New York City will pay $5.3 million to the United States for fraudulently obtaining FEMA funds related to Superstorm Sandy in a False Claims Act settlement with the Southern District of New York. The City admitted improperly seeking reimbursement from FEMA for vehicles that were not damaged by Superstorm Sandy.

Superstorm Sandy swept through New York in October 2012 and left extraordinary damage in its wake. The New York City Department of Transportation (NYC DOT) sought reimbursement from the Federal Emergency Management Agency (FEMA) for 132 vehicles it certified had been directly damages by Sandy. Many of these vehicles, however, had been non-operational prior to the storm.

In February, the SDNY filed a civil complaint asserting False Claims Act and common law claims. In a settlement stipulation filed the same day, the City admitted to fraudulent conduct, including:

  • NYC DOT failed to sufficiently review whether the vehicles were operational or in use prior to Sandy, and whether the amounts in the request for reimbursement accurately represented losses incurred due to Sandy;
  • The City official signing the certification did not have personal knowledge and failed to direct a proper investigation before signing the certification;
  • Shortly after the certification, a NYC DOT employee sent an e-mail to the certifying official that certain vehicles were “junk for years;”
  • The City did not take steps to notify FEMA that it was not entitled to certain of the requested funds until after it became aware of the SDNY investigation.

The City agreed to a total settlement of $5.3 million, including a repayment of over $4 million and a de-obligation of over $1 million that FEMA had authorized but not yet paid.  The City agreed to cooperate with the investigation of individuals, and the release language of the settlement agreement specifically provided that “[f]or avoidance of doubt, this Stipulation does not release any current or former officer, director, employee, or agent of the City from liability of any kind.”

This settlement, and the possible continuing investigation, highlight the significant responsibilities held by those who certify information in requests for federal funds.

EDNY Judge Nina Gershon analyzed several False Claims Act issues in United States ex rel. Omni Healthcare Inc. v. McKesson Corp., ruling on first-to-file, Rule 9(b), and statute of limitations issues.

Relator Omni Healthcare alleged that defendants improperly used “overfill” in vials of injectable drugs. “Overfill” is the amount of a drug in excess of the amount indicated on the label, typically included so the provider can withdraw a full dose from the vial. Relator alleged that defendants wrongfully broke into the vials, harvested the overfill, and then sold syringes with the overfill to providers who then billed the government.

Identify of Defendants Drives First-To-File Ruling

The Court initially addressed whether relator’s second amended complaint should be dismissed under the first-to-file rule, based on an earlier-filed case that also addressed alleged fraudulent repackaging of overfill. The Court reviewed Second Circuit law holding that a later-filed action is related and therefore barred if it “incorporate[s] the same material elements of fraud as the earlier action.” The Court concluded that the Omni Healthcare allegations were only related as to the one defendant that was a defendant in the earlier action, and dismissed the complaint only as against that defendant. The Court held that “the first-to-file bar would not reach a subsequent qui tam action otherwise alleging the same material elements of fraud, but alleging those elements concerning different defendants.” A later complaint is related if the earlier complaint equips the Government to investigate the fraud, and the Court determined that to be “‘equipped’ to investigate a fraud, the government must know whom to investigate.”

2017 Chorches Decisions Defeats Rule 9(b) Challenge

Defendants next asserted that the complaint did not satisfy the particularity requirement for pleading fraud under Rule 9(b), because it lacked allegations about the content of the false claims, who submitted them, and when they were submitted. Judge Gershon denied this argument based on the 2017 Second Circuit decision in United States ex rel. Chorches v. Am. Med. Response, Inc., which was discussed in our New York Health Law Blog here. The Court held that “such information is not required where, as here, the relator’s allegations create a strong inference that specific false claims were submitted.”

Statute of Limitations Bars Claims Against Added Defendants

Omni Healthcare conceded that, to satisfy the False Claims Act six year statute of limitations, the new allegations in its second amended complaint would be timely only if they related back to its earlier-filed first amended complaint. The Court noted that the False Claims Act specifically allows a timely complaint to satisfy the statute of limitations even though the named defendants were deprived of notice while the complaint was sealed. New claims against defendants named by Omni Healthcare in the first amended complaint were therefore timely. The second amended complaint, however, had added five additional defendants, and the Court held that claims against these defendants were untimely. “The statute of limitations, like the first-to-file rule, encourages relators to come forward promptly with information to help the government uncover fraud … This purpose would be undermined if a relator were permitted to add additional defendants years later—and potentially after the government has declined to intervene.”

Judge Gershon’s rulings highlight the importance of naming all False Claims Act defendants as early as possible to avoid procedural dismissals.