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For government, FY 2012 a record year for qui tam actions

It’s safe to say that Boston lawyer Joseph M. Makalusky ended 2012 on a high note.

In late December, Makalusky’s client Mark Giddarie was awarded $18.5 million for his role as a whistleblower in a False Claims Act suit against pharmaceutical company Sanofi, which agreed to pay the federal and state governments a total of $109 million.

Sanofi’s pharmaceutical reps used “free samples” of a product to induce physicians to purchase it — and then unlawfully billed Medicare and Medicaid for the drugs, according to the suit.

Just eight days later, the Ellis & Rapacki partner scored another victory when a second pharmaceutical company reached a $12.2 million agreement with the government. Makalusky’s client in that case, Chad Miller, was awarded $1.7 million for blowing the whistle on Victory Pharma, Inc., his former employer.

In addition to providing cash to doctors, Miller revealed that the company gave out tickets to sporting events and concerts and funded a strip club outing, including the cost of lap dances.

The settlements contributed to the billions of dollars the federal government recouped under the False Claims Act in Fiscal 2012. The dollar amount is likely to rise in coming years with new qui tam programs in place at the Internal Revenue Service and the Securities and Exchange Commission, as well as greater legal protections for whistleblowers.

The cases also demonstrate the breadth of illegal activity, from a big, international pharmaceutical corporation to an outfit so small it told employees they would never get caught, Makalusky says. “And both [cases] show that it takes a person with a lot of courage to come forward and combat fraud.”

‘Old school’ fraud

Over a four-year period, pharmaceutical representatives for Sanofi’s U.S. arm offered physicians free samples of Hyalgan, a drug used to relieve osteoarthritis pain, according to the allegations in the False Claims Act suit.

Reps would cut deals with doctors to provide free samples with the purchase of a certain amount of the drug, Makalusky says. For example, a rep allegedly would provide 25 free samples for every 100 Hyalgan units purchased — and then take the doctor’s office out for a “lavish dinner,” paid for by Sanofi.

Further, the suit claimed that the company would submit false average sales price reports that did not account for the free units, which resulted in government programs such as Medicare and Medicaid paying inflated amounts for Hyalgan. The free samples allowed the company to hold on to the same fixed reimbursement rate as its direct competitor, yet effectively lower the price with the promise of additional, free units to doctors, the government alleged. That way, Sanofi’s product was cheaper than that of its competitor without Sanofi having to actually lower the cost and potentially start a price war.

The fraud perpetrated by Sanofi demonstrates how companies are increasingly using sophisticated techniques to avoid detection and whistleblower actions, Makalusky says. But his second case reveals that “old school” fraud still occurs as well.

A small pharmaceutical company that only hired those new to the industry, Victory Pharma told its reps to find out what doctors coveted, Makalusky says. To do so, the company encouraged its employees to schedule “preceptorships,” an arrangement in which the reps would pay a fee to shadow doctors for the day. But the preceptorships also provided the sales representatives with the chance to bribe physicians.

In one example, a doctor allegedly told a rep that he was having trouble making house payments. The rep’s usual $150 payment for an on-site shadow visit was upped to $300, and the doctor was told the extra cash was for his house. Another doctor, a big fan of the Indiana University men’s basketball team, reportedly was treated to tickets to the Big 10 Tournament, valued at approximately $1,600.

And Victory Pharma representatives escorted the staff of yet another doctor’s office to a nearby strip club and paid for lap dances. When a rep asked how he was supposed to bill the activity, his manager told him to classify it as “tips,” Makalusky says.

Qui tam actions are “uniquely challenging,” according to Makalusky. Because a whistleblower’s complaint remains under seal while the government investigates the allegations — sometimes for years — the whistleblower typically must deal with a range of emotions while he waits, none of which he can share with former colleagues, friends or family.

Makalusky has an insider’s understanding of the struggle, having witnessed it firsthand in 2008. Chatting with his brother about a whistleblower who was in the news, Makalusky was startled when his brother told him that illegal conduct by a former employer was the reason he quit his job as a pharmaceutical sales representative. His brother ended up becoming his first whistleblower client, ultimately sharing a $58 million award with three other relators when the company settled the suit with several states and the federal government for $425 million.

A record year

Makalusky’s settlements are part of a record year for qui tam actions. Fiscal 2012 brought nearly $5 billion in recovery for the federal government under the Federal Claims Act, a new record after the previous year’s record of $3.2 billion.

Although the FCA was originally signed into law by President Lincoln, it was amended and modernized in 1986. The continuing increase in fraud recovery can be attributed to several factors, says Jeffrey A. Newman of Boston and Marblehead, Mass.

Whistle-blowing itself has become “much more well-accepted,” Newman says. People understand the need to report fraud and protect the government, and even competitors are getting in on the action, particularly involving the Foreign Corrupt Practices Act.

And when one case makes the news, others follow. Settlements “reveal to other individuals in that industry that they can report [fraud], too,” Newman says.

In addition, Congress has added enhancements to the FCA with new protections for whistleblower retaliation. A victorious plaintiff can receive front pay, back pay and even special damages, Newman says.

Finally, new subject matter areas are now getting the attention of whistleblowers. In particular, the Securities and Exchange Commission and the IRS have strengthened their whistle-blowing programs, Newman notes, with a record $104 million award going to an IRS whistleblower in 2012.

All of the factors “are coming together in a perfect storm,” he says. “The nation has suffered as a result of clear fraud against the government, and there is a wholesale recognition that whistle-blowing is not only a good thing, but essential to the preservation of our way of life.”

While health care fraud still leads the pack for total recovery (accounting for $3 billion in 2012), the new hot area for qui tam actions involves fraud in the financial industry, particularly related to mortgages, Boston lawyer Rory H. Delaney says. “When banks go bad, it’s even bigger than pharmaceutical companies.”

There has been a trend by practitioners to unseal cases sooner than the prior national average of 13 months, Delaney says. The U.S. Department of Justice reportedly now has an unofficial policy of lifting the seal on qui tam cases after nine months.

“The practical impact is that people who file these cases increasingly have to litigate,” which Delaney says can prove problematic for a law firm that must front the money to take on a sizable defendant.

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