Court Denies Summary Judgment For Defendants
Private Equity Group’s Possible Liability For Portfolio Company Acts
Positive Result For Whistleblowers
Healthcare fraud is the largest kind of fraud against the government. Increasingly, healthcare providers are owned by private equity groups. The companies owned by private equity groups are often referred to as portfolio companies. The private equity groups typically claim they are not liable for the acts of their portfolio companies. As discussed below, the law is changing on the responsibility of private equity groups for the fraudulent acts of their portfolio companies. When individuals have information of fraudulent claims by those portfolio companies for reimbursement from the government, they can bring actions on behalf of the government against the offending corporation under the False Claims Act, 31 U.S.C. §§ 3729 et seq. (FCA). The FCA provides for damages and penalty recoveries to the government from the wrongdoers. The cases brought under the FCA by private persons are called qui tams and can result in a reward for the individual bringing the action (referred to as relators) if the government recovers. 31 U.S.C. § 3730(c). Medical device manufacturers, drug makers, infirmaries, clinics, pharmacies, hospitals, nursing homes, physician groups, diagnostic labs, therapy providers, home health care agencies and others are among the healthcare providers that may defraud the government. Relators in whistleblower cases put a lot of time and work in qui tam cases (especially when the corporate structure of the offending company is complicated) but the reward can be a substantial percentage of whatever the government ultimately recovers. 31 U.S.C. § 3730(d). Evans Law Firm, Inc. represents whistleblowers in qui tam cases in San Francisco and throughout California. If you have credible information of fraud against the government that may be the basis for a whistleblower or qui tam case, call us today at (415) 441-8669 or toll free at 1-888-50EVANS (888-503-8267).
Private Equity Group Liability
On May 19, 2021, a federal district court denied a motion for summary judgment in qui tam case against a private equity group and its subsidiary, a healthcare provider. The case hinges on allegations that the private equity group permitted its portfolio company to engage in fraudulent conduct. Until recent years, private equity firms with significant holdings in the healthcare industry have avoided any substantial exposure under the FCA. While portfolio companies frequently found themselves in the regulatory crosshairs, their owners did not face liability. That dynamic is changing. Martino-Fleming is the first time an FCA lawsuit against a private equity firm has proceeded through summary judgment.
In the case, the private equity group purchased a provider of mental health services, which primarily treated Medicaid patients. Relators alleged that the provider used unlicensed and unqualified social workers and counselors to provide services to government beneficiaries and provided inadequate supervision of clinical personnel. The record developed during discovery revealed that certain red flags emerged during the private equity group’s pre-buyout due diligence (e.g., inadequate supervision) and that, following the takeover, the pressure to grow was virtually “astronomical.” The evidence suggested that the private equity group which owned most of the equity in the provider and controlled its board, was aware of the company’s apparently extensive compliance failures. The District Court found that sufficient to establish scienter as to the private equity firm. The opinion makes clear that board members and others working on behalf of private equity firms cannot ignore red flags that emerge during due diligence or thereafter.
How Qui Tam Cases Begin
In the reported case, it was a former employee who uncovered the allegedly fraudulent practices of the provide. Individuals with original and credible information of false claims, like the employee in this case, begin FCA qui tam cases by filing a complaint under seal in the federal court. At the same time, the relator submits a disclosure to the DOJ outlining the material evidence the relator has of the alleged false claims. 31 U.S.C. § 3730(b). The seal period of the complaint lasts 60 days during which the DOJ investigates the claims. 31 U.S.C. § 3730(b)(2). (If necessary, the government can, and often does, extend the 60-day period during which the allegations are kept under seal.) If the government decides to intervene in the case, the government essentially takes over the litigation. 31 U.S.C. § 3730(c)(1). If the government declines to intervene, the relator may proceed with the litigation on his or her own. 31 U.S.C. § 3730(c)(3).
If you are an employee with information of fraud, you employer is prohibited from retaliating against you for bringing a FCA qui tam case. Despite the law’s protection, employers often do retaliate against whistleblowers, but you can fight back. Your qui tam complaint can include claims that the defendant unlawfully retaliated against you. 31 U.S.C. § 3730(h). Whether your claims are included in the underlying qui tam or the subject of an independent action for damages, reinstatement, double back pay with interest and all other available relief, we can represent you in pursuing that relief.
If you have information regarding a whistleblower or qui tam case for any kind of healthcare fraud against the government here in San Francisco or elsewhere in California, contact Ingrid M. Evans at (415) 441-8669 or toll free at 1-888-50EVANS (888-503-8267), or by email at <a href=”mailto:firstname.lastname@example.org”>email@example.com</a>. In addition to False Claims Act cases, Ingrid also handles bank fraud whistleblower cases under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), commodities and futures trading cases under the Commodities Futures Trading Commission Whistleblower Program, securities fraud cases under the Securities and Exchange Commission Whistleblower Program and FINRA Whistleblower Office and offshore tax evasion and other tax fraud cases under the Internal Revenue Service Whistleblower Office.
 Evans Law Firm, Inc. was not involved in the case in any way. The case is captioned U.S. ex rel. Martino-Fleming v. S. Bay Mental Health Centers, Case No. 15-cv-13065-PBS (D. Mass.).