FALSE CLAIMS ACT OF 1979, S. 1981 MONDAY, NOVEMBER 19, 1979 U.S. SENATE, SUBCOMMITTEE ON IMPROVEMENTS IN JUDICIAL MACHINERY, Washington, D.C. The subcommittee met, pursuant to notice, at 9:30 a.m., in room 6226, Dirksen Senate Office Building, Senator Dennis DeConcini (chairman of the subcommittee) presiding. Present: Senator DeConcini. Also present: Romano Romani, staff director; Robert E. Feidler, counsel; Kevin O'Malley, staff assistant, and Pamela J. Phillips, chief clerk. OPENING STATEMENT OF SENATOR DECONCINI Senator DECONCINI. The Subcommittee on Improvements in Judicial Machinery will come to order. Today we will hold hearings on S. 1981, the amendments to the False Claims Act of 1979, which would provide the United States with an effective and useful tool to combat fraud in modern times. This bill was developed by the Department of Justice in an attempt to bolster the mechanism available to the Department to carry out its responsibility of vigorously pursuing fraudulent practices in dealings with the Federal Government. There can be no doubt that a need exists for reforming the False Claims Act, which has not been amended in any substantial respect since its enactment by the Congress in 1863. Although I retain some reservations about certain provisions of the bill, I am convinced that, on the whole, it is a valuable and necessary step forward in our struggle to protect the taxpayer from those who would defraud the United States. The wholesale reform contemplated by the act would include provisions expanding jurisdiction and venue, increasing recoverable damages, raising the forfeiture levels and redefining the mental element required for a successful prosecution. In addition, the burden of proof would be altered, nolo contendere pleas would take on more serious consequences in subsequent civil actions and a mechanism would be established to provide the necessary investigative tools so crucial to the development of a case in the face of these sophisticated schemes. I want to pay particular thanks to the Judiciary Subcommittee, Bob Feidler, and Kevin O'Malley, who put in a great deal of time in this effort. The first witnesses will be a panel from the Department of Justice headed by Roger Edgar, Director, Commercial Litigation Branch, Civil Division. Subsequently, we will look forward to hearing from L. Stanley Paige, who is presently vice president for legal affairs, Post-Newsweek Stations, Inc., but who for many years headed up the Fraud Section of the Civil Division of the Department of Justice. I understand joining you, Mr. Edgar, on the panel, will be Mr. Younger; is that right? Mr. EDGAR. That's correct, Mr. Chairman. Senator DECONCINI. Also Mr. Eugene R. Sullivan, Alan C. Brown, and one other person have accompanied you this morning. Mr. EDGAR. Mr. Merrick Garland, Special Assistant to the Attorney General. Senator DECONCINI. Very good. We are pleased to have you with us today. If you would, please proceed in whatever way you care to put your case on. We welcome you this morning. PANEL OF DEPARTMENT OF JUSTICE OFFICIALS: ROGER EDGAR, DIRECTOR, COMMERCIAL LITIGATION BRANCH; ALEXANDER YOUNGER, ASSISTANT DIRECTOR, COMMERCIAL LITIGATION BRANCH; EUGENE R. SULLIVAN AND ALAN C. BROWN, TRIAL ATTORNEYS, CIVIL DIVISION, AND MERRICK GARLAND, SPECIAL ASSISTANT TO THE ATTORNEY GENERAL Mr. EDGAR. Mr. Chairman, I do want to thank the committee for an opportunity to present the Department's views on this bill. I have a prepared statement which has been distributed to the committee, and if the Chair will permit me, I would like to have that incorporated into the record of these proceedings, and thereafter, depart from that statement and present to you the highlights of the bill. Senator DECONCINI. Your complete statement will appear at the conclusion of your oral testimony. You may proceed to highlight it, if you desire. Mr. EDGAR. Senator, you noted at the outset, in your remarks opening these proceedings, that the False Claims Act has not been amended in any substantial respect since its enactment following the Civil War. This bill is an effort on the part of the Department of Justice, working with virtually every interested component of the executive branch, to modernize and to bring up to date a very useful statutory tool. But I should hasten to emphasize that we are not in any way suggesting to the committee that the entire body of law known as the False Claims Act should be discarded. There are many provisions of that statute which have been utilized by the Department over the years to effect substantial recoveries in civil fraud cases. Those provisions have continuing vitality and from our perspective it would be most unwise to discard a body of precedent which has been established at considerable effort in 116 years. Nevertheless, there are a number of changes which circumstances make appropriate that we suggest to the Congress for consideration. The bill comes to this committee as a result of a study which was suggested during the session of the last Congress when an amendment to the False Claims Act was presented dealing with nationwide service of process. On the House side and on the Senate side, a number of the Members, a number of the Senators, suggested to the Department that this statute should be updated. The time had come for serious study to be given to this problem and we ought to go back and try to see what we could do to bring it up to date. This bill, as it has been presented to the committee this morning, is the result of that study. The jurisdiction and venue provisions have been considerably broadened. Many of our cases which are brought involve multiple defendants, and, under the present law, an action under the False Claims Act can be brought only where a defendant can be found. Now in a case where you have multiple defendants as is frequently true in most of our litigation, that will sometimes require that duplicitous lawsuits be begun in several districts, even though the conduct which gave rise to the litigation has a common genesis and a common origin. The bill is designed to remedy those deficiencies by providing a wider selection of jurisdiction and venue so that one action can be commenced in a single forum and that that court will have jurisdiction and venue over the action. The Department believes that duplicitous litigation involving similar facts is not in the public interest. The bill is designed to correct that perceived deficiency. A second significant change that the bill effects is a change in the damage calculation which is made upon a finding of liability in a suit brought under the False Claims Act. At the present time, there is considerable confusion among the circuits as to whether or not consequential damages can be recovered in an action under the False Claims Act. These consequential damages are particularly significant in most procurement cases. Many times we have found that the consequential damages will far exceed and in some instances even exceed the actual damages that are sustained by the Government in a procurement fraud situation. Again, this bill remedies this deficiency and codifies, to some extent, existing law. The forfeiture provision of the act has been modified. Under existing law, the United States may recover a $2,000 forfeiture for each false claim which is presented. Again, this particular provision was enacted during the Civil War, and given 116 years of escalating costs, we think it not unreasonable to suggest to the Congress, for its consideration, an increase of a fairly substantial amount in the forfeiture provisions of the act and the bill does that by increasing the forfeiture amount from $2,000 to $5,000. Another significant change made by this legislation is to provide that a plea of nolo contendere in a criminal case involving fraud against the Government will collaterally estop the defendant in a subsequent civil case upon those same facts from denying the truth of those facts. In brief, the bill which is before the committee this morning would give to a nolo plea the same effects as that presently attributable to a guilty plea. The nolo plea, Senator, is the plea of the white-collar criminal. I believe I can say this looking back on 16 years of prosecuting and defending criminal cases in the State and Federal courts. The nolo plea is not the plea of the bank robber, the interstate car thief and the like. The nolo plea is the plea of the sophisticated white-collar criminal represented by able, competent counsel who appreciates the fact that a nolo plea will have absolutely no collateral consequences in subsequent civil litigation. I would like to give you one, I think, graphic illustration of the problems that the Department encounters under existing law. In 1969, a Federal grand jury, in the Eastern District of Louisiana, began a criminal investigation of widespread fraudulent practices in the grain industry. The pattern of conduct that emerged from that investigation, which resulted in indictments of virtually all of the major grain exporting companies, showed a systematic, industrywide practice of shortweighing and misgrading grain which the United States was either purchasing or financing under the food for peace program. Indictments were returned and one by one the corporations began to enter pleas of nolo contendere. One corporation entered a plea of nolo contendere on a 37-count indictment and was fined $370,000. Thereafter, the Department began civil litigation against this same corporation under the False Claims Act, and after 31⁄2, almost 4 years of litigation, that case was settled by a payment from the corporation to the Treasurer of the United States of a sum of $4 million. I think that case illustrates a number of points. First of all, that the civil consequences of engaging in a fraud against the Government, at least in monetary terms, in many instances will far outweigh the consequences, again in financial terms, attendant upon a criminal conviction. Second, I believe the case illustrates the anomaly that existing law contemplates by requiring that the Department of Justice begin anew an effort to establish the corporation's liability in Federal court. The case required literally thousands of attorney hours and it is difficult to explain, and I believe rightfully so, to interested citizens and to the public why a corporation who pleads nolo contendere, and, hence, is subject to the full sanctions of the criminal law, the full extent of any fine that might be imposed, and in the case of an individual, indeed, even imprisonment to the maximum amount permitted by the statute, why that same individual is permitted to relitigate, in a civil case, his liability. Again, let me emphasize that this provision is designed to eliminate that anomaly and it is directed at what we have found consistently to be true in cases involving white-collar crime. That is a marked departure from existing law, but I do believe that the facts and the circumstances warrant it, that it is in the public interest, and that the Congress should enact it. Another provision which has been included in this draft bill is a provision dealing with civil investigative demands. As you probably know, Mr. Chairman, many of our cases follow antecedent criminal cases which are developed through the mechanism of a Federal grand jury. We, on the civil side of the Department of Justice, are foreclosed under existing law, and properly so, from having any input into that investigation with a view toward directing the development of evi dence which is designed or which has as its object and purpose garnering facts for the development of the civil case. The Supreme Court decisions on that subject are quite clear. This provision providing the Department with civil investigative demands will provide an independent avenue for the Department to develop evidence which is crucial to the development of these cases without waiting for the results of a Federal grand jury and without tempting prosecutors to pursue the civil consequences of a case through the vehicle of a Federal grand jury. A number of years ago, the Congress gave similar powers to the Department in the form of the Hart-Scott-Rodino amendments, called the Antitrust Improvements Amendment Act; I believe that is the title. The provisions in this bill are patterned quite carefully, quite closely after the provisions in that bill. We believe that these provisions are truly essential for the development of the facts that we need to bring before the courts to pursue these cases. I would like to mention one other change in existing law which is contemplated by the present bill, and then make myself and other - members of the panel available for whatever questions you may have. The final thing I would like to mention is the changes made in the existing law and the provisions of the bill that deal with bribery and official corruption. At the present time, the Department of Justice is investigating widespread corruption in the General Services Administration. It is a sorry history of bribery and misconduct among Government employees that appears in virtually every edition of the newspapers. What we have found, and I regret to say this, because I am a Government employee, but the facts are there: We have found in our investigation that many individuals employed by the Government have been corrupted by bribes and the corruption was so endemic, so pervasive, that these individuals were literally on the payroll of private contractors. Payments were made over a period of time to these individuals in relatively modest amounts, sometimes in cash and sometimes in kind, in exchange for which the employee would agree to execute receipts for goods which are never delivered or which were never delivered, or if delivered were not delivered in the quantity stated in the invoice. But because the practice had continued for so many years, the employees were unable, not unwilling, they were simply unable to point specifically to a particular contract and say, "Yes, indeed, this is a contract which gave us, the General Service Administration, merchandise on its face, but in fact and in truth, that merchandise was never delivered." Obviously, the practice was not followed in every case and the employees have told us that they did this to avoid or at least to minimize the risk of detection. So, perhaps in one case out of three or in one case out of four there would be a so-called "phony" or "bogus" invoice. This is truly shocking, but under existing law, in order for the Government to be made whole, we must have proof to tie up a particular bribe to a particular tainted contract and even though we have willing witnesses, witnesses who participated in the wrongdoing and hence are in the best position to tell us what in fact transpired, we face considerable and, indeed, in some instances, insurmountable problems of proof. 56-282 O 80 - 2 |