Wake Forest Law Review

By: Adam McCoy & Shawn Namet

U.S. v. Palin
In this criminal case, the defendants argued the government did not sufficiently prove the materiality requirement of health care fraud to convict for submitting to the insurance company medically unnecessary and more expensive tests to increase profits.  Materiality requires showing the misrepresentation effected the insurance company’s decision to pay the claim.  The Fourth Circuit affirmed the conviction and found there was sufficient evidence of materiality because insurers would not have paid for the more expensive tests submitted by the defendants if they had known the tests were not medically necessarily.

U.S. v. Ali
In this civil case, Melina Ali appealed the district court’s order holding her in contempt after she failed to produce certain documents in response to an administrative summons issued by the IRS, arguing that the Government failed to establish her possession or control of additional responsive documents.  The Fourth Circuit affirmed the district court’s judgment, finding sufficient evidence in the record to establish that Ali’s production was presumptively incomplete, and that the burden shifted to Ali to demonstrate her good faith efforts to produce responsive documents.

By Kelsey Hyde

On March 17, 2017, the Fourth Circuit published an opinion in the civil matter of Sharma v. USA International, vacating the district court’s grant of summary judgment and remanding for further proceedings. In departing from the lower court’s ruling, the Court found the U.S. District Court for the Eastern District of Virginia improperly granted the defendant’s motion for summary judgment based solely on the contested issue of plaintiff’s purported damages.

Factual & Procedural Background

The plaintiffs in this case, Jatinder Sharma & his corporation Haymarket Fast Foods, Inc., were involved in a business transaction with defendants Khalil Ahmad and Mahrah Butt, partners at USA International, LLC. Sharma became interested in purchasing two restaurants– a Checkers and an Auntie Anne’s– from defendants upon learning how these restaurants were generating high sales. Throughout negotiations for the purchase of these restaurants, Sharma reviewed USA International’s tax returns and financial statements, which indicated the combined sales of the restaurants for the most recent months were about $75,000 per month.

The parties’ first purchase agreement specified a price of $720,000, and made the sale contingent on the stores collectively acquiring $90,000 in monthly sales in the two months prior to a settlement. Subsequent financial statements revealed lower monthly sales, thus the price was later reduced to $600,000 and the conditional-sale provision was eliminated from the final agreement. Sharma formed the entity Haymarket Fast Foods, Inc. in relation to the transaction, and also applied for a loan at his bank to secure part of the purchase price. His application represented that the restaurants’ average monthly sales based on the figures presented in the financial statements provided by defendants.

Shortly after the closing, Sharma noticed sales well below the figures that had been conveyed by defendants. Sharma looked further at other elements of the business– namely the supply orders, employee’s personal observations, and bank records– in an attempt to uncover the discrepancy. This investigation made Sharma realize that, based on the supplies available, the amount of sales defendants had purported to make were simply not possible; he then suspected that defendants had inflated their sales on the income statements provided to him before closing. Further, employees who had been working for defendants revealed to Sharma that defendant Butt had, on numerous occasions, rung up high sales for food not ordered by customers, and then directed employees not to prepare the food that coincided with these orders. Moreover, Bank of America accounts revealed that deposits attributable to the restaurant were substantially lower than those represented in the statements given to Sharma.

In response to these findings, Sharma filed on action for fraud against the defendants, alleging they had inflated sales figures and lied during negotiations, resulting in fraudulent inducement to pay a higher price for the business than it was truly worth. He proposed that damages be calculated by either (1) multiplying weekly sales by 36, or (2) multiplying monthly earnings by 48, either of which meant to provide the proper valuation of the business.

Defendants filed a motion for summary judgment, claiming plaintiffs had failed to sufficiently establish the materiality of the alleged misrepresentations, their reliance on the misrepresentations, and their damages (i.e. three of the particular elements necessary to succeed on a fraud claim). The district court found that plaintiffs had adequately shown the materiality of and reliance on defendants’ misrepresentation, but had indeed failed to provide enough evidence for a factfinder to estimate with reasonable certainty the amount of damages they sustained. Namely, the court rejected the two methods proposed by plaintiff for finding the actual value of the two restaurants, concluding that neither method conformed to any generally accepted methods for valuing a business, nor sufficiently proved they were independently reliable. Thus, because damages are a necessary element of a fraud claim under controlling state law, the court granted summary judgment. On appeal, the sole issue presented regarded the district court’s finding of insufficient evidence of damages.

Elements of the Claim & Standards to be Met on Motion for Summary Judgment

On a motion for summary judgment, the court takes the record in the light most favorable to the non-movant party. The moving party is entitled to a grant of summary judgement as a matter of law if they show there is no genuine dispute as to any material fact. F.R.C.P. 56(a).

To establish a claim for fraud under Virginia law, a plaintiff must show: (1) false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting in damages to the party so misled. Evaluation Research Corp. v. Alequin, 439 S.E.2d 387, 390 (Va. 1994). Because all such elements are necessary, failure to satisfy any one element is enough to bar relief for a fraud claim, as the district court found in their ruling based on failure to establish damages.

Under Virginia law, when a dispute involves the transfer of goods or property, damages are measured by the difference between the asset’s actual value at the time of contract and the asset’s purported value if the representations made had instead been true. Courts have previously treated sales prices as sufficient evidence of value, especially in arms’ length transactions. Virginia law maintains that plaintiffs need not prove damages with absolute certainty, but a plaintiff still must provide sufficient evidence to allow a factfinder to make an intelligent, probable estimate of the damages or losses allegedly sustained.

Fourth Circuit Finds Plaintiffs’ Evidence Regarding Estimated Damages Sufficient to Survive Motion for Summary Judgement

The Court concluded that plaintiffs had indeed met their burden and had put forth sufficient evidence to allow an estimate of damages by a factfinder. Namely, the Court emphasized that the parties’ arms-length transaction would allow a reasonable factfinder to conclude that the restaurants’ final sales price represented their value, as needed for the calculation of damages. Viewing the record most favorably for the plaintiffs, the Court found that negotiations surrounding the final price of the restaurants evidenced that both parties’ relied on a valuation of the businesses derived from a multiple of weekly and/or monthly sales. Moreover, the entire content of negotiations between the parties clearly revolved around the restaurants’ weekly or monthly sales, from Sharma’s initial interest in purchasing the restaurant to the later financial statements used by defendants to further persuade Sharma to go forward with the purchase. The Court even performed its own calculations to affirm this result, despite the defendants’ refusal to confirm the calculation methods used to arrive at the sales price.

However, the Court also emphasized that the actual multiplier-numbers used or derived are not dispositive in this case, and that defendants could indeed challenge those numbers as a matter of fact later in the case. Instead, the true question was whether plaintiffs provided sufficient evidence, as a matter of law, for a factfinder to estimate a probable calculation of damages. In the Fourth Circuit’s opinion, the plaintiffs did just that by presenting their own estimate with reasonable precision and support for their own calculations, using an accepted approach based on income and computing their results with specific numbers provided by defendants to estimate the purchase price.

Vacated & Remanded

Based on their finding that Plaintiff’s purported estimates of damages were acceptable and sufficient to create a material dispute of fact, the Fourth Circuit vacated the District Court’s grant of summary judgement and remanded for further proceedings to continue plaintiff’s fraud claims.

By Kelsey Hyde

Today, in the civil case of United States ex rel. Michaels v. Agape Senior Community, Inc., the Fourth Circuit published an opinion affirming the district court’s decision on the Attorney General’s unreviewable veto power under 31 U.S.C. § 3730, and dismissing the appeal of an evidentiary issue. In affirming the lower court’s ruling, the Court found the U.S. District Court for the District of South Carolina properly interpreted the relevant statute and persuasive case law on the issue of the Government’s right to veto a settlement for qui tam action cases in which they elected not to take part. In dismissing the appeal of the district court’s decision to disallow statistical sampling as hard evidence, the Court strictly construed 28 U.S.C. § 1292(b) and declined to review the present issue for it did not concern a pure question of law.

Procedural Matters in Determining the Parties

This action arose from the allegations of Brianna Michaels and Amy Whitesides regarding the dealings of their former employer, defendant Agape Senior Community, Inc. and twenty-three affiliated elder care facilities throughout South Carolina (collectively, “Agape”). The two former employees alleged that Agape had fraudulently billed Medicare and other health care programs run by the Federal Government for thousands of patients who were ineligible or did not actually receive the charged services.

Michaels and Whitesides proceeded with this matter under the False Claims Act (FCA), which authorizes private individuals (referred to as “relators”) to pursue legal actions on behalf of the United States in order to receive civil remedies for fraud committed against the Government, called a “qui tam action”. See 31 U.S.C. §§ 3729-3733. This type of suit permits the Government to intervene within specified time periods, or decline to intervene and instead allow the relators to conduct the action. Id. at § 3730(b)(4)(A)-(B). In this case, the Government declined to intervene, but did alert the relators of a provision in § 3730(b) which provides the Attorney General ultimate, non-reviewable authority to object to proposed settlements and dismissals, a provision at the center of this appeal.

The Two District Court Rulings that Led to Interlocutory Appeal  

Discovery efforts revealed that Agape had filed over 50,000 claims for federal health care programs for a relevant time period in which they had also admitted 10,000 patients. Based on the unreasonable cost of reviewing all such documents and materials pertaining to these claims and individuals, estimated at over $36 million, the relators sought instead to use a statistical sampling of the evidence to prove their case of fraudulent federal health care billing. However, the District Court ruled this to be an improper evidentiary method (referred to as “the statistical sampling ruling”).

The parties then negotiated and reached a proposed settlement agreement, but the Attorney General objected to the settlement amount, pursuant to § 3730(b)(1), based on the Government’s own statistical sampling assessment and estimated damages. Agape sought to enforce the settlement over such objection, but the District court refused and found instead that the Attorney General possessed absolute veto power over such decisions under § 3730(b)(1). In this ruling, the court did note the peculiarity of the Government involving itself in a case in which it chose not to be a party, and by way of a method in which the court had found improper, but still upheld this veto power (referred to as “the unreviewable veto ruling”).

Challenges & Standards of Review on Appeal

On appeal, the Fourth Circuit addressed the district court’s two rulings, the statistical sampling ruling and the unreviewable veto ruling. Namely, these matters raised two issues: (1) the extent of the Attorney General’s power under § 3730(b)(1) to veto an FCA qui tam action settlement in which the Government chose not to intervene; and (2) the authority of the Court of Appeals to review the district court’s decision regarding the evidentiary use of statistical sampling in this case. The Court’s review of these matters was de novo. The appeal of these issues occurred before the actual trial to better serve judicial efficiency, based on the court’s opinion that both involved important and controlling questions whose result could lead to the ultimate termination and judgment of litigation. As such, the Fourth Circuit granted appeal and heard these issues pursuant to 28 U.S.C. § 1292(b).

Fourth Circuit Adopts Finding of Attorney General’s “Absolute Veto Power” Over Such Settlements

            In reviewing the district court’s interpretation of Section 3730(b)(1), the Court began by assessing two different interpretations of this very statute put forth by different circuit courts. First, the Ninth Circuit’s decision in United States ex rel. Killingsworth v. Northrop, 25 F.3d 715 (9th Cir. 1994) held that the Attorney General’s consent-for-dismissal provision for FCA qui tam suits is not absolute, but instead can be limited and subject to a reasonableness review if the government chooses not to intervene. Conversely, the Fifth and Sixth Circuits both determined that the Attorney General has absolute veto power over such settlements, regardless of the Government’s choice to intervene, and therefore relators may not seek voluntary dismissals without the consent of the Attorney General. See Searcy v. Philips Electronics North America Corp., 117 F.3d 154 (5th Cir. 1997); United States v. Health Possibilities, P.S.C., 207 F.3d 335 (6th Cir. 2000).

The Fourth Circuit chose to adopt the interpretation of the Fifth and Sixth Circuits, holding that the Attorney General does indeed have absolute, unreviewable power to consent or object to voluntary settlements in FCA qui tam suits. It reached this conclusion based on the plain language of the statute and the determination that the consent-for-dismissal provision is unambiguous. Additionally, the court found that the statute’s legislative history reveals a clear Congressional intent to grant such unreviewable authority to the Attorney General, and that Congress did in fact act purposefully by choosing not to articulate limitations on this authority. Moreover, the court reasoned that this interpretation is wholly consistent with the FCA, a statutory scheme that still construes the United States Government as the real party of interest, regardless of their choice to intervene.

District Court’s Evidentiary Ruling Did Not Present Question of Law Subject for Review on Interlocutory Appeal

            In examining the district court’s statistical sampling ruling, the Circuit relied on other Fourth Circuit precedent concerning interlocutory review to determine that this issue was not eligible for this specific type of appeal. Namely, the court observed that such review is to be used sparingly under strictly construed requirements, and must involve a controlling question of law. See Myles v. Laffitte, 881 F.2d 125, 127 (4th Cir. 1989). Moreover, the court emphasized that review under Section 1292(b) is not proper when the question turns on genuine issues of fact where the district court applies settled law to the facts and evidence of a particular case. Based on such standards, the Court found that the district court’s ruling to disallow statistical sampling did not concern a question of law regarding its admissibility in general, but instead solely concerned its admissibility with respect to the particular facts and evidence in this case. Thus, the issue did not raise a pure question of law subject to interlocutory review.

Fourth Circuit Affirmed in Part, and Dismissed in Part

Accordingly, the Fourth Circuit affirmed the district court’s unreviewable veto ruling, and dismissed the relators’ appeal of the statistical sampling ruling.

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By M. Allie Clayton

On November 15, 2016, the Fourth Circuit released a published opinion in the civil case of United States v. Government Logistics N. V., and held that, while the substantial continuity test for successor corporate liability did not apply, the factual allegations regarding the fraudulent transaction test could not be resolved in this case except by a fact finder, and thus reversed.

Facts and Procedural History

This complex case began over fifteen years ago as a bid-rigging scheme by shipping businesses in order to defraud the United States. The Fourth Circuit has entertained appeals from decisions in this case at three different points throughout the litigation.

This case began in the year 2001, when Gosselin Group N. V. (then known as Gosselin World Wide Moving, N. V.) and at least one other entity, the Pasha Group, implemented a bid-rigging scheme with regard to two government programs—the International Through Government Bill of Lading (“ITGBL”) program and the Direct Procurement Method (“DPM”) program—that facilitate the trans-Atlantic shipping of household goods that belong to military and domestic personnel. The ITGBL program involves the Department of Defense (“DOD”) soliciting bids from domestic freight forwarders, and those domestic forwarders subcontract foreign operations to businesses overseas. The DPM program involves the DOD soliciting bids from international businesses. Both programs were administered by the Army’s Military Transport Management Command (the “MTMC”).

The Gosselin defendants (Gosselin Group N. V., Gosselin World Wide Moving N. V., and Gosselin Group’s CEO and former managing director, Marc Smet) and the Pasha Group (“Pasha”) implemented a bid-rigging scheme in which they increased the prices that the DOD paid to ship goods to and from Europe under the ITGBL and DPM programs. This led to the DOD paying millions of dollars more than it should have paid. Those bid-rigging schemes did not go undetected, and led to the qui tam proceedings in this case, and successful criminal prosecutions. Qui tam proceedings are lawsuits in which a whistleblower brings a civil claim pursuant to the False Claims Act (“FCA”). Under the FCA, 31 U.S.C. § 3730, whistleblowers are rewarded for assisting the United States in recovering any money lost to the defendants, up to 25% of the proceeds if the government participates, and up to 30% of the proceeds if the government does not participate.

The Criminal Prosecutions

In November of 2003, a grand jury returned a two-count indictment against Gosselin Group and Smet that charged each with “conspiracy to restrain trade, in violation of 15 U.S.C. § 1, and conspiracy to defraud the United States, in contravention of 18 U.S.C. § 371.” In February 2004, Gosselin Group and Pasha agreed to be charged and prosecuted by criminal information for the conspiracy offenses. Gosselin Group N. V. and the Pasha Group entered conditional guilty pleas to a pair of criminal conspiracy offenses. Smet signed the plea both for himself and for the Gosselin Group, thereby escaping further criminal prosecution. Pursuant to that plea agreement, both the Gosselin Group and Pasha admitted to various elements of the conspiracy. The plea agreement was accepted on February 18, 2004. As a result of a contemporaneous agreement between Smet and the Army, Smet was barred from doing business with the United States for three years (March 2004-March 2007). A United States Management Team—consisting of four Gosselin Group employees: COO Stephan Geurts St., Stephan Geurts Jr., Timotheus Noppen, and Ludi Bokken—was created within Gosselin Group to allow Gosselin Group to continue working with DOD, in the absence of Smet.

Under the plea agreement, Gosselin Group and Pasha were able to pursue an immunity claim in the district court to seek dismissal of both the charges lodged in the information. The two defendants claimed that the bid-rigging scheme was immune from federal prosecution. In August 2004, the Eastern District of Virginia dismissed one of those charges, finding that certain provisions of the Shipping Act granted Gosselin Group and Pasha immunity from federal prosecution on the antitrust conspiracy. However, the district court also found that the defendants did not have immunity from prosecution on the charge of conspiracy to defraud the United States. Therefore, the two defendants were sentenced only on the latter charge. This decision led to cross appeals from the defendants and the United States. The Fourth Circuit determined that immunity did not apply to either charge, and further held that the defendants were both criminally liable for both conspiracies and remanded to the district court for resentencing. United States v. Gosselin World Wide Moving, N. V., 411 F. 3d 501 (4th Cir. 2005). The resentencing proceedings began in 2006. The district court imposed a $6 million dollar fine on Gosselin Group, and two separate $4.6 million dollar fines on Pasha. The court also ordered both defendants to make restitution to the DOD in the sum of $865,000.

The Qui Tam Proceedings

In 2002, realtors Kurt Bunk and Ray Ammons (the “Realtors”) brought qui tam proceedings against the Gosselin defendants under the FCA. Bunk filed his qui tam action alleging an FCA claim related to the DPM program in the Eastern District of Virginia in August of 2002. Ammons filed his qui tam action alleging an FCA claim related to the ITGBL program (“ITGBL claim”) and to Gosselin Group exerting pressure on Covan International (“Covan claim”) and Cartwright International Van Lines (the “Cartwright claim”) to submit higher ITGBL claims. These cases were sealed, pursuant to 31 U.S.C. § 3730, and remained under seal and pending while the criminal cases were resolved.

Once the criminal proceedings were resolved in 2006, the Department of Justice (“DOJ”) gave the Gosselin defendants notice of the two pending qui tam actions. The DOJ not only detailed the false claims and bid rigging evidence that was underlying the qui tam actions, but also advised the Gosselin defendants that the United States might intervene. In January 2007, the DOJ sent a settlement demand to the Gosselin defendants.

Smet conveyed his frustration regarding the criminal liability and pending civil matters to Geurts Jr. Later Smet approached Jan Lefebure, the Managing Director of International Freight Forwarding Service—the company that handled Gosselin Group’s commercial exports—with a proposal to move Gosselin Group’s business as it related to the United States to another business entity. Lefebure owned another corporation called Brabiver—described as a “company doing nothing” but that had “a license for transportation or freight forwarding.” Smet proposed to Lefebure a scheme to rebrand and reopen Brabiver and move all of his [a.k.a. Gosselin Group’s] government contracts into Brabiver.

On June 27, 2007, Smet made several interest free loans, totaling over €100,000 to the four principles involved in the Brabiver venture, Noppen, Geurts Jr., Lefebure, and Rene Beckers. The loans were not secured, and only repayable on Smet’s demand, but that never occurred. The next day, Smet’s principles used the loans to purchase shares in Brabiver and formalize the change from Brabiver to GovLog. The very next day, GovLog and Gosselin Group entered into a series of agreements that were memorialized by contracts with terms dictated by Smet, not negotiated, and drafted by Smet’s attorneys and presented by Smet to the GovLog principals. These agreements transferred Gosselin Group’s business with the DOD to GovLog, and also committed GovLog to exclusively use Gosselin Group and its related entities to perform said DOD contracts. In exchange for Gosselin Group’s business with DOD, GovLog did not pay, but promised Gosselin Group a percentage of its future net revenue—“all of those revenues received by GovLog . . . minus the amount of the [services] invoiced by [Gosselin Group] to GovLog in connection with the services provided to GovLog by Gosselin Group and its subsidiaries.” Once GovLog obtained Gosselin Group’s DOD contracts, it began its shipping operations on behalf of Gosselin Group on July 1, 2007—approximately four days after Smet made loans to the GovLog Principals.

GovLog consisted of 20 employees, all but one of whom were previous Gosselin Group employees. Their sole business was signing contracts with DOD and arranging shipping services for DOD, but GovLog was not responsible for any actual shipping, nor did it have any warehouses (GovLog leased warehousing facilities from Gosselin Group). All GovLog actually owned was a couple of automobiles, a chair, and a table. GovLog earned no net revenues during 2007 or 2008, and thus was not obligated to pay any funds to Gosselin Group in exchange for Gosselin Group’s business with the DOD. However, GovLog did pay for the leased warehouse facilities and other services provided by Gosselin Group, which essentially meant that any “money that’s going to GovLog is actually ending up being paid to Gosselin.”

Later that year, on November 7, 2007, Ammons’s qui tam action was transferred to the Eastern District of Virginia and consolidated with Bunk’s qui tam action. In 2008, the Realtors’ complaints were unsealed, but on July 18, 2008 Ammons’s qui tam action was superseded by the government’s Complaint in Intervention under 31 U.S.C. § 3730(b)(2). The government did not intervene in Bunk’s qui tam suit. In the Complaint in Intervention, the government named GovLog as a defendant, and alleged that GovLog was “a successor/transferee in interest of Gosselin [Group].” On October 2, 2008, Bunk filed his Second Amended Complaint, which included GovLog as a named defendant and alleged successor corporation liability claim against GovLog.

The Bunk Complaint pleaded numerous FCA theories of liability against the Gosselin defendants and others. Bunk joined several additional complaints, including a 42 U.S.C. § 1985 claim and state law claims. However, only his DPM claim was not superseded by the government’s Complaint in Intervention. In 2011, the government and the Relators moved for summary judgment on the issue of whether GovLog was liable as a successor corporation of Gosselin Group. The district court severed the claims against GovLog from those against the Gosselin defendants, and then proceeded to conduct a trial to first resolve the claims against the Gosselin defendants.

On July 18, 2011, the jury trial for the Gosselin defendants began on the DPM, ITGBL, and Covan claims. At the close of the government’s case, the district court awarded judgment as a matter of law to the defendants on the ITGBL claim, and submitted the DPM and Covan claims were submitted to the jury. On August 4, 2011, the jury returned a verdict against the Gosselin defendants on the DPM claim and in favor of the Gosselin defendants on the Covan claim. Despite evidence establishing that the defendants had submitted over 9,000 false invoices to the DOD, the district court did not impose any civil penalties, reasoning that such an award would be unconstitutionally punitive (each false claim authorized a minimum civil penalty of $5,500, which would have resulted in a cumulative penalty in excess of $50 million dollars).

Both parties appealed. Bunk challenged the district court’s denial of civil penalties, the government challenged the court’s award of judgment on the ITGBL claim, and the Gosselin defendants argued that Bunk lacked standing. The Fourth Circuit rejected the Gosselin defendants’ standing argument, and directed the court to amend its civil penalties judgment and award $24 million dollars in civil penalties on the DPM claim. The Fourth Circuit also vacated the grant of judgment in favor of the Gosselin defendants on the ITGBL claim and remanded the matter for further proceedings.

Once the claims against the Gosselin defendants were resolved, the district court proceeded to determine the successor corporation liability claims pending against GovLog. The district court initially focused on identifying the applicable legal test for successor corporation liability claim. In September 2014, the district court ruled that application of Carolina Transformer’s substantial continuity test would be inconsistent with the Supreme Court’s decision in Bestfoods. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992); United States v. Bestfoods, 524 U.S. 51 (1998). The court then found that only traditional common law principles governed the issue of GovLog’s liability as a successor corporation.

On November 3, 2014, the Relators and the government moved for summary judgment, relying on the common law’s fraudulent transaction theory of successor corporation liability. Bunk presented two theories of successor corporation liability against GovLog: (1) the substantial continuity theory, and (2) the fraudulent transaction theory. GovLog cross-moved for summary judgment, stating that the theory proposed by the government and the Relators was entirely speculative. On December 23, 2014, the district court granted judgment to GovLog under two theories: (1) neither complaint had properly alleged that GovLog was liable as a successor corporation under any recognized legal theory; and (2) GovLog was entitled to summary judgment for want of a genuine dispute of material fact. The court ruled that the transactions between GovLog and Gosselin Group were not shown to have been pursued with a fraudulent intention because there was “no evidence sufficient to establish any of the recognized ‘badges of fraud’” in regard to the creation or operation of GovLog. On December 29, 2014, the court entered judgment in favor of GovLog. The Relators appealed from the judgment, and the Fourth Circuit has jurisdiction under 28 U.S.C. § 1291.

The Initial Jurisdictional Question

Initially, the Fourth Circuit addressed whether or not the district court had subject matter jurisdiction over Bunk’s successor corporation complaint. The Fourth Circuit found that the court possessed supplemental jurisdiction over Bunk’s claim. Bunk’s FCA claim provided original jurisdiction under 28 U.S.C. § 1331. The question remained whether the successor corporation liability claim revolves around the same central fact pattern as the original FCA claim against the Gosselin defendants. The Fourth Circuit held that GovLog’s successor corporate entity liability is wholly dependent on the Gosselin defendants’ liability. Because the “successor corporation liability question is part and parcel of Bunk’s original qui tam action,” the district court did not err in exercising supplemental jurisdiction on this claim.

The Alleged Errors

The Fourth Circuit had to decide whether or not the district court erred by entering judgment in favor of GovLog on the successor corporation liability issue. Bunk challenged the three rulings of the District Court: (1) that the substantial continuity test is inconsistent with Supreme Court precedent; (2) that Bunk had not adequately pleaded the fraudulent transaction theory; and (3) that the fraudulent transaction theory was without evidentiary support, thus leaving no genuine issue of material fact and entitling GovLog to summary judgment.

Successor Corporation Liability Theories

There are four exceptions from the general rule that a corporation that acquires the assets of another corporation does not acquire its liabilities. Under federal common law, a successor corporation takes on the liabilities of its predecessor if: (1) the successor agrees to assume the liabilities; (2) the transaction is a de facto merger; (3) the successor may be considered a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992).

Under exception (3), the mere continuation theory states that liability can pass to the successor if “after the transfer of assets, only one corporation remains.” This is not applicable to Bunk’s case because two corporations were viable after the transfer of assets. However, there was another theory proposed in Carolina Transformer—the substantial continuity theory. Substantial continuity theory allows a court to look at eight factors to determine whether successor corporation liability should be imposed. However, the Supreme Court stated in United States v. Bestfoods that “‘[i]n order to abrogate a common-law principle, the statute must speak directly to the question addressed by the common law.’” United States v. Bestfoods, 524 U.S. 51 (1998) (quoting United States v. Texas, 507 U.S. 529 (1993)). Because the FCA doesn’t speak to successor corporation liability, it has “no impact on the traditional common law principles governing successor corporation liability.” Therefore, the district court did not err in declining to apply the substantial continuity test.

Bunk also relied on exception (4), the “fraudulent transaction theory of successor corporation liability.” Because this was dismissed on a motion for summary judgment, the Fourth Circuit reviewed whether the pleadings were legally sufficient under a de novo standard of review. The Fourth Circuit did not decide whether the heightened standard of pleading in Fed. R. Civ. P. 9(b) applied because the Court stated that even if there was a heightened standard it was satisfied in this case. The Bunk Complaint sufficiently outlined the dealings between GovLog and Gosselin Group that formed a solid foundation for the fraudulent transaction theory. Therefore, the district court erred in dismissing Bunk’s successor corporation liability claim as insufficiently pleaded.

The Fraudulent Transaction Theory

However, because the district court ruled in the alternative that GovLog was entitled to summary judgment on Bunk’s fraudulent transaction theory, the Fourth Circuit had to also address whether the summary judgment award was warranted.

Because direct evidence of intent to defraud is rare, courts have developed recognized “badges of fraud” that constitute indirect and circumstantial evidence. Those “badges of fraud” include; (1) the conveyance is to a spouse or near relative; (2) inadequacy of consideration; (3) transactions different from the usual method of transacting business; (4) transfers in anticipation of suit; (5) retention of possession by the debtor; (6) transfer of all or nearly all of the debtor’s property; (7) insolvency caused by the transfer; (8) failure to produce rebutting evidence when the circumstances surrounding the transfer are suspicious; or (9) transactions in which the debtor retains benefits.

In this situation the court found that the evidence did not simply fail to dispel the required fraudulent intention, but it could easily establish it. The Fourth Circuit found that “[a]t least four of the badges of fraud are readily apparent on the evidence . . .:” (1) inadequacy of consideration; (2) transactions different from the usual method of transacting business; (3) transactions in anticipation of suit or execution; and (4) transactions through which the debtor retains benefits. The consideration was found to be grossly inadequate because, in effect, GovLog paid nothing for the business interests it received from Gosselin Group. The transaction was made in haste and with little input from GovLog or any GovLog owners, and Smet was in control of every facet of the transaction—which is not something that occurs in the usual mode of transacting business. Also, the Fourth Circuit found that a reasonable juror could find that Gosselin Group continued to reap the benefits of the business that it transferred to GovLog. But the most suspicious aspect, according to the Fourth Circuit, was the timing of the transaction. “[T]he temporal proximity of the Gosselin defendants’ being advised of the qui tam actions and the GovLog transaction being consummated suggests that the transaction was made to defraud Bunk and the United States out of civil penalties.”

Disposition

According to the Fourth Circuit, the various factual disputes in this case cannot be resolved by anyone except a factfinder. Therefore, the district court erred in awarding summary judgment to GovLog. The Fourth Circuit vacated the judgment and the case was remanded to the district court for further proceedings.

8-03-2

By Eric Jones

On January 7, 2016, the Fourth Circuit issued a published opinion in the criminal case United States v. Martinovich.  At trial, Jeffrey A. Martinovich (“Martinovich”) was convicted of one count of conspiracy to commit mail and wire fraud, four counts of wire fraud, five counts of mail fraud, and seven counts of money laundering.  On appeal, Martinovich argued that the district court’s frequent interruptions and interferences at trial deprived him of a fair trial, and that the treatment of sentencing guidelines as mandatory led to an excessive sentence.  The Fourth Circuit affirmed his conviction in part, vacated in part, and remanded for resentencing before a different judge.

The Investment Firm Fraud

In 2005, Martinovich became the sole owner and CEO of MICG, a financial services company that provided investment services to clients.  In November of 2006, MICG formed MICG Venture Strategies, LLC (“Venture Fund”) as a hedge fund for MICG’s clients to invest in EPV Solar, Inc., a privately held solar energy company.  Martinovich was given a managerial role in the Venture Fund, and had sole authority for investment decisions, asset valuations, incentive allocation, and management fees.  Martinovich received a 1% management fee and 20% incentive fee based on the Venture Fund’s performance.  Determining the value of the management and incentive fees owed to Martinovich required an independent valuation of the EPV shares held by the Venture Fund.

Despite the requirement of independent valuations, Martinovich had an EPV shareholder and consultant perform a valuation by misleading him into thinking the valuation was only to be used internally at EPV.  Based on this valuation, Martinovich took an incentive/management fee of $357,019 for end-of-year 2007.  Through 2009, Martinovich personally and consistently inflated the value of EPV shares and other assets held by the Venture Fund in order to justify increased incentive and management fees.  Additionally, Martinovich “(1) sought unsophisticated investors; (2) failed to disclose EPV’s dire condition; (3) misinformed investors about their redemption ability; and (4) used new investment money to pay other investors.”  In October of 2012, Martinovich was charged with conspiracy to commit mail and wire fraud and multiple counts of mail and wire fraud.

The District Court’s Interruptions

At trial, the district court “frequently interrupted counsel and questioned counsel’s tactics.”  For example, at one point the court asked Martinovich’s counsel to clarify his line of questioning.  When he attempted to do so, the court interrupted saying “[n]o, don’t say anything.”  When counsel responded “[y]ou asked me why,” the court answered “I did, and I made a mistake.”  On another occasion, the district court “criticized [Martinovich]’s counsel for developing a sequential timeline. Shortly thereafter, however, the district court reproached [Martinovich]’s counsel for proceeding in a non-sequential manner.”  The district court additionally interrupted the presentation of evidence.  For example, defense counsel, addressing a witness, said “[a]nd why is the date-” when the court interrupted, asking “[s]top. Have we got a date when this all took place?”  Defense counsel responded “[t]hat’s what I’m asking him.”  At times, the district court even attempted to move forward in time and interfered with the defense’s presentation, interrupting repeatedly to ask if they could move from discussing events in 2005 and “get to somewhere near here, get up to 2007.”  When defense counsel responded that they were getting there, the court answered “[w]ell, get there.  Excuse me.  I want to get there, okay?”  At no point during trial did Martinovich’s counsel object to any of the district court’s comments, questions, or disruptions.

The Sentencing Guidelines

At sentencing, the district court stated numerous times that “it viewed the Guidelines as mandatory and that its discretion was restricted to a sentence that fit within the range set forth in the Guidelines.”  Counsel for both Martinovich and the Government repeatedly argued that the Guidelines were merely advisory and not mandatory, but the district court refused to agree.  Despite expressly acknowledging that “the Supreme Court indicates that they are advisory,” the court continually stated that “I will follow the guidelines only because I have to.  I find that they’re not discretionary, they’re mandatory.”  The court even stated that “[t]he sentences now are draconian” in reference to the Guidelines.  Confronted with a Guideline range of 135-168 months, the district court sentenced Martinovich to 140 months.

The Standard for Judicial Interference

Because Martinovich did not timely object at trial, the alleged judicial interference was reviewed only for plain error.  Even after finding plain error, the Fourth Circuit explained, for the convictions to be overturned, “the error must be so prejudicial that it affected [Martinovich]’s substantial rights, i.e., it had to change the outcome of the trial.”  The Circuit held that although the district court crossed the line and was in error, Martinovich was not deprived of a fair trial, and thus the convictions must be affirmed.  The Fourth Circuit held that the trial record was “replete with the district court’s ill-advised comments and interference,” and stated that “[c]onsidering the breadth of the district court’s actions, from questioning witnesses and counsel to interrupting unnecessarily, we find that the district court strayed too far from convention. Ultimately, we find the district court’s actions were in error.”

As to the second prong, however, the Circuit concluded that the error did not prejudice Martinovich.  The Fourth Circuit primarily based this holding on the plain error standard of review, which is extremely deferential.  The Court held that “although the district court’s interferences in this case went beyond the pale, in light of the plain error standard of review and the overwhelming evidence against [Martinovich], the district court’s conduct did not create such an impartial and unfair environment as to affect [Martinovich]’s substantial rights and undermine confidence in the convictions.”

The Standard for Criminal Sentencing

The Fourth Circuit first explained that criminal sentences are reviewed for abuse of discretion.  The Circuit further stated that “[u]pon a finding of a procedural error, the error shall be subject to harmlessness review.”  “When a district court has treated the Guidelines range as mandatory, the sentence is procedurally unreasonable and subject to vacatur” if the resulting sentence is longer than the defendant would otherwise be subject to.

After concluding that significant procedural error had occurred, the Circuit Court explained that “had the district court considered the Guidelines as discretionary, [Martinovich]’s sentence may have been lower.”  The Court pointed to several instances where the district court expressed concern that the Guidelines set too high a sentence, and did not consider Martinovich’s “good character.”  This, the Fourth Circuit held, left them “obliged to vacate [Martinovich]’s sentence and remand for resentencing.”

The Fourth Circuit Affirmed in Part, Vacated in Part, and Remanded

Because the evidence against Martinovich was overwhelming, the Fourth Circuit affirmed his convictions despite the repeated interruptions and interference by the trial court.  Because Martinovich likely received a lengthier sentence than he otherwise would have if the trial court had treated the Guidelines as advisory and not mandatory, the Circuit reversed the sentence and remanded for further sentencing proceedings.  Finally, because the Circuit feared that “remanding the case to that court with our own reminder of the correct law would most likely be an exercise in futility,” because of the trial court’s repeated misunderstanding of the advisory nature of the Guidelines, the Circuit ordered that the further proceedings occur before a different judge.

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By Andrew Kilpinen

Today, in an unpublished opinion in U.S. v. Daren Gadsden, the 4th Circuit affirmed the convictions and sentence of the district court for the District of Maryland and remanded with instructions to reduce the restitution amount.

Gadsden Orchestrates Scheme to Defraud Section 8 Housing Authority

Daren Karem Gadsden (“Gadsden”) was a landlord in the Housing Authority of Baltimore City’s (“HABC”) Section 8 program. In 2010, Gadsden, with the help of three others, established bank accounts in fake business names, fraudulently created a consulting agreement between one of these fake businesses and the HABC with a forged signature of HABC’s CFO, and ultimately transferred $1.3 million of unauthorized funds into the accounts. A jury convicted Gadsden of one count of conspiracy to commit bank fraud, eight counts of bank fraud, two counts of aggravated identity theft, and two counts of evidence tampering. Gadsden was sentenced to 286 months imprisonment.

District Court Denies Gadsden Rule 29 Motion for Acquital

After the jury verdict, Gadsden moved for a judgment of acquittal under Rule 29 arguing that the evidence offered at trial did not support the conviction. Gadsden argued that the government did not satisfy it’s burden for the bank fraud charges, and as a consequence, did not satisfy the elements of the conspiracy or aggravated identity theft charges. The 4th Circuit reviewed the district court’s denial of the Rule 29 motion de novo.

Gadsden Scheme Placed Both Banks at Risk of Loss

On appeal, Gadsden argued that the government failed to satisfy its burden under § 1344(2). At trial, the government argued that Gadsden orchestrated an integrated scheme to obtain funds from HABC’s bank account and the fraudulently opened business accounts. Therefore, Gadsden argued, the government had to prove that Gadsden violated § 1344 as to both banks. While the Court refused to opine as to whether this standard was appropriate under the facts, the Court held that a reasonable jury could find that Gadsden placed both banks at a risk of loss that the banks did not knowingly accept. As a result, the district court did not err in denying Gadsden Rule 29 motion.

Conspiracy and Aggravated Identity Theft Charges Affirmed

As a result of finding that the evidence was sufficient to affirm the bank fraud charges, the Court affirmed the conspiracy charge and the aggravated identity theft charge as well.

Restitution Remanded for Reduction

The district court originally ordered Gadsden to pay $1.3 million in restitution to the bank that opened the fraudulent accounts. The Court found that because the bank was able to mitigate its losses to $1.1 million, Gadsden’s restitution should be reduced to that amount.

District Court Affirmed in Part and Remanded in Part

The 4th Circuit affirmed Gadsden’s convictions and sentence, and remanded the restitution judgment with instructions to reduce the amount to $1.1 million.

By Evelyn Norton

Today, in an unpublished per curiam opinion, United States v. Hartsoe, the Fourth Circuit affirmed the decision of the U.S. District Court for the District of South Carolina convicting Jerry Elmo Hartsoe of mail fraud and making false statements.

Hartsoe Argued His Statements Were Improperly Admitted into Evidence

In the District Court, the jury convicted Hartsoe of eight counts of mail fraud and one count of making false statements.

On appeal, Hartsoe argued that the Fourth Circuit should vacate the District Court’s decision.  Hartsoe alleged that the District Court improperly allowed into evidence statements Hartsoe made before law enforcement read Hartsoe his Miranda Rights.

Miranda Warnings are Not Required if the Suspect is Not in Custody

Citing Miranda v. Arizona, the Fourth Circuit stated that Miranda warnings are indisputably required when a suspect is interrogated while in custody.  For Miranda purposes, a suspect is “in custody” when the suspect’s freedom of action is curtailed to a degree associated with formal arrest.  Thus, a reasonable person in the suspect’s position would believe he was “in custody.”

Hartsoe Was Not In Custody

Here, however, the Fourth Circuit determined that Hartsoe’s presence was voluntary.  When Hartsoe first arrived to the scene, law enforcement asked Hartsoe to leave.  Hartsoe’s testimony indicated he was not intimidated, but was aggressive and demanding at the scene.  Later, law enforcement told Hartsoe that he was not under arrest and was free to leave.  As a result, the Fourth Circuit found it unlikely that a reasonable person in Hartsoe’s position would have believed himself to be in custody.  Thus, no Miranda warnings were required and Hartsoe’s statements were properly admitted into evidence.

Court of Appeals for the Fourth Circuit Affirmed

The Fourth Circuit Affirmed Hartsoe’s convictions, finding the District Court did not err in allowing Hartsoe’s statements into evidence.

 

By: Michael Klotz

Today, in Douglas C. Dunlap v. Texas Guaranteed, the Fourth Circuit reaffirmed that a plaintiff has the burden of establishing that fraud by a defendant could not have been discovered through a reasonable investigation, providing an exception to the standard statute of limitations. Under Va. Code Ann. § 8.01-243(A), a two year statute of limitations begins to run from the date that a fraud is discovered by the plaintiff or when it could have been discovered “by the exercise of due diligence.” Unless a plaintiff can establish that the fraudulent conduct could not have been discovered within the previous two years, any lawsuit on this grounds is barred.

What does the “exercise of due diligence” mean?

The standard of “due diligence” is such “prudence, activity, or assiduity” as a “reasonable and prudent man” would exercise under the “relative facts of the special case.” In Dunlap, the court affirmed the district court’s dismissal of the case on the grounds that it was barred by the statute of limitations. The plaintiff did not present sufficient evidence that the exercise of due diligence would not have revealed the fraud. Thus, Dunlap demonstrates that in order to overcome the statute of limitations through the undiscovered fraud exception, the burden is on a plaintiff to demonstrate that he did not have a reasonable opportunity to discover the underlying conduct.

 

 

 

By: Michael Klotz

              Today, in United States v. Graves, the 4th Circuit affirmed the conviction of John Robert Graves, a former F.B.I. employee who—along with his wife—ran a sophisticated investment scheme that he used to defraud mostly elderly investors. Mr. Graves raised three issues on appeal. First, he claimed that his conviction for making false statements was contrary to law because some of the questions posed during his interrogation, and some of his answers, were ambiguous. Second, he disputed his convictions under the Investment Advisers Act because he claimed that during the relevant period he was working as a broker-dealer and not an investment adviser. Finally, Mr. Graves disputed the finding of fact that his scheme involved “sophisticated means,” and thus argued that he should not have been subject to a sentence enhancement. The Fourth Circuit affirmed each of these convictions.

Mr. Graves made False Statements

            First, Mr. Graves argued on appeal that the government had not established that he made one or more “materially false, fictitious, or fraudulent statement[s] or representation[s]” in violation of 18 U.S.C. §1001(a). To support this argument, Mr. Graves pointed to isolated evidence from his interrogation. For instance, when a government agent asked him—“And that’s where the $150,000 went, came from to go to [victim]?.” Mr. Graves responded: “I guess.” Mr. Graves claimed that this question was ambiguous as was his answer, and thus he had not made an affirmatively false statement. The Fourth Circuit observed that this was the “slightest snippet” from a larger conversation that Mr. Graves surreptitiously recorded and then played to the jury during his trial. The recording included other unambiguously false statements by Mr. Graves, and thus the jury had a reasonable basis to conclude that he had made false statements in violation of §1001(a).

Mr. Graves was acting as an Investment Adviser

            Second, Mr. Graves argued that his conviction under the Investment Advisers Act, 15 U.S.C. § 80b-6, was improper because he was employed as a broker-dealer and not an investment adviser during the relevant time period. As a professional matter, Mr. Graves was registered as an investment adviser, and the court observed that he provided “investment advice for a fee to his victims to prompt them to invest in his and his wife’s companies.” Even if the statutory understanding of the term “investment adviser” differed from what was required to be registered in this profession, the court noted that Mr. Graves stipulated at trial that between 2006 and 2010 he “was an Investment Adviser” as that term is intended under 15 U.S.C. § 80b-6. Thus, as a matter of law Mr. Graves acted as an investment adviser under § 80b-6.

Mr. Graves used “sophisticated means” to defraud his victims

           Finally, Mr. Graves disputed that he should be subject to a sentence enhancement under U.S.S.G. § 2B1.1(b)(10), which punishes fraudulent schemes using “sophisticated means.” This sentence enhancement is intended to apply to “especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense.” Mr. Graves claimed that his conduct was not sufficiently complex to receive this punishment. The Fourth Circuit observed that the district court had “ample basis” for concluding that his conduct involved sophisticated means, given that Mr. Graves and his wife engaged in a “veritable shell game” routinely “transfer[ing] funds multiple times through multiple accounts, in one case channeling [a victim’s] money through four accounts in a matter of days.” As a result, there was sufficient evidence for a sentence enhancement in a fraud involving “sophisticated means.”

 

By: Diana C. Castro

Today, in United States v. Jayad Zainab Ester Conteh, the Fourth Circuit affirmed by unpublished per curiam opinion the District Court of Maryland’s denial of a motion to suppress, holding there was probable cause to justify the issuance of a search warrant. The Fourth Circuit reviewed the District Court’s factual findings for clear error and its legal conclusions de novo.

Defendant Argues the Sworn Application Supporting her Arrest Warrant Was Insufficient to Establish Probable Cause.

On appeal the defendant raised three issues: (1) the sworn application supporting her arrest warrant was insufficient to establish probable cause; (2) the officer executing the warrant did not act in reasonable good faith reliance on the state commissioner’s determination of probable cause; and (3) the District Court abused its discretion in qualifying a witness as an expert in Sierra Leoneon Creole.

Defendant was Convicted of Conspiracy to Commit Bank Fraud, Aggravated Identity Theft, and Exceeding Authorized Access to a Computer Thereby Obtaining Information Contained in a Financial Record of a Financial Institution.

Conteh, a teller for the bank, accessed accounts with information personally identifying the account holders in a way that suggested her access was unauthorized. Several bank accounts were compromised when information for the accounts was changed and checks were ordered without authorization. Further, the owner of a vehicle observed attempting to retrieve checks ordered without authorization from one of the compromised accounts relied on a bank insider to provide him information.

Probable Cause to Justify an Arrest Means a Police Officer is Aware of Facts and Circumstances That Are Sufficient to Warrant a Prudent Person in Believing That the Suspect Has committed an Offense, Under the Circumstances Shown.

Determined by the totality of the circumstances, probable cause is a fluid concept that turns on the assessment of probabilities. United States v. Dickey-Bey, 393 F.3d 449, 453–54. In reviewing the state commissioner’s probable cause determination, the court may only ask whether the commissioner had a substantial basis for concluding there was probable cause. Under this standard, the court grants much deference to the commissioner’s assessment of the facts presented to him. United States v. Blackwood, 913 F.2d 139, 142 (4th Cir. 1990).

Taking the facts of this case as a whole, the commissioner had a substantial basis to conclude that the supporting application established probable cause.

Alternatively, the Fourth Circuit Rejects the Defendant’s Claim That the Officer Did Not Rely on the Warrant in Good Faith.

Under the good faith exception, created by the Supreme Court of the United States in United States v. Leon, evidence obtained from an invalid warrant will not be suppressed if the officer’s reliance on the warrant was objectively reasonable. United States v. Perez, 393 F.3d 457, 461 (4th Cir. 2004).

Leon identifies four ways in which an officer’s reliance on a warrant would not qualify as good faith reliance. Conteh argued one of these exceptions, noting that an officer’s reliance on a warrant would not qualify as good faith if the warrant was so facially deficient that no reasonable officer could presume its validity.

However, the Court rejected, as unsupported by the record, Conteh’s assertion that probable cause is lacking because the application contains a “significant misstatement” that she was the individual who changed the information.

Reviewing for Abuse of Discretion, the Fourth Circuit Affirmed the District Court’s Decision to Qualify an Expert Witness.

In ensuring that evidence is reliable under Fed. R. Evid. 702, a district court “must decide whether the expert has ‘sufficient specialized knowledge to assist the jurors in deciding the particular issues in the case.’” Belk, Inc. v. Meyer Corp., U.S., 679 F.3d 146, 162 (4th Cir. 2012). In making this decision, the court should “consider the proposed expert’s full range of experience and training.” United States v. Pansier, 576 F.3d 726, 737 (7th Cir. 2009). Federal Rule of Evidence 702 “does not require any particular imprimatur.” United States v. Gutierrez, 757 F.3d 785, 788 (8th Cir. 2014).

Despite the facts that the witness does not hold degrees in Sierra Leoneon Creole, works as a teacher in another field, and had not acted as a translator for any government agency prior to his involvement in the case at bar, the Court concluded that the witness was properly qualified as an expert in Sierra Leoneon Creole based on his education and experience with the language. The witness testified regarding messages in Sierra Leoneon Creole obtained from the cellular phone seized from Conteh incident to her arrest.

Court of Appeals for the Fourth Circuit Affirmed.