff, as the original source o f the
information and the prime mover of the lawsuit, 30 percent of
that fine. 31 U.S.C. 5 3730(d)(2).
Accordingly, IT IS ORDERED that:
1. Pursuant to 31 U.S.C. § 3729(a) , defendantsare fined
$1, 680, 000, of which 30% shall be paid to piaintiff
Patrick Hays. Defendants are jointly and severally.
liable for that amount.°
5 The Court notes that the fine assessed is a multiplier of 2.2
times the damages the jury found were suffered by plaintiff.
As the Supreme Court has noted, "We need not, and indeed
we cannot, draw a mathematical bright line between the
constitutionally acceptable and the constitutionally
unacceptable that would fit every case. We can say, however,
that general concerns of reasonableness. . .properly enter into
the constitutional calculus." Pacific Mutual-Life Ins, Co. v.
Haslip 499 U.S. 1, 18 (1991) (quoted in BMW _v. Gore, 517
U.S. 559, 582-83 (1996)). The Court considers a fine
amounting, essentially, to double damages to be well within
the bounds of reasonableness and proportionality.
6 A defendant's ability to pay a“fine is a factor under the
Excessive Fines Clause. United States v. Lippert, 148 F.3d
974, 978 ( 8th Cir. 1998). None of the defendants, corporate
B-6
2. Pursuant to 31 U.S.C § 3730(h), defendants shall pay
plaintiff Patrick Hays $771,736, plus interest on the
back pay amount.
3. Plaintiff is entitled to costs and reasonable attorney's
fees in an amount to be determined by the Magistrate
q Judge.
LET JUDGMENT BE ENTERED .ACCORDINGLY.
Dated: August 20, 2001
s/JAMES M. ROSENBAUM
United States District Judge
or individual, contend they are unable to pay, merely that they
are unwilling to do so.
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
97-CV-1656 (JMR/FLN)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Patrick M. Hays;
v. VERDICT
Luverne Hoffman; Kay Knock;
St. Francis Health Services
of Morris, Inc.; Villa of
St. Francis Nursing Home
Inc.; Browns Valley Health
Center, Inc.; Franciscan
Health Center, Inc.; Leisure
Hills Health Center, Inc.;
Prairie Community Services,
Inc.; Prairie Community
Waivered Services, Inc.;
Prairieland Management
Services, Inc.; and St. Louis
Riverview Homes, Inc.
We, the jury, answer the questions submitted to us as
follows:
1. Claims concerning apples:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X Yes __ No
(a) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
C-]
X Yes ___No
(a) If you answered "yes" to either of the two questions
above, what were the measurable damages sustained
by the United States?
$_ O
————
_ Claims concerning van swap by St. Louis Riverview
Homes, Inc.:
(a) Did defendant Kay Knock violate the False Claims
Act?
__ Yes XNo
(b) Did defendant Luverne Hoffman violate the False
Claims Act? |
_ Yes XNo
(c) Did defendant Kay Knock conspire to violate the
False Claims Act?
_ ee ae
(d) Did defendant Luverne Hoffman conspire to violate
the False Claims Act?
Ve fe
(e) Did defendant St.. Louis Riverview Homes, Inc.
violate the False Claims Act?
_ Yes {NO
(f) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
Yes _XNo
(g) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$
. Claims concerning condominium timeshare:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X Yes___No
(b) Did defendant Kay Knock violate the False Claims
Act?
a, me 6.
(c) Did defendant Luverne Hoffman conspire to violate
the False Claims Act?
X_Yes___No
(d) Did defendant Kay Knock conspire to violate the
False Claims Act?
__Yes _XNo
(e) Did defendant St. Louis Riverview Homes, Inc.
violate the False Claims Act?
__ Yes XNo
(f) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
X_Yes__No
(g) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
C-3
$_@
_ Claims concerning company vehicle use by defendant
Luverne Hoffman:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X_Yes___No
(b) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?’
X_Yes___No
(c) If you answered "yes" t o any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$_@
ee
_ Claims concerning St. Louis Riverview Homes'
management fees:
(a) Did defendant Kay Knock violate the False Claims
Act?
X_Yes___No
(b) Did defendant Luverne Hoffman violate the. False
Claims Act?
X_Yes.___No
(c) Did defendant Kay Knock conspire to violate the
False Claims Act?
__Yes XNo
is
Fs
' 2
ie
4
by
pes
t
d
(d) Did defendant Luverne Hoffman conspire to violate
the False Claims Act?
__ Yes XNo
(e) Did defendant St. Louis Riverview Homes, Inc.
violate the False Claims Act?
xX Yes.__ No
(f) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
X Yes__No
(g) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$_@
. Claims concerning Specialized Transportation
charges:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X_Yes___No
(b) Did defendant Kay Knock violate the False Claims
Act?
X_Yes___No
(c) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
X_Yes___No
(d) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
C-5
$_@
. Claims concerning Specialized Transportation's use of
a Prairie Community Services Lakewood Home van:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X_Yes___No
(b) Did defendant Kay Knock violate the False Claims
Act?
X Yes_.No
(c) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
X_Yes___No
(d) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$ _ @
ee
_ Claims concerning dietary consulting:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X_Yes___No
(b) Did defendant Kay Knock violate the False Claims
Act?
X_Yes___No
———
C-6
51 aR RE IO
SANGO MLNS IR LIL GAS RELIED SELLS
10.
(c) Did defendant St. Francis Health Services of Mormis,
Inc., or any of its subsidiaries, violate the False Claims
Act?
X_Yes__No
(d) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$_@
Claims concerning Prairie Community Service's
maintenance workers:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X_Yes___No
(b) Did defendant Kay Knock violated the False Claims
Act?
X_Yes___No
(c) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
X_Yes___No
(d) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$_@
Claims concerning Everstrong Construction Co. fire
payment:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
C-7
X_Yes___No
(b) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act? 3
X_Yes___No
(c) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$_@
11. Claims concerning the Steiger payment:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X_Yes___No
(b) Did defendant Luverne Hoffman conspire to violate
the False Claims Act?
__Yes _XNo
(c) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
__Yes XNo
(d) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$ @O
ee
12. Claims concerning grant money and the Hoffman
Home van:
ankemnrn marinate:
(a) Did defendant Luverne Hoffman violate the False
Claims Act?
X_Yes__No
(b) Did defendant St. Francis Health Services of Morris,
Inc., or any of its subsidiaries, violate the False Claims
Act?
X_Yes___No
(c) If you answered "yes" to any of the questions above,
what were the measurable damages, if any, sustained
by the United States?
$_@
.Did defendant Luverne Hoffman retaliate against
plaintiff Patrick Hays in violation of the federal False
Claims Act?
X_Yes___No
. Did defendant Villa of St. Francis Nursing Home, Inc.
retaliate against plaintiff Patrick Hays in violation of
the federal False Claims Act?
__ Yes XNo
. Did defendant St. Francis Health Services of Morris,
Inc. retaliate against plaintiff Patrick Hays in violation
of the federal False Claims Act?
X_Yes___No
. Did defendant. Villa of St. Francis Nursing Home, Inc.
retaliate against plaintiff Patrick Hays in violation of
the Minnesota Whistleblower law?
¥ae Are
C-9
17. Did defendant St. Francis Health Services of Morris,
Inc. retaliate against plaintiff Patrick Hays in violation
of the Minnesota Whistleblower law?
X_Yes___ No
Note: Answer the following question about damages to
Patrick Hays only if you answered "yes" to any of the
retaliation questions 13 through 17 above.
18. What amount of damages do you find that plaintiff
Patrick Hays sustained?
(a) Lost income and benefits to date: $171,736.00
(b) Loss of future income and benefits: $428 264.00
(c) Emotional distress: $ @
Dated: December 5, 2000
s/Foreperson
fees
&
-
’
$
BI ABT LIEW I AI IAN HET
THE MORRIS TRIBUNE
Thursday, February 13, 1997
Some operating expenses questioned
SFHS plans to appeal audit findings
Apparently it all depends on your perspective whether you
consider the results of a recent audit of St. Francis Health
Services significant.
In one scenario, the Morris-based manager of a number of
nursing homes and group homes around the state will have to
reduce its cost of doing business by hundreds of thousand of
dollars. In another scenario, only some relatively minor book-
keeping adjustments will be made.
The state's Department of Human Services conducted
what one auditor characterized as a random field audit last
summer and fall of St. Francis Health Services and the more
than 20 facilities it manages. Locally, the best known facility
is the Villa of St. Francis nursing home.
The adjustments to the business costs claimed by SFHS
fall into three broad categories: reducing the charges made by
SFHS's for-profit businesses to its nonprofits; reallocation of
salaries and labor costs; and disallowing costs not legitimately
related to doing business.
Among other things, the DHS field auditor suggested a
pattern of St. Francis’ for-profit businesses over-charging the
nonprofit entities for services performed. In addition, a
substantial amount of expenses claimed to be necessary for
operating the facilities were disallowed by the auditor.
The DHS conducts "desk audits” annually, which are done
D-1
at DHS offices in St. Paul using cost information submitted
by nonprofit nursing facilities throughout the state. The
facilities’ rates, which are determined by the-DHS, usually are
set based on the information provided, On occasion, DHS
personnel will also conduct a "field audit" by visiting
facilities and going over the books at the site. That's what
happened with St. Francis Health Services.
The DHS field audit which became public a little over two
weeks ago was for the fiscal years ending September 30, 1994
and September 30, 1995. The auditor concluded that SFHS's
for-profit subsidiaries over-charged its nonprofits by nearly
$200,000 during that time.
According to Minnesota law, if a for-profit business
provides services for related nonprofits, the for-profit
business must demonstrate it does at least 50 percent of its
business sales with unrelated businesses. If not, the for-profits
cannot charge the related nonprofits more than the actual cost
of the service.
SFHS's for-profit subsidiaries did just that, however,
according to the audit.
Prairie Land Management Services (PLM) is a for-profit
subsidiary of SFHS. Among its businesses are laundry and
housekeeping services; in fact, the laundry service is located
in the basement of the Villa. From October, 1993 to October,
1995, the auditor determined that about two-thirds of its
business was done with the Villa, charging 30-32 cents per
pound for laundry when the actual cost was only about 22
cents per pound. The result was an overcharge of about
$115,000, according to the auditor. =
The auditor also stated that PLM's housekeeping service
D-2
Same iL
RP kode Sect ta
KEENE RON SIAN F
SYST
Do ances Soe tained
ARLES
Re a FREEING $.
ore Seats
mini Saving
had over-charged the Villa by about $57,000 during the two-
year period.
At the hear of the auditor's conclusion regarding the
laundry service was his determination that revenue from
PLM's two Laundromats and car wash should not be included
in total revenue to determine the 50-percent rule because they
are "dissimilar operations." If the revenue from those
operations are included, PLM would meet the 50 percent rule.
St. Francis Health Services’ CEO Luverne Hoffman
disputed the auditor's disallowance of the laundromats'
revenue. :
"If you're operating a business, laundry income is laundry
income," he maintained. "That's the issue. We've been doing
it for years."
Hoffman backed up his statement by saying that an audit
done two years ago found no problem with including the
laundromats' income in determining the 50 percent rule.
In fact, Hoffman seemed surprised that anyone would be
curious about the results of the recent audit, saying that DHS
audits of nursing homes are routine.
"Really, it's nothing," he commented. He also noted that
all the issues raised by the current auditor are subject to
appeal, which SFHS intends to do. In fact, Hoffman said the
auditor's superiors have assured him that SFHS would win at
least some of the appeals. He added that some issues that
SFHS appealed at the last audit still have not been resolved.
One appeal from the most recent audit no doubt will
involve a finding made about dieticians’ hours.
D-3
According to the audit, during the October, 1993 to
October, 1995 period, Home Care Service Options provided
dietary consulting to several St. Francis-owned facilities,
including the Villa, Prairie Community Services and Prairie
Community Waivered Services. In fact, based on sales, the
auditor estimated_that Home Care Services Options’ dietician
program did between 70-80 percent of its business with
related parties, yet charged them more than the actual cost of
the service.
In addition, the auditor found large discrepancies between
the billed hours and the actual payroll hours. The audit
indicates that in one month alone, January 1994, Home Care
Service Options billed related facilities for 153 hours, yet the
payroll reflected only 47 hours worked.
All together, more than $11,000 of costs claimed by the
nonprofits for dietary consulting were disallowed for the two-
year period. Regarding the apparent over-billing, the auditor
commented that an "other finding" may be made regarding
the billing for hours in excess of the actual hours worked.
Hoffman, who said he had not gone ‘through the entire
audit yet, appeared to be puzzled about the finding about the
dietary consulting. He acknowledged that dietary consulting
services are provided, but not through Home Care Service
Options. He added that dieticians’ fees are a flat fee billed
monthly.
In addition to the supposed over-charges, nearly $170,000
in other operating costs claimed by St. Francis Health Center
between October, 1993 and October, 1995 were disallowed
by the DHS auditors.
D-4
2 el
A partial list of those disallowed costs either indicates the
zeal of the auditors, the attempt of SFHS to recapture some
questionable expenses, or both.
Among the expenses disallowed or reduced:
$24,500 in rent paid to the Villa of St. Francis.
According to the auditor, when SFHS offices were
located in the Villa, that area was already included in
the Villa's property-related payment rate. The auditor
concluded that allowing SFHS to claim the rent as an
operating expense would result in a duplication of
payment for the space.
$15,580 for a deferred compensation/key man life
insurance for Hoffman. The law allows life insurance
for owners or officers only if comparable insurance is
provided to all employees, which it apparently was
not.
$2,371 for Hoffman's personal use of a St. Francis
vehicle.
nearly $17,000 in legal fees charged for property
purchases, lawsuits, Service Options for Seniors
incorporation, and other legal work not considered
part of the legitimate costs of operating SFHS.
$2,100 in management fees paid by St. Louis
Riverview Home near Duluth were offset against
SFHS costs because the actual expense for services
was not known.
$990 in advertising expenses paid to KMRS radio.
State law allows nursing homes to advertise only in
D-5
the yellow pages.
=» $384 airplane ticket for Hoffman's daughter, who
accompanied him to a conference in Washington, D.C.
Additionally, a number of employees who split their time
among the various nonprofit and for-profit entities did not
sufficiently document their time at the various facilities to the
satisfaction of the DHS auditor. This resulted in a
redistribution of over $90,000 in wages over the two-year
period.
The total amount in dispute between the Department of
Human Services and St. Francis Health Services and its
subsidiaries is not summarized in any one particular place in
the audit. Even if that amount runs into the hundreds of
thousands of dollars, as it appears to, it would represent only
a fraction of the total operating costs of the multimillion
dollar SFHS conglomerate. Nonetheless, it is a significant
amount of taxpayer money that is caught in the tug of war.
SFHS has 60 days to appeal the results of the audit, and
based on Hoffman's comments, it may be years before some
issues are resolved. At this point, St. Francis Health Services
has not been accused of any wrongdoing.
Regarding appeals, Hoffman concluded, "We just want
our chance to talk to somebody. If we're doing something
wrong, we don't know that yet.”
D-6
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
SIXTH DIVISION
CIVIL FILE NO. 98-1656 JMR/FLN
He KR KEKE EEE EEE EEE EEE EEE EERE EEE ERE
Patrick M. Hays, et al.,
Plaintiffs,
AFFIDAVIT
VS. OF
JOHN G. BURNS
Luverne Hoffman, et al.,
Defendants.
HK KEKE KEE EERE EEE EE EEE EE EEE EH EEE EEE
John G. Burns states the following under oath:
1: I have been employed as an auditor for- the
Department of Human Services for over 14 years. For
over nine years, I have been a Field Audit Supervisor.
My resume and my February 14, 1999 three page
description of employment experience is attached. I
was the Field Audit Supervisor for the field audit that
was conducted on St. Francis Health Services and its
subsidiary organizations, the Rule 50 nursing homes
and Rule 53 Intermediate Care Facility Mentally
Retarded (ICRMR) homes, in the summer of 1996.
2. For the 1996 field audit of St. Francis Health Services
and its subsidiaries, I supervised two other DHS
auditors, Robert Cooke and Peter Deng. I also
E-1
performed some of the actual audit work.
_ The actual field audit work in 1996 began in about
mid-May. Before that Patrick Hays had sent several
letters advising us of what he believed to be illegal
conduct by officials at St. Francis organizations.
These letters were Provided from February to April,
1996. These letters caused the field audit of St.
Francis in the summer of 1996. Desk audits of cost
reports are performed each year, on each annual cost
report submitted by nursing homes or group homes.
Field audits happen less frequently. Desk audits occur
with the auditor reviewing papers that are submitted
font the management of the homes. These desk audits
are performed at our DHS office in St. Paul, on cost
reports and other specified documents that are
submitted by the management of the homes. Field
audits consist of a review of all of these desk audit
type documents, but also consist of on-site
examinations of the homes, the premises and
equipment, many more financial and business records
and discussions with personnel. In the case of a
multiple corporate entity like St. Francis, these field
audits take months to complete. A field audit was
performed of St. Francis in 1994. It is not common to
have a field audit by our DHS agency occur within
two years of another field audit. The St. Francis
organization may have gone for a good number of
years without another field audit if it hadn't been for
the complaint letters of Patrick Hays.
_ The incorrect claims of St. Francis Health Services
and its organizations were discovered in the field
audits as a result of the originating complaints by
Patrick Hays, and what our desk auditors had learned
E-2
in the previous annual desk audits. In the early stages
of conducting the field audit, I also personally
interviewed Patrick Hays to obtain more information
to help us in the field audit.
The cost reports are legally required to be provided by
nursing homes and group homes (ICFMRs), pursuant
to state law, as the initial step in obtaining government
reimbursement. Reimbursement costs can't be claimed
unless a cost report is submitted. The government
provides state and federal money to nursing homes
and group homes based upon the expenses itemized in
these cost reports. The managing officers of these
businesses that receive government money are legally
required to know the accuracy, and certify the
accuracy, of these cost reports. Each line item on these
cost reports is a claim for money to the state and
federal government, unless it is a line on the report
that is designated as a non-reimbursable expense item.
In order for the businesses to receive the state and
federal money to operate their nursing homes or group
times, they need to make the claim for the expense on
the-cost report, and the reimbursement rate paid by the
government is based upon the amount that they place
in each line item of the cost report. Our DHS agency
disallows costs claimed in cost reports by providers
where the costs claimed are incorrect, meaning not in
compliance with the law. :
In the 1996 audits, there were repeated violation of the
50% related party rule, repeated violations of time
keeping requirements for employees who worked at
more than one business, gifts to employees improperly
claimed as legitimate expenses, and a transportation
van owned by a non-profit of St. Francis Health
E-3
Services being used by a private, for-profit company
owned by the CEO of St. Francis and the
administrator of the for-profit companies of St.
Francis. I can also state that in all my years of doing
audits of nursing homes, I have never seen anything
like the check written back to St. Francis Health
Services by the former owner of a nursing home that
sold the home to St. Francis, the check being over
$400,000.
_ The laws relating to time record requirements for
shared employees are found in the legal Rules 50 and
53 (DHS Rules chapters 9549 and 9553, respectively),
the instruction manuals for providers on these rules
that are issued by DHS, and DHS bulletins 91-64A
and 92-64A on time record requirements, which were
issued in 1991 and 1992. Although there was a new
time record keeping bulletin issued in 1995 by DHS,
this was not used for our field audits or desk audit for
the cost years 1994 and 1995 involved in this case.
Dated: 11-29-99
s/John G. Burns
TESTIMONY OF JOHN G. BURNS
KK
_ And that rate, then, is the amount of money that
Medicaid then is paying to the nursing home or group
home?
. Yes. It's a per diem, amount, per day.
. Now, otter this rate is set, the nursing home or group
home gets the money, gets the Medicaid money, right?
. Yes.
. And how do they do that?
. The group home or nursing home will bill the state
and then a warrant or check will be issued.
. Okay.
A. To the home.
. And, umm, is that billing the state called a payment
request?
. Umn, you could call it that way.
_ And how often are these payment requests made by
the nursing home or group home?
. Usually monthly.
. So twelve times a year?
F-]
. ¥es.
_ All right umm, now, let's look at how this works for a
system like St. Francis’s, ah, and you're familiar with
you did the t field audit?
. ¥es.
_ Umm, and St. Francis has a central office, a number of
nursing homes, a number of group homes, and then
companies
***
or aS
TESTIMONY OF ROBERT RAU
***
were at Browns Valley Nursing Home as well?
Yes.
Now, did you prepare a summary, umm -- excuse
me a minute. Did you, at, examine how many cost
reports these gift apple claims ended-up on?
Yes.
And how many cost reports was that?
It impacted 27 Cost reports.
And did you examine how many umm, the number
of payment requests that had these gilt apples
within it?
. With the assumption that every month that they
billed the Medicaid program, we would call, one
claim, it would have impacted 200 claims.
. Now, can you explain for the jury, umm, how that
would be, ah, now you would arrive at that, ah,
first the number of cost reports, and start out by
saying, were some of the girt apples purchased
actually through the central office?
Yes.
Okay. And now would that impact the cost reports
G-1
for the nursing homes and group homes?
_ They took the expenditure that they mad tar those
apples and they allocated 'em to the various, what I
call ICFMR facilities, the group homes.
. Okay.
- So what I did is 1 counted the rate adjustments
made, or the rate disallowances made by the
department through their desk and field audits and
came up with the 27 reports that were Impacted.
_ So those would have been cost reports submitted
to the Department of Human Services by the group
homes and by the nursing homes?
, wee.
_ All right. Correct? And then because the term
trickle down was used, because these expenses
from central office trickle down into here and were
reported on cost reports, each of them, homes
would have submitted monthly bills for payment,
right?
. Yes.
- And within that could be a quite minute amount
for the gift apples?
. That's true.
_ Now, did I ask you to prepare a summary based on
these audits on the amount of the federal share of
G-2
QP
dollars, ah, going into this false claim had on gift
apples?
Yes.
Showing you what's marked at Exhibit 241, is this
two-page exhibit?
Yes.
And is that a calculation that you put together to
arrive at just what the federal share payment was
on the
ee
. No.
Okay.
Could I explain that?
Not now, Incidentally, do you recall Mr.
Wojtalewicz's questions concerning these payment
requests that were submitted by the nursing homes
and the group homes?
Yes.
. Are you referring to the residential service
invoices?
Yes.
Okay. And for each of your calculations on these,
you would say that there would be one per month
G-3
per facility; is that right?
A. That's correct.
Q. Well, that's not correct, is it, Mr. Rau? Isn't it true
that nursing homes submit residential service
invoices one per resident per month?
MR. WOJTALEWICZ: objection to
the from of the question, argumentative
THE-COURT: You may answer, it
you're able.
THE WITNESS: They do bill by
resident, but they send in one bill, either paper bill
or electronic hill.
BY MS. NEWBERG:
Q. I'm asking you how many residential service
invoices a nursing home sends in a month.
A. I'd maintain it's one.
+e
G-4
February 23, 1996
Department of Human Services
Medicare Fraud Division
Attn: SIRS
444 Lafayette Road
St. Paul, MN 55155-3851
Dear S IRS ,
You are being notified that Medicare /Medicaid Fraud is
taking place at St. Francis Health Services/Villa of St. Francis
(245262-Medicare) (0026546-Medicade in Morris, MN.
Federal ID Number 23-76-25-632.
3
Management fees from St. Francis Health Services
(SFHS) and Prairie Land Management Services
(PLMS) Dustbusters were disallowed (SFHS -
$60,000) (PLMS - $76,000) by Medicaid. These fees
were reduced to COST on Medicaid Cost Reoort but
are not reduced on Medicare Cost Report. These fees
were not paid back to the Villa of St. Francis (VOSF)
by PLMS. It is a FOR-profit company making
excessive profits from a NON-profit company. These
fees continue to inflate every year. Both companies
are owned by SFHS.
Specialized Transportation (FOR-Profit) owned by
SFHS has a captured market in the transportation Villa
residents. was ordered never to use another company,
even when necessary (ie: Medivan). This is against the
Safe Harbor Law.
Staff paid by NON-profit companies are doing work
for FOR-profit companies. Their time charged to MA
H-1
projects.
_ Hoffman Home (group home) in Morris was a
Medicaid project. Everstrong Construction on gave a
$50,000, kickback to Luverne Hoffman (CEO of
SFHS and member of all Boards of Directors).
Luverne Hoffman then released a lien he had against
Everstrong Construction from a project: they had done
for SFHS in Redwood Falls. The total building cost
was turnedin to Medicade. First American Bank
formerly the Morris State Bank has the records of this
and the release of the lien in Redwood Falls should be
in the court t records.
_ Luverne Hoffman owns Des Apfel Haus an apple
orchard. Luverne 'sells' apples, apple chips and apple
juice to many of the organizations under SFHS, as
GIFTS, at an inflated price. The accounting personnel
are then ordered to put the costs of these apple
products under "Food" so that they are reimbursed.
This has been going on for several years, These
products are being made in a barn in a non-
commercial kitchen.
_ Administration and Professional Directors in the
group homes under SFHS are "advised" as to where to
charge their salaries so that they are reimbursable
under Medicaid.
I would strongly suggest that you do a complete audit of
the books of St. Francis Health Services, et. al. Please contact
me if you have any questions.
Sincerely,
H-2
Patrick M. Hays (former Adm. of VOSF)
10 Pomme de Terre Lane
Morris, MN 56267
(612) 589-4297 ,
cc: Attorney General Hubert H. Humphrey III 102 State
Capitol
St. Paul, MN 55155
H-3
April 11, 1996
Ms. Elaine Dufresne
Department of Human Service
444 Lafayette Road
St Paul, MN 55155
Dear Ms. Dufresne,
1 want to take the time to thank you for your letter March
13, 1996, acknowledging the information that I sent to the
Department of Human Services. I have been terminated from
St. Francis Health Services employment for approaching
Board of Directors on some of the following activities of
Luverne Hoffman and hence, I am seeking legal advice under
the Whistle Blower Statute. Additionally, 1 wanted to inform
you of more items that DHS should be aware of. Elaine,
under GROUP HOMES #5 - This should ring a bell with
you!!!
I have enclosed copies of document and pictures that may
assist you in "discovering" some of the fraud under the
auspices of SFHS!
The CEO of St. Francis Health Services (SFHS) directs
and manages in methods that would shock the normal
working class. Mr.: Hoffman runs all related companies
employment policies as "employment at will” That is "his
will". If an employee does not follow his direction, they are
terminated or conditions are made so impossible for them,
they are forced to resign. Thus, all employees, Department
heads, Supervisors, and Administrators are not allowed to
make their own decisions or determine their own course of
action. This work environment results in the following:
H-4
CODES: SFHS_ - St. Francis Health Services
VOSF - Villa of St. Francis
BVHS - Browns Valley Health Center
FHC’ - Franciscan Health Center
LHHC - Leisure Hills Health Center
PLMS - Prairie Land Management Services
PWOM - Pioneer West of Morris*
PCS~ - Prairie Community Services
PCWS - Prairie Community Wavered Services
SLRH - St Louis Riverview Home*
*FOR Profit
CENTRAL OFFICE: "ST. FRANCIS HEALTH
SERVICES OF MORRIS"
1. The central office costs consists of three levels of
supervisors allocating and charging their time to the
Medicaid/Medicare certified Nursing Homes and
Group Homes.
First of all, there is Mr. Luverne Hoffman (CEO) who
spends the majority of his time developing new business; not
related to Medical Assistance such as managing St Louis
Riverview Homes, Inc., picking apples and pruning his
private orchard His latest project is a three-phase Assisted
Living Complex which he has been working on for at least
two years now.
Second, there is Mr. Bruce Prause, Director of Operations,
who supervises the Administrators.
Third, three is Kay Knock who is the Vice president of the
H-5
FOR-profit companies called Prairie Land Management
Services, Inc. and Pioneer West of Morris, Inc. Ms. Knock,
for the past four years or so has directly charged her time to
the nursing homes as Director of The Villa of St. Francis,
Director of Browns Valley Health Center, Director of
Franciscan Health Center and Director of Leisure Hills Health
Center. The majority of the time Ms. Knock does not go near
these facilities! Ms. Knock charges her time to the nursing
homes so her for-profit companies do not have to pay for it. I
would suggest you check, her time cards.
How can the DHS allow three levels of supervisors above the
Administrators to be charged to the M.A. Program? Isn't there
any relationship of costs to the benefits received by the
resident or can Mr. Hoffman continue to build his empire on
the backs of the M.A. Program?
.. These is and has been a special relationship between
the senior Administrators and SFHS. They own a
company called St. Louis Riverview Homes, Inc.
(Brookston, MN), (SLRH), a complex of two Rule 36
Group Homes. Don't you find it funny that there is no
allocation of costs from the central office to the
Riverview Homes? If one would check the telephone
bills from both locations, you would find that there is
considerable management time (also Property
Insurance (1995) listed location and the largest claim
from this location) being used for management of
SLRH. Additionally, there are corporate dollars
“loaned” to SLRH. See enclosed invoice and
documents. Many items have disappeared from the
Nursing Homes and Group Homes to furnish a
privately owned for-profit company (SLRH). Owners:
Luveme Hoffman, Kay Knock, Mary Garmer previous
Adm. of the VOSF, Sandy Lenertz former Coo
H-6
Group Homes, and Kristine Carr former Director of
Finance SFHS. Some of the items that have
disappeared include used dining room tables from the
VOSF, used teacher lounge cabinets from Longfellow
School (now the home office of SFHS) and a new
vehicle paid for under the M A Program (Westwood
Group Home, Redwood Falls, MN). See enclosed
letter. One day, Mr. Hoffman borrowed Dick & Gloria
Henriksen's horsetrailer (he is the van driver for
Specialized Transportation and she is the manager of
Dustbusters and are both employed by Kay Knock)
and loaded up on furniture items and headed for
Brookstcn.
. Mr. Hoff man buys a new vehicle each year for his
personal/business use. The majority of the miles on
these vehicles are for apple delivery. Guess what? He
really likes minivans. One can take out the seats for
more bushels of apples! Needless to say, all of these
personal use costs are mainly paid for by the M.A.
Program and he doesn't even receive an IRS 1099 to
increase his taxable income.
. The building depreciation on the Corporate Books is
for the time share condominium in Lake Tahoe,
Nevada. (This. is asset number 201, see list) It was
purchased by the Corporation but in reality is in
Luverne and Mary Hoffman's name. Does the M.A.
Program pay for this, too? This must be a perk!!!
. Mr. Hoffman is also a big collector of "Red wing"
crocks. Guess who pays for the expensive ones!
Check out asset numbers 673, 699 and 706 on the
VOSF books and asset number 303 on the SFHS
books!
H-7
NURSING HOMES
1. The Villa of St Francis is forced to do business with
Prairie Land Management Services - Laundry and
Housekeeping and Dietary Consulting Services. Even
to the extent of almost $80,000 disallowance by DHS
in the 711195 rate year. The VOSF has to be one of
the highest cost facilities in the State of Minnesota in
Laundry and Housekeeping. Not only does the VOSF
get charged outrageous prices, Hoffman/Knock have
set up a COMMERCIAL LAUNDRY in the basement
of the VOSF. Do you have any idea what water and
sewer charges cost? I can tell you the square foot cost
allocation does not cover it! Housekeeping rates for
the VOSF are determined by Ms. Knock. Needless to
say, the VOSF gets charged $15.00 for some
Housekeeping services while the same service is
provide? downtown and in private homes at $8.50.
Why does the Medicaid/Medicare Program get
charged so much more than commercial/private
individuals for the same work? The Dietary
Consultant costs in the Nursing Homes and Group
Hones are related party costs and do not meet the 50%
Rule on non-related parties In fact, their only
customers are themselves
2. The Maintenance men at the VOSF have had to work
at ALL Morris owned locations such as group homes
and the VOSF paid for it! The Social Worker and
Minister of SLRH charged their employment to the
FHC in Duluth - convenient? Where do they actually
work? |
GROUP HOMES:
H-8
. Maintenance men at the Rule 53 Group Homes fix
everything in the area, including the for-profit
Laundromat. See Picture #4. The brown van is used
by Wes Hoffman (Luverne Hoffman's brother) nd the
gray van is Dwight Gades. Guess who pays for their
vehicles and time?
_ Mr. Hoffman likes to have Rule 53 and Wavered
Group Homes in the same town. Guess why? Watch
out for homes in Morris, Alexandria and Spider. The
Administrators and Program Directors complain about
why they are "told" to charge their time to Rule 53
Homes.
. Vehicles are paid for under the M.A. Program (Rule
53 Group Homes) and by corporate (SFHS) and are
used every place but where they were intended for.
Check out these pictures #5 to #12! Run these license
plates through the Department of Motor Vehicles and
you will find that none of them are owned by the for-
profit Laundromat Company where they are used. |
doubt that there is any vehicle where it should be in
Luverne's companies.
. Mr. Hoffman has entered the Special Transportation
business with M.A. reimbursement. None of the
Administrators are allowed to call anyone but "S
Specialized Transportation". They even use Rule 53
vans for the additional billed service (Spider,
Alexandria and Morris). See enclosed copy of the
letter from MNDOT. The Parkview Group Home in
Hancock has received an 80% grant from MINDOT
for a new van. Watch to see if the FULL price of this
vehicle is reported, for 1995, to the M A Program for
H-9
reimbursement from the Hoffman Home in Morris!
See pages #1 to #3. Additionally, those credits for
covering operating costs, I'm sure, will show up some
place!
5. Mr. Hoffman brags how he "screwed" the DHS on the
Arlington Home. Something about he got them to
allow a loan. There is a wire transfer from First
Federal Bank in Morris (in the bank's loan files)
directly to the owners of the Group Homes in
Hancock This is not even close to the Fergus Fall's
Arlington Home.
6. The Hoffman Group home in Morris had the
Contractor "build-in" an extra $42,000 cost to clear up
a judgment in Redwood Falls courts. It's amazing how
the judgment between Everstrong Construction and
Prairie Community Services was settled when the
Morris project was completed! See minutes from the
PCS. Trustees’ meeting under CEO Report. This is
how Mr. Hoffman explains things to his trustees and
Boards of Directors with no mention of the lien.
Sincerely,
Patrick M. Hays
10 Pomme de Terre Lane
Morris, MN 56267
(320) 589-4297
cc: Attorney General Humphrey Ill
Bev Nelson, Analyst/Medicare A
Elaine Dufresne, Department of Human Services
H-10
Febuary 23, 1996
Blue Cross Medicare
Bev Nelson
Section W821
Post Office Box 64357
St. Paul, MN 55164
Dear Ms. Nelson,
You are being notified that Medicare/Medicaid Fraud is
taking place at St. Francis health Services/Villa of St. Francis
(245 262-Medicare) (0026546-Medicade) in Morris,MN.
Federal ID Number 23-76-25-632.
i.
Management fees from St. Francis Health Services
(SFHS) and Prairie Land Management Services
(PLMS) Dustbusters were disallowed (SFHS-$60,000)
(PLMS- $76,000) by Medicaid. These fees were
reduced to COST on Medicaid Cost Report but are not
reduced on Medicare Cost Report. These fees were
not paid back to the Villa of St. Francis (VOSF) by
PLMS. It is a FOR-profit company making excessive
profits from a NON-profit company. These fees
continue to inflate every year. Both companies are
owned by SFHS.
Specialized Transportation (FOR-profit) owned by
SFHS has captured market in the transportation of
Villa residents. | was ordered never to use another
company, even when necessary (ie: Medivan). This is
against the Safe Harbor Law.
Staff paid by NON-profit companies are doing work
for FOR-profit companies. Their time is charged to
H-11
MA projects.
4. Hoffman Home (group hore) in Morris was 2
Medicaid project. Everstrong Construction gave a
$50,000 kickback to Luverne Hoffman (CFO of SFHS
and member of all Boards of Directors). Luverne
Hoffman then released a lien he had against
Everstrong construction from a project they had done
for SFHS in Redwood Falls. The total building cost
was turned in to Medicade. First American Bank
formerly the Morris State Bank has the records of this
and the release of the lien in Redwood Falls should be
in the court records.
5. Luverne Hoffman owns Das Apfel Haus an apple
~ orchard. Luverne 'sells' apples, apple chips and apple
juice to many of the organizations under SFHS, as
GIFTS, at an inflate” price. The accounting personnel
are then ordered to put the costs of these apple
products under "Food" so that they are reimbursed.
This has been going on for several years. These
products are being made in a bam in a non-
commercial kitchen.
6. Administration and Professional Directors in the
group homes under SFHS are “advised” as to where to
charge their salaries so that they are reimbursable
under Medicaid.
I would strongly suggest that you do a complete audit of
the books of St. Francis Health Services, et. al. Please contact
me if you have any questions or need any further information
or documentation.
Sincerely,
H-12
Patrick M. Hayes (former Adm. of VOSF)
10 Pomme de Terre Lane
Morris, MN 56267
ce: Attorney General Hubert H. Humphrey III
102 State Capitol
St. Paul, MN 55155
March 1, 1996
Ms. Elaine DuFresne
Director Long Term Appeals/Audit Division
t of Human Services
444 Lafayette Road
St. Paul, MN 55155-3836
Dear Ms. DuFresne,
This letter concerns allow and to be allowed employee
gifts on Medicaid Cost Reports (Rule 50 & 53).
There is a Chief Execytive Officer in Minnesota who
dictated that all related/controlled facilities buy boxes of
apples from his personal apple orchard. There arc well over
$20,000 of GIFTS buried in Food Costs and Office Supplies,
etc. cacti year. Below is a list of ID numbers. Attached is a
copy of employee notes on how well the apples are liked.
RULE 50 PID'S RULE 53 PID'S
482343500 082745200 229525300
990343700 382045900 426526200
551218200 632245000 065725500
863278200 582245900 516025100
692245700 527025100
653245400 954025300
773545600 113325000
763245200 522559100
Thank you for taking cate of this matter.
Sincerely,
Patrick M. Hays
H-14
i: aan |
March 4, 1996
Ms. Judy Ellison
MN Dept. of Transportation
395 John Ireland Boulevard, MS 430
St. Paul , MN 55155
Re: Public Transportation Grants
Dear Ms. Ellison,
I feel that as a citizen and taxpayers of Minnesota | must
disclose the following injustice. Sometime in 1995, the
Department of Transportation approved a grant for a Van to
transport the aged and handicapped individuals from
Hancock, MN to Morris, MN. Prairie Community Wavered
Services, Inc. (PCWS) was the grantee. The van arrived in
fate 1995 (see picture). Since then, the van has been Located
in a Morris Group Home called Hoffman Home and used to
transpose residents at a ten bed ICF/MR Rule 53 Group Home
owned and operated by Prairie Community Services (PCS).
Additionally, this van is used by St. Francis Health
Services of Morris, Inc. (parent company to transport private
. and Medical] Assistance individuals for $ 1.10 (profit). I also
believe that somehow the CEO (Luverne Hoffinan) plans
some way to get reimbursed by Medial Assistance, again, for
the same van that was given to PCWS with other intentions
for its use. How can something like this continue in our fair
State?
A concerned citizen,
Patrick M. Hays
10 Pomme de Terre Lane
Morris, MN 56267
H-15
March 12, 1996
Elaine DuFresne
Director of Provider Appeals
444 Lafayette Road
St. Paul, MN 55155-3836
Dear Ms. DuFresne,
I just wanted to inform you of a credit due to the
Minnesota Department of Human Resources Medicaid.
Sometime between November, 1995 and January, 1996, St.
Francis Health Services received a personal check for
$413,000 from Kenneth Steiger as some type of refund from
the purchase of Leisure Hills Health Center in Hibbing. At the
same time, the Financial Director at St. Francis suddenly
resigned.
On March 1, I sent you a fetter regarding apple purchases
for employee Christmas gifts for December, 1994. Enclosed
is more information about these gifts. These, so called, gifts,
have increased to approximately $20,000 -$30,000 per year in
1995.
Sincerely,
Patrick M. Hays
10 Pomme de Terre Lane
Morris, MN 56267
cc: Terri Engel
Greg Tabelle
~ #H-16
FALSE CLAIMS ACT
HON. HOWARD L. BERMAN
of California
in the house of representatives
Wednesday, July 14, 1999
Mr. BERMAN. Mr. Speaker, I submit the following for the
Record:
Hon. Janet Reno,
Attorney General of the United States,
U.S. Department of Justice,
Washington, DC.
Dear Madam Attorney General:
As you know, we are the principal House and Senate
sponsors of the 1986 Amendments to the False Claims Act,
31 U.S.C. Sec. 3729, et seq. ("the Amendments"). We have
watched with pride the remarkable success of the
amendments in bringing to the attention of the federal
government hundreds of cases of fraud. We are particularly
pleased with the qui tam provisions of the Amendments,
which have resulted in cases that have returned $2.3 billion to
the federal Treasury.
With dismay, however, we have watched the federal
courts interpret several sections of the Amendments in ways
that directly contravene Congressional intent, and, of even
greater significance, discourage and foreclose potential
relators from bringing meritorious cases. In particular, we are
I-1
extremely concerned with the courts’ crabbed interpretations
of the public disclosure bar--Sec. 3730(e)(4)(A) and (B). That
provision, which was drafted to deter so-called "parasitic"
cases, has been converted by several circuit courts into a
powerful sword by which defendants are able to defeat
worthy relators and their claims. If this trend continues, we
fear that the very purpose of the Amendments--- "to
encourage more private enforcement suits"--ultimately will be
undermined. See S. Rep. No. 99-345, at 23-24 (1986).
Thus, we believe it is imperative that the Department of
Justice ("the Department") adopt and adhere publicly to an
interpretation of the public disclosure bar that comports with
the plain meaning of the statute and the Congress’ obvious
intent. The Department's role in this regard is critical. First, of
course, the Department is often involved as a party in cases
where the public disclosure bar is raised, and it is entitled and
expected to make its views known. Even in cases where the
Department determines not to intervene, Congress intended
for the Department to be involved in monitoring cases, in part
to address questions significant to the ongoing operation of
the statute. See e.g. Sec. 3730(c)(3) and (c)(4). Finally, as the
agency charged, in effect, with the administration of the False
Claims Act, the courts are likely to accord significant
deference to the Department's interpretation of the Act, and
we believe the Department has an obligation to the Congress
and to the courts to articulate those views.
With this letter, we intend to provide a detailed
explanation of our view of the public disclosure bar, focusing
in particular on some of the cases where we believe the courts
have misinterpreted the law. In order to place that discussion
in context, we want first to explain the origin and significance
of the public disclosure bar so that the cases can be viewed in
light of Congress’ intent.
1-2
The public disclosure bar is intertwined inextricably with
the history of the qui tam provisions of the statute. From its
enactment in 1863, the False Claims Act allowed a relator to
bring a qui tam action even if the Government already knew
of, investigated and even criminally prosecuted the identical
fraud. Such parasitic suites, made infamous in the Supreme
Court's decision in Marcus v. Hess, 317 U.S. 537 (1943),
allowed relators to recover if they "contributed nothing to the
discovery of this crime." Id. At 545. To correct that obvious
inequity, Congress enacted the government knowledge bar in
1943, which prohibited qui tam suits based an information in
the Government's possession. The government knowledge
bar, however, was interpreted too broadly by the courts. If
information about fraud was in a file somewhere in the vast
federal bureaucracy, a qui tam case was barred even if the
government was unaware of the information in its files or had
done nothing to pursue it. Indeed, one court held that even if
it was the relator him or herself who had reported the fraud to
the federal government, their case was precluded on the
theory that the government had knowledge of the fraud before
the relator filed their case. See, e.g. United States ex rel. State
of Wisconsin v. Dean, 729 F.2d 1100 (7th Cir. 1984).
The 1986 Amendment sought to restore some balance
between these two extreme regimes. Unquestionably,
Congress wanted to prohibit qui tam cases that merely copied
a federal criminal indictment and to allow those in which the
relator simply informed the government of their allegations
before filing suit. But there is considerable terrain between
these two poles, and it is here that the courts seem to get lost.
The key to navigating the public disclosure bar successfully is
understanding Congress' purpose in enacting the
Amendments.
Three goals inspired the 1986 Amendments. First and
foremost, Congress. wanted to encourage those with
knowledge of fraud to come forward. Second, we wanted a
mechanism to force the government to investigate and act on
credible allegations of fraud. Third, we wanted relators and
their counsel to contribute additional resources to the
government's battle against fraud, both in terms of detecting,
investigating and reporting fraud and in terms of helping the
government prosecute cases. The reward to the relator is for
furthering these goals.
In reversing the old government knowledge bar, however,
we wanted to continue to preclude qui tam cases that merely
repackage allegations the government can be presumed
already to know about because they were disclosed publicly
either in a federal proceeding or in the news media. The
reason is simple: if the relator simply repeats allegations that
he or she heard from someone else and about which the
government is already aware and taking action, the relator
contributes nothing to the government's efforts to combat
fraud. Accordingly, in the 1986 Amendments, we provided
that a qui tam case is barred if the relator has based his or her
filing upon publicly disclosed allegations unless the relator
already has provided information concerning the allegations
to the government before filing suit.
Certain courts have exploded this limited bar in ways that
mock the very purpose and intent of the 1986 Amendments.
A recent case is illustrative. In United States ex rel. Jones v,
Horizon Healthcare Corp., No. 97-1635, the Sixth Circuit
Court of Appeals held that Ms. Jones' qui tam action was
barred because, before she filed her case, she had filed an
application for unemployment insurance with the Michigan
Employment Security Commission. Her application stated
that she had been fired after reporting to her supervisor at
1-4
Horizon HealthCare that she believed several claims prepared
for subraission to Medicare were false. The Court held that
Ms. Jones' unemployment application was a public disclosure
within the federal government prior to filing her action, her
suit was barred. ,
In both its reasoning and its outcome, Jones strays far
from the policies that underlie the public disclosure bar. First,
as you know, 3730(e)(4)(A) specifica'ly limits a public
disclosure to "allegations or transactions" disclosed 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." That
list is exclusive, as many of the courts to have considered the
question agree. See U.S. ex rel. Dunleavy v. County of
Delaware, 123 F.3d 734, 744 (3rd. Cir. 1997) (recognizing
the.’ prevailing view is that this list constitutes an exhaustive
rendition of possible sources.") Only an absurdly broad
definition of an "administrative hearing" would put an
application for unemployment insurance on that list. And
Congress did not intend to enact absurdities.
We did intend, and any fair reading of the statute will
confirm, that the disclosure must be in a federal criminal, civil
or administrative hearing. Disclosure in a state proceeding of
any kind should not be a bar to a subsequent qui tam suit: The
reason is grounded in the history of the FCA and the policies
underlying the 1986 Amendments that we just reviewed. One
thing is common to the law throughout its history. It was the
Federal Government's knowledge of fraud that triggered the
government knowledge bar; it was the federal government's
indictment in Marcus v. Hess that formed the basis of the
parasitic suit. Thus, when it enacted the public disclosure bar
in 1986, Congress was concerned about what the federal
government knew about fraud, that is, whether the federal
I-5
government had in its possession sufficient information to
investigate and pursue allegations of fraud, and whether that
information was sufficiently pzblicized so that the federal
government would be forced to act or explain why it chose
not to act. As was noted in the Senate ‘Report on the
Amendments: "Unlike most other types of crimes or abuses,
fraud against the Federal Government can be policed by only
one body--the Federal Government." S; Rep. 99-345 at 7. To
suggest that Congress was concerned with disclosure to
anyone other than the federal government when it enacted the
public disclosure bar is to ignore history. And to suggest, as
the Sixth Circuit held in Jones, that disclosure of fraud to a
state agency on an application for unemployment is likely to
alert the federal government to fraud is to ignore common
sense.’
Unfortunately, Jones is by no means an isolated example.
U.S. ex ref. Fine v. Advanced Sciences, Inc.. 99 F. 3d 1000
1 The same is true for civil complaints filed in state court or
discovery obtained as a result of state court proceedings,
which several Circuits have held constitute public disclosures
within the meaning of Sec. 3720(3)(4)(A). See e.g. U.S. ex
rel. Kreindler & Kreindler v. United Technologies Corp., 985
F.2d 1148, 1158 (2d Cir.), curt. denied, 113 S.Ct. 2962 (1993)
(holding that discovery materials contained in unsealed court
records was "publicly disclosed"); U.S. ex rel. Stinson, Lyons,
Gerlin & Bustamante v. Prudential Ins. Co., 944 F2d 1149,
1155-56 (3d Cir. 1991) (holding that the disclosure of
discovery material--even if not filed in court--constitutes a
public disclosure). We believe those cases are wrongly
decided. Disclosure of fraud to a state court proceeding, even
a state criminal proceeding, is unlikely to get to the attention
of the federal government, unless it is publicized in the news
media, a contingency the public disclosure bar addresses.
1-6
(10th Cir. 1996) is an equally egregious example of judicial
overreaching. In Advance Sciences, the Tenth Circuit held,
first, that the listed sources in Sec. 3730(3)(4)(A) were not the
exclusive means of public disclosure--a holding which, as we
have noted already, is simply wrong. The Court went on,
however, to hold that a public disclosure occurs whenever the
allegations or transactions are provided to any member of the
public who is a "stranger to the fraud." In Mr. Fine's case, the
stranger was a representative of the American Association of
Retired Persons counseling Mr. Fine with respect to a
potential age discrimination claim. By public disclosure, we
meant disclosure to the public at large, not just one member
of the public and certainly not to a confidential counselor.
U.S. ex rel. John Doe v. John Doe Corp., 960 F.2d 318 (2nd
Cir. 1992), reached a similarly untenable result, holding that
disclosure of a government investigation of fraud to the
employees of the defendant corporation was during their
interviews with government investigators a public disclosure
within the meaning of the False Claims Act. -
Finally, in this regard, we want forcefully to disagree with
cases holding that qui tam suits are barred if the relator
obtains some, or even all, of the information necessary to
prove fraud from publicly available documents, such as those
obtained through a Freedom of Information Act (FOIA)
request. See ex rel. Schumer v. Hughes Aircraft Co., 63 F.3d
1512, 1520 (9th Cir. 1995), (finding that a public disclosure
would occur only if the relator makes a FOIA request and
receives the information requested). We believe that a relator
who uses their education, training, experience, or talent to
uncover a fraudulent scheme from publicly available
documents, should be allowed to file a qui tam action. Cases
such as U.S. ex rel. Stinson, Lyons, Gerlin & Bustamante,
P.A. v. Prudential Ins. Co., 944 F. 2d 1149, 1150 (3re Cir.
1991), which held that a " relator must possess substantive
1-7
information about the particular fraud, rather than merely
background information which enables a putative relator to
understand the significance of a publicly disclosed transaction
or allegation [.]" undermine Congress’ explicit goals. If,
absent the relator’s ability to understand a fraudulent scheme,
the fraud would go undetected, then we should reward
relators who with their talent and energy come forward with
allegations and file a qui tam suit.2 This is especially true
where a relator must piece together facts exposing a fraud
from separate documents.
The consequences of these decisions are alarming. Fraud
may well go unpunished and, as a practical matter,
undetected. Relators, like Ms. Jones, who are fired from their
jobs because they blew the whistle on fraud and then take the
not unreasonable step of applying for unemployment
insurance will be told by their lawyers that their qui tam case
is barred. Congress never intended to force relators to choose
between filing a qui tam case and providing for themselves
and their families.
The Jones case highlights one aspect of the public
disclosure bar that has been widely. misinterpreted by the
courts--the question of what constitutes public disclosure.
Unfortunately, other issues involving the public disclosure bar
also need to be addressed. A second issue concerns how much
information needs to be disclosed in order to constitute a
disclosure of “allegations or transactions." On this question,
2Some courts do get it right. In U.S. ex rel. Fallon v.
Accudyne Corp., 921 F.Supp. 611 (W.D. Wisc. 1995), the
court held that an audit report produced by a state agency did
not constitute a public disclosure. "Under these circumstances
there is no reason to believe that the United States would
become aware of such information." Id., at 625.
1-8
some, but by no means all, of the courts have held
appropriately that in order to trigger the bar, the disclosure
must include all of the essential elements of the fraud against
a specifically identified defendant. As the Eleventh Circuit
observed in U.S. ex rel. Cooper v. Blue Cross and Blue
Shield, 19 F. 3d 562, 566 (11th Cir. 1994): "Requiring that
allegations specific to .a particular defendant be publicly
disclosed before finding the action potentially barred
encourages private citizen involvement and increases the
changes that every instance of specific fraud will be revealed.
To hold otherwise would preclude any qui tam suit once
widespread--but not universal--fraud in an industry was
revealed." See also U.S. ex rel. Lidenthan v. General
Dynamics Corp., 61 F. 3d 1402 (9th Cir. 1995) cert. dented
517 U.S. 1104 (1996) (disclosures that make no mention of
specific defendant insufficient to invoke bar).”
Not only must the particular defendant be identified, so
too must all of the elements necessary to bring a fraud action.
As the D.C. Circuit explained in U.S. ex rel Springfield
Terminal Ry Co. V. Quinn, 14F.3d 645 (D.C. Cir. 1994),
Congress sought to prohibit qui tam actions only when either
the allegation of fraud or the critical elements of the
fraudulent transaction themselves were in the public
domain..." Bits and pieces of information about a defendant
and some of its actions--even when publicly disclosed--rarely
> Senator Grassley made a similar comment during the debate
on the 1986 Amendments: "The publication of general, non-
specific information does not necessarily lead to the discovery
of specific, individual fraud which is the target of the qui ta:
action." False Claims Act Implementation: Hearing Before
the Subcomm. On Admin. Law and Gov. Relations of the
House Comm. On the Judiciary, 101st cong. 6 (1990)
Statement of Senator Grassley.
1-9
add up to an allegation of fraud. There must be ‘enough
information in the public domain to expose the fraudulent
transaction." U.S. ex rel. Rabushka v. Crane Co., 40 F.3d
1509, 1513-14 (8th Cir. 1994) quoting Springfield, 14 F.3d at
65. To hold otherwise, as some courts have, would undermine
the stated purposes of the False Claims Act.
"Embracing too broad a definition of ‘transaction’
threatens to choke off the efforts of qui tam relators in their
capacity as ‘private attorneys general.’ By allowing [qui tam]
complaint[s] to proceed beyond the jurisdictional inquiry, we
help ensure that private actions designed to protect the public
fist can proceed in the absence of governmental notice or
potential fraud. This is not the type of case that Congress
sought to bar, precisely because the publicly disclosed
transactions involved do not raise such an inference of
fraud."--Id., at 1514.
The last issue we want to raise with respect to public
_ disclosure concern the "original source" exception to the bar.
The public disclosure bar applies "unless the action is brought
by the Attorney General or the person bringing the action is
an original source of the information" 31 U.S.C. Sec.
3730(e)(4)(A). Section 3730(e)(4)(B) defines "original
source" as a relator with "direct and independent knowledge
of the information on which the allegations are based who has
voluntarily provided the information to the Government
before filing an action under this section which is based on
the information.” This provision, too, is a source of
considerable confusion and controversy in the courts. Again,
however, what Congress intended when it drafted the original
source exception is easy to discern both from the statute itself
and from its legislative history.
First, the language of the statute makes plain that by
1-10
original source," Congress meant an original source of
information provided to the government and did not, as some
courts have held, add an additional requirement that the
relator also be the original source of the public disclosure that
triggers the bar. See, e.g. U.S. ex rel. Dick v. Long Island
Lighting Co., 912 F.Zd 13 (2d Cir. 1990); U.S. ex rel. Wang
v. FMC Corp., 975 F.Zd 1412, 1418 (9th Cir. 1992). There is
no statutory nor logical linguistic connection between an
original source and the public disclosure that triggers the bar.
Of course, a relator could be an original source of the
information publicly disclosed, if the relator first provided the
information to the Government.
Nor is there any policy rationale that would justify such
an interpretation of the original source provision. When
Congress enacted the original source provision, we had in
mind a scenario where an individual reports fraud to the
government and then there is a subsequent public disclosure
of the allegations or transactions before that person has filed a
qui tam complaint. The disclosure could be, for example, a
criminal indictment brought by the Government as a result of
the relator’s information. It could also be a press story, based
on a leak from a Government investigation or an enterprising
reporter's investigative skills. Under these circumstances, the
relator would not be barred from bringing a qui tam case. To
the contrary, he or she should be rewarded for bringing to the
Government information about the fraud.
Defendants have also sought the dismissal of relators by
urging that "direct and independent knowledge" somehow
requires the relator to be an eyewitness to the fraudulent
conduct as it occurs. To the contrary, as the Eleventh Circuit
concluded to Cooper v. Blue Shield of Florida, Inc., 19 F. 3d
562 (1994) a relator's knowledge of the fraud is "direct and
independent” if it results from his or her own efforts. For
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example, a relator who learns of false claims by gathering and
comparing data could have direct and independent knowledge
of the fraud, regardless of his or her status as a precipitant
witness.
In light of these policies, it should not be surprising that
we support emphatically the courts that have held that Sec.
3730(e)(4)(B) does not require that the qui tam relator possess
direct and independent knowledge of "all of the vital
ingredients to a fraudulent transaction.” Springfield, 14 F.3d
at 656-57. As Representative Berman explained, " A person is
an original source if he had some of the information related to
the claim which he made available to the government . . . in
advance of the false claims being publicly disclosed." 132
Cong. Rec. 293Z2 (Oct. 7, 1986).
In closing, we want to urge you to consider seriously the
Department's obligation to shape the courts’ interpretation of
the False Claims Act. We are frankly troubled by the fact that
the majority of cases confronting the public disclosure bar are
cases in which the Department has not intervened and in
which there is no reference at ali to the Department's views.
To us, it appears that the courts take the Department's
decision not to intervene I n a case as a verdict on the merits
of the relator’s claims and are using the public disclosure bar
in order to dismiss the case quickly. Even if some of those
cases should be dismissed on the merits, we -cannot
countenance a tortured interpretation of the public disclosure
bar to reach a desired result.
Moreover, if the public disclosure provisions continue to
be misinterpreted, relators and their counsel will be deterred
from filing truly meritorious claims.
Further, not all of the cases in which the public disclosure
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bar is raised are those in which the government has declined
to intervene. Defendants make public disclosure motions after
the government has joined a case, and they do so for only one
reason: to deprive the government of the resources that
relators and their counsel bring to the case. Yet in those cases,
too, the Department is typically silent, refusing to take a
position on the public disclosure issue. That stance, too, may
well undermine Congress’ expressed intent.
One of the principal goals of the 1986 Amendments was
to ameliorate the "lack of resources on the part of Federal
enforcement agencies." S. Rep. 99-345 at 7. That was one of
the reasons we strengthened the qui tam provisions of the law.
Thus, we expected some meritorious cases to proceed without
the Government's intervention, and we fully expected that the
Government and relators would work together in many cases
to achieve a just result. By dismissing relators based on
spurious interpretations of the public disclosure bar, the
courts are depriving the government of these additional
resources. And those resources have been considerable. In
numerous cases, relators and their counsel have contributed --
thousands of hours of their time and talent and spend
hundreds of thousands of their own dollars investigating and
pursuing their allegations. The Department must act to protect
those resources, even to cases where it has not ‘intervened.
When a question of statutory interpretation arises, particularly
with respect to the public disclosure bar, the Department must
make its views known to the court.. As we stated
emphatically at the time the Amendments were adopted,
Congress enacted the Amendments based on the belief that
"only a coordinated effort of both the Government and the
citizenry will decrease this wave of defrauding public funds."
We continue to hold that view.
Sincerely,
1-13
Howard L. Berman,
Member of Congress Charles E. Grassley,
U.S. Senator.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.