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Federal Judge Joins Growing Chorus Calling for Stiffer Penalties for Corporate Fraud

Posted  January 30, 2013

By Gordon Schnell

It happens all the time these days.  After a lengthy investigation of reported misconduct, the government enters into a hefty settlement with the company, secures from it a mea culpa and promise to change its ways, and trumpets the resolution as another success story in the government’s continuing crusade against corporate fraud.  And no question, the settlements are getting larger and the government feistier in its charge.  In the past few weeks alone, it has extracted eye-popping payouts from a who’s who of business giants — tens of billions from the banks for their mortgage machinations (click here for more); $1.5 billion from UBS for LIBOR rate rigging (click here for more); and $1.9 billion from HSBC for dealing with money launderers and terrorist states (click here for more), to name just a few examples.  But if one federal judge has his way, the price of engaging in corporate wrongdoing is going to rise considerably.  And the monetary fine will be the least of it.

That judge is the Honorable Terrence Boyle of the U.S. District Court for the Eastern District of North Carolina.  He presides over the government’s prosecution of Wakemed Health and Hospitals, an 870-bed hospital system with roughly 8,300 employees.  The case focuses on Wakemed’s practice over the past decade of billing Medicare for millions of dollars worth of costly overnight care for patients who never actually stayed in the hospital overnight.  Federal regulators unearthed the fraudulent practice when a routine audit red-flagged the hospital for having one of the highest “zero-day stay” rates in the country.  This is when a hospital bills Medicare for inpatient hospital stays even though the stay lasts less than a day.  When further digging showed that this data could not be reconciled with actual doctor’s orders or other hospital records, the government knew that Wakemed was up to no good.

Flash forward to the recent court conference where the government presented to Judge Boyle for his approval the 116-page settlement it had negotiated with Wakemed to resolve the matter.  The judge would have none of it.  No matter that the settlement was two years in the making; or that it required the hospital to admit wrongdoing and pay a relatively steep $8 million fine; or even that it reportedly was the first time a hospital was charged criminally for committing Medicare fraud (albeit, under the agreement the criminal charges would be deferred for two years and ultimately dropped if the company behaved going forward).  Judge Doyle refused to approve any of it and instead lambasted the settlement, the hospital and the government lawyers alike.

The Judge did not mince words in his antipathy and excoriated the settlement as just another “slap on the hand” for a “too-big-to-fail” corporate power.  He complained about the skyrocketing number of healthcare fraud cases in the country and its impact on “every American wage earner and every American citizen.”  And he noted the difficulty “for society and the court to differentiate between the everyday working Joe or Jane who goes to prison and the nonprofit corporate giant who doesn’t.”  He complained that deferred prosecution agreements like the one before him are supposed to be for marijuana-smoking teenagers, not corporations accused of financial crimes.  He obviously was looking for a much stiffer punishment against the hospital than the government was willing to extract, and did not appreciate his perceived treatment as mere “window dressing” in the approval process.

Clearly Judge Doyle was trying to make a point in all of this.  It is a point that many have tried to make amidst the recent spate of nine- and ten-figure fraud settlements that have been bereft of any real criminal sanction.  See Too Big to Prosecute?  While the government seems to be stepping up its enforcement might (see Government Ups the Ante for Financial Fraud With Criminal Charges . . .), many still believe it is has a long way to go in shedding a “too-big-too-fail” mindset.

Apparently, Judge Doyle is not alone on the bench in holding this perspective.  The same day he lacerated the Wakemed deal, Judge John Kane in Colorado, took his own hatchet to a proposed ponzi scheme settlement that did not require the wrongdoers to fully admit their wrongdoing.  Click here for the decision.  A month before that, Judge Richard Leon in Washington, D.C. refused to approve a proposed government settlement of IBM’s foreign bribery charges for similarly lacking enough heft to suit the judge’s fancy.  Click here for more.  And of course, there is the well-known rejection by New York federal Judge Jed Rakoff of the government’s proposed $285 million securities fraud settlement with Citigroup because it did not require any kind of admission of wrongdoing.  Click here for the decision.

It remains to be seen whether Judge Doyle and his judicial brethren represent an aberrant course of judicial defiance to what they perceive as the government’s soft stance on corporate crime.  Or whether they are part of a judicial bandwagon collectively trying to goad the government to take a more aggressive posture in its enforcement mentality.  Either way, the government and corporations alike should be on clear notice that, at least for some judges, stiff financial penalties alone are not going to cut it anymore.