DOJ Will Clear Out Weak Qui Tam Cases

In a surprise announcement, the U.S. Justice Department says it will start moving to dismiss weak whistleblower cases brought under the False Claims Act rather than let them run their course. The announcement was made at a recent conference by the Director of Commercial Litigation for the Fraud Section of the Department’s Civil Division. I wasn’t at the conference, but this gentleman was, and he sheds light on the new policy.

Up to this point, the government has let whistleblowers litigate cases on their own even when it didn’t think they were any good. The government always get a first look at these cases, as we’ve explained before. If it likes what it sees, it will take over the case and throw its weight behind it. If it doesn’t, it will decline to intervene but allow the case to proceed if the whistleblower (and his or her lawyers) is willing to do the work. Often, the government’s decision not to intervene will prompt whistleblowers to dismiss the case themselves. But now, it seems, the government will sometimes make that decision for them.

Don’t Keep The Change, Doc

Meaning, don’t just pocket the difference when the government overpays you for healthcare goods or services.

Recently, a medical group agreed to pay $450,000 to settle allegations that it refused to return $175,000 in overpayments that it received from federal healthcare programs like Medicare and Medicaid. Here’s the government’s press release.

The overpayments at issue tend to happen in medical practices when two insurers share responsibility for a payment, and one pays too much.

But the thing is, you have to return the surplus, whether it’s big or small; you can’t keep it, and you can’t dawdle, either. If you do, you may incur significant liability under the False Claims Act, as we’ve explained before.

The rule is that you have sixty days to return the money once you know (or should know) about the overpayment. For more on the 60-day rule, see here.

In this case, the government alleged that the medical group failed to return the money despite repeated warnings, until it learned the Justice Department was investigating. Apparently, it didn’t know that one of its employees had filed a whistleblower lawsuit, which the government joined and took over. (For more on that process, see here.) The former employee will receive $90,000 of the settlement proceeds, or twenty percent.

This isn’t the first time the feds have moved to enforce the 60-day rule, and it sure won’t be the last. They’re just getting started.

California’s New Law of Fair Shakes

Whether you’re an employer or an employee, take note.

Earlier this month, California enacted the Fair Chance Act.

This means that, beginning next year, many employers can no longer ask about or look into criminal convictions until they’ve decided a person is right for the job. That means they can’t ask about convictions anymore on a job application. It also means they can’t run a background check until they’ve made a conditional offer of employment.

Also, once employers make a conditional offer and run someone’s record, they can’t deny the job based on a conviction unless they first analyze the relationship between the job and conviction. What kind of job is it, after all? Does it have anything to do with the conviction? How long ago was that, anyway? There must be a “direct and adverse” relationship between the two to justify the decision.

Employers don’t have to share their analysis with applicants, but they must advise of their decision in writing. When they do, they must identify the relevant conviction, attach a copy of the report they ran on the person, and explain that he or she has at least five business days to show why the report isn’t accurate or why they should still get the job based on rehabilitation or mitigating circumstances. Employers must consider any evidence they submit. If they still decide to deny the job, they must let the person know in writing, refer him or her to any existing procedure they have for challenging it, and give them notice of the right to file a complaint with the Department of Fair Employment and Housing.

What hasn’t changed? Employers still can’t consider arrests that didn’t lead to conviction, unless charges are still pending or the arrest was for certain drug or sex offenses and the job is in a healthcare facility that requires access to drugs or patients. Nor can employers consider convictions that have been sealed, dismissed, or otherwise expunged.

The law will apply to employers with five or more employees. It exempts those who must conduct background checks by law. For more on the new law and its passage, see here and here. For the text itself, see here.

When It Sounds Too Good To Be True

Last week, it was the SEC; this week, it’s the FTC or Federal Trade Commission. That’s the agency that, among other things, enforces federal laws against unfair or deceptive business acts or practices, including false advertising.

So what happened?

The FTC settled a lawsuit against a chiropractor who sold a “breakthrough” weight-loss system for $1,895 a pop. He also licensed and franchised the system to other chiropractors and professionals to sell.

Although the defendant didn’t admit or deny the allegations, he agreed to stop making the following claims about his system:

  1. That you could lose twenty to forty pounds, or more, in forty days.
  2. That you could do that safely and without cutting calories or exercising.
  3. That you could burn between 2,000 and 7,000 calories per day.
  4. That you could treat diabetes, psoriasis, and other conditions.

I’m no doctor, but as far as I know, it’s not possible to lose that much weight or burn that many calories without starving yourself or exercising like you’re on meth. According to the complaint, the people who bought the system were told—only after the fact—to eat about 500 calories per day. To put that in perspective, the bowl of cereal you had this morning was at least 200 calories. Good luck getting through the rest of the day.

The defendant also agreed to pay $2 million in refunds; to pay $30 million more if he violates the settlement agreement; to stop presenting friends, relatives, or business partners as satisfied customers who endorsed his system; and to stop using a non-disparagement clause in his contract that punished people for criticizing the system.

Buyer, beware: All that glitters ain’t gold, and there’s no substitute for good nutrition, exercise, and sleep.

SEC Lights Up Another Cannabis Company

In what may be a sign of maturity for the industry, the Securities and Exchange Commission has sued another marijuana-related business for violating federal securities laws.

Last month, the SEC charged a California-based company and two former executives with a classic pump-and-dump scheme. First, the Commission says, the defendants touted phony revenue to drive up the price of the company’s stock. Then they unloaded their own shares for millions of dollars. According to the complaint, much of the revenue came from a series of sham transactions with a shell company that the executives controlled. So the SEC charged them with fraud as well as offering and selling unregistered securities.

The company and one of the executives have settled the case without admitting or denying liability. The executive agreed to pay more than $12 million, among other penalties.

Meanwhile, the company has turned over a new leaf, so to speak, overhauling its management, business model, and board of directors.

The SEC will continue to scrutinize the market, however, which highlights something cannabis companies should already know: get your ducks in a row, and run your business the right way.

Puff and pass if you want, but don’t pump and dump.

Securities Fraud: But Was It Even A Security?

What is a security, anyway? The California Court of Appeal tackled that question recently in a case about a loan between friends.

A good starting point is that the law considers a security to be an investment contract, but there’s more to it than that. You may be familiar with common examples like publicly-traded stocks and bonds, but sometimes it’s a tougher call.

California law recognizes two tests to determine whether a deal or transaction is a security. One is the state’s risk-capital test, and the other is the federal Howey test (from a U.S. Supreme Court case). California courts may apply either one to your case, their goal being to protect the public from shady investment schemes.

The narrower risk-capital test asks whether you indiscriminately solicited passive investments from the public at large. A passive investment is one whose success depends mainly or exclusively on the efforts of people other than the investors.

The broader federal test simply asks whether you solicited people to invest passively.

In this case, the defendant had persuaded a guy he knew to invest in his land-development deal. The investment was a $280,000 promissory note that promised to pay out as follows:

  1. If the land were sold, the guy would share in the net profits from the sale.
  2. If the land were developed, he would receive one residential acre of his choosing.
  3. If neither event took place within one year, he could call the note and get interest on top of principal at a rate of ten percent.

But things didn’t exactly pan out, and some years later, the local district attorney’s office charged the defendant with securities fraud.

The trial court partly dismissed the case because it ruled that the promissory note wasn’t a security but a simple loan.

The government appealed that ruling, but the appeals court agreed. Even under the federal test, the note wasn’t a security because it was carefully negotiated between the parties, and it called for repayment whether the venture succeeded or not. The defendant had even personally guaranteed it.

So the case could’ve been a breach of contract, or it could’ve been a fraud.

But it wasn’t a securities fraud because the note wasn’t a security.

New California Criminal Laws in 2017

Let’s get right to it.

We already covered three of them in prior posts. One was Proposition 64, which legalized recreational marijuana. Another was Proposition 57, which expanded parole eligibility for nonviolent felons and cut back on prosecuting kids as adults. A third was Assembly Bill 1909, which made it a felony for prosecutors to commit Brady violations in bad faith.

Here are five more.

Ransomware is a form of extortion. This is Senate Bill 1137. It amended the Penal Code to punish anyone who introduces ransomware into a computer system or network. It doesn’t matter whether you actually got the ransom or not; it’s a felony punishable by two, three, or four years in the county jail. See Pen. Code § 523.

New business search warrants, less drama. This is Senate Bill 1087. It amended the Evidence Code to make it easier for innocent businesses to comply with search warrants for their records. Now, if a business is not a subject of the underlying investigation, it may be able to produce its records by mail or in some other arms-length way. That’s a lot better than having agents show up to go through your stuff. See Evid. Code § 1560(f).

New motion to vacate a conviction or sentence based on immigration consequences or fresh evidence of innocence. This is Assembly Bill 813. It allows you to ask a court to throw out your case in two situations even though you’ve served out your sentence. The first is if you pleaded guilty because of a legal mistake that undermined your ability to understand the immigration consequences of your plea. The second is if you can present fresh evidence that you were innocent. See Pen. Code § 1473.7.

No more possibility of probation for sex offenses where the victim was unconscious or too intoxicated to consent. This is Assembly Bill 2888. It eliminated probation as a possible sentence for rape, sodomy, oral copulation, or sexual penetration with a foreign object if the victim was unconscious or too intoxicated to consent. It extended a rule that already applied to other, serious sex offenses. See Pen. Code § 1203.065.

No more statute of limitations for felony sex and child-molestation cases. This is Senate Bill 813. It eliminated the statute of limitations for a litany of sex crimes, which now may be prosecuted at any time. Previously, they had to be prosecuted within ten years, or if the alleged victim was under 18, before he or she turned 40. See Pen. Code § 799.

When It Rains, It Pours

Here’s another case that blurs the line between civil and criminal laws.

It started as a civil dispute between a homeowner and contractor. The homeowner hired the contractor to paint her house and install ten windows. Six months later, he had painted her house and installed eight-and-a-half windows, but no one was happy. He wanted $8,000 more to finish the work, but she’d already paid him $61,000 and refused to pay more.

The contractor sued for the $8,000 balance, but he had a problem: apparently, he didn’t actually have a contractor’s license. Or he couldn’t produce a valid one, anyway.

He may not have realized that, in California, an unlicensed contractor can’t sue for a breach of contract no matter how good a job he may have done. Not only that but he can be sued for every penny that he was paid even if he did great work. Which is what happened here. The homeowner lawyered up and countersued for the $61,000 that she had paid him.

Then his luck got worse.

Because he couldn’t produce a contractor’s license, he was charged criminally with six misdemeanor counts of contracting without a license. Yes, it’s a crime, too. He pleaded no contest to one count, and the other six were dismissed. He was put on probation and ordered to pay restitution as part of it.

At the restitution hearing, the government demanded that he pay back the entire $61,000 that the homeowner had paid him plus her attorneys’ fees. He testified that he did the work right and that she owed him $8,000. She testified that he didn’t do it right because some of the paint had faded, chipped, bubbled, and peeled in the three years since. He argued that any damage was due to natural weathering because the house was so close to the ocean, and he called an expert who testified to that.

The trial court sided with the contractor, but on appeal, he was ordered to pay back everything, including her attorneys’ fees.

Why?  The law was clear that he didn’t have a right to the money no matter how well he performed, so legally, she never should’ve had to pay for his work in the first place.

Wasn’t this a criminal case, not a civil one? Yes, but the civil rule applied to criminal restitution.

Wasn’t this an unfair windfall for the homeowner? Perhaps.

But that’s the way the cookie crumbled.

Update: On August 22, 2017, a higher appeals court reversed this decision. It held that the civil rule doesn’t apply to criminal restitution, which is limited to a victim’s actual economic loss. And with that, all is right in the world again.

SEC Reports Enforcement Results for 2016

As we wind down the calendar year, the Securities and Exchange Commission has already reported its enforcement results for the fiscal year that ended September 30.

In case you missed it, here’s the press release. Naturally, there’s some self-patting on the back, but if the past predicts the future, the agency is looking to file cases. Its numbers have climbed steadily over the last dozen years, and it continues to ramp up its use of big-data analytics and the whistleblower program, which it launched in 2011.

Here are some highlights from 2016.

  • The agency filed a total of 868 cases, which was a new single-year high.
  • It filed a record number of cases involving investment companies or advisers and a record number under the Foreign Corrupt Practices Act.
  • It obtained over $4 billion in judgments and orders, which matched the haul from each of the last two years.
  • It awarded more money to whistleblowers ($57 million) than in all prior years combined.

California’s Next Gold Rush Is Green

Last week, California legalized recreational marijuana. So did Maine, Nevada, and Massachusetts, and four other states passed medical-marijuana laws: Arkansas, Florida, Montana, and North Dakota.

It marked the end of prohibition as we know it, which didn’t work for alcohol and doesn’t work for pot. Too many millions of people enjoy it responsibly or know others who do, and it’s safer than alcohol or tobacco. As a much-beloved sportscaster used to say, the game’s now in the refrigerator; the door’s closed, the light’s out, the eggs are cooling, the butter’s getting hard, and the Jell-O is a-jigglin’. Hopefully, Uncle Sam does the right thing, too.

Through Proposition 64, California voters enacted the Control, Regulate, and Tax Adult Use of Marijuana Act of 2016. It’s called the Adult Use of Marijuana Act for short. For a deep dive on the issues, see the state’s official voter guide to the election. It’s a big file, but a summary of Prop 64 starts on page 90, and the full text follows on page 178.

What do you need to know right now? These six things.

It legalized recreational marijuana for adults age 21 or older. You may now grow up to six plants on your property, and you may buy or possess up to 28.5 grams of cannabis, which is an ounce, or eight grams of concentrated cannabis.

It taxes the sale and cultivation of marijuana. It imposes an excise tax of 15% on retailers, on top of existing state and local sales taxes, as well as a cultivation tax on growers of $9.25 per ounce of flower and $2.75 per ounce of leaf. It will generate billions of dollars in tax revenue in the coming years, and it will save millions of dollars in costs to law enforcement.

It imposes standards on the testing, labeling, packaging, and marketing of marijuana. It prohibits marketing to minors, and it bars shops from operating within 600 feet of a school, daycare center, or youth center unless the local government approves. It also bars them from selling alcohol or tobacco.

It continues to punish those who use, grow, or sell outside the rules. It’s a misdemeanor to have more than 28.5 grams, grow more than six plants, or sell without a license. It’s punishable by up to six months in county jail, a $500 fine, or both, and you’re subject to large civil monetary penalties for each day you’re in business. Or you could face a felony based on your criminal history, your selling to or employing underage people, or the environmental impact of your unlicensed grow. Separate penalties continue to apply to minors and people age 18 to 21. Finally, you can’t use pot on the road, in a public place (except for shops that allow it), or anywhere that you can’t use tobacco.

It allows people to petition to clear their records. If you’re currently serving or have ever served a sentence for an eligible marijuana offense, you can petition the court to reduce your conviction and sentence or dismiss your case entirely. The court will presume that you’re entitled to this relief unless prosecutors prove by clear and convincing evidence that you’re not. If they can’t, the court will grant your petition unless it finds that doing so would endanger public safety. Many counties have already prepared to process these petitions.

The state will tax, license, and regulate marijuana businesses, and it will issue its first licenses by January 1, 2018. Cities and counties may further tax or regulate the industry or just ban it outright (but not ban its transportation through their jurisdiction). The main state agencies are as follows:

  • The Bureau of Marijuana Control (formerly the Bureau of Medical Cannabis Regulation): to license and regulate retailers, distributors, and testing facilities
  • The Department of Food and Agriculture: to license and regulate growers
  • The Department of Public Health: to license and regulate edibles
  • The Department of Fish and Wildlife: to regulate the environmental impacts of growing
  • The State Water Resources Control Board: to regulate the environmental impacts of growing on water quality
  • The Department of Pesticide Regulation: to regulate the use of pesticides in growing
  • The Marijuana Control Appeals Panel: to hear appeals from people and businesses affected by an agency’s decision

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