CLIENT ALERT: TARP and the False Claims Act

February 6, 2009

On January 22, 2009, Neil M. Barofsky, the Special Inspector General for the Troubled Asset Relief Program (“TARP”), wrote to Senator Charles Grassley to advise the Senator of a new TARP oversight initiative. According to Mr. Barofsky’s letter, the Treasury Department’s Inspector General’s Office is preparing to send requests to TARP recipients requiring them to provide: (a) a description of the recipient’s use or expected use of TARP funds; (b) copies of supporting documents; (c) a statement concerning the recipient’s plans for complying with applicable executive pay compensation restrictions; and (d) a certification by a duly authorized senior executive officer of the recipient attesting to the accuracy of the statements, representations, and supporting documents.

The certification provision is significant because a false submission by a TARP recipient could expose the recipient to liability under the False Claims Act. Under the Act, which has both a civil and criminal component, an entity that submits, or causes to be submitted, a false or fraudulent claim or statement in support of a claim for money to the Federal Government is liable for up to treble the damages caused by the false claim or statement, penalties for each false claim or statement, and the Government’s costs of bringing suit. Senator Grassley has been urging the Treasury Department to utilize the False Claims Act to investigate and prosecute fraud and waste in connection with the TARP program.

Importantly, the False Claims Act contains a private plaintiff’s provision. Any person, called a “relator,” can bring an action under the Act if they have knowledge of fraud being perpetrated against the Government and the specifics of the fraud have not otherwise been publicly disclosed. The relator files the suit under seal in the name of the Government. The Government then evaluates whether to join in the action, or whether to let the relator pursue the case on his or her own. If the suit is successful, the relator shares in the recovery whether or not the Government intervened in the case. Thus, an employee of an entity receiving TARP funds could file an action against his or her employer under the False Claims Act if they believed the recipient’s statement to Treasury concerning use of the funds is false—and share in any recovery. In 2008, the United States Government recovered over one billion dollars in judgments and settlements involving relator cases under the False Claims Act.

Further, Congress is considering amendments to the False Claims Act that would make it easier for relators to bring suits under the False Claims Act by removing some of the jurisdictional bars from the existing statute. Perhaps more important, both the House and Senate bills would expressly allow Federal employees to file False Claims Act suits as relators, based on information they obtained as part of their employment with the Government. Thus, a Treasury employee with cause to believe that a TARP recipient has falsely described how it will use TARP funds, or how it will comply with applicable executive pay restrictions, would be able to file a relator’s suit under the Act.

The False Claim Act’s treble damages provisions, and its award of a portion of any settlements or judgments to the private relator, are powerful incentives for use of the Act, not only by the Government as an enforcement tool, but also by employees, former employees, and perhaps even Government employees.

Mary Beth Bosco and Micah Green