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Project on Government Oversight

Supreme Court Makes it Harder to Hold Contractors Accountable for Fraud

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May 17, 2011

Yesterday, the Supreme Court weakened the government’s ability to recoup money from contractors defrauding the government. In a 5-3 decision, the Court found in Schindler Elevator Corp. vs. U.S. that private citizens cannot file lawsuits under a qui tam provision of the False Claims Act that rely upon information obtained through the Freedom of Information Act (FOIA). The Justice Department secured $3 billion in civil settlements in 2010 under the False Claims Act (FCA), and has recovered more than $27 billion since 1986.

The case revolves around Vietnam War veteran Daniel A. Kirk, who was an employee of Schindler Elevator Corporation and suspected that the company was not in compliance with disclosure requirements under the Vietnam Era Readjustment Assistance Act of 1972. His wife received confirmation of these observations from information obtained from the Department of Labor under FOIA, and Kirk filed his own suit.

The issue at stake is what the suit is “based on.” The decision centered on a “public disclosure” bar in the False Claims Act (31 U.S.C. 3730(e)(4)(A)) designed to prevent “parasitical actions.” The bar prohibits bringing suit based on public information unless “the person bringing the action is an original source of the information” (having “direct and indepfendent knowledge”).

Justice Clarence Thomas, in the majority opinion, wrote that the suit was based on the information obtained from DOL and as a result, the suit is prohibited under the public disclosure bar because otherwise, “Anyone could identify a few regulatory filing and certification requirements, submit FOIA requests until he discovers a federal contractor who is out of compliance, and potentially reap a windfall in a qui tam action under the FCA.”

In a dissent, Justice Ruth Bader Ginsburg noted that the decision “severely limits whistleblowers’ ability to substantiate their allegations before commencing suit.” While not agreeing that FOIA disclosures should be counted as part of the public disclosure bar, she argued that the suit was based on Kirk’s observations and experience, and that the FOIA did not constitute an administrative action prohibited under the Act.

In a different context, the Securities and Exchange Commission (SEC) is still working on the final rules for its whistleblower reward program, including the definitions of “independent knowledge” and “independent analysis” under which a whistleblower could qualify for an award.

The SEC’s proposed rules recognized that “independent analysis” could involve examination of information that is publicly available:

‘‘Analysis’’ would mean the whistleblower’s examination and evaluation of information that may be generally available, but which reveals information that is not generally known or available to the public. This definition recognizes that there are circumstances where individuals can review publicly available information, and, through their additional evaluation and analysis, provide vital assistance to the Commission staff in understanding complex schemes and identifying securities violations.

In POGO’s public comment on the proposed rules, we urged the SEC to clarify that a whistleblower's analysis could draw on facts published in certain sources:

POGO urges the SEC to clarify that the analysis itself cannot have been previously published in one of the sources listed in Proposed Rule 21F-4(b)(1)(iii) (“a governmental report, hearing, audit, or investigation, or from the news media”), but that a new analysis could draw on facts published in these sources. This clarification would allow the SEC to receive tips from whistleblowers, such as Harry Markopolos, who often perform original analysis based on publicly available sources.

Senator Charles Grassley (R-IA)—who introduced key improvements to the False Claims Act and the Internal Revenue Service’s (IRS) whistleblower reward program, among others—has supported the SEC’s proposed definition of “independent analysis,” but has also raised serious concerns about other proposed rules that could potentially undermine the program just as it’s getting started.

Last week, POGO submitted a letter into the hearing record urging Congress to reject draft legislation proposed by Rep. Michael Grimm (R-NY) that would silence potential whistleblowers, weaken SEC enforcement actions, and allow law-breaking companies to evade accountability. Instead of modifying the SEC program at this time, Congress should revisit the public disclosure language of the FCA to determine if it inappropriately hinders citizens helping the government to recover money lost through fraud and misconduct.

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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