Peril, Perjury, and Moral Hazard

December, 2017

Washington -- One of the purposes of the federal False Claims Act is to deter wrong-doing by any entity tempted to make an illegal claim against the U.S. Government. Under the law, if someone discovers that a claim is false, not only does the entity have to pay the amount of the claim back, but also pay damages. False claims against the federal government are a matter of civil fraud, committed at the peril of those making them.

If an individual lies under oath to deny the existence of a plan at his organization to make the claims in question, whether or not the claims were later determined to be false, it is perjury. The individual lied about the existence of the plan, under oath. Perjury.

If the claims turn out to be false, that is civil fraud on top of perjury.

If the claims turn out to be false but the entity says it did not believe they were false when made, then the entity can argue that the False Claims Act does not apply, and indeed it might not. But the False Claims Act does not allow the entity to escape via this argument if the making of the claims was "reckless."

So the issue can boil down to a determination of a jury as to what is reckless. In the recent case against the student loan lender PHEAA (U.S. ex rel. Oberg v. PHEAA), we argued that claims of $116 million without benefit of opinion of counsel as to their legality, claims made without even asking the Department of Education whether they were legal, and hiding the plan (!) to make the claims from the Inspector General during an audit was recklessness, three times over. Not to mention that the claims were indeed false, as determined by the Inspector General's audit. Coupled with the false testimony under oath about the existence of a plan to make the claims – perjury – the preponderance of the evidence clearly pointed to "reckless disregard" of the law (that's the language of the False Claims Act) in making the claims, we argued.

Not so, a jury decided this month, without explanation. We'll never know the jury's thinking. During the trial, PHEAA tried to divert attention away from its own behavior toward that of the Department of Education, which it called "pathetic" and "weak-minded." It even called the Department's decision to cut off PHEAA's false claims a "joke." Perhaps the jury agreed that the government was so incompetent in paying the claims before eventually cutting them off that it didn't deserve to get the money back.* The jury wasn't saying.

But we know that this decision creates a moral hazard for dealings between contractors and the U.S. government, as it undermines the False Claims Act, the primary law combating fraud against the government. A moral hazard is defined as a lack of incentive to protect against risk of consequences. Contractors may learn from this case that the risk bar is so low that there is no peril in making false claims. Why not make false claims if the only risk is to have the claims cut off going forward if the contractor is ever caught, with no requirement to repay the false claims and no damages ever to be paid? Should false claims be integrated into a company's business plan? Why not? How about perjury in business plans? No consequences for that either.

Is the threat of a whistle-blower putting a contractor through a trial the only thing standing in the way of false claims? It's an unreasonable expectation for the government to rely on whistle-blowers to bear such burdens. Whistle-blowers invariably become the target of counter-attacks against their person; many if not most are ruined as a part of defendants' plans to discredit them and their motives. All whistle-blowers I know personally are good, patriotic citizens. Many have lost everything for their efforts. The government itself needs to clean up its own act with vigorous prosecutions of false claims.

* My explanation for the Department's behavior is less about incompetence and more about corruption. See a previous post about how PHEAA created an "iron triangle" and exploited it to generate an undisputed illegal windfall of $116 million.