SCOTUS Says You Must Tell the SEC

Last week, the U.S. Supreme Court settled an important question for the SEC’s whistleblower program. That program awards you money for reporting corporate misdeeds to the Commission. It also protects you from retaliation because you can sue to recover your position, double your back pay, and accrued interest, legal fees, and litigation costs.

Well, the Court said you can’t sue for retaliation if you only report something internally at your company. You have to tell the Commission, too, or you’re not a whistleblower under the law. Sounds simple enough, except the SEC had promulgated a rule to the contrary. Here’s the Wall Street Journal’s take on it.

The case was brought by a man who said his company fired him after he reported some accounting problems up the chain.

He didn’t go to the SEC, but he did sue for retaliation, and the company moved to dismiss.

Both the trial court and the appeals court denied that motion. They ruled that even if the man wasn’t entitled to money as a whistleblower, he could sue under the anti-retaliation sections of the law if he was fired for reporting wrongdoing.

But the high court unanimously reversed, saying you can’t sue for retaliation as a whistleblower unless and until you tell the SEC. The statute that created the whistleblower program, the Dodd-Frank law, defines whistleblower as a person who provides information “to the Commission.” And that supports the law’s core purpose, which is to spur people to tell the SEC. There’s another federal law, Sarbanes-Oxley, that protects you from retaliation for reporting something internally. But that law requires you to file a complaint with the Labor Department within six months before you can sue in court. And you only get simple back pay. The Dodd-Frank law lets you sue directly in federal court within six to ten years, and you get double back pay. But only if you tell the SEC.

Feds Raise Healthcare Penalties Again

If you’re a healthcare provider who takes Medicare or another federal program, take note.

We didn’t get a government shutdown, but the budget law from last week more than doubled the civil and criminal penalties you face when the government accuses you of fraud, waste, or abuse. To see for yourself, click the link and scroll all the way down to section 50412. You need to go about three-fifths of the way down.

The maximum civil penalties have doubled and, in some cases, more than doubled. Where they used to be $2,000 per violation, they’re now $5,000; where $5,000 before, they’re now $10,000; if $10,000, they’re now $20,000; if $15,000, now $30,000; and where they were $50,000 before, they’re now $100,000. Generally, the penalties apply per violation.

The maximum criminal penalties have doubled or quadrupled. A felony charge that used to threaten five years in prison and a $25,000 fine now carries up to ten years in prison and a $100,000 fine. A misdemeanor charge that carried a $2,000 or $10,000 fine could now cost $4,000 or $20,000 respectively in fines alone.

These changes apply to conduct after the law was enacted on February 9, 2018.

A Tale of Two Memos for White-Collar Cases and Whistleblowers

In the past month, the U.S. Justice Department has released two memoranda that will affect civil enforcement generally and the False Claims Act specifically.

The first memo confirms that DOJ will more actively dismiss the whistleblower cases it turns down rather than let them run their course. The memo follows a surprise announcement in October that we covered here. It’s an internal memo, but it’s already been published in the legal press. Here’s a summary.

Under the False Claims Act, the government may move to dismiss a case over a whistleblower’s dissent as long as it gives notice of the motion and there’s a hearing on it.

In exercising this power, the memo calls on civil prosecutors to consider these factors:

  1. Whether the case clearly lacks merit at the outset or after investigation.
  2. Whether it piggybacks off an existing government investigation but adds nothing to it.
  3. Whether it interferes with the government’s policies and programs in that sector or industry.
  4. Whether it interferes with the government’s goals for litigation brought on its behalf.
  5. Whether it poses a risk to national security from disclosure of classified information.
  6. Whether it will cost the government more in time, labor, dollars, or lost opportunities than it will return on the investment.

Three more points. First, these factors are not mutually exclusive, so more than one may apply at a time. Second, they’re not exhaustive, so the government can move to dismiss for other reasons, too. Third, it ain’t all or nothing, so the government can move to dismiss some claims or defendants but not others.

The second memo says something more profound for enforcement generally. Effective January 25, civil prosecutors may no longer treat an agency’s “guidance” as a set of binding rules whose violation means a violation of law. That’s because an agency’s guidance can’t create binding rules beyond what exists by statute or regulation. For one thing, it doesn’t go through the same process as formal regulations do, where an agency will give notice of a proposed rule to stakeholders and afford them a chance to comment. (Which makes for better rules). Sometimes, it doesn’t even emanate from the agency but a contractor. Because guidance doesn’t have the force of law, the fact that a person or business didn’t comply with it doesn’t prove or even presume that they violated the law.

The memo defines such guidance as “any agency statement of general applicability and future effect, whether styled as ‘guidance’ or otherwise, that is designed to advise parties outside of the federal Executive Branch about legal rights and obligations.” The memo expressly applies, for example, when the government enforces the False Claims Act by alleging that someone falsely certified their compliance with statutes or regulations.

New California Criminal Laws in 2018

We’ve already touched on four of them: Recreational pot. A ban-the-box law for employers. An overhauled sex-offender registry beginning in 2021. New rules for picking juries in civil and criminal cases.

Here are five more this week, with five more to come next week.

Lawyers can advise clients on cannabis. This is Assembly Bill 1159. It amended the Evidence Code to protect attorney-client privilege and confidentiality for legal services rendered in compliance with state and local law. The lawyer must also advise the client on the current conflict under federal law. Lawyers are already advising the cannabis industry, of course. But generally speaking, there’s no attorney-client privilege for legal services that are sought to help someone commit a crime or fraud. It’s the famous crime-fraud exception to the privilege. This law makes clear that, notwithstanding federal law, there’s no crime-fraud exception here just because it’s pot. The law also amended the Civil Code to support commercial cannabis activity that complies with state and local law.

You can seal your arrest record automatically if you weren’t charged or convicted. This is Senate Bill 393. It amended the Penal Code to permit most people who’ve been arrested but not charged or convicted (or whose convictions were overturned on appeal) to seal their arrest record. You may even be entitled to it as a matter of right in many cases; otherwise, you have to show that sealing your record would serve the interests of justice. Before this law, you couldn’t seal an arrest unless you proved your innocence, which is often difficult or impossible even when people did nothing wrong. But the law doesn’t apply if you could still be charged with something, so you must wait until the statute of limitations has run.

You don’t need to plead guilty to get drug treatment for simple possession. This is Assembly Bill 208. It amended the Penal Code to change a type of drug-treatment program we wrote about two weeks ago. The program used to be called deferred entry of judgment; now it’s called pretrial diversion. Before, you had to plead guilty and complete a program that ran 18 months to three years. If you completed the program, your case was dismissed, but if you didn’t, you’d be sentenced on your guilty plea. Now, you can plead not guilty, and the program runs only 12 to 18 months. But you have to waive your right to a jury trial, so if you don’t complete the program, you’ll go before a judge for trial.

The military diversion program includes misdemeanor DUI. Speaking of pretrial diversion, this is Senate Bill 725. It amended the Penal Code to extend a military diversion program to misdemeanor DUIs. This program enables a court to postpone a misdemeanor prosecution and place the defendant in a treatment program in which he may earn a dismissal if he is or was a member of the U.S. military and may be suffering from significant trauma or mental health problems as a result of his service. It wasn’t clear if the program included DUIs; two cases had decided it differently. This law resolves that it does. But it doesn’t guarantee diversion, and it doesn’t stop the DMV from taking your license.

It’s okay to enter a crosswalk during the countdown signal as long as you reach the other side before it ends. This is Assembly Bill 390. Before, you could only enter a crosswalk on a “walk” sign or symbol, and it was a crime (well, an infraction) to do it during the countdown. Who knew? So what if there’s no countdown, but the “don’t walk” sign or symbol is flashing? You’re not supposed to enter the crosswalk.


When the Doctor Is Not In

Last week, it was the California Medical Board, but Medicare ain’t playing around either, doc.

It will revoke your billing privileges if you submit inaccurate claims, and it will test the accuracy of those claims by mining data about you and your travels.

Recently, for example, the government revoked a clinic’s privileges because it determined the doctor who supposedly rendered the services wasn’t present on the dates of service. It’s not clear how the government knew that, but the implication is that it cross-referenced the doctor’s travel records. The clinic challenged the decision, and the case went to an administrative law judge.

The clinic admitted that the doctor wasn’t there on the dates of service, but it argued that the claims weren’t fraudulent because they covered services that were medically necessary and performed by other doctors on staff.

That’s not the point, said the judge. The government didn’t need to prove fraud, only an abuse of billing privileges. Under Medicare’s regulations, one way to abuse them is to bill for services that couldn’t have been furnished on that date. And one example of that is when the billing doctor was not in the state or country at the time. See 42 C.F.R. § 424.535.

So be careful out there. There have been a spate of government actions lately that used people’s travel and location data to build a case. Here’s a good article that cites a few of them. Be careful because even clerical errors can prove costly when the doctor’s not in.

Medical Board Metes Out Discipline Based on a Police Report

If you’re a doctor or other licensed healthcare professional in California, remember. Your board or agency can discipline you for alleged conduct in a police report even if you’re never charged with or convicted of anything.

Just this week, the California Court of Appeal ruled that the medical board could discipline a doctor based on a police report even though his criminal case was dismissed.

Here’s what happened. The doctor was arrested for possessing cocaine. As part of his plea deal, he successfully completed a drug treatment program, and the case was dismissed. But the medical board learned of the arrest and filed its own case against him. At the hearing, the doctor argued the board’s case was based entirely on the arrest report, which was a problem because the Penal Code said you can’t do that.

The case pitted two statutes against each other. On one hand, the Penal Code says that when you complete a program like the one this doctor did, your arrest record can’t be used “in any way” to deny you a professional license or certificate. But the Business and Professions Code says that, “notwithstanding any other provision of law,” an agency that oversees the healing arts can do just that. It can rely on an arrest report to discipline you even if you successfully completed such a program.

It wasn’t the first time this question had come up, but remarkably, it was an issue of first impression in the law, meaning it was the first time a court of appeal had to decide it.

The court, though, had no trouble deciding that the second statute was a straightforward exception to the first one. The clincher was that the Penal Code was amended this year to make that interpretation explicit. So the doctor lost.

In these cases, you should begin to defend your professional license and livelihood at the same time you begin to defend against a criminal case or investigation. Which is immediately. We can help you do both.

New Year’s Resolutions

Speaking of compliance, here are two businesses that ended the year resolving charges they violated U.S. trade sanctions by dealing with blocked countries, people, or entities.

Both cases show how the government enforces its sanctions regime, and they illustrate how an ounce of prevention can beat a pound of cure. Both cases were brought by the Office of Foreign Assets Control, or OFAC, which is an agency within the Department of Treasury.

The first case concerns a dental-supply company that agreed to pay $1.2 million to settle charges that it violated the Iranian Transactions and Sanctions Regulations. The government alleged that, from the end of 2009 through the middle of 2012, the company exported 37 shipments of dental equipment to distributors in other countries knowing, or having reason to know, they would end up in Iran.

According to the government, it wasn’t an egregious case because the exports were likely eligible for a license if the company had only applied for one. But it didn’t, and that ended up costing it a lot more on the back end.

The second case concerns a luxury-goods company that agreed to pay $300,000-plus to settle charges that it violated the Foreign Narcotics Kingpin Sanctions Regulations. The government alleged that, from October 2010 to April 2011, the company exported four shipments of jewelry to a Hong Kong entity that was on OFAC’s list of blocked persons and interests. The blocked entity’s name and address squarely matched those of the ship-to party, but the company didn’t flag the transaction before shipping the goods.

According to the government, this wasn’t an egregious case either, but if you add up the settlement costs and legal fees, it sure does eat into the margin.

Happy 2018, California

Let’s celebrate because the new year marks the dawn of the state’s licensing program for commercial, recreational cannabis. It follows the voters’ approval of Proposition 64, the Adult Use of Marijuana Act, which we wrote about last year.

But hold your horses, too, because it’s just the beginning. Earlier this month, the state launched its online application system, and two weeks ago, it issued its first batch of temporary licenses to retailers, distributors, microbusinesses, and testing laboratories. These licenses go effective January 1 and allow previously accredited businesses to do business while they complete the application process.

So far, only a few cities and counties are ready to go on January 1. Others, like Los Angeles, have been getting ready and will start taking applications within days or weeks. Some have opted out entirely. And most haven’t decided one way or another.

It’s a work in progress, then, and the best advice for now is to cover your backside. Run your business by the book, and invest in high-quality legal research, analysis, and representation. Invest in compliance, in other words, because it’s the only sustainable way in the end.

In the meantime, seven more states are poised to join the growing majority that has chosen to legalize, regulate, and tax medical or recreational pot.

So it may just be the beginning, but the new year looks bright.

The Most Patriotic Thing

Here’s a gift for the holidays: James P. Gray arguing relentlessly against drug prohibition as he has for twenty-five years now. He calls it the best thing, the most patriotic thing, that he can do for his country.

If you don’t know Jim Gray, you should. He’s a former state judge from Orange County, California who used to be a Republican, now is a Libertarian, and ran for the Vice-Presidency of the United States in 2012. He’s also a national treasure. He served in the Peace Corps after college, the Navy JAG Corps after law school, and the U.S. Attorney’s Office after that. As a federal prosecutor, he handled some of the major drug cases of his day, and as a trial judge, he presided over the drug cases that flooded his courtroom. He saw the system from every perspective, and his experiences changed him.

Way before it was popular to say so, especially in Orange County, Judge Gray held a press conference to criticize the war on drugs. It was 1992, and he may have been the first sitting judge ever to do so. He risked his career and reputation in doing so, but he was right then as he is now. Most of the problems we associate with drugs, he says, are drug-prohibition problems, not drug-use problems.

“Drug prohibition is the biggest failed policy in the history of the United States, second only to slavery. And if you listen, regardless of what your interests are—I will tell you, regardless of what that is—be it education, healthcare, crime, terrorism, or the environment—I will show you to your satisfaction how it is made worse by our policy of drug prohibition.”


SEC Chair Offers Advice on Bitcoin and Its Ilk

This week, the chair of the U.S. Securities and Exchange Commission weighed in on crypto-currencies as well as ICOs or initial coin offerings. With the price of bitcoin nearing $20,000, it probably comes at the right time. You may have been wondering yourself: What are the rules for this stuff? Are they being followed? And what are the risks in these markets?

Here is a summary of his advice for both Main Street and Wall Street.

For Main Street

These are the folks at home who may be tempted to jump on the bandwagon.

  1. Understand that, for now, it’s the Wild West out there. The SEC hasn’t approved any crypto-currency-related funds or products for listing and trading, and no one has registered an ICO with the Commission. Don’t let anyone today tell you otherwise.
  2. Do your homework. If you choose to invest in these things, ask plenty of questions and demand clear answers. The Chair’s statement includes a list of sample questions to consider. Be especially careful if a pitch sounds too good to be true or you’re pressured to act quickly.
  3. Understand that these markets cross borders, so your money may travel overseas even without your knowledge. Once there, you may not ever be able to get it back.

For Wall Street

These are market professionals like brokers, dealers, lawyers, advisers, accountants, and exchanges.

  1. Although ICOs can be effective ways to raise money, you have to follow the securities laws if it constitutes an offering of securities. So ask yourself: Is this offering a security? Is it an investment contract? Is it, in other words, an investment of money in a pooled venture that expects to derive profit from the efforts of others? If you’re not clear on this then you need a lawyer because the Commission will look past the form of a transaction to its substance. So just calling it a currency doesn’t settle the question. We blogged recently about this fact-intensive inquiry here.
  2. If you handle transactions in crypto-currency, you should treat them as if cash were being handed from one party to the other. You should know your customer and mind anti-money-laundering laws whenever you allow payments in crypto-currencies, allow their purchase on margin, or otherwise use them to facilitate securities transactions.

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