In Aftermath of Hurricane Maria, Puerto Rico Passes Whistleblower Statute

As reported in an October 1, 2018  Miami Herald article  by Mary Inman, in the aftermath of Hurricane Maria, Puerto Rico passed a False Claim Act (FCA) statute modeled on the federal FCA.  Like the federal statute, this new legislation allows individual whistleblowers to bring lawsuits in the name of the government to recover public funds lost to fraud.  Whistleblowers can receive as much as 15 percent to 30 percent of the funds recovered.  These cases are generally handled on a contingency fee basis so that the whistleblower doesn’t incur attorney fees unless an award is made.

The article states:

Puerto Rico relies largely on federal aid for repairing the estimated $100 billion in damage inflicted by Maria. After past disasters, including Hurricane Katrina in 2005 and Hurricane Sandy in 2012, fraud and corruption siphoned off public resources meant for recovery efforts. The Hurricane Katrina Task Force reported bringing federal charges against at least 907 individuals for trying to take advantage of victim assistance and rebuilding efforts in the three years after that catastrophic event. Fraudsters co-opted an estimated $1 billion in relief.

One of the most common forms of corruption in public contract bidding, especially emergency rebuilding contracts, is bid rigging.  Bid rigging is a generic term that encompasses many different schemes.  When I was with the Department of Justice, we generally referred to bid rigging broadly as “corruption of the bidding process.”

A.      Collusion Among Bidders

Bid rigging is an antitrust term that refers to when bidders on a contract form an agreement to limit or eliminate competition for a contract.  Knowing that the bid is rigged, the winner will inflate his bid.  The losing bidders will make sure their bids are higher.  There is generally a quid pro quo involved: the designated contract winner pays off the intentionally losing bidders with something for their (illegal) troubles.  The payoff is often letting the losers on Contract 1 take turns winning on future contracts.  Sometimes the payoff will be subcontracts at inflated prices.  Occasionally the pay off is simply cash.  The common thread is that the government is ripped off by paying rigged prices and the overcharges are split among the crooked vendors in various ways.

A key component of bid rigging schemes is the “complementary bid.”  This is an intentionally high bid submitted by agreement among the  losing vendors who rigged the bid.  The complementary bids are important to deceive the government into thinking there was competition for the bid.  Sometimes losing bidders will simply agree with the winner to not bid.  But, if only the company designated to win submitted a bid, the government likely would not accept the bid because there was no competition.  The complementary bids create the false appearance of competition.  It is important to note that simply submitting a high bid that you think probably isn’t going to be successful is not collusion.  A company may bid high because they have plenty of work and are not that interested in the job–but would do it if they got their price.  There may be other reasons a company may submit a high bid it doesn’t expect to be successful. If a company submits a bid making an independent decision, it is not collusion regardless of how high the bid may be.  But, if a company submits a bid by agreement with another bidder, it can be collusion no matter what the price is.

For further information, please see a primer I helped write when I was with the Antitrust Division:

B.      Corruption of the Bidding Process 

Bid rigging broadly, or corruption of the bidding process, can take many other forms:

  • A payoff to a government insider to write the job specs a certain way; exclude certain competitors, sole source the project, etc.  Paying off a government insider is bid rigging in the broad sense.  The goal is the same: inflate the bid.  Only the form of the scheme is slightly different.
  • Often contracts are set aside as Small Business Contracts; Minority, Women Owned or Veterans’ Contracts.  Unscrupulous contractors can bid when they in fact are not qualified, have a qualified company bid as a front, or set up a sham company to bid as a front.  Any of these schemes can be illegal, defraud the government and lead to a recovery if they are exposed.

C.     Conclusion

The above are general observations and not legal advice for any specific situation.  As a former Antitrust Division prosecutor, I spent a career talking to businesses and investigating possible bid rigging. It is my opinion that by far most business owners are hard working and honest.  But, the temptation to collude is real–especially in disaster rebuilding when there may be less scrutiny given the need to move quickly.  Bid rigging schemes of any sort are secret agreements intended to deceive the government.  Often, someone with inside information (a whistleblower) is the only way to expose this fraud.  Whistleblower legislation, like the federal False Claims Act and the recently passed Puerto Rico False Claims Act (and states haveFalse Claims Act equivalents), are good public policy to reward those who come forward.

If you have questions or a situation you’d like to discuss, feel free to contact me.  bob@reconnollylaw.com

Thanks for reading.…

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A Hypothetical Whistleblowing Story

I have been advocating for some time that antitrust cartel whistleblower legislation be passed.  Whistleblower legislation has been phenomenally successful for the SEC and other agencies and there is no reason price fixing/bid rigging cartels shouldn’t face the threat of a whistleblower.  Kimberly Justice and I wrote a short article: It’s a Crime There Isn’t an Antitrust Whistleblower Statute, Wolters Kluwer, Antitrust Law Daily, April 8, 2018.  We are working on a longer version of that article with cites to law review articles, business publications, prosecutors, defense attorneys, felons, statistics and all the usual ingredients of a “law review” style article.  But, nothing makes an argument better than a good story so I’ll get ahead of myself and share one now.

To illustrate why a cartel whistleblower statute is needed, consider Hypothetical Bill:

            Hypothetical Bill is the US sales rep for a foreign manufacturer of Widget Company.  There are five main players in the industry. Bill had heard whispers of a cartel.  After a recent promotion, Bill has been assigned to attend “working group” meetings.   The “top guys” set price targets, but the working group has the more hands-on task of implementing the prices by region, accounting for exchange rates, maintaining relative allocations, and host of other details that can derail a cartel.  Bill understands that it is none too smart for him to be going to these meetings—especially as an American who may go to prison if caught. He confides in a friend of his who is a lawyer who knows about criminal law.  The lawyer tells Bill he can hire an attorney to go to the government and he will likely be able to negotiate an immunity/cooperation agreement. But, negotiations time and likely multiple trips by Bill and his lawyer to visit the prosecutors for interviews.  Obviously Widget Company will not be paying for Bill’s travel, lawyer fees, etc.  The cooperation agreement lasts for the duration of the investigation—a slightly shorter version of the Hundred Years War.  The Antitrust Division will ask Bill for documents to corroborate his story—travel records, emails, etc.  Bill may be called upon by foreign competition commissions to appear for interviews.  Besides the time and expense of cooperation, Bill’s attorney friend tells him he will likely will be fired by the company when they learn of his cooperation (after all, he is a confessed criminal and they are shocked he was talking to competitors). Widget Company may also sue Bill for “stealing” documents from the company.  Bottom line: “Bill, this will likely bankrupt you, make you forever non-employable in your industry and drag your family through hell.  What would you like to do?”

Unless Bill is nuts (not a good quality in a witness), Bill will almost certainly not expose the cartel. He could go to the company’s compliance counsel but since the CEO is involved in the illegal activity, he’s guessing that he, not the CEO, will regret his internal reporting.  At best, Bill will leave his job, get out the situation and keep quiet.  But most likely, Bill will think of how his family needs the money the new promotion brought (kids/college etc.), stay in the job and hope for the best.  After all, even if the cartel gets exposed, isn’t there a chance he could get immunity then? And, if Bill is a bit delusion, he may think “The company will take care of me” if anything happens.   Bottom line, Bill does not expose the cartel.

Now, imagine this scenario.  Bill’s lawyer friend tells him that he has the option of being a whistleblower.  Many of the bad things that can happen to a whistleblower may happen anyway, but you have the potential of recovering perhaps millions of dollars if you cooperate with the government. You can get a great lawyer[1] who will work on a contingency basis and get paid only if you get a whistleblower award.  The government will likely grant immunity in return for your full cooperation, which may include even asking you to record conversations.  But, the government will grant you a whistleblower reward of between 10-30% and the more you cooperate, the higher the likely award.  There is, however no reward, unless guilty pleas and fines are imposed so you have an incentive to cooperate as much as you can.  As a whistleblower under this new legislation, you are protected from retaliation.  You still get fired (would you want to stay there anyway?), but being a protected whistleblower should deter the company from other forms of retaliation.

In this case, Bill decides to cooperate and become a whistleblower.  He gives the Antitrust Division all they need to obtain a search warrant on Bill’s company. Warrant in hand, the Antitrust Division asks for a meeting with Widget Company’s US counsel.  At the meeting, government lawyers explain that Widget Company has 48 hours to get a Leniency Marker in before the investigation goes public and search warrants (and perhaps dawn raids in other parts of the world) are executed.  Widget Company folds and starts the leniency process.  Bill’s cooperation as a whistleblower is never known, except by his banker.  He now becomes one of many witnesses under Widget Company’s leniency coverage.  A cartel that may never have been exposed, falls like dominos.  The cost to the public is a whistleblower’s share paid to Bill, who then pays his lawyer.

This hypothetical uses an international cartel, but think of the possible collusion taking place domestically in the wake of hurricanes and natural disasters across the United States.  After Hurricanes Harvey, Irma and Maria, the Antitrust Division and Federal Trade Commission recognized that collusion could emerge on a wide scale as rebuilding efforts begin.  In a joint statement, the agencies said, “While natural disasters often bring out the best in human compassion and spirit, they can also lead to unscrupulous individuals and organizations taking advantage of those in need.”[2]  There may be a lot of “Bills” out there who don’t like what they see but can’t afford the risk/expense of being a whistleblower without whistleblower legislation.

Note:  Where the government is a victim of fraud, a whistleblower can currently bring a suit under the False Claims Act, but whistleblower legislation would make the process much more attractive.   

Thanks for reading.

bob@reconnollylaw.com

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[1]   If not obvious yet, let me be clear that I have a bias—a personal interest –in seeing cartel whistleblower legislation passed.  I have represented whistleblowers and would be particularly interested in representing cartel whistleblowers since I spent the bulk of my career investigating and prosecuting cartels for the Antitrust Division.

[2]  FTC Antitrust Division Joint Statement:  Antitrust Guidance: Hurricanes Harvey and Irma, September 12, 2017,  available at https://www.ftc.gov/system/files/documents/public_statements/1253313/hurricanes_harvey_and_irma_ftc_doj_statement.pdf.…

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Whistleblower Exposes Small/Veteran Business Fraud

A whistleblower was awarded $3 million for exposing a bid rigging scheme among entities that held themselves out to be competing small business but in fact were controlled by one entity.  The settlement with defendant ADS resolved a lawsuit filed under the whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and share in a portion of the government’s recovery. The civil lawsuit was filed in federal district court in the District of Columbia by Ameliorate Partners LLP.  As part of the settlement, the whistleblower will receive approximately $2.9 million.

From the Department of Justice press release:

            Virginia Beach, Virginia-based contractor ADS Inc. and its subsidiaries have agreed to pay the United States $16 million to settle allegations that they violated the False Claims Act by knowingly conspiring with and causing purported small businesses to submit false claims for payment in connection with fraudulently obtained small business contracts, the Department of Justice announced today. The settlement further resolves allegations that ADS engaged in improper bid rigging relating to certain of the fraudulently obtained contracts. The settlement with ADS ranks as one of the largest recoveries involving alleged fraud in connection with small business contracting eligibility.

There are a number of ways unethical contractors try to “game” programs setting aside contracts for small businesses, veteran owned businesses, women or other minority owned businesses.  One scam is for a non-eligible large business to use a small business (either an existing small business or a sham company they set up) as a “front” for the larger business.  The eligible small business bids, but in reality, the large business is going to do the bulk, if not all of the work.

Collusion among bidders is often a part of schemes to scam the small business set aside.  Typically, if the government only gets one bid, it will not award the contract, or will demand the sole bidder justify its pricing.  Therefore, even if Company A is designated to win the bid, Companies B and C will put in complementary (high bids) to make it appear that there is competition.  The aim of bid rigging/collusion schemes is to create the appearance of competition, when in fact, due to a secret scheme among the bidders, there is none.

The government is serious about fighting bid rigging fraud in small business set aside programs.  From the press release:

            “This case involved fraud perpetrated in the Service-Disabled Veteran-Owned Small Business Contracting Program and the 8(a) Program for disadvantaged individuals. Identifying and aggressively pursuing instances of civil fraud by participants in these procurement programs and other set aside contracting programs, is one of SBA’s top priorities.”

 A whistleblower can be an individual, a group of individuals or a company.  In this case it was a company—probably a legitimately legible company that was one that was cheated out getting a contract under the set-aside program.  If you have information about collusion on government contracts (federal and/or state) and want to discuss the situation, please feel free to contact me to discuss.  Thanks for reading.

Bob Connolly

www.reconnollylaw.com

bob@reconnollylaw.com

(215) 219-4418…

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The Bid Rigging Whistleblower–Part 1

by Bob Connolly (previously posted on Cartel Capers)

I have been writing, along with my co-author Kimberly Justice, about the desirability of a criminal antitrust whistleblower statute.  Besides many blog posts, we have written a few articles such as It’s a Crime There Isn’t an Antitrust Whistleblower Statute, Wolters Kluwer, Antitrust Law Daily, April 8, 2018.

A principle objection to an antitrust whistleblower statute is that it would undermine the credibility of a witness if she received compensation for exposing a cartel.  Superficially that sounds right but doesn’t hold up when you consider the success of the Antitrust Division’s Corporate Leniency Program. Simply change “leniency applicant” to “whistleblower” and one can see that the Antitrust Division already has a form of whistleblowing; the Corporate Leniency Program which bestows rich rewards on the whistleblower.  As the Antitrust Division has stated repeatedly, the value of leniency is the tens of millions of dollars it can save a company.   Leniency/whistleblowing saves not only the leniency company money, but it can save multiple culpable executives from jail time in return for their cooperation: When Calculating The Costs And Benefits Of Applying For Corporate Amnesty, How Do You Put A Price Tag On An Individual’s Freedom?” So, the government is rightfully not skittish about paying for information. It’s a necessary evil to breaking up secret cartels and hopefully deter their inception.

The reward of leniency does, of course, undermine the credibility of witnesses just as a whistleblower reward will ding the credibility of any whistleblower who testifies.  If the government has only the cooperation of a leniency applicant, it is likely to: a) not bring a case; or b) lose the case it brings.  But, that flaw in leniency that does not outweigh the benefits!  Leniency whistleblowing almost always leads to cooperation from other subjects of the investigation.  The value of leniency whistleblowing is that it starts the dominos falling of companies/individuals coming in to cooperate for the next best deal available. You don’t see many criminal antitrust trials based on a grant of leniency, because the grant of leniency to one company leads to many guilty pleas and an overwhelming case against whomever is left.[1] A criminal antitrust whistleblower statute for individuals will work the same way.

Pardon the advertisement for a criminal antitrust whistleblower statute because this post is not about that.  In writing about the need for a whistleblower statute, I may have given the impression that it is not currently possible to be a whistleblower on cartel cases.  This is not true.  An individual whistleblower already has a way to help the government recover damages from bidding collusion, while at the same time getting some reward for the great expense and risk in doing this.  If there is bid rigging or price-fixing and the federal government is a victim of the collusion, a qui tam(whistleblower) suit can be brought seeking damages on behalf of the government.  A whistleblower can file a False Claims Act case alleging that a defendant (or group of defendants as in a cartel) obtained a federal contract by means of making a material false statement.  If a bid was rigged, the false statement would likely be the non-collusion affidavit filed with a vendor’s bid package.  This is typically referred to as a Certificate of Independent Price Determination, or something similar.  But, even without such a certification, in the context of a competitive bidding situation, there would be an implied certification that each vendor submitted his bid independently and without collusion with the other bidders, or even non-bidders if the scheme involved payoffs to a potential competitor to not bid).

A couple of things to note. To get a reward for this type of whistleblowing, it is not sufficient to simply go into the prosecutor’s office and lay out the evidence you have.[2]  Under the False Claims Act, the “Relator” [as the whistleblower is called] must file a qui tamsuit on behalf of the government alleging the government suffered damages as a result of the fraud.[3]  If damages are awarded as a result of the qui tamsuit, the Relator is entitled to between 15-25% of the amount the government recovers as a result of the bid rigging.  As an example, if a Relator files a qui tamaction alleging bid rigging on a $50 million contract and the contractor repays the government $10 million in overcharges, the whistleblower should recover between $1.5 million and $2.5 million.[4]

Once a qui tam suit is filed, the Relator’s attorneys must present the evidence they have to the government.  The government will decide whether they want to intervene and take over prosecution of the fraud.  If the government declines to intervene, (and the reason for declination can range from the government thinks your case is weak, or your case is fine, but they are just too busy with other matters).  Even if the government declines to intervene, the Relator can still prosecute the case, and some do, but it is obviously more difficult without the government’s assistance.  And in some fairly rare instances, the government can seek to have the Relator’s case dismissed if they believe it is without evidentiary merit or based on a legal theory the government doesn’t agree with.

The Antitrust Division has actually had successful criminal prosecutions that began based on evidence provided by a whistleblower who had filed a False Claims Act suit. The Antitrust Division neither publicizes the fact that whistleblowing rewards are available for exposing bid rigging on government contracts (and most states have similar False Claims Act statutes) and does not publicize when a whistleblower has successfully recovered damages for the government or himself.  When I was Chief of the Philadelphia Office of the Antitrust Division we prosecuted several cases where the investigation began as a result of a whistleblower False Claims Act case.  A publicly documented example of this was in 2012 when the Antitrust Division settled a civil bid rigging case where two companies were charged with rigging contracts for Bureau of Land Management gas leases.[5]  Because of the collusion, SG Interests and Gunnison Energy Corp. overcharged the government for leases by bidding less than they would have if they bid competitively. Each company paid a settlement of $550,000 in a civil case brought by the Antitrust Division.  The government’s case was based on a qui tamcase filed in 2009 by a former vice president of one of the companies.[6]  See, Justice Department Settlement Requires Gunnison Energy and SG Interests to Pay the United States a Total of $550,000 for Antitrust and False Claims Act Violations.

Also, there was a False Claim Act case filed in the Puerto Rican ocean shipping cartel matter.  That investigation resulted in the longest jail sentence ever received by an individual convicted of a Sherman Act violation–5 years[7].  Again, the fact that a whistleblower case was filed is not well known, but the following is an excerpt from an Antitrust Division appellate brief as Mr. Peake appealed his conviction:

Stallings, a former Sea Star executive, was the government’s first cooperator in its investigation into the shipping conspiracy, although he did not testify at Peake’s trial. Stallings’s [whistleblower] lawsuit sought damages for “injuries to the United States Government resulting from Defendants’ fraudulent course of conduct and conspiracy to allocate customers, rig bids, fix rates, surcharges and other fees for Puerto Rican Cabotage which resulted in the submission of false or fraudulent claims to the Government. [8]

The Antitrust Division noted in its brief:

The qui tam provisions of the False Claims Act permit whistleblowers (known as “relators”) to bring certain fraud claims on behalf of the United States. 31 U.S.C. § 3730(b). These actions “are filed under seal and remain that way for at least 60 days” to give “the government an opportunity to assess the relator’s complaint and decide whether to intervene and assume primary responsibility for prosecuting the case.” United States ex rel. Heineman-Guta v. Guidant Corp., 718 F.3d 28, 30 (1st Cir. 2013) (citing 31 U.S.C. § 3730(b)(2), (b)(4), (c)(1)). Regardless of whether the government intervenes, a relator is entitled to a portion of the proceeds from the lawsuit. 31 U.S.C. § 3730(d).

Coming Next in Part II:  Should There Be an Antitrust Division “Whistleblower Czar?”

Thanks for reading.  Please come back.  Bob Connolly  

[1]  To be honest, another reason there are so few criminal antitrust trials is the prohibitive cost and the draconian “trial penalty” a convicted defendant is likely to face for demanding his day in court.

[2]     It would be far more efficient if a whistleblower could simply provide the information he has to the government and cooperate in the investigation.  This is among the reasons Ms. Justice and I are advocating an SEC style whistleblower statute.

[3]     It is unquestioned that a scheme to rig bids not only violation the Sherman Act, but is a conspiracy to defraud the government where the government’s money is at stake.

[4]     31 U.S. Code § 3730 (d)Award to Qui Tam Plaintiff. — (1) If the Government proceeds with an action brought by a person under subsection (b), such person shall, subject to the second sentence of this paragraph, receive at least 15 percent but not more than 25 percent of the proceeds of the action or settlement of the claim, depending upon the extent to which the person substantially contributed to the prosecution of the action. Where the action is one which the court finds to be based primarily on disclosures of specific information (other than information provided by the person bringing the action) relating to allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government  Accounting Office report, hearing, audit, or investigation, or from the news media, the court may award such sums as it considers appropriate, but in no case more than 10 percent of the proceeds, taking into account the significance of the information and the role of the person bringing the action in advancing the case to litigation. Any payment to a person under the first or second sentence of this paragraph shall be made from the proceeds. Any such person shall also receive an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys’ fees and costs. All such expenses, fees, and costs shall be awarded against the defendant.

[5]     https://www.justice.gov/atr/case-document/file/510616/download.

[6]     https://www.justice.gov/opa/pr/justice-department-settlement-requires-gunnison-energy-and-sg-interests-pay-united-states.

[7].   https://www.justice.gov/opa/pr/former-sea-star-line-president-sentenced-serve-five-years-prison-role-price-fixing-conspiracy.

[8]      US v. Frank Peake, Antitrust Division brief available at, https://www.justice.gov/atr/case-document/file/936611/download

 …

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Encouraging Bid Rigging Whistleblowers

Welcome to the first post of my new blog, The Bid Rigging Whistleblower.  I have published numerous posts on my other blog, Cartel Capers, that relate to whistleblowing on government contracts that have been rigged.  I’ve also posted on what I believe is a pressing public policy issue; the need for a criminal antitrust whistleblower statute. While it currently is possible for a whistleblower (“Relator”) to file a False Claims case (qui tam case) alleging that a government contract has been rigged; it would be transformative if a whistleblower could simply supply actionable evidence to the Antitrust Division that led to a damage recovery for the government that the whistleblower would share in.

Because this is a recurring interest of mine (perhaps an obsession) I thought it would be useful to establish a separate blog on the subject.  It gives me a place to collect all the relevant information, both articles I’ve written and third-party posts, that relate to the subject.  I would really love to see the Antitrust Division develop a robust criminal enforcement program with government contract collusion being a significant part of the overall criminal enforcement priorities.

I will start this blog by posting an article I co-authored with a friend and former colleague, Kimberly Justice.  Kim and I both worked together in the Antitrust Division’s Philadelphia Field Office. The title of the article is “It’s a Crime There Isn’t A Criminal Antitrust Whistleblower Statute.”  The article discusses the tremendous success of the SEC whistleblower legislation and why there should be similar criminal antitrust whistleblower legislation.

I also recently had published on Law 360 an article entitled,DOJ Should Encourage the Bid-Rigging Whistleblower.”  This article discusses how to be a bid rigging whistleblower and how I believe the Antitrust Division could better support and encourage whistleblowers.  (I’ll send you a copy if you are not a Law 360 subscriber.)

 I hope this blog becomes a resource to encourage credible whistleblower complaints of bid rigging on federal state and local contracts. I also hope it can spur development of further interest in whistleblowers by the Antitrust Division, Department of Justice, including supporting legislation for a criminal antitrust whistleblower statute that would mirror the whistleblowing procedures of the SEC, CFTC, IRS and other government agencies.  I welcome comments, questions and guest posts.

Thanks for reading.  Bob Connolly

bob@reconnollylaw.com

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