CAPITAL MARKETS ALERT: The Fraud Enforcement and Recovery Act of 2009’s Amendments to the False Claims Act Significantly Impact Recipients of Government Funds

    22 May 2009
    On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009, or “FERA.” Congress passed FERA to improve enforcement of mortgage and securities fraud, financial institutions fraud, and other fraud related to receipt of Federal financial assistance, such as TARP or Recovery Act funds. Section 4 of FERA revises the False Claims Act (“FCA”) in ways that will significantly impact any one who pays to or receives money from the Federal Government – including contractors, grantees and other entities receiving Recovery Act funds.

     

    FERA Broadens FCA Liability

    FERA’s Section 4 greatly expands the universe of actions on which False Claims Act liability may be premised:

     

    • FERA extends liability to anyone who knowingly presents, or causes to be presented, a false claim or statement for payment or approval. The FERA amendments remove the requirement that a claim or statement be designed “to get” false claims paid or approved “by the Government.” To illustrate the impact of this change, the Recovery Act requires prime contractors to submit quarterly reports to the Government, and conditions receipt of Recovery Act funds on submission of the quarterly reports. If a subcontractor on a Recovery Act project submits a status report to its prime contractor that falsely describes the subcontractor’s progress, the subcontractor could be subject to FCA liability even if its report to the prime was not submitted to the Government or directly tied to the prime’s payment to the subcontractor. This is so because, under the new FERA language, the subcontractor has “caused to be presented” a false statement – even though the statement was not presented to the Government specifically to obtain payment. This change to the statute is retroactive to June 7, 2008.

    • FERA extends liability to anyone participating in a conspiracy to decrease an obligation owed to the United States. Until the FERA amendments, the FCA’s conspiracy section was limited to claims for payment, which courts had interpreted to exclude “reverse” false claims, or claims or statements made for the purpose of decreasing a liability to the Government. The FERA amendments ensure that the conspiracy provision covers the reverse false claim situation. Using the Recovery Act as an example again, a grantee with a requirement for matching funds could be liable under the FCA for participating in a conspiracy to submit false claims or statements aimed at reducing the amount of matching funds.
    • FERA extends liability to overpayments even if there is no affirmative act to submit a false claim or statement. FERA adds language to the FCA imposing liability on anyone who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” “Obligation” is defined to include overpayments. Notably, the language does not require that the contractor have submitted a falsely inflated invoice, but instead captures the situation where a contractor becomes aware of a Government overpayment through, for example, an internal audit. This new provision therefore adds significant layers of complication to the timing and performance of internal audits.

    • FERA expands the definition of “claim” to include claims made to recipients of Government funds where the money is to be spent or used on the Government’s behalf or used to advance a “Government program or interest.” This FERA change underscores that a false claim or statement need not be made to the Government itself so long as the funds involved are used on behalf of the Government or in furtherance of a Government program or interest. This added language, if construed broadly by the Department of Justice and the courts, may visit liability on second and third or lower tier subcontractors or subgrantees.

    FERA’s Procedural Changes Ease Restrictions On FCA Cases

     

    In addition to expanding which claims or actions may result in FCA liability, the FERA amendments to the FCA include procedural changes easing restrictions on the conduct of FCA cases. These include:

     

    • FERA permits Government claims in intervention to relate back to the initial relator’s complaint. The FERA amendments expand the statute of limitations applicable to Government complaints in intervention by stating that such Government pleadings will relate back to the filing date of the initial relator’s complaint.

    • FERA broadens the dissemination of information obtained by the Government through Civil Investigative Demands (“CIDs”). The Attorney General or his or her designee may issue CIDs for documents or testimony in connection with the investigation of an FCA case. The FERA amendments now expressly authorize the sharing of information obtained under a CID with “any qui tam relator,” with Federal, state or local government agencies, and in connection with “official use,” which includes sharing the information with courts, consultants, auditors, experts, counsel and arbitrators and mediators, so long as it is done in connection with an investigation, case or proceeding.

    Pending FCA Amendments Will Generate Many New FCA Plaintiffs

     

    FERA most likely will not be the only change to the FCA this congressional term. Pending legislation such as H.R. 1788 would also amend the statute in significant ways. These bills, for example, would greatly weaken the “public disclosure” defense to qui tam suits by eliminating the FCA defendant’s right to move to dismiss a relator complaint based on the public disclosure bar. When viewed in connection with the vast amount of public information to be posted on Recovery.gov – agency and GAO reports, agency spending reports, summaries of contractor progress reports – the elimination of this defense portends an exponential increase in private plaintiff suits under the FCA.

    Written by Mary Beth Bosco