Injunctions in Federal Health Care, Securities & Bank Mortgage Fraud Cases for Attorneys & Lawyers

The health care fraud, bank/mortgage fraud and securities fraud practitioner should be aware of 18 U.S.C. § 1345, a law which permits the federal government to file a civil action to enjoin the commission or imminent commission of a federal health care offense, bank-mortgage offense, securities offense, and other offenses under Title 18, Chapter 63. Otherwise known as the federal Fraud Injunction Statute, it also authorizes a court to freeze the assets of persons or entities who have obtained property as a result of a past or ongoing federal bank violations, health care violations, securities violations, or other covered federal offenses. This statutory authority to restrain such conduct and to freeze a defendant’s assets is powerful tool in the federal government’s arsenal for combating fraud. Section 1345 has not been widely used by the federal government in the past in connection with its fraud prosecution of health and hospital care, bank-mortgage and securities cases, however, when an action is filed by the government, it can have a tremendous effect on the outcome of such cases. Health and hospital care fraud lawyers, bank and mortgage fraud attorneys, and securities fraud law firms must understand that when a defendant’s assets are frozen, the defendant’s ability to maintain a defense can be fundamentally impaired. The white collar criminal defense attorney should advise his health and hospital care, bank-mortgage and securities clients that parallel civil injunctive proceedings can be brought by federal prosecutors simultaneously with a criminal indictment involving one of the covered offenses.

Section 1345 authorizes the U.S. Attorney General to commence a civil action in any Federal court to enjoin a person from:

• violating or about to violate 18 U.S.C. §§ 287, 1001, 1341-1351, and 371 (involving a conspiracy to defraud the United States or any agency thereof)
• committing or about to commit a banking law violation, or
• committing or about to commit a Federal health care offense.

Section 1345 further provides that the U.S. Attorney General may obtain an injunction (without bond) or restraining order prohibiting a person from alienating, withdrawing, transferring, removing, dissipating, or disposing property obtained as a result of a banking law violation, securities law violation or a federal healthcare offense or property which is traceable to such violation. The court must proceed immediately to a hearing and determination of any such action, and may enter such a restraining order or prohibition, or take such other action, as is warranted to prevent a continuing and substantial injury to the United States or to any person or class of persons for whose protection the action is brought. Generally, a proceeding under Section 1345 is governed by the Federal Rules of Civil Procedure, except when an indictment has been returned against the defendant, in which such case discovery is governed by the Federal Rules of Criminal Procedure.

The government successfully invoked Section 1345 in the federal healthcare fraud case of United States v. Bisig, et al., Civil Action No. 1:00-cv-335-JDT-WTL (S.D.In.). The case was initiated as a qui tam by a Relator, FDSI, which was a private company engaged in the detection and prosecution of false and improper billing practices involving Medicaid. FDSI was hired by the State of Indiana and given access to Indiana’s Medicaid billing database. After investigating co-defendant Home Pharm, FDSI filed a qui tam action in February, 2000, pursuant to the civil False Claims Act, 31 U.S.C. §§ 3729, et seq. The government soon joined FDSI’s investigation of Home Pharm and Ms. Bisig, and, in January, 2001, the United States filed an action under 18 U.S.C. § 1345 to enjoin the ongoing criminal fraud and to freeze the assets of Home Pharm and Peggy and Philip Bisig. In 2002, an indictment was returned against Ms. Bisig and Home Pharm. In March, 2003, a superseding indictment was filed in the criminal prosecution charging Ms. Bisig and/or Home Pharm with four counts of violating 18 U.S.C. § 1347, one count of Unlawful Payment of Kickbacks in violation of 42 U.S.C. § 1320a-7b(b)(2)(A), and one count of mail fraud in violation of 18 U.S.C. § 1341. The superseding indictment also asserted a criminal forfeiture allegation that certain property of Ms. Bisig and Home Pharm was subject to forfeiture to the United States pursuant to 18 U.S.C. § 982(a)(7). Pursuant to her guilty plea agreement, Ms. Bisig agreed to forfeit various pieces of real and personal property that were acquired by her personally during her scheme, as well as the assets of Home Pharm. The United States seized about $265,000 from the injunctive action and recovered about $916,000 in property forfeited in the criminal action. The court held that the relator could participate in the proceeds of the recovered assets because the relator’s rights in the forfeiture proceedings were governed by 31 U.S.C. § 3730(c)(5), which provides that a relator maintains the “same rights” in an alternate proceeding as it would have had in the qui tam proceeding.

A key issue when Section 1345 is invoked is the scope of the assets which may be frozen. Under § 1345(a)(2), the property or proceeds of a fraudulent federal healthcare offense, bank offense or securities offense must be “traceable to such violation” in order to be frozen. United States v. DBB, Inc., 180 F.3d 1277, 1280-1281 (11th Cir. 1999); United States v. Brown, 988 F.2d 658, 664 (6th Cir. 1993); United States v. Fang, 937 F.Supp. 1186, 1194 (D.Md. 1996) (any assets to be frozen must be traceable to the allegedly illicit activity in some way); United States v. Quadro Corp., 916 F.Supp. 613, 619 (E.D.Tex. 1996) (court may only freeze assets which the government has proven to be related to the alleged scheme). Even though the government may seek treble damages against a defendant pursuant to the civil False Claims Act, the amount of treble damages and civil monetary penalties does not determine the amount of assets which may be frozen. Again, only those proceeds which are traceable to the criminal offense may be frozen under the statute. United States v. Sriram, 147 F.Supp.2d 914 (N.D.Il. 2001).

The majority of courts have found that injunctive relief under the statute does not require the court to make a traditional balancing analysis under Rule 65 of the Federal Rules of Civil Procedure. Id. No proof of irreparable harm, inadequacy of other remedies, or balancing of interest is required because the mere fact that the statute was passed implies that violation will necessarily harm the public and should be restrained when necessary. Id. The government need only prove, by a preponderance of the evidence standard, that an offense has occurred. Id. However, other courts have balanced the traditional injunctive relief factors when faced with an action under Section 1345. United States v. Hoffman, 560 F.Supp.2d 772 (D.Minn. 2008). Those factors are (1) the threat of irreparable harm to the movant in the absence of relief, (2) the balance between that harm and the harm that the relief would cause to the other litigants, (3) the likelihood of the movant’s ultimate success on the merits and (4) the public interest, and the movant bears the burden of proof concerning each factor. Id.; United States v. Williams, 476 F.Supp2d 1368 (M.D.Fl. 2007). No single factor is determinative, and the primary question is whether the balance of equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined. If the threat of irreparable harm to the movant is slight when compared to likely injury to the other party, the movant carries a particularly heavy burden of showing a likelihood of success on the merits. Id.

In the Hoffman case, the government presented evidence of the following facts to the court:

• Beginning in June 2006, the Hoffman defendants created entities to purchase apartment buildings, convert them into condominiums and sell the individual condominiums for sizable profit.

• To finance the venture, the Hoffman defendants and others deceptively obtained mortgages from financial institutions and mortgage lenders in the names of third parties, and the Hoffmans directed the third party buyers to cooperating mortgage brokers to apply for mortgages.

• The subject loan applications contained multiple material false statements, including inflation of the buyers’ income and bank account balances, failure to list other properties being purchased at or near the time of the current property, failure to disclose other mortgages or liabilities and false characterization of the source of down payment provided at closing.

• The Hoffman defendants used this method from January to August 2007 to purchase over 50 properties.

• Generally, the Hoffmans inherited or placed renters in the condominium units, received their rental payments and then paid the rent to third-party buyers to be applied as mortgage payments. The Hoffmans and others routinely diverted portions of such rental payments, often causing the third-party buyers to become delinquent on the mortgage payments.

• The United States believe that the amount traceable to defendants’ fraudulent activities is approximately $5.5 million.

While the court recognized that the appointment of a receiver was an extraordinary remedy, the court determined that it was appropriate at the time. The Hoffman court found that there was a complex financial structure which involved straw buyers and a possible legitimate business coexisting with fraudulent schemes and that a neutral party was necessary to administer the properties due to the potential for rent skimming and foreclosures.

Like other injunctions, the defendant subject to an injunction under Section 1345 is subject to contempt proceedings in the event of a violation of such injunction. United States v. Smith, 502 F.Supp.2d 852 (D.Minn. 2007) (defendant found guilty of criminal contempt for withdrawing money from a bank account that had been frozen under 18 U.S.C. § 1345 and placed under a receivership).

If the defendant prevails in an action filed by the government under the Section 1345, the defendant may be entitled to attorney’s fees and costs under the Equal Access to Justice Act (EAJA). United States v. Cacho-Bonilla, 206 F.Supp.2d 204 (D.P.R. 2002). EAJA allows a court to award costs, fees and other expenses to a prevailing private party in litigation against the United States unless the court finds that the government’s position was “substantially justified.” 28 U.S.C. § 2412(d)(1)(A). In order to be eligible for a fee award under the EAJA, the defendant must establish (1) that it is the prevailing party; (2) that the government’s position was not substantially justified; and (3) that no special circumstances make an award unjust; and the fee application must be submitted to the court, supported by an itemized statement, within 30 days of the final judgment. Cacho-Bonilla, supra.

Healthcare fraud attorneys, bank and mortgage fraud law firms, and securities fraud lawyers should be cognizant of the government’s authority under the Fraud Injunction Statute. The federal government’s ability to file a civil action to enjoin the commission or imminent commission of federal health care fraud offenses, bank fraud offenses, securities fraud offenses, and other offenses under Chapter 63 of Title 18 of the United States Code, and to freeze a defendant’s assets can dramatically change the course of a case. While Section 1345 has been infrequently used by the federal government in the past, there is a growing recognition by federal prosecutors that prosecutions involving healthcare, bank-mortgage and securities offenses can be more effective when an ancillary action under the Section 1345 is instigated by the government. Health and hospital care lawyers, bank and mortgage attorneys, and securities law firms must understand that when a defendant’s assets are frozen, the defendant’s ability to maintain a defense can be greatly imperiled.

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Ignorance Management and Health Care Reform

I’m betting you have an opinion about the U.S. health care reform legislation. It’s one of those big issues that can polarize the nation. I’m curious how you came by your opinion, how you decided which side to take. And I’m betting you decided wrong.

I challenge you to think about how you think. Your thinking leads you to decisions throughout your life. Some decisions are small, and some are large, like where you live, where you work, and who you marry. How you come to these larger decisions can have a serious affect on your future success and happiness. I fear your decision system is causing you to miss great opportunities because you don’t have a method for sorting past the confusion.

I could approach this topic from the seller’s side as I often do. Understanding human nature and how to deal with it can make us more effective sales people. However, this article will more directly benefit you if we look at from the buyer’s side. Specifically, how you buy into ideas that are presented to you. Once you are clear on how to help yourself, you’ll be in a better position to help those to whom you sell.

Mistaken Beliefs

Let me assume you believe that the 2010 U.S. health-care reform package is either good, or bad. Let me also assume you have not fully read (and understood!) the legislation. Therefore, you have come to your beliefs and taken your position based on information from other sources. Do you think that might be a problem? I confess… I have the same problem.

Everyday you and I make decisions that will affect our futures. Many of these decisions may be based on mistaken beliefs, and these beliefs can sabotage your success. Let’s take a few minutes to question where these beliefs come from so we can gain a clear vision of our future. By doing so, we can eliminate the paralysis (when we make no decision), the lost opportunities, the bad decisions, and the expensive mistakes that are keeping us from the progress and improved quality of life we seek.

Thoughtless Thinking

Thinking today has its challenges. Life has grown more complex over time. The U.S. Census once mandated a simple headcount; now some lucky recipients get to answer a 14-page questionnaire. The health care reform package is well over a thousand pages. In contrast, the Homestead Act of 1862, which gave away 430 million acres of U.S. land to its citizens, fit on two handwritten pages. Then there’s the tangle called the U.S. Tax Code and the IRS 1040 form. Today we’re faced with many challenging decisions, some of them time consuming. Getting comprehensive information about the topic isn’t always the solution. We need something else.

We need to plan how we think, as it seems we don’t actually do this very often. It’s easier to default to a familiar decision system regardless of the potential impact of the decision. Instead, we need to stretch our critical thinking skills. We need to make time to decide how we’re going to decide.

Truthful Consequences

Begin by considering the consequences and the rewards associated with the decision and let that influence how you will think about it and how much time you’ll take to think about it. For instance, before committing to spend hundreds of thousands of dollars to buy a home with a mortgage, should you take time to read the paperwork before you sign it? I believe the potential consequences merit that level of attention. What about terms for a new credit card? What about the list of ingredients on packages of processed food?

Many of us choose to ignore the ingredients list, because the worst that can happen for most of us is we ingest a few extra calories and a little too much salt. However, if you’re allergic to peanuts, the consequences of eating blindly can make you sick.

Conjoined Questions

To determine how you want to think about a decision and how much time you want to devote to that thinking, ask yourself these three questions:

– What is the potential impact on me?
– How much can I affect the decision?
– What else at this priority level is competing for my time?

You must consider your answers to those three questions holistically, and then choose. Using U.S. health care reform as our example (let’s imagine there’s still a choice to be made), the impact on you will likely be significant and long-lasting. Those are good reasons to invest time in understanding it. However, your ability to affect that decision (should it become law or not) is somewhat limited, as we are depending on the representatives we elected to vote for us. Therefore, our ultimate decision would be to determine if we want to attempt to affect their decision. Whether you do that not will largely depend on your answer to the third question regarding competing priorities. Issues at home or at work may be consuming you to the point where you can’t justify diverting time and energy to persuading your Senate and Congressional representatives.

Ignorance Management

I suspect most Americans opted not to get deeply involved in affecting the health care reform process, but instead chose to figuratively shout from the sidelines. We often come to the beliefs that affect our decisions using four common methods:

– Become An Expert. Actually, this isn’t terribly common because of the time starvation we face and the competing priorities we juggle. But in some areas of your life you are indeed an expert and can take confidence in your beliefs and the decisions that result.

– Let Others Think For Me. This method falls at the other end of the involvement scale. In theory, this is what our elected government representatives are supposed to do for us. They’re supposed to be experts who will make good decisions for us (if we trust them to do that). As another example, I haven’t filled out a tax return in decades. I chose a CPA to help me decide how to best file my tax return. I give him some input, and he thinks for me.

– Use A Litmus Test. You latch onto one issue for your deciding factor and ignore all else. For instance, when confused about voting for political candidates, it’s easy to pick one issue that you care about, such as abortion, gun-control, or immigration, then base your decision on that and ignore all else. Sellers often force buyers to resort to a litmus test. If the seller confuses the buyer with their sales approach, the buyer will frequently resort to the litmus test of lowest price, if they make a purchase at all; a confused mind says, “No!”

– Validate Key Drivers. I recommend identifying the key drivers that will likely be associated with a successful decision outcome, and then testing the validity of those drivers.

For example, when choosing a mortgage the key drivers to investigate might include:

– the interest rate calculation method
– the terms should you default
– early repayment options and penalties

If these three key drivers meet with your approval and don’t raise any red flags, you may feel comfortable deciding to go ahead without studying the entire agreement.

If you sell, help your buyers work through this ignorance management process. It will allow them to make better decisions faster, and that can lead to a healthier wallet for you.

Decision Satisfaction

Ultimately, you want to plan how you’re going to decide important issues. You want to like your answer to, “Why do I BELIEVE the way I do?”

We know we’re starved for time, that we can’t be expert on everything. Not every decision can be about information and logic. Yet we can get clear on why we believe what we believe. Decisions based on untested beliefs are prone to failure. Make time for critical thinking. Consider the consequences and rewards. Decide how much you’re willing to invest in the decision, and then choose a decision process that will enable you to believe in your decision. Make time to learn, make time to think, and you’ll enjoy more opportunities for success.

Copyright 2010 Paul Johnson.

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