Whistleblower’s one-two punch: Confidential informant/employee spurs criminal investigation, then successfully sues individual company owner in qui tam action
In a stark reminder of the importance of a robust compliance program, a former employee whose disclosures to the FBI launched a criminal prosecution became the successful plaintiff in a qui tam motion for summary judgment against one of the individual owners of the now-defunct company.
The False Claims Act (“FCA”) complaint was brought by a former employee of Schuylkill Products, Inc. (“SPI”) who blew the whistle on fraudulent billing practices by the Pennsylvania-based manufacturer of concrete bridge beams. According to federal prosecutors, the fraud involved more than $136 million in government contracts and lasted for more than 15 years. SPI gained lucrative contracts under the government program which requires companies to subcontract a percentage of their work to a “Disadvantaged Business Enterprise” (“DBE”). The subcontracts were procured by minority-owned Marikina Construction Corp., (“Marikina”), but this company operated merely as a front for SPI. Marikina held the subcontracts, but SPI performed all the work (and retained most of the profits).
Investigation, indictment, and conviction
SPI employee Robert Green contacted the FBI to report what he characterized as DBE fraud. Green provided information as a confidential informant, and was compensated $5,300 for his assistance in the FBI investigation, during which Green made numerous recordings later used by the government in its criminal prosecution of SPI’s owners. The subsequent prosecution led to the guilty plea of Ernest Fink (director and officer of SPI) and the conviction of Joseph Nagle (president and CEO of SPI) after trial by jury.
The agreement to which Fink pleaded contained a statement of facts that included acknowledgment that Fink and other upper-level SPI managers used Marikina as a shell and that Marikina did not perform a commercially useful function. At trial, Nagle was convicted of 26 of the 30 charges against him, including conspiracy to defraud the U.S. Department of Transportation, conspiracy to commit wire and mail fraud, and conspiracy to launder money. After the conviction, Middle District of Pennsylvania Judge Sylvia Rambo upheld the sum of $53.9 million as the loss attributable to Nagle. Currently, both Fink and Nagle are awaiting sentencing.
Qui tam action
On January 8, 2010, less than two months after the filing of the grand jury indictment of Fink and Nagle, Relator-Plaintiff Green filed a FCA lawsuit against SPI, Fink, Nagle, and Marikina. Nagle and SPI never responded to Green’s complaint, and default judgment was entered against them in 2012. One month later, Fink filed his answer, but did not file a response to the plaintiff’s subsequent Motion for Summary Judgment.
On May 22, 2014, Judge Rambo entered summary judgment for the plaintiff; Fink’s admissions as part of his guilty plea provided sufficient support. The court stated: “as both the criminal and these civil proceedings involved the same conspiracy, Defendant Fink’s guilty plea conclusively establishes all of the factual issues as to his liability under the FCA counts set forth in the amended complaint.”
Whistleblowers may serve as both “original sources” of information for criminal investigations and for qui tam actions. Relators, moreover, may sue not only their former employer but also their former supervisors and managers in their individual capacities. Companies should understand the parallel nature of the criminal and civil proceedings in the FCA context, and should strive to deploy robust compliance programs to encourage employees to raise their concerns internally to afford companies the opportunity to assess allegations of misconduct, take remedial action, and self-report where warranted. Please feel free to contact the authors if you have questions about this case, the FCA, or your compliance program.