The United States Department of the Navy had entered into an agreement with Contracting Systems, Inc. II (“CSI”) for the construction of an addition to, and renovations of, a training center in Lehigh Valley. CSI, in turn, subcontracted with Clipper Pipe & Service, Inc. (“Clipper”) to perform heating, ventilation, and air conditioning work. When CSI failed to pay Clipper per the terms of their agreement, Clipper filed suit against CSI and its surety, the Ohio Casualty Insurance Company (“OCIC”) in the United States District Court for the Eastern District of Pennsylvania.

OCIC and CSI moved for summary judgment contending that CASPA does not apply to public works projects because a government entity does not qualify as an “owner” under CASPA. CASPA defines an “owner” as “[a] person who has an interest in real property that is improved and who ordered the improvement to be made.” “Person” is defined as “[a] corporation, partnership, business trust, other association, estate, trust foundation or a natural individual.” According to CSI and OCIC, government bodies cannot be “owners” under CASPA because the word “government” does not appear in the definition – i.e., a government body is not an “association” and therefore not a “person” or “owner.” Further, OCIC and CSI argued that the Prompt Payment Act (“PPA”), not CASPA, addresses public works projects. OCIC and CSI argued that given the substantial differences between CASPA and PPA, it would be untenable if both applied simultaneously.

The District Court had dismissed the claim brought by Thomas Foglia, a registered nurse who began working at Renal Ventures Management, LLC, a dialysis care services company, under Federal Rule of Civil Procedure 12(b)(6). The court determined that Foglia’s complaint failed to follow the heightened, fact-style pleadings standard required by Federal Rule of Civil Procedure 9(b) for fraud claims.

As a dialysis care company, Renal used a variety of medication in its day to day operations, such as Zemplar, a single-use injection drug that promotes the active form of vitamin D during kidney dialysis. Zemplar, the drug at issue in this case, is provided in three vial sizes, and Renal chose to import 5-microgram sized vials although patients typically use less than the 5-mcg amount. Abbott Laboratories, its producer, recommends opening the vial once and discarding it upon first use, even if there are dosages leftover.

Foglia claimed that Renal would re-use the vials, his “overfill” claim, by harvesting leftover dosages in the vials and administering it to patients. Although the Department of Health and Human Services in September 2002 declared it acceptable to administer injectable medicines in multiple usages, six conditions had to be followed. Foglia argues that Renal did not follow the six conditions and continued the administering of Zemplar in a precarious manner. Also, through this overfill scheme, Renal would charge the US Government for one 5-mcg vial administered to one patient, although in reality, maybe two patients would receive a dose from a single vial of Zemplar. Foglia contends that Renal, in October 2008 alone, actually used only 29 to 35 vials of Zemplar each day even though, if it used Zemplar in a single-dose fashion, it would have needed around 50 vials a day. Foglia further contends Renal still billed the US Government for the full 50 vials while using only 29 to 35 vials.

Based on the facts of the case, the Third Circuit found for a more liberal pleadings standard.  It held that, although Foglia did not identify specific examples of fraud, Foglia’s allegations established fraud claims that can be understood as a factually false claim.  Specifically, in concurrence with the First, Fifth, and Ninth Circuits, the Third Circuit also agreed that plaintiff must only allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”

Due to the inability for Foglia to have had access to Renal records, as he was only a nurse and not under administration, he would have had a difficult time to prove specific facts establishing the alleged fraudulent conduct. Thus, Foglia’s factually false claim, or when a claimant falsifies goods or services provided to the Government, even without specific examples of fraudulent conduct, sufficiently fell under Rule 9(b).

SEC Insider Trading Alert: Teo’s Musicland Insider Trading Appeal Unsuccessful

On February 10, 2014, the Third Circuit Court of Appeals affirmed a lower federal court’s jury verdict of insider trading against Alfred Teo and a trust he controlled.  Alfred Teo Sr., a former shareholder in Musicland Stores Corp, a conglomerate company that oversaw numerous music endeavors including Sam Goody music stores and Suncoast Motion Picture Co. video shops, was found guilty of insider trading.  Teo and his trust were ordered to disgorge gains of $17,000,000 and to pay prejudgment interest of an additional $14,000,000.  Teo received and traded on confidential information from insiders of Musicland about an impending all cash tender offer by Best Buy for all the shares of Musicland. The decision in SEC v. Teo is another stark illustration of the painful economic consequences of insider trading.

The perceived benefits of trading on material nonpublic information are usually overwhelmed by the emotional, reputational and economic sanctions that flow from detection and prosecution by federal authorities.  Teo misappropriated valuable nonpublic information and shared it with others who also traded.  Everyone who receives and trades on nonpublic information can pay the price.  Under federal securities laws, insider trading law subjects the wrongdoer to the equitable remedy of disgorgement of all ill-gotten economic gains.  In addition, prejudgment interest on the disgorgement amount, calculated from the date of the violation at the IRS underpayment interest rate, can be awarded.  Furthermore, a money penalty in an amount up to the amount of the ill-gotten gain also can be imposed.  Those found guilty of insider trading also can be permanently barred from serving as an officer or director of a public company.  Securities Exchange Commission investigations and litigation can drag on for, literally, years with ever mounting legal fees, anxiety and stress.

Historically, the SEC has enjoyed a success rate of nearly 80% in the cases that go to trial.  Although the agency has lost some high profile cases recently, the odds and the costs are still heavily tilted in favor of the government when it brings insider trading charges.  Despite its stellar track record, the SEC encourages and rewards cooperation by those who become parties to SEC insider trading investigations. If you believe you may be involved in a questionable securities transaction, you should contact an experienced securities lawyer right away.  Kang Haggerty provides confidential consultations and represents parties in SEC enforcement investigations and securities litigation.