Supreme Court Makes it Harder to Hold Contractors Accountable for Fraud

By MANDY SMITHBERGER and MICHAEL SMALLBERG

Yesterday, the Supreme Court weakened the government's ability to recoup money from contractors defrauding the government. In a 5-3 decision, the Court found in Schindler Elevator Corp. vs. U.S. that private citizens cannot file lawsuits under a qui tam provision of the False Claims Act that rely upon information obtained through the Freedom of Information Act (FOIA). The Justice Department secured $3 billion in civil settlements in 2010 under the False Claims Act (FCA), and has recovered more than $27 billion since 1986.

The case revolves around Vietnam War veteran Daniel A. Kirk, who was an employee of Schindler Elevator Corporation and suspected that the company was not in compliance with disclosure requirements under the Vietnam Era Readjustment Assistance Act of 1972. His wife received confirmation of these observations from information obtained from the Department of Labor under FOIA, and Kirk filed his own suit.

The issue at stake is what the suit is “based on.” The decision centered on a “public disclosure” bar in the False Claims Act (31 U.S.C. 3730(e)(4)(A)) designed to prevent “parasitical actions.” The bar prohibits bringing suit based on public information unless “the person bringing the action is an original source of the information” (having “direct and indepfendent knowledge”).

Justice Clarence Thomas, in the majority opinion, wrote that the suit was based on the information obtained from DOL and as a result, the suit is prohibited under the public disclosure bar because otherwise, “Anyone could identify a few regulatory filing and certification requirements, submit FOIA requests until he discovers a federal contractor who is out of compliance, and potentially reap a windfall in a qui tam action under the FCA.”

In a dissent, Justice Ruth Bader Ginsburg noted that the decision “severely limits whistleblowers’ ability to substantiate their allegations before commencing suit.” While not agreeing that FOIA disclosures should be counted as part of the public disclosure bar, she argued that the suit was based on Kirk’s observations and experience, and that the FOIA did not constitute an administrative action prohibited under the Act.

In a different context, the Securities and Exchange Commission (SEC) is still working on the final rules for its whistleblower reward program, including the definitions of “independent knowledge” and “independent analysis” under which a whistleblower could qualify for an award.

The SEC’s proposed rules recognized that “independent analysis” could involve examination of information that is publicly available:

‘‘Analysis’’ would mean the whistleblower’s examination and evaluation of information that may be generally available, but which reveals information that is not generally known or available to the public. This definition recognizes that there are circumstances where individuals can review publicly available information, and, through their additional evaluation and analysis, provide vital assistance to the Commission staff in understanding complex schemes and identifying securities violations.

In POGO’s public comment on the proposed rules, we urged the SEC to clarify that a whistleblower's analysis could draw on facts published in certain sources:

POGO urges the SEC to clarify that the analysis itself cannot have been previously published in one of the sources listed in Proposed Rule 21F-4(b)(1)(iii) (“a governmental report, hearing, audit, or investigation, or from the news media”), but that a new analysis could draw on facts published in these sources. This clarification would allow the SEC to receive tips from whistleblowers, such as Harry Markopolos, who often perform original analysis based on publicly available sources.

Senator Charles Grassley (R-IA)—who introduced key improvements to the False Claims Act and the Internal Revenue Service’s (IRS) whistleblower reward program, among others—has supported the SEC’s proposed definition of “independent analysis,” but has also raised serious concerns about other proposed rules that could potentially undermine the program just as it’s getting started.

Last week, POGO submitted a letter into the hearing record urging Congress to reject draft legislation proposed by Rep. Michael Grimm (R-NY) that would silence potential whistleblowers, weaken SEC enforcement actions, and allow law-breaking companies to evade accountability. Instead of modifying the SEC program at this time, Congress should revisit the public disclosure language of the FCA to determine if it inappropriately hinders citizens helping the government to recover money lost through fraud and misconduct.

Mandy Smithberger and Michael Smallberg are POGO Investigators.

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Comments

[shawn]

What can Obama do about it??? The Supreme Court is its own entity, and checks and balances have been gone for a long time. Obama or Congress can not over-ride Supreme Court decisions. I havent went to look at the case, but I bet the knuckleheads that voted for this were appointed by Republican Presidents as it is a very conservative decision, protecting the conservative political money machine...I had a friend who worked for Brown & Root (Haliburton) in Afghanistan who told me they billed for the same materials more times than they even got supply's if they even got them....our tax dollars at work...but for who??

[kay sieverding]

I've been pursuing an income tax whistleblower claim against Colorado Intergovernmental Risk Sharing Agency for 5 years. I began my interaction with CIRSA because they sold local government errors and omissions insurance to the City of Steamboat Springs Colorado. I sued the City of Steamboat. I got CIRSA's financial statements originally through a state open records request and noticed they didn't list income taxes as an expense. The State of Colorado does not list CIRSA on its list of local governments. The Colorado Secretary of State has no listings for CIRSA and lists "Colorado Intergovernmental Risk Sharing Agency" as an "available" name. They aren't listed on GuideStar.org as filing IRS 990 nonprofit forms. I attempted to sue CIRSA in Denver County court, # 05-cv-5485, and the assistant AG filed "The Colorado Supreme Court has described CIRSA as a 'self-insurance pool' for public entities, but not a State agency'

I wrote again to CIRSA by priority mail # 9405 5036 9930 0087 1047 37, delivered 5/2/11 and requested copies of their 990 nonprofit reports or current financial statements showing they pay income taxes but they didn't respond. All non profits are required to file a 990 form of some sort and make it available to the public. The last time I looked CIRSA had cash of more than $12 Million and was selling insurance to almost 200 organizations.

[kay sieverding]

This article doesn't discuss Whisteblower income tax rewards
http://www.irs.gov/compliance/article/0,,id=180171,00.html

[Patrick Carmody]

It seems to me that Justice Thomas decision has very narrow application. As I read it, the point of the decision is that "anyone" could file suit by obtaining the information, the essence of a parasitic lawsuit. However, where the "insider" has the information regarding the fraud, but merely uses the documentation to corroborate his allegations for transactions (ie, where the specific allegations of fraud are not disclosed in the government "report" obtained), the Supreme Court decision would seem inapplicable.

Of course, the decision leaves a huge hole in the FCA: wilery malefactors will disclose enormous amounts of material, most of which will be benign, just to disclose the bad stuff and prevent FCA litigation. This is a classic Wall Street disclosure trick and will be used in the most eggregious cases.

How could the Supreme Court be so naive?

[Delphinium]

So wait... You can file a FOIA, discover wrong doing, but can't do a damn thing about it? Isn't the whole point of FOIA?? Being able to locate the fraud and prove it? I thought we WANTED people to discover these things and blow the whistle on these people.

Why would the Justice dept, find it sensible to make it harder to hold those breaking the law, and intentionally defrauding the small businesses out there trying to legitimately gain that business, accountable for their actions? I don't get it. Oh wait, I forgot.... It hides their own secrets

[tillytally]

oh goody.. a law gets passed to make it harder to hold the law breakers accountable... how convenient for the law breakers.

our government is pathetic. Obama, please open your eyes.