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Qui Tam

Qui Tam Practice Example: Use of the Virginia Fraud Against Taxpayers Act to Combat Fraud in State Grants

By Zachary A. Kitts (all)

An article in yesterday's Lynchburg News and Advance provides a great chance to look at some potential uses of the Virginia Fraud Against Taxpayers Act by the Virginia Attorney General's Office.  We will also examine how a qui tam relator could have come forward if the VFATA had existed at that time. 

To be clear, most of the facts discussed herein occurred roughly a decade ago, and as such they are well outside the statute of limitations.  Also, the VFATA did not become law until Jan. 1, 2003, so it was not an option for Attorney General Mark Early, who served as AG at the time.  Still, this example will hopefully prove illustrative. 

The News and Advance article deals with the fraud prosecution of the National D-Day Memorial Foundation a few years back, and in particular with one attorney's role in a fraud perpetrated by the D-Day Foundation's then-President, Richard Burrow.  Louis Harrison, a family lawyer in Bedford, Virginia, was a prominent witness in the prosecution of Burrow.  Apparently, Harrison's role is the scheme--or rather, his inability to assess what Burrow was up to--is now preventing him from being appointed to the bench.    

For those of you who don't recall, the National D-Day Foundation was formed to raise the money necessary to build and maintain the National D-Day Memorial in Bedford.  The Foundation underwent a tumultuous period when it was first formed the early part of this decade.  Various actions by Richard Burrow resulted in federal charges by then-U.S. Attorney John Brownlee.  Those charges were tried and ended in a hung jury.  (For the non-lawyers out there, in criminal cases a jury verdict must unanimous.  If there are eleven jurors in a case, and 10 want to convict a defendant and one refuses, the result is a hung jury).  The result of a hung jury is that the defendant walks free, and the government is free to begin the process again.   

After the first hung jury, Brownlee obtained a second set of charges, and proceeded to trial.  The second trial also ended in a hung jury.  After the second hung jury, Brownlee announced that no new charges would be pursued.  There is, of course, no shame in any of that for the U.S. Attorney's Office or for Brownlee.  The prosecution of white-collar crimes is almost always difficult, because it deals with educated professionals--accountants, doctors, lawyers, etc.--who go a little too far over the line between unprofessional activity and criminal actions.  

White-collar criminals normally try to use one of a couple approaches.  First, they can try to convince a jury that while they may have used poor discretion--and may have engaged in sleazy business practices, they didn't break any laws such that they should go to prison.  Alternatively, they can try what I call the "Aw, shucks" defense--this one consists of blaming someone else and trying to convince the jury that you are not really all that smart, and were easily snookered by a clever co-worker, or business partner, etc.  

Also, by any account, Brownlee did the right thing professionally by not continuing to prosecute a case after a jury disagreed about the guilt of Mr. Burrrow two times in a row.            

To be clear, there is no question that Burrow engaged in activities that were untoward.  Burrow asserted strategy number one above, and thus the question all along was whether Burrow's actions amounted to a crime, or whether they merely constituted sleazy business practices, aggressive pursuit of government money, and sloppy accounting. 

And that is where the Virginia Fraud Against Taxpayers Act can be used in the future, in the same way that the federal government uses the Federal False Claims Act.  The VFATA and FCA are tailor-made to prosecute sleazy business practices that border on crimes. 

The most prominent example for our purposes today is a $3.5 million grant Burrow obtained from the Commonwealth of Virginia in the year 2000.  The grant from Virginia was a "matching grant."  In other words, in order to get this grant from Virginia, Burrow had to show that the Foundation had raised an equivalent amount of private money.  Then, and only then, would the Foundation get the $3.5 million approved by the Virginia Legislature.  

In other words, raising $3.5 million was a mandatory "condition of participation" in the grant program.  The problem was the Burrow and the Foundation had not raised the $3.5 million they needed.  So, instead of rolling up his shirt sleeves and going to work--or instead of simply foregoing the $3.5 million grant--he came up with a plan.  Burrow discreetly obtained a loan from a small California bank, and used that money to pad out the accounts of the Foundation. 

Then, in the grant application, he showed deposits of the loan money as donations in the amount of $3.5 million.  The Commonwealth had no reason to think he had not actually raised $3.5 million in private donations, and the matching $3.5 million grant was quickly approved and paid.  Burrow then paid the loan back to the bank. 

Later, Harrison would testify via a sworn declaration as to the following: "I ignored clear warnings and signs that Burrow was intentionally defrauding the State of Virginia,? according to a statement released by the U.S. Attorney?s office in 2003.  Harrison continued:  "I was willfully blind to the fact that the loan had to be repaid in only 90 days, and that the Foundation did not have the required matching funds to obtain the state grant.? 

The Foundation was required to raise $3.5 million in order to participate in the grant program--that requirement was a condition of participation, just a like a requirement in a contract.  Conditions of participation contain important statements of government policy, and violations of those terms are serious matters.  In this case, Virginia's requirement that the $3.5 million grant be matched by private funds has a clear purpose--the Legislature wants to give money only to projects that are going to succeed, and one clear indicator of success is the amount of private funds raised.

Burrow knew that requirement, and knew he could not meet it.  Instead of foregoing the grant money, he chose to make an end-run around the requirement. 

Because the $3.5 million grant from Virginia was purely state money, the claim would have arisen under the VFATA.  The Federal False Claims Act, which has existed since 1863, would not have been available to Brownlee to prosecute this claim as a civil matter and obtain treble damages, civil penalties and so forth.  Had the grant at issue been a federal grant--with the result that the matching funds would have been federal money--Brownlee could have done so.  

U.S. Attorneys have no authority to prosecute state claims on behalf of a state in a state court; as a result, enforcement of the VFATA to obtain treble damages and civil penalties in our hypothetical would have to be initiated by the Virginia Attorney General.         
 
Alternatively, if one of Burrow's employees had noticed Burrow's actions and had hired an attorney with qui tam experience to help prosecute a qui tam action, that person could have qualified as a qui tam relator, shared the information with the government, filed a case under seal, and eventually have recovered a share of the money.  The damages to the Commonwealth would be $10.5 million (which is treble damages for the entire $3.5 million grant) plus a civil penalty of $10,000 for each false claim made by Burrow and the Foundation. 

And that is where the Virginia Fraud Against Taxpayers Act could have played a role in this case, if it had been law at the time.  Like the Federal False Claims Act, the VFATA should be used to prosecute clear wrongdoing that does not quite rise to the level of a crime.  Our system of laws places a high--almost impossible--burden on criminal prosecutions; but with the false claims act, proof is required only by a preponderance of the evidence, making it an effective tool to root out fraud against the public fisc.  

The fact that the burden for civil false claims prosecutions is "preponderance of the evidence" rather than "beyond a reasonable doubt" is sometimes cited by people trying to find fault with the VFATA or the FCA.  More often than not, this issue raised by those who have been caught with their hands in the cookie jar. 

It is true that if you do business with the government, the liability risks you run are huge.  You can be on the hook for enormous amounts of money in the form of treble damages, large civil penalties, mandatory attorney's fees, and other damages for making false claims to the government.  And it is true that the prosecution, whether done by a qui tam relator and private counsel, or by the government, or both, will only have to prove its claims by a preponderance of the evidence. 

The simple fact is that constant vigilance is the price that private parties must pay for doing business with the government.  If you don't like it, don't do business with the government.  Make no mistake about it--the Virginia Fraud Against Taxpayers Act and the Federal False Claims Act are designed to make constant vigilance a "condition of participation" in government business. 

Zach Kitts
Cook & Kitts, PLLC          

     

Full post as published by Virginia Qui Tam Law on March 20, 2009 (boomark / email).