Identification, Prevention, and Remedies for False Claims in Highway Improvement Contracting (2011)

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3 SECTION I. INTRODUCTION Executive Summary This Legal Research Digest is intended to provide at- torneys for state transportation departments and other interested practitioners with information concerning the False Claims Act, 31 U.S.C. §§ 3729 et seq. (FCA), a statute that authorizes civil investigations and civil actions by government agencies and private parties to recover damages for such false claims and fraud. This digest focuses on the application of that statute in the context of government highway and bridge capital con- struction projects. It summarizes the provisions of the current version of the statute and discusses how recent amendments have changed it in ways that affect the applicability and relevance of recent case law. It pre- sents the results of a survey of state departments of transportation (DOTs) concerning their utilization of and other experiences with that statute, how that com- pares with their use of other remedies, and their efforts to adopt administrative safeguards against false claims. It summarizes other federal statutes that may also be applicable to some of the same types of conduct and state false claims acts analogous to the federal statute. This digest also presents the results of interviews with federal and state government attorneys, auditors, engineers, and nationally recognized experts in the field of false claims litigation, and in the field of pre- venting false claims, fraud, and abuse on government contracts. It offers insights those experts have offered into the reasons why, as our survey indicates, the FCA appears to be used significantly less than other meas- ures as a remedy for false claims and fraud in the highway and bridge construction industry. Finally, this digest discusses administrative practices described by experts during these interviews that appear to hold promise for improving the effectiveness of efforts to detect, remedy, deter, and prevent false claims, fraud, and other abuse in state-administered highway and bridge construction programs. The Reach and Significance of the FCA The Federal FCA has been in existence for over 147 years. Originally enacted to combat fraud in federal military procurement during the Civil War, it still pro- vides the government with powerful tools to combat fraud and recover damages and penalties. Although the amounts of federal recoveries under the FCA may not be common knowledge, U.S. Department of Justice statistics indicate that since 1986, a cumulative total of more than $22 billion has been recovered under the FCA on behalf of federal agencies that have been the victims of fraud.1 Of noteworthy significance is the FCA's ability to augment the government's efforts to combat fraud by authorizing private citizens with information about fraud to commence civil actions on the government's behalf. These private citizens, known as "qui tam rela- tors," are rewarded by receiving a portion of the recov- ery if their actions are successful in assisting the gov- ernment to combat fraud. The FCA's qui tam provisions have proven to be a valuable tool in augmenting the government's enforcement efforts over time. Since 1986, the U.S. Department of Justice has reportedly recovered more than $13.6 billion for the U.S. Government through 6,199 qui tam FCA lawsuits.2 The Federal FCA has been augmented by the passage of false claim statutes by 24 states, and by several cities including New York City, Chicago, and Washington, DC.3 Today, as our Nation works to recover from the worldwide recession, billions of dollars in federal fund- ing, including significant new funding for state and municipal transportation capital projects, are being distributed nationwide. New attention is being focused on preventing waste, fraud, and abuse in the use of these funds. Passage of various federal initiatives, in- cluding the Emergency Economic Stabilization Act of 2008,4 the American Recovery and Reinvestment Act of 2009 (ARRA),5 and the Fraud Enforcement Recovery Act of 2009 6 (FERA), make the understanding and enforce- 1 See testimony by Scott Hammond, Deputy Assistant At- torney General, Antitrust Division, U.S. Department of Jus- tice, Follow the Money: An Update on Stimulus Spending, Transparency and Fraud Prevention, before the Committee on Homeland Security and Governmental Affairs, United States Senate (Sept. 10, 2009), at 4,5; available online at http://www.justice.gov/atr/public/testimony/250274.pdf (last accessed June 12, 2010); and Press Release, U.S. Department of Justice, Fraud Statistics Overview, Civil Division, U.S. Department of Justice, October 1, 1986–September 30, 2008, (Sept . 10 , 2009) , available online at http://www.justice. gov/opa/pr/2008/November/fraud-statistics1986-2008.htm (last accessed on June 12, 2010). 2 Id. 3 For a listing of state and municipal False Claims Acts, see § XIII of this digest. 4 Pub. L. No. 110-343, 122 Stat. 3765, Oct. 3, 2008. 5 Pub. L. No. 111-5, 123 Stat. 303, Feb. 17, 2009. 6 Pub. L. No. 111-21, 123 Stat. 1617, May 20, 2009; text available online at http://www.gpo.gov/fdsys/pkg/PLAW- 111publ21/pdf (last accessed June 12, 201 0). IDENTIFICATION, PREVENTION, AND REMEDIES FOR FALSE CLAIMS IN HIGHWAY IMPROVEMENT CONTRACTING By Eric Kerness and Peter Shawhan Kerness Consulting, Schenectady, New York

4 ment of the FCA a topic of significant importance for public owners. The FCA has been recognized for years as an important tool for combating waste, fraud, and abuse in government contracting, and recent federal legislation increases its potential importance for the transportation construction sector. A Brief History of the FCA During the Civil War, Congress focused its attention on an embarrassing series of fraudulent military procurement transactions involving the War and Treasury Departments. Congress responded by enacting the FCA in 1863 to enlist the public in preventing fraud and abuse. This statute, originally codified as 31U.S.C. § 232 et seq., is now codified as 31 U.S.C. § 3729 et seq. The FCA has undergone a series of sig- nificant changes since its enactment, some weakening and others strengthening its provisions. The most significant amendments appear to have been enacted in 1943, 1986, and 2009. As originally enacted, the statute provided for double dam- ages and a $2,000 civil penalty per false claim, and private citizens were entitled to half of the government's recovery. At that time, the statute authorized private qui tam actions, but did not authorize the government to intervene.7 In 1943, during World War II, Congress amended the FCA in response to a series of qui tam cases that were viewed as opportunistic and parasitic, because they were based solely on information made public by federal indictments and made little if any independent contribution to the prevention of fraud. The 1943 amendments reflected a congressional de- sire to restrict parasitic qui tam cases. They authorized the U.S. Department of Justice to intervene in and take over FCA cases initiated by private qui tam relators, and gave the Gov- ernment 60 days to decide in each such case whether or not to intervene and take exclusive control of the litigation. The 1943 amendments included a “government knowledge bar" that deprived courts of jurisdiction over qui tam actions that were based on evidence or information in possession of the government. They also reduced the relator's share to a maximum of 10 percent of the proceeds if the government intervened, and 25 percent if it did not.8 The pendulum swung back the other way toward once again promoting qui tam actions with the passage of the 1986 amendments, which reflected congressional efforts dur- ing the Reagan Administration to reduce waste, fraud, and abuse in government programs. The 1986 amendments strengthened the FCA by increasing the penalty provisions to treble damages, making it unlawful to retaliate against employees, and providing "whistle blowers" with protections against retaliation. It also modified the former government knowledge bar to a "public disclosure bar," and limited the 7 For an excellent discussion of the historical foundation of the FCA, see CLAIRE M. SYLVIA, THE FALSE CLAIMS ACT: FRAUD AGAINST THE GOVERNMENT, 31–64 (2d ed. 2010); and see James S. Thiel, Supervising Attorney, Wisconsin DOT, Federal False Claims Act—31 U.S.C. 3729–3732, 2009, available online at http://www.fhwa.dot.gov/construction/cqit/ falseclaims.cfm. 8 Id. at 49–53. uncertainty of qui tam recoveries by providing courts with guidance on setting qui tam awards within a relatively narrow range of percentages.9 The Emergency Economic Stabilization Act of 2008 To recover from the economic down turn and reces- sion, the United States Government has committed bil- lions of dollars. The Emergency Economic Stabilization Act of 200810 authorizes the U.S. Treasury to purchase and insure up to $700 billion in "troubled" assets to promote financial market stability. The act requires financial institutions to issue equity warrants, equity, or senior debt securities to the U.S. Treasury to protect the taxpayers. In addition the act provides for limits on executive compensation, recoupment, disclosure and transparency, and judicial review of Treasury actions. The American Recovery and Reinvestment Act of 2008 ARRA11 will provide over $500 billion of funding for pro- grams to jump start the U.S. economy, including approxi- mately $50 billion for transportation capital projects. In addi- tion, ARRA creates a Recovery Accountability and Transparency Board to coordinate and conduct oversight of covered funds in order to prevent fraud, waste, and abuse. The Board reviews and audits ARRA-funded programs and projects to determine whether wasteful spending, poor con- tract and grant management, or other abuses are occurring. It refers potential abuses to the Inspectors General of the U.S. Department of Transportation and other federal agencies for investigation, and makes recommendations to agencies on measures to prevent waste, fraud, and abuse affecting such programs and projects. ARRA also provides additional whis- tleblowers protection for employees of state and local govern- ments and contractors. The Fraud Enforcement and Recovery Act of 2009 Most recently, in May 2009, President Obama has signed into law FERA, Public Law 111-21.12 This recent legislation provides federal investigators and prosecutors with signifi- cant new criminal and civil tools to assist in holding account- able those who have committed financial fraud.13 In addition to amending certain other federal statutes, FERA amends the 9 Id. at 53–60. 10 Pub. L. No. 110-343, Oct. 3, 2008. 11 Pub. L. No. 111-5, Feb. 17, 2009. 12 Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617, May 20, 2009 (FERA); text avail- able online at http://www.gpo.gov/fdsys/pkg/PLAW-111publ21/pdf/PLAW- 111publ21.pdf (last accessed June 12, 2010). 13 Press Release, White House Office of Communications, Statement of the President (May 20, 2009), available online at http://www.whitehouse.gov/the-press-office/ reforms-american-homeowners-and-consumers- president-obama-signs-helping-families-sa (last accessed June 12, 2010).

5 FCA to clarify interpretations of law and reflect the original intent of the law, following certain federal court decisions. FERA amends the seven liability provisions of the FCA, clari- fies presentment issues, modifies other provisions of the FCA, and also provides an additional $245 million to investi- gate and prosecute frauds involving federal economic assis- tance. Section II of this digest provides a more detailed discussion of the FCA's provisions, including the significant FERA amendments to those provisions, and the relationship between those amendments and certain recent U.S. Supreme Court and other federal court decisions that have been over- ruled by FERA. Major Nonconstruction FCA Recoveries While the FCA was originally enacted in response to prob- lems affecting military procurement, its provisions are nei- ther limited to that field nor to construction projects, and touch a number of other industries as well. While analyzing the application of the FCA outside the highway and bridge construction industry is basically outside the scope of this digest, having at least some knowledge of the broader context in which the FCA was established and functions is helpful to understanding the potential strengths and weaknesses of the FCA as a remedy for false claims and fraud in the construction industry. During the past two decades, the most extensive applica- tion of the FCA may have been in private qui tam relators using the FCA to pursue recoveries for Medicaid fraud. There have been some spectacularly large FCA recoveries in such cases. There is now something of an established industry of private-sector law firms specializing in qui tam FCA actions against large pharmaceutical manufacturers. A few of the more noteworthy federal FCA settlements for Medicaid and defense procurement include: • In September 2009, Pfizer and its subsidiary Pharmacia & Upjohn agreed to pay the U.S. Gov- ernment over $2.3 billion, including $1 billion under the FCA plus $1.3 billion in criminal penalties for kickbacks and off-label marketing, to settle a series of FCA cases and prosecutions involving the illegal promo- tion of several drugs.14 It is worth noting that the $2.3 billion settlement in that case was larger than the total statewide annual capital construction programs of many state departments of transportation. • In July 2009, New York State and New York City agreed to pay $540 million to settle a false claim case in which state and city agencies were accused of im- properly billing Medicaid for student speech, physical, and occupational therapy; psychological counseling; and transportation costs.15 14 Taxpayers Against Fraud, www.taf.org, News Stories, Sept. 2, 2009, available online at http://www.taf.org/whistle253.htm (last accessed on June 12, 2009). 15 Press Release, U.S. Department of Justice, New York State and New York City to Pay Record $540 Million to Settle Allegations of False Claims for Medicaid Funds, (July 21, 2009) available online at http://www.justice.gov/ opa/pr/2009/July/09-civ-709.html (last accessed on June 12, • In April 2009, Northrop Grumman agreed to pay $325 million to settle a false claim lawsuit alleging that it made defective parts for spy satellites, result- ing in serious malfunctions that forced the Govern- ment to undertake expensive fixes.16 Recent FCA Recoveries in Construction Cases Although many major FCA recoveries involve pharmaceu- tical companies, as noted above, construction projects do play a significant role in FCA litigation. The following cases, among others, have focused national attention on the appli- cations of the Federal FCA and its state counterparts in the construction context. Daewoo Engineering and Construction—Contractor Forfeits $50 Million Claim In 2008, the Court of Federal Claims decided a case that has established significant financial and legal precedents for federal-aid construction projects. In that case,Oaewoo Engineering and Construction Co. Ltd.17 the prime contractor on a federal contract to build a road in the Republic of Palau commenced an action in the Court of Federal Claims, alleging that the United States had breached its contract. The United States filed a counter-claim alleging violations of the FCA, 31 U.S.C. § 3729, and the Contract Disputes Act, 41U.S.C. § 604, and seeking forfeiture of the claims pursuant to 28 U.S.C. § 2514. The court found that Daewoo certified the claim for $64 million, even though only $14 mil- lion in costs were allegedly incurred. The Court of Federal Claims found that the amount set forth in the certified claim was no more than a "negotiating ploy," and that the extra $50 million had only been intended to make the Government more willing to ne- gotiate a settlement. The court determined that the claim was fraudulent and wholly without merit, that it was filed in bad faith, and that Daewoo knew that it was false and fraudulent. The court awarded the government $10,000 under the FCA and $50,629,855 under the Contract Disputes Act, and forfeited Dae- woo's claim pursuant to § 2514. On appeal, the United States Court of Appeals for the federal circuit affirmed the decision of the trial court, holding that the Gov- ernment had shown by clear and convincing evi- dence that Daewoo knowingly presented a false claim with the intention of being paid for it, and holding Daewoo's claims against the government to be forfeited. The Court of Appeals subsequently affirmed the awards to the Government of $10,000 under the FCA and $50,629,855 under the Contracts Dispute Act. 2009). 16 Military Contractor Agrees To Pay $325 Million to Settle Whistle-Blower Lawsuit, N.Y. TIMES, Apr. 2, 2009. 17 Daewoo Eng’g and Construction Co., Ltd. v. United States, 557 F.3d 1332 (2009), cert. denied, 2009 U.S. Lexus 7658.

6 False Claims on the Boston Central Artery/Tunnel Project ('The Big Dig") At $14.6 billion, the Central Artery I Tunnel Project ("the Big Dig") in Boston, Massachusetts, has been one of the largest recent public construction projects on the East Coast. This project has been subject to several noteworthy fraud and false claim situations. In Sep- tember 2009, a Big Dig contractor was sentenced for submitting false claims involving fraudulent billings of apprentice workers at the higher rate for journey- men, resulting in continuing overpayments by the Central Artery/Tunnel project to the contractor.18 Other similar overbilling schemes were also uncovered. In July 2007, an aggregate supplier pled guilty and agreed to pay $50 million to the federal and state government to resolve criminal and civil liabilities in connection with a fraudulent scheme to deliver adul- terated concrete to the Central Artery/Tunnel Pro- ject.19 In 2008, the joint venture of Bechtel/Parsons Brinckerhoff, Bechtel Infrastructure Corp., and PB America, Inc, the management consultant for the Big Dig project, agreed to pay more than $407 million to resolve criminal and civil liabilities in connection with the collapse of part of the I -90 Connector Tun- nel and defects in the slurry wall of the Tip O'Neil Tunnel. The Statement of Fact in the agreement re- solving these matters included the Joint Venture's acknowledgement of serious failures in its obligation to manage construction of the I -93 slurry walls.20 The Joint Venture also acknowledged that documents submitted to the Central Artery/ Tunnel certifying the safety and substantial completion of the I-90 Connector Tunnel were not true or accurate. Total false claims and other recoveries related to the Big Dig project to date now exceed $500 million.21 18 Press Release, U.S. Department of Transportation Of- fice of lnspector General (Nov. 21, 2008), available online at http://www.oig.dot.gov/library-item/3669 (last accessed June 12, 201 0). 19 U.S. Department of Justice, Big Dig Contractor to Plead Guilty and Make $50 Million in Cash Payments and Provide Up to $75 Million Insurance Coverage ( July 2007), available online at http://www.justice.gov/usao/ma/Press Office-Press Release Files/July2007/AggregatePleaPR.html (last accessed on June 10, 2010). 20 Master Agreement and Exhibit A Statement of Facts between United States of America, Commonwealth of Mas- sachusetts, Massachusetts Highway Department, Bechtel Infrastructure Corp., PB America Inc., Bechtel Parson Brinckerhoff et al., Press Release, Massachusetts Attorney General Martha Coakley, Big Dig Management Consultant to Pay $450 Million (Jan. 23, 2008). 21 Press Release, U.S. Department of Justice, Employees of Big Dig Contractor Convicted of Fraud (Aug. 4, 2009), available online at http://boston.fbi.gov/dojpressrel/pressrel09/bs080409.htm (last accessed June 12, 2010); Press Release, U.S. Department of Justice, Big Dig Management Consultant and Designer to Pay $450 Million (Jan. 23, 2008) available online at http://www.justice.gov/criminal/npftf/pr/2008/jan/01-23- White Construction and Florida DOT—Debarment for 30 Years White Construction Company, Inc., a Florida contrac- tor who had worked on three Florida DOT projects, was indicted for allegedly double and triple billing t h e F l o r i d a D e p a r t m e n t o f T r a n s p o r t a t i o n ( FDOT) for labor and equipment. The case involved a total of $30 million in false claims filed against FDOT. White subsequently entered into a plea agree- ment agreeing not to do business with FDOT for a pe- riod of 30 years, and also agreeing to pay the cost of investigation and restitution in the amount of $1,422,000.22 In a related matter, a claim consultant's license to practice engineering was suspended for 6 months.23 Tutor, Saliba, Perini J.V. vs. Los Angeles MTA In 1995 Tutor, Saliba, Perini (TSP) sued the Los An- geles Metropolitan Transportation Authority (MTA) alleging $16 million in change order claims. MTA cross- complained, alleging breach of contract and violations of California's False Claims Act (FCA) and Unfair Compe- tition Law (UCL). The MTA obtained a $60 million judgment against TSP in 2001 for alleged violations of the California FCA and UCL, but that judgment was reversed on appeal. On partial retrial in 2006, a jury found TSP liable for false claims and breach of contract, and awarded MTA $0.4 million. The case continued for several years and a third trial was scheduled. However in 2010, the MTA reportedly settled the case for reasons of judicial efficiency, agreeing to pay TSP $1.1 million without admitting liability and dropping its remaining false claims allegations against TSP, with appeal of some issues continuing. Despite the mixed outcome for the MTA, this case drew attention to the potential stakes and complexity of FCA litigation. 24 Potential for Expansion of False Claims Recoveries The potential for expansion of false claim activities in the transportation industry is shown by a review of broader U.S. Department of Justice statistics on FCA recoveries in general. These statistics indicate that in fiscal year (FY) 2009, ending September 30, 2009, DOJ secured $2.4 billion in settlements and judgments in 08bigdig-pay.pdf (last accessed June 12, 2010). 22 Plea agreement between State of Florida and White Construction Company, Inc., Case No. 2002-2053, July 7, 2004. 23 State of Florida Board of Professional Engineers Set- tlement Stipulation, Fla. Eng’rs Management Corp. v. William T. Cooper, Case No. 01-0131, Sept. 8, 2003. 24 2005 WL 240685 (Cal. App. 2 Dist.) (Jan. 25, 2005); T. Illia, California Jury Says Tutor-Saliba Breached Contract on Tunnel, ENGINEERING NEWS RECORD, Dec. 25, 2006; http://enr.construction.com/news/finance/archives/ 061225.asp, last accessed on May 2, 2011; T. Anderson, MTA Drops Lawsuit Against Firm Over Red Line Construction, Sept. 17, 2010, http://www.pasadenastarnews.com/crime/ ci_16105479, last accessed May 2, 2011.