White-Collar Defense
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White-Collar Defense

August 2012

The Obama Administration has placed a premium on eliminating fraud from the health care system. The efforts of its special Medicare Fraud Strike Force recouped a record-breaking $4 billion in 2011. And that's just the beginning of a new focus on enforcement. Under the Patient Protection and Affordable Care Act, the Department of Health and Human Services can suspend payments to providers suspected of fraudulent behavior and ultimately exclude them from government contracts for years. Our panel of experts discusses this as well as the changing landscape in the securities practice area post-Madoff and the economic downturn. They also look at the overlap and divergence in FCPA and antitrust law. They are Benjamin Gluck and Gary Lincenberg of Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg; and Doug Sprague with the U.S. Attorney's Office in San Francisco. The roundtable was moderated by California Lawyer and reported by Rick Galten of Barkley Court Reporters.

Moderator: What are the differences and similarities between current Antitrust and Foreign Corrupt Practices Act (FCPA) law? How have recent rulings, such as in AU Optronics (United States v. AU Optronics Corp., No. 09-CR-110 (N.D. Cal.)) and Lindsey Manufacturing (United States v. Aguilar, No. 10-CR-01031 (C.D. Cal.)), affected the practice area?

Lincenberg: Antitrust and FCPA are two of the most "internationalized" areas of white-collar practice. Both (1) test the limits and creativity involved in foreign evidence gathering; (2) generally involve large corporations; (3) seek to preserve fair competition, and (4) have generated a fair amount of business in recent years for white-collar practitioners.

But the two areas have major differences. Whereas antitrust cases generally involve companies in major industrialized countries (such as Japan, Korea, and Germany), FCPA cases are more likely to involve developing and non-democratic countries (the likes of China, the United Arab Emirates, and Gabon). The amnesty program is a key feature of antitrust cases. The corporation that comes forward in an antitrust case generally is a competitor, and they get a very real reward when they get an amnesty "marker" from the antitrust division documenting the company as being the first in the door. There is no similar FCPA amnesty program and it is far less often that a competitor originates an FCPA investigation.

In FCPA cases, the government must prove corrupt intent, which usually is harder to prove than is the more typical intent requirement in antitrust cases. In FCPA cases, it is rare to see smoking gun emails between the alleged briber and the alleged government official; whereas in a lot of antitrust cases, one often finds emails showing the sharing of pricing information between competitors.

Sprague: Among the similarities is an expanding reach of federal regulators in criminal prosecutions. The AU Optronics case involved, I believe, the first foreign nationals convicted after trial by the antitrust division for conduct abroad and prosecuted in U.S. courts. There is a perceived increase in federal regulators focusing on not just extracting large fines from corporations, but also charging individual defendants and obtaining convictions. The top two executives in AU Optronics, for example, were convicted.

Gary [Lincenberg] mentioned the lack of amnesty in the FCPA. In the antitrust field, Samsung, for example, was the first corporate entity to come forward in the AU Optronics matter, and Samsung received leniency from the antitrust division. Federal regulators look at whether a corporation brought information to the Department of Justice or if the DOJ found it through a whistleblower or another insider or other complaint source. If a corporation discovered it because of a thorough compliance program, that would weigh in its favor. It may not be amnesty, but it certainly is looked upon favorably for corporations in these contexts.

Lincenberg: In AU Optronics, although the two top executives were convicted, three of the five defendants who went to trial were not convicted. The history of antitrust prosecutions against individuals is a mixed bag from the government's perspective. In the DRAM investigation (United States v. Samsung Elec. Co., Ltd., No. 05-CR-0643 N.D. Cal.), the individual who went to trial was acquitted. Over the past ten years, the antitrust division's record at trial against individuals is much weaker than the DOJ's record in white-collar prosecutions.

On the other hand, the antitrust division has done an effective job of obtaining guilty pleas from both individuals and companies. The antitrust division effectively pits individuals against each other. In a typical case, the corporate target settles. The settlement includes most employees, but a number are "carved out" from the settlement and therefore subject to prosecution. Consistent with their settlement, employers often pressure their employees to cooperate. Also, since one's willingness to cooperate is a major factor in the charging decision, employees often compete at the pre-indictment phase to avoid being prosecuted by agreeing to travel to the United States to give interviews to the prosecutors. The antitrust division thereby gains access to overseas witnesses without expending a lot of resources or effort.

In the FCPA area, the Lindsey case has received a lot of attention because Judge Howard Matz (my former partner) overturned convictions based on prosecutorial misconduct. But one should not read into Lindsey any suggestion that jurors don't like FCPA cases; remember that before the Lindsey convictions were thrown out, the jury had convicted two individuals.

Several other FCPA cases are more encouraging to defense attorneys who are debating whether to roll the dice and go to trial. The so-called "Shot" or "Africa Sting" prosecution in Washington, D.C. (see United States v. Alvirez, No. 09-CR-00335 (D.D.C. superseding indictment filed Apr. 16, 2010)) resulted in a lengthy trial followed by acquittals. In the O'Shea prosecution in Texas (United States v. O'Shea, No. 09-CR-629 (S.D. Tex.), the judge granted defendant's motion for judgment of acquittal. Those cases may be more telling about how jurors and judges perceive FCPA cases.

Moreover, the bias against corporate defendants charged in other business crime cases is not as pronounced against individuals accused of bribing foreign officials to win contracts. Many jurors accept such payments as the way that business must be done to win certain foreign contracts. Especially in these times, people want to hear news that U.S. companies are winning foreign contracts and are less concerned that they may need to bend the rules to compete abroad.

Sprague: In Lindsey, two defendants, the president and CFO, were convicted by a jury. The issues that undid those convictions were quite separate from whether there was sufficient evidence to convict or whether a jury would do so. In the O'Shea case, the judge said there wasn't enough evidence. It may embolden FCPA defendants to go to trial, but neither of these cases will make the government shy about doing the same.

Lincenberg: Well, I agree that antitrust and FCPA are fertile areas for the government. As much or more than any other area, the government benefits here from companies aggressively putting compliance programs into place, conducting exhaustive internal investigations, turning over a lot of information to the government, settling, and cooperating.

Sprague: I should add that the opinions I have expressed or will express today are my own and not those of the Department of Justice.

Moderator: How has the landscape in securities fraud prosecutions changed in a post-recession and post-Madoff era?

Lincenberg: In the wake of Madoff and the recession, there have been more fraud investigations, particularly brought by the SEC. The SEC seems to increasingly be taking the lead (instead of DOJ). I see a significant up-tick in the filing of insider trading cases and commend the government's efforts to adopt more traditional law enforcement techniques, such as wiretaps, and successfully capturing evidence of intent. The sentences for insider trading have also become stiffer, capped off by the 11-year sentence handed down in New York to Raj Rajaratnam (United States v. Rajaratnam, 09-CR-1184 (S.D.N.Y. superseding indictment filed Feb. 9, 2010)). That sentence sets an important benchmark for prosecutors and defense attorneys to use to compare and contrast their cases.

In light of Dodd-Frank, the sentencing commission has proposed amendments to the sentencing guidelines. This should result in even harsher sentences. It seems that younger prosecutors and judges are already starting to view them as the norm.

In the securities area, the government has to be careful not to let the quest for statistics obscure the quest for justice. Assistant United States Attorneys (AUSAs)need to be trained to look at the individual circumstances of each case. The government has a panoply of tools available to enforce the laws. Even criminal division AUSAs should be sensitive to the fact that sometimes civil remedies are more appropriate.

Gluck: With this economy, when you walk into a courtroom as defense counsel with a client charged with a fraud offense, the reception from the jury or even from the judge isn't pleasant. It's interesting, however, that the economy and the big fraud cases being prosecuted have nothing to do with each other. Bernie Madoff didn't cause the recession. But when someone like Madoff walks into the courtroom, the economic climate makes life more difficult for him. And there's potential for really severe sentences that until recently were just unthinkable.

A few years ago the Supreme Court loosened up the sentencing guidelines. They've become advisory under the whole post-Blakely and Booker regime. (Blakely v. Washington, 542 U.S. 296 (2004); United States v. Booker, 543 U.S. 220 (2005)). But right now we're seeing very severe sentences for fraud defendants. It's not at all uncommon now in relatively run-of-the-mill fraud cases for people to get 10- to 14-year sentences.

There seems to be a one-way ratchet. Bernie Madoff getting 150 years likely informed Allen Stanford getting 110 years. That leads to smaller cases getting 10 years. We just had a sentencing (United States v. Flores, No. 10-CR-27 (C.D. Cal.) here in the Central District of California of 14 years for a $1.2 million fraud, but it didn't seem to have any extraordinary circumstances. More than ten years on fraud cases is becoming common.

Sprague: I don't agree with the premise that the length of sentences in fraud cases is rising; it could be true, I just do not want to accept the premise without support. I haven't analyzed that premise with, say, sentencing commission reports, but I suspect that the upward variance figures are very, very small, in the neighborhood of 2 or 3 percent, with a much larger proportion within or below the guidelines, including non-cooperators falling below the guidelines.

I don't agree that the economy is a factor in the length of a sentence, but it is a factor in the number of fraud investigations and prosecutions. During and after a recession, people ask for their money back, and, more importantly, new investors don't have money to give. Those two factors cause a lot of Ponzi schemes to go belly up, and so we get a lot more referrals, especially in real estate-backed Ponzi schemes.

If you talk to victims, there isn't such a thing as a "run-of-the-mill" fraud case. Judges seem to pay more and more attention to the devastating consequences of fraud schemes to victims. Judges comment on not just the loss of money and the resulting difficulty to pay for college or to retire, but that the victims in these cases lose their ability to trust themselves and to trust other people, because one con artist stole that from them, too.

Other factors go into these sentences, and therefore some could be quite high - and deservedly so. I'm surprised to hear there was a 14-year sentence for a $1.2 million fraud, just based on the loss amount. Absent enhancements and assuming a guilty plea, that guideline range would be in the neighborhood of 33 to 41 months. I suspect multiple aggravating factors ratcheted that up to 14 years.

I agree there has been a significant up-tick in insider trading referrals, investigations, and prosecutions. Unquestionably one of the post-Madoff developments is the SEC restructuring. Their enforcement division has restructured around specific areas of expertise. They've streamlined their handling of complaints and tips to result in better fraud detection. For example, they created the Office of Market Intelligence, encouraging greater cooperation of insiders by having a funded whistleblower program.

Lincenberg: Doug [Sprague] may be right that upward variances are used by judges in a low percentage of cases, but that just illustrates how tough the guidelines can be. In an investor fraud case with a loss of over $20 million, for example, it doesn't take too many enhancements before a defendant is facing life imprisonment under the guidelines. And often not all of the loss amount was due to the fraud; lately a lot of the loss amounts were due in part to the weak economy.

Sometimes the loss is partly the fault of the investors; a lot of people invest in high-risk areas. Many of the fraud schemes involved promises, which the investor should have known were too good to be true. Such investors should bear some accountability and judges should consider this in assessing the seriousness of the fraud. In short, not all $20 million loss cases are equal.

Sprague: The accountability for placing millions of dollars of other people's money at risk based on false statements belongs to the defendant, not the economy or the victims.

Gluck: Doug [Sprague] pointed to the really important human story of the victims. It's not some loss that nobody is going to bear, but a person who lost his retirement savings. But what gets lost is how fraud fits in the scheme of things when a person can murder someone in California and do much less than 14 years? But if a person commits a financial fraud, he's going to get 14 years and he will actually serve the vast majority of that time.

The point that gets lost in this is whether such sentences are necessary. Title 18 U.S.C. § 3553 says that sentences must not be longer than necessary to accomplish the goals of sentencing. If you take a first-time offender in a financial fraud case even with all the terrible fallout to victims, § 3553 says you must ask what sentencing goals will not be accomplished if instead of giving this defendant 14 years, we give him 12? Or we give him 8? Eight years is an awfully long time and it seems that this question is getting overlooked.

Moderator: How has your practice been affected by recent trends in health care fraud cases, including cracking down on foreign drug importers, the 2009 amendments to the False Claims Act regarding failure to report overpayment, and the aggressive investigation led by the Medicare Fraud Strike Force?

Gluck: According to government statistics for the 2011 fiscal year, health care-related convictions were up 27 percent between 2009 and 2011, and charges were up 74 percent from 2008 to 2011. The government brought criminal health care-related charges against about 1,400 defendants in 2011, the highest number ever.

In part, this is due to health care reform and the effect of the government's Medicare Fraud Strike Force cases. Of the 742 convictions obtained last year, 200 were Strike Force-related, with average Strike Force sentences of 47 months. The government recovered over $4 billion in its health care fraud cases so overall we're seeing a large up-tick in enforcement. We are witnessing what promises to be a fundamental change in the way health care fraud cases are investigated and enforced.

Many Strike Force cases don't involve actual health care services but organized crime stealing billing information and billing Medicare. They are also different in the way they are being investigated, with tools traditionally seen in the organized crime-type case - cameras on telephone poles, surveillance, wiretaps, and the like. The government has also been very successful using data mining to review masses of health care claims and to identify statistical outliers and suspicious patterns of claims.

This combination of sophisticated analysis, along with old-fashioned, mob-style criminal investigatory techniques are starting to filter out from the Strike Force cases into other run-of-the-mill health care fraud cases. We're seeing cases that start with insurance companies looking at statistics, and then it turns into a criminal investigation of all kinds of things, such as billing services that weren't rendered, upcoding, and kickbacks.

It's also important to keep in mind the government's more aggressive stance for excluding providers from further participation in federally funded programs. The government is becoming more aggressive about applying them. Previously if your client was under investigation, and you obtained a resolution, for example, that the corporation would enter a guilty plea but the individual wouldn't, you could be much more optimistic that Office of Inspector General would not exclude your client based on that outcome. Today, the chances are that the individual will be excluded.

Sprague: I agree with almost everything Benjamin [Gluck] said, and it reflects clear direction from DOJ leadership and corresponding resources. Health care fraud has clearly been a priority of the Department of Justice over the past several years. By resources, I mean additional assistant U.S. attorneys to prosecute the cases, additional paralegals and other support staff to handle the large amount of paperwork often associated with health care investigations, additional financial analysts to perform data mining, and substantial training for new programs. This overall trend is going to continue.

Lincenberg: At the risk of generating some controversy on this health care topic, I think that as a general matter, the most important factor for what should be dealt with criminally - particularly on the federal level, or even on the state level - versus civilly, is between malum in se and malum prohibitum offenses. We've had a lot of success defending against health care fraud prosecutions where the jury felt the government overreached, for example, in prosecuting doctors for allegedly failing to follow the bureaucratic rules unrelated to the delivery of good medical care.

Gluck: Gary [Lincenberg] raises a very good point. Using "mob-style" investigatory techniques may be appropriate in some cases but it's a bit dangerous to think of typical health care fraud cases as akin to organized crime cases, because they're not. For example, we're representing doctors in the nationwide investigation connected to counterfeit chemo drugs and those are much more subtle questions related to whether a doctor had reason to be suspicious of a drug vendor. Those get into very complex and subtle questions of medical care and those are very different from Strike Force cases where a doctor's ID was stolen and used to bill for some nonexistent patient.

Lincenberg: The government has to be careful not to be co-opted by the insurance companies under the new provisions of the Patient Protection and Affordable Care Act.

Gluck: That's correct. The health care system is fraught with regulations. And when you take government money, you are essentially representing that you have complied with the regulations. Based on amendments to the Fraud Enforcement Recovery Act and the health care reform laws, if a provider learns that it received money to which it is not entitled, the provider must return it to the government within 60 days, or else it's a false claim.

That raises a lot of questions, and there are innumerable regulations in health care. Under the new rules, any regulation could conceivably trigger a criminal enforcement action and many regulations are inherently unclear. So these new tools seem to be working as seen by the numbers discussed earlier, but as they spread into more typical health care-type cases, they present a danger and need to be watched very carefully.

Lincenberg: Doug [Sprague] is going to disagree with that.

Sprague: Well, I am. But even before that, it's unclear if you're saying the issue is actually ripe. Maybe you're warning the government to look for this or be careful of it. But in a criminal case, we'd have to prove that someone intended to defraud someone or intended to violate rules. The focus is on criminal intent, not a "gotcha" from 60 days ago that you didn't have to pay attention to at the time and then you went back in a good-faith effort to correct. There's a pretty big gap between those two.

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