Qui Tam Initiator Denied Right to Intervene in Criminal Case

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In United States v. Wegeler, No. 17-1717 (3rd Cir. 2019) the Third Circuit refused to allow the person who brought a qui tam suit against the taxpayer to intervene in the taxpayer’s criminal tax case.  I would never have thought of having a third party participate in a criminal case.  So, the idea of making sure someone was convicted by becoming an intervenor in a criminal case caught my eye.  The outcome here does not surprise me from the perspective of granting an entrée into the criminal proceeding but, for reasons discussed below, does bother me if the outcome is no recovery for coming forward with the information.

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Before the whistleblower provisions created a statutory means of pursuing a monetary recovery for spilling the beans to the IRS, the qui tam provisions offered one way to do it.  Just as monetary awards for providing the IRS with information existed before and remain available to those who provide information to the IRS without going through the statutory provisions, qui tam suits remain an option.  The person with the information brings a suit against the third party for taking from the government and hopes that the government will intervene, take over the case, win the case and produce a recovery for the party who initiated the qui tam action.  Qui tam actions were never much of a path to recovery in the tax area, but they have existed as one path since the Civil War.

The Third Circuit had a reaction to the effort of the relator to intervene in the criminal prosecution similar to my reaction.  It explained:

the Supreme Court has observed, “in American jurisprudence at least, a private citizen lacks a judicially cognizable interest in the prosecution or non[-]prosecution of another.” Linda R.S. (“Linda”) v. Richard D., 410 U.S. 614, 619 (1973).

Jean Charte insists that she is the anomaly. Her case rests on the False Claims Act (“FCA”), 31 U.S.C. §§ 3729–3733 (2012), which is a statute that Congress enacted during the Civil War to stem fraud against the federal government. United States v. Bornstein, 423 U.S. 303, 309 (1976). The FCA includes a qui tam provision to encourage actions by private individuals — called relators — who are entitled to a portion of the amount recovered, subject to certain limitations. See § 3730(b), (d). In turn, a relator is required to provide the government with the information she intends to rely on so that the government can make an informed decision as to whether it should intervene. § 3730(b)(2). In the event that the government elects to pursue what is ultimately its claim through an “alternate remedy,” the statute provides that the relator retains the same rights she would have had in the FCA action. § 3730(c)(5).

This case started with Ms. Charte providing information about Mr. Wegeler alleging that he had defrauded the Education Department.  After initiation the qui tam action, she provided all of the information to the DOE required by the statute.  The government determined that Mr. Wegeler’s actions were so egregious that they required criminal prosecution rather than continuation of the FCA action.  The government succeeded in the prosecution and also obtained a judgment for $1.5 million in restitution.  Because it went the criminal route and because it obtained a plea agreement and a restitution order by going that route, the government did not pick up the FCA case. Ms. Charte thus faced the prospect of receiving nothing for having uncovered the wrongdoing and initiating the action that led to the prosecution.  To avoid that outcome and after learning of the plea agreement, Ms. Charte sought to intervene in the criminal case.

The district court denied her motion to intervene.  The Third Circuit stated:

Her appeal to us thus presents a question of first impression for our Court: whether a criminal proceeding constitutes an “alternate remedy” to a civil qui tam action under the FCA, entitling a relator to intervene in the criminal action and recover a share of the proceeds pursuant to § 3730(c)(5). The

Third Circuit denies Ms. Charte’s right to intervene and states that she can pursue her monetary judgement by continuing the FCA case on her own.  By this point, those few of you still reading this post may be wondering how a qui tam action involving the defrauding of DOE has anything to do with tax.  Turns out the government decided to go after Wegeler for tax evasion rather than for false billing of DOE.  The opinion does not make clear if the decision to pursue tax evasion stemmed from the ability to obtain a tax conviction easier than a conviction for false billing practices, but since the time of Al Capone, tax has served as a back-up for all sectors of the government, as proving tax fraud sometimes comes easier than other criminal provisions.

Ms. Charte probably did not realize she could have made a whistleblower referral to the IRS when, as an employee of a school run by Wegeler, she uncovered false billing.  Her focus was on telling the people who were harmed by the false billing.

The Third Circuit discusses the FCA proceedings and other matters related to her efforts that have nothing to do with tax.  I will not take up more space discussing a procedure that will have little overlap with anything most of our readers do, but there does seem to be one lesson here for parties bringing a qui tam or similar action regarding the defrauding of the government.  That lesson could be that at the same time they bring the qui tam action they should make a whistleblower referral to the IRS.  Since no one knows when the tax code might be used to prosecute someone for fraudulent activity in a non-tax area nor if the information the relator uncovered and brought to light will result in a tax prosecution, maybe it’s best to hedge your bets and bring the IRS in at the beginning.  It could also happen in many cases like the Wegeler case that the person defrauding one part of the government is also cheating on the IRS.  I don’t know enough about the private pursuit of remedies for uncovering fraud to pretend that I am an expert, but it appears that filing a whistleblower document with the IRS could not have hurt and could have resulted in an alternative method for recovering a reward.

If Ms. Charte does not receive any award here, it seems that the government is, in part, the loser because it has benefited from information without encouraging others with similar information to come forward.  Seems like the government should look for a way to reward Ms. Charte and not to cut off rights.  It took courage and effort to come forward and to initiate the qui tam proceeding.  The information seems to obviously have been valuable.  The relator deserves some recognition for that effort.  

Comments

  1. Kenneth H. Ryesky says

    It is only relatively recent (i.e., past 40 years or so) the the term “relator” has been used in connection with the False Claims Act. Prior to that, the usual term was “informant.” Seems that being a “relator” has less of a social stigma than being an “informant.”

  2. John M Colvin says

    I have no experience with the FCA and whether criminal prosecution allows the government to avoid any responsibility to pay a relator, but least with the IRS whistleblower statute, “collected proceeds” can include a criminal fine. Whistleblower 21276-13W v CIR, 147 TC No. 4 (2016).

    • FCA Aficionado says

      To my knowledge, there is no limitation for submitting a 211 for original information provided to the government which is then used by the IRS in a criminal referral.

      Indeed, the case you cite, 21276/7, specifically ruled, in a different memo or opinion, that the WB, who provided his tip to the FBI, was eligible for a 7623b reward (something like “it doesn’t matter which government door the tip comes in, because the USG is one house, and if IRS uses that tip to collect proceeds, it is obligated to pay the WB.

      The ruling you cite, Title 26 proceeds under the IRS statue vs. Title 18 and 31 (criminal statute) proceeds, where the IRS has to pay rewards on all proceeds regardless of the law used to collect the proceeds, was a later ruling in the same case.

      If I were the Relator/failed intervenor’s lawyer (IANAL), I would:
      – file 211. If denied by the IRS, then go to tax court like 21276/7-13 did.
      – continue the Qui Tam as a non-intervened case, given that the crook pled, the facts shouldn’t much be in dispute.
      – caveats: if the plea agreement settled all issues between the crook and the USG, then the chance the USG would ask the court to dismiss the case are pretty good. Also, if the crook has no assets to recover after paying the criminal fee, then a successful FCA suit award may be a pyrrhic victory.

      Note: I just read the policy, and I do not want to provide my name because I am a WB. But I wanted to share my layman’s knowledge of the 7623 topic which I have been following intensely for years. Thank you and hopefully you can relax your policy due to my circumstance.

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