— “Today’s decision sends out a strong message that we will tackle illegal behavior that is designed to stifle competition at the expense of customers – in this case, the NHS and, ultimately, taxpayers.”
Michael Grenfell from the Competition and Markets Authority commenting on GSK antidepressant pay-for-delay fine.
By the C|C Whistleblower Lawyer Team
This week’s Department of Justice “Catch of the Week” goes to Morgan Stanley. Yesterday, the company agreed to pay a $2.6 billion penalty “for misleading investors about the subprime mortgage loans underlying the securities it sold” in the period leading up to the financial crisis. As part of the agreement, Morgan Stanley admitted that it failed to disclose critical information to prospective investors about the quality of the mortgage loans underlying its residential mortgage-backed securities (RMBS) which ultimately caused investors, including federally insured financial institutions, to lose billions of dollars from investing in Morgan Stanley in the 2006-07 timeframe. See DOJ Press Release
An RMBS is comprised of a pool of mortgage loans with its value determined in large part by the value of the underlying properties. As acknowledged by Morgan Stanley, the company made numerous misrepresentations to prospective investors about the subprime mortgage loans underlying its RMBS, including:
- Telling investors it did not securitize underwater loans (loans that exceeded the value of the property) even though it had expanded its “risk tolerance” in evaluating loans in order to purchase and securitize “everything possible.”
- Telling investors it did not securitize loans that failed to meet originators’ guidelines even though in fact it did securitize loans that neither comported with the underwriting guidelines nor had adequate compensating factors.
- Claiming in presentation materials for potential investors due diligence practices it did not actually follow regarding its review of certain pools of loans prior to securitization.
Despite being aware of the “deteriorating appraisal quality” and “sloppy underwriting” by the sellers of these underlying loans, Morgan Stanley did not engage in appropriate due diligence practices for fear of harming its relationship with its largest subprime originators. The government highlighted that Morgan Stanley’s manager of credit-and-compliance due diligence was actually admonished to “stop fighting and begin recognizing the point that we need monthly volume from our biggest trading partners and that . . . the client [an originator] does not have to sell to Morgan Stanley.”
The $2.6 billion civil penalty resolves claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The settlement expressly preserves the government’s ability to bring criminal charges against Morgan Stanley and any of its employees or executives. In addition to the federal settlement, the states of New York and Illinois announced their own settlements with Morgan Stanley for $550 million and $22.5 million, respectively.
Morgan Stanley previously paid $225 million to resolve claims brought by the National Credit Union Administration arising from losses related to corporate credit unions’ purchases of RMBS; $1.25 billion to resolve claims by Federal Housing Finance Agency (FHFA) for RMBS purchased by Fannie Mae and Freddie Mac; and $86.95 million to resolve federal and state securities laws claims brought by the Federal Deposit Insurance Corporation as receiver on behalf of failed financial institutions. Morgan Stanley also previously entered into a consent decree with the SEC to pay $275 million, bringing to almost $5 billion the total payout by Morgan Stanley in connection with its fraudulent sales of RMBS.
In announcing the settlement, a host of government regulators stressed the importance of holding financial institutions accountable for engaging in improper investment practices, particularly those that precipitated the financial crisis. DOJ Civil Chief Benjamin C. Mizer said “[t]hose who contributed to the financial crisis of 2008 cannot evade responsibility for their misconduct.” And Acting U.S. Attorney Brian Stretch of the Northern District of California stated the strong commitment of his office to go after “[a]buses in the mortgage-backed securities industry such as these [which] helped bring about the most devastating financial crisis in our lifetime.”
By Molly Knobler
Only a day after the SEC announced that agro-giant Monsanto would pay an $80 million penalty to settle charges of accounting improprieties in connection with sales of its flagship product Roundup, attorney Stuart Meissner has said that he represents the whistleblower who brought the matter to the SEC’s attention. If true, under the rules governing the SEC’s whistleblower program, Mr. Meissner’s client could be awarded up to 30% of the SEC’s recovery, or $24 million.
An SEC investigation found that over the course of several years, Monsanto booked substantial revenue derived from a rebate program designed to boost sales of Roundup, but failed to recognize related program costs at the same time, in violation of Generally Accepted Accounting Principles. Generic competition for the weed killer ha d undercut Monsanto’s prices and resulted in significant loss of market share. The rebate program, aimed at retailers and distributors, was intended to reverse some of these losses. The rebate program may have been successful in doing so, but as a result of insufficient internal accounting controls, Monsanto failed to properly account for the costs of the program in the appropriate reporting periods. As a result, Monsanto materially misstated is consolidated earnings in corporate filings during a three-year period.
This settlement is remarkable not only for its size and target but for the early identification of the involvement of a whistleblower and the SEC’s “return to its roots” with an action not against a large bank or financial institution involved in sophisticated fraud (the standard fare for SEC settlements these days), but rather against a large public company engaged in classic accounting misstatements. The SEC used its press release announcing the settlement as an opportunity to remind investors and regulated parties that “[f]inancial reporting and disclosure cases continue to be a high priority for the Commission.”
The SEC did not announce the involvement of a whistleblower. The SEC treats the identity of whistleblowers, and their involvement with any particular case, as confidential information. And because whistleblowers frequently face retaliation if their actions are disclosed, they are similarly likely to keep their identities under wraps. As a result, generally the existence of a whistleblower is unknown until the SEC makes and announces an award. This case is different only because Mr. Meissner, presumably with the blessing of his client, has disclosed that his client exists. All we know at this point is that the client is an employee of Monsanto and that he/she reported internally before turning to the SEC’s whistleblower program. But it’s a safe bet that those keeping an eye on the SEC whistleblower program will be looking for an award between $8 million (10%) and $24 million (30%) in the coming months.
By the C|C Whistleblower Lawyer Team
GSK fined for deals with competitors — The Competition and Markets Authority says GSK made more than £50m of payments to companies making generic versions of its anti-depressant Seroxat to delay them coming to market. GSK has been fined £37,606,275 and the generic firms have to pay £7.4m. BBC
Boeing faces SEC probe of Dreamliner, 747 accounting — The SEC is investigating whether Boeing properly accounted for the costs and expected sales of two of its best known jetliners, according to people with knowledge of the matter. Seattle Times
Whistleblower tips lead CA state auditor to $370,000 in waste — Whistleblower tips alerted California’s auditor to $370,000 in waste and forgery at various state agencies including state psychiatric hospitals. Orange County Register
Jackie Robinson West parents file suit against league — The parents of 13 members of the Jackie Robinson West baseball team that captivated Chicago with a national championship in 2014, only to be stripped of the title for residency violations, have sued the team’s director, Little League Baseball and the whistleblower who alerted authorities to the boundary issues. Chicago Tribune
Dozens of Georgia prison officers charged in corruption probe — A corruption probe into Georgia state prisons led to the arrests on Thursday of 46 current and former officers who were indicted by a federal grand jury after the probe found prison officers were offering protection for methamphetamine and cocaine trafficking in exchange for bribes. Reuters
— “PEOPLE ARE DYING NEEDLESSLY BECAUSE WE ARE MOVING TOO SLOW.”
Resignation letter of Jullette Saussy, the medical director for the Washington DC fire department, commenting on problems she confronted in the city’s fire department.
By the C|C Whistleblower Lawyer Team
Cancer “treatment” clinic owner convicted of providing fraudulent medical services – Antonella Carpenter, the former owner of Lase Med Inc., told patients she could cure cancer, but she in fact was just injecting them with a saline solution mixed with food coloring. DOJ
Washington DC medical director resigns, citing mismanaged fire department – The medical director for the city’s fire department said that the agency is plagued with problems and people are dying unnecessarily. Washington Post
Monsanto’s $80 million settlement this week brought about by whistleblower – The whistleblower who tipped off the Securities & Exchange Commission about Monsanto’s violations of accounting rules could receive upwards of $24 million. Accounting Today
DOJ files False Claims Act lawsuit against New Jersey physician – Dr. Labib Riachi and his two medical practice companies allegedly billed the government millions of dollars for tests that were never performed and physical therapy performed by unqualified people. USAO – DNJ
Trader sues hedge fund under Dodd-Frank – An energy commodities trader claims that Vermillion Asset Management mismanaged funds, leading to an “Enron situation” that wiped out investors, and then misled investors into believing they would still earn their stakes back. Greenwich Time
By Hamsa Mahendranathan
Violators of the False Claims Act can be subject to significant damages: the Act provides treble damages and civil penalties of between $5,500 and $11,000 for each false claim. But in some cases, the correct measure of damages can be a murky subject. This is especially true when considering whether the damages should account for any value the government received on the contract. Last week, the Sixth Circuit’s United States ex rel. Brian Wall v. Circle C Construction, LLC decision weighed in on this issue, holding that the government’s damages for a contractor’s illegal underpayment to its workers is the amount of the underpayment itself, and not the entirety of the government’s payments on the contract.
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— “The first step in a real war on fraud is for the federal government to declare war. The new CTFC whistleblower web site is a very good step in the right direction, but it can’t be the last.”
Patrick Burns, Director of Taxpayers Against Fraud, a non-profit organization dedicated to promoting and strengthening federal and state whistleblower laws, on whether it is time to reconsider the CFTC Whistleblower Program. Click here for more.
By Gordon Schnell
Under the False Claims Act, the public disclosure bar prevents whistleblower suits challenging fraud already disclosed through certain public channels like the news media. The rule is designed to discourage whistleblower actions based on information already in the public domain, unless it was the whistleblower that actually put it there. It is supposed to neatly balance the twin-goals of discouraging so-called “parasitic” lawsuits and encouraging whistleblower suits based on true inside or independent knowledge. With last week’s United States ex rel. Moore & Company v. Majestic Blue Fisheries decision, the Third Circuit made a strong statement of the types of cases it sees on the right side of this sharp divide.
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By the C|C Whistleblower Lawyer Team
Is it Time to Reconsider the CFTC Whistleblower Program? — Taxpayers Against Fraud commentary on how the CFTC whistleblower program is doing. TAF
Monsanto pays $80M penalty for accounting violations — The St. Louis-based agribusiness agreed to make the payment to settle charges it violated accounting rules and misstated company earnings as it pertained to its flagship product Roundup. SEC
Taming drug prices by pulling back the curtain online — “Now, a few entrepreneurs say they are aiming to fundamentally change the way people buy drugs, bringing the industry into the digital age by disclosing the lowest prices for generic prescriptions to allow comparison-shopping.” NYT
Miami physician pleads guilty to $20M Medicare fraud scheme — Dr. Henry Lora, the medical director of the Miami-area Merfi Corporation clinic, admitted taking kickbacks to write prescriptions for home health care patients that were not medically necessary or actually provided. DOJ
Keene Medical Products to pay $460,000 to settle Vermont False Claims Act charges — The state charged the durable medical equipment supplier with submitting improper claims to Medicaid relating oximetry equipment (measuring blood oxygen saturations) and other medical supplies. VT
Boston fire chief convicted of fraud — “District Chief Edward A. Scigliano . . . was found guilty . . . of cheating the city out of nearly $50,000 while he ran the Boston fire training academy by having vendors write checks to his credit card companies, while he took home a flat-screen TV, gas grill, a Sam’s Club living room set and other items paid for with department funds.” Boston Herald