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HHS Contractors May Have Additional Disclosure Obligations As Contractors 

Earlier this week, I posted Part I which dealt specifically with the Guidance released by OIG-HHS on contractor disclosures and the relevant Sections included in the Guidance.

Today, I will focus on why OIG’s guidance is a bit, well, misguided. In issuing its guidance on disclosure on its site, OIG-HHS stated, in unambiguous terms, as follows:

The HHS OIG’s contractor self-disclosure program provides a means for contractors to self-disclose potential violations of the False Claims Act and various Federal criminal laws involving fraud, conflict of interest, bribery or gratuity. The Federal Acquisition Regulation (FAR) requires certain Federal contractors (those with contracts valued over $5,000,000) to disclose when they have credible evidence of one of these violations. These contractors are required to make their disclosures to the Office of Inspector General. HHS OIG accepts contractor self-disclosures regarding contracts awarded by any HHS Operating or Staff Division.

At first blush, someone reading this statement might believe that the disclosure requirement above only applies to contactors with contracts valued at more than $5 million. Technically, this is correct.  The mandatory disclosure requirement mentioned above is set forth in 48 C.F.R. Section 52.203-13 (“Contracts Clause”), which applies to contracts with a value of more than $5 million.

Yet, in practice, it would be borderline reckless to advise a contractor client that disclosure may only be required when the contractor client has entered into a contract with HHS with a value of more than $5 million because a failure to timely disclose “credible evidence” of  certain Title 18 criminal violations, a violation of the False Claims Act, or any “significant overpayments,” entitles HHS to suspend or debar the contractor. This is true regardless of the amount or value of the contract.

Indeed, pursuant to 48 C.F.R. Sections 9.406-2, 9.407-2, the debarring official may debar a contractor, based upon the preponderance of the evidence, for any of the following:

a knowing failure by a principal, until three years after final payment on any government contract awarded to the Contractor, to timely disclose to the Government, in connection with the award, performance, or close out of the contract or subcontract… credible evidence of a (i) violation of the False Claims Act, (ii) a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18, or (iii) significant overpayments, other than overpayments resulting from contracting finance payments..

Accordingly, HHS contractors (and contractors, generally) should view disclosure more broadly.

Further, there are significant differences  (e.g., to whom, when, what, and how a violation must or should be reported) between the suspension and debarment disclosure provisions found at 48 C.F.R. Sections 9.406-2, 9.407-2 and the mandatory disclosure provision or Contracts Clause found at 48 C.F.R. Section 52.203-13  as follows:

1. Who Should Report. Pursuant to the suspension and debarment provision, a “principal” includes an owner, director, partners, or person having management or supervisory responsibilities within a business entity; head of a subsidiary, division, or business segment, and similar positions, whereas the affirmative disclosure requirement set forth in the Contracts Clause only applies to the “Contractor.”

2. How to Report. Under the Contracts Clause, disclosure must be made in “writing” to OIG  (so, the Guidance provided by OIG-HHS on this point is helpful), but the suspension and debarment clause states that disclosure is to be made to the “Government,” which, read literally, could be a phone call or a letter to the Contracting Officer. Furthermore, in this context, a failure to disclose is a ground for debarment. So, the contractor may want to disclose the violation to the Contracting Officer and may also prefer to disclose “credible evidence” of the violation and any steps that the contractor has taken to remediate the violation (internal investigation, discipline, etc) to the SDO and/or HHS debarment counsel. After all, the SDO decides whether to debar a contractor.

3. When to Report. The Contracts Clause does not expressly provide a time limitation governing when a disclosure must be made, whereas the suspension and debarment provision contains a three year period governing disclosure. In fact, once a final payment on the government contract at issue has been made, the three year clock starts running on when a “principal” should disclose “credible evidence” of a violation in order to potentially avoid receiving a Notice of suspension and proposed debarment from HHS. As such, deciding when “final payment” on the contract occurs is a critical determination since it will determine when the 3 year clock begins running. Regardless of when the final payment occurs, contractors should not “sit on” their disclosure because, in practice, SDO’s may be less inclined to view such disclosures as “timely.”

Contractors of Department of Health and Human Services Receive Additional Guidance for Disclosing Violations to OIG

Broadly speaking, organizations that enter into contracts with the Department of Health and Human Services (HHS) are generally considered government contractors. As government contractors, organizations also have mandatory disclosure requirements, which are separate and apart from other, voluntary disclosures that health care providers or suppliers might make to the Office of the Inspector General (OIG) for HHS. For example, contractor disclosure is mandatory when there is “credible evidence” (which is a higher standard than “reasonable grounds to believe”)  of a violation  the False Claims Act, or a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18.

To this end, OIG-HHS recently posted an (8) page guidance document to its website, Guidance for Submitting a Contractor Self-Disclosure, providing a road map for submitting a contractor disclosure to OIG.

The Guidance document contains the standard government disclaimer which clarifies that: “Contractor self-disclosures are made with no advance agreement regarding possible OIG resolution of the matter and with no promises regarding potential civil or criminal actions by the Department of Justice. Prompt disclosure, full cooperation, completed access to necessary records, restitution, and adequate corrective actions are key indicators of an attitude of contractor integrity even in the wake of self-disclosures of potential criminal liability.”

Further, the Guidance document contains (3) Sections which merit additional discussion.

Section E – Disclosure

Provide a full description of the nature of the violation being disclosed, including the period during which the violation occurred, the names of individuals involved, and an explanation of their roles in the alleged conduct and the relevant periods of their involvement. This field must be completed to submit a disclosure.

Comment: It is not uncommon to see these types of requirements as part of a disclosure (e.g. OIG Provider Self-Disclosure Protocol) or as a condition of a deferred prosecution agreement (DPA). The Contractor should therefore expect to make these types of disclosures if the contractor wants to continue doing business with the government. The Contractor should also expect that counsel for the individuals “involved” might challenge the descriptions provided in the self-disclosure assuming counsel is able to obtain a copy of the disclosure provided to OIG.

Section F – Overpayments

Did an Overpayment Occur?

Comment: Contractors should broadly construe the word “overpayment” to include all overpayments and not just overpayments that result from violations of the False Claims Act. Read literally, a contractor might be permitted to simply write “yes” or “no” in its disclosure. But, if the overpayment results from a violation of the FCA, then perhaps an additional description of the circumstances surrounding the violation should be included in the disclosure either in this Section or Section E.

Estimated Amount of Overpayment

Comment: Again, this leaves open the possibility that the Contractor can simply write in a number since it does not expressly require the Contractor to undertake any analyses or implement any specific method for calculating the overpayment.

Nonetheless, where an overpayment is not easily quantifiable, the Contractor should adopt a reasonably acceptable method for calculating the overpayment and should attach any corresponding reports to support the overpayment noted in the disclosure. Although OIG may take issue with the method used to calculate the overpayment, the report and the analyses contained in the report will demonstrate to OIG that the Contractor has made a good faith effort to calculate the overpayment.

Finally, while the Guidance Document recommends a workable format for submitting a disclosure and does not provide any guidance on when, or how, to reimburse the government for an overpayment, the Contractor might consider submitting a check with the overpayment report and determination since the preamble to the Guidance document specifically references “restitution” as one of the “key indicators of an attitude of contractor integrity..”

Section G – Company Internal Investigation

Has an investigation been conducted?

Comment:This Section reinforces the importance of conducting an internal investigation. Further, conducting an internal investigation is already a factor that the Suspension and Debarment Official (SDO) and HHS will consider in deciding whether a contractor is sufficiently responsible to continue to do business with the government. Likewise, this is consistent with OIG’s Provider Self-Disclosure Protocol, which requires a provider to conduct an internal investigation.

Enter a description of the records reviewed and the number and positions of the employees interviewed.

Comment:Answering this question ensures that the internal investigation was thorough, complete, and, hopefully, independent.

Is the Company Willing to Provide a Copy of the Investigative Report?

Comment: Providing the investigative report is certainly a factor that the Suspension and Debarment Official (SDO) will consider in deciding whether the contractor is “presently responsible,” but it also may contain attorney-client communications. Thus, a decision to provide the Report may also be a decision to waive attorney-client privilege communications, which might apply to a wide variety of communications, (e.g. internal emails) which are not included in the Investigative Report.

Measures Taken to Prevent Recurrence

Comment: The measures taken to prevent recurrence will depend on the particular violation and the size of the organization. Was the violation continuous and egregious? Was it committed by senior members of the organization? Or, was the violation an isolated incident that can be easily resolved without significant changes to the organization?

Disciplining or terminating wrong-doers, even if they are in senior management positions, will demonstrate to the SDO that the contractor is serious about its commitment to a culture of compliance. Similarly, making significant changes internally to the organization’s system of reporting and the organization’s internal audit policies and procedures, should send the proper message to the SDO. And, where appropriate, the organization might ask whether the organization needs to strengthen its compliance program by hiring a new chief compliance officer.

 Employee Exception is a Jury Issue in Criminal Anti-Kickback Trial

In United States v. Novak, Case No. 13-CR-00312 (June 30, 2014), the district court’s recent denial of defendants’ motions to dismiss the government’s superseding indictment reinforces that as long as the four corners of the indictment adequately allege a violation of a federal criminal statute, a motion to dismiss will likely be denied. In Novak, this was true even though defendants argued that they were entitled to an affirmative defense (statutory bona fide employee exception) to a violation of the Federal Anti-Kickback Statute.

Facts

More specifically, in Novak, government filed a superseding against several medical doctors and a podiatrist alleging that, among other things, they violated the Federal Anti-Kickback Statute. The crux of one of the government’s kickback allegations against one of the co-defendants, Dr. Venkateswara Kuchipudi (“Dr. Kuchipudi”), is that a physician assistant (listed as Employee A and likely a government witness) working for Sacred Heart hospital received checks which were, indirectly, paid to Dr. Kuchipudi in return for Dr. Kuchipudi referring patients, i.e., Medicaid and Medicare business, back to Sacred Heart.

In response to the kickback allegations in the indictment, Dr. Kuchipudi and his co-defendants filed motions to dismiss the indictment contending that the Counts in the indictment alleging violations of the Federal Anti-Kickback Statute fail to state an offense because any remuneration (including the checks) received by the physicians constitutes remuneration received by employees. Therefore, as employees, they are entitled to the protections provided by the statutory exception to the Federal Anti-Kickback statute, which states that violations of the Federal Anti-Kickback Statute “shall not apply to …any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services. . . .” See 42 U.S.C. § 1320a-7b(b)(3)(B).

District judge Matthew F. Kennelly of the Northern District of Illinois, however, was not convinced and underscored:

Their [Defendants’] contention is that the indictment fails to negate, or affirmatively concedes, the application of the safe harbor [Note: the district judge is mistakenly referring to the regulatory safe-harbor for employees found at 42 C.F.R. § 1001.951(i) as opposed to the statutory exception for employees found at 42 U.S.C. § 1320a-7b(b)(3)(B)]. A great deal of ink has been spilled on these motions, but their resolution, in the Court’s view, is fairly simple.

It is settled law that an indictment is sufficient if it states all the elements of the crime charged, adequately informs the defendant of the nature of the charges so that he may prepare a defense, and allows him to plead the judgment as a bar to future prosecutions. (other citation omitted). The offense charged in the counts at issue is violation of the anti-kickback statute. There is no question that the government has alleged each of the elements of an offense under the pertinent provision and that it has done so by essentially adopting the language of the statute itself

Takeaway

Affirmative Defense in Pre-Trial Motion to Dismiss. While defendants will very likely raise the employee exception or employee safe-harbor as an affirmative defense at trial, the district court in Novak further demonstrates that an indictment that ‘parrot[s] the language of a federal criminal statute’ is sufficient except in extraordinary circumstances.

Comparison to False Claims Act.In a civil False Claims Act action, defendants would have an opportunity to depose witnesses and to develop their affirmative defense that defendants are bona fide employees to position themselves to potentially prevail on a motion for summary judgment pursuant to Federal Rule of Civil Procedure 56. Here, however, as the district court strongly emphasized, “for better or worse there is no such thing as a motion for summary judgment in a criminal case” and the employee defense raised in the motion was premature.

Jury Instructions. In light of the recent Halifax trial where the jury was permitted to extensively analyzed the employee exception to Stark, defense counsel should be granted substantial flexibility in fashioning jury instructions that concisely convey what constitutes a bona fide employee so that the jury may properly render a verdict. Also, two questions remain: (i) whether, and to what extent, the court will permit the jurors to methodically review each and every factor relevant to a determination of whether a person is a bona fide employee and (ii) whether defense counsel will also request an alternative instruction with respect to the employee safe harbor. 

The Securities and Exchange Commission (SEC) Recently Charged a West Palm Beach, Florida based Hedge Fund with Fraud

The Securities and Exchange Commission (SEC) recently charged a West Palm Beach, Florida based hedge fund with fraud. According to the complaint, Weston Capital Asset Management LLC, and its founder and president Albert Hallac engaged in fraud by illegally draining more than $17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group Inc.  The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before.  Weston Capital’s former general counsel Keith Wellner assisted the activities. The SEC further alleges that out of the transferred investor proceeds, Hallac, Wellner, and Hallac’s son collectively received $750,000.00 in payments from Swartz IP.  Weston Capital and Hallac also wrongfully used $3.5 million to pay down a portion of a loan from another fund managed by the firm.

“Investment advisers owe their clients a fiduciary duty of utmost good faith and full disclosure about what they’re doing with their money,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Weston and Hallac dishonored that duty with Wellner’s assistance by secretly steering investor proceeds to a third party and then pocketing some of those funds.”

Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession.  Wellner and Jeffrey Hallac each also agreed to pay $120,000 in disgorgement.

Takeaway

While this settlement is by no means a large settlement in financial terms – especially given some of the recent SEC settlements involving fraud, FCPA violations, and other egregious conduct – the settlement is a strong reminder that the SEC will continue to examine more registered investment advisers, including advisers attached to private equity and hedge funds.

Further, in this case, the fund’s general counsel appears to have been actively involved in the fraud.  In fact, indictments of general counsels are becoming increasingly common-place, e.g.,  general counsel’s of GlaxoSmith Kline and Detroit’s Pension Fund. Indeed, Laura Stevens, the assistant general counsel for GlaxoSmith Kline, was acquitted after suffering through two separate indictments, but after resigning from GSK Ms. Stevens cautioned: “I think the criminalization of the practice of law is here, and I don’t think it’s necessarily going away…The government will continue to be aggressive in looking at in-house counsel.” Recognizing that this case did not involve allegations of criminal conduct, the message is the same: general counsels may wind up in the cross-hairs of a civil enforcement action or a criminal investigation.

The SEC press release is available here