So often more is merrier, but when it comes to FCA liability, three can be a crowd. The government rarely pursues third-party liability in FCA cases despite the routine involvement of consultants, auditors, and investors with companies alleged to have defrauded the government. In what appears to be an effort to expand the scope of FCA liability to a new class of defendants, the government in February pursued FCA claims against two third parties. On February 16, the government intervened in United States ex. rel. Medrano v. Diabetic Care RX, LLC, No. 15-cv-62617 (S.D. Fla. Feb. 16, 2018) alleging that Riordan, Lewis & Harden, Inc. (“RLH”), the private equity sponsor of the pharmacy now known as Patient Care America (“PCA”), through two RLH partners who oversaw the investment, was responsible in part for an illegal kickback scheme designed to obtain increased prescriptions for compounded creams and vitamins, and thus greater reimbursement from TRICARE. A week later, on February 28, the government announced a $149.5 million settlement with Deloitte & Touche LLP (“Deloitte”) for knowingly deviating from traditional auditing standards which the government argued allowed the mortgage originator Taylor Bean & Whitaker Mortgage Corporation to defraud the government. Though these cases are not directly related, the timing suggests that third-party FCA liability may be a focus of the DOJ moving forward.

In United States ex. rel. Medrano v. Diabetic Care RX, LLC, the government alleges that PCA, and RLH by extension, paid independent “marketers” in order to obtain referrals, specifically from military members and their families, for compounded pain and scar creams and vitamins, thereby increasing PCA’s TRICARE reimbursement. These creams and vitamins are intended to be individualized to a patient’s needs; however, the government alleges that PCA formulated the creams and vitamins in order to obtain the largest reimbursement possible from TRICARE.

Though this may seem like a run-of-the-mill Medicare fraud case, the inclusion of RLH, the private equity sponsor, and the theory for holding RLH liable, is somewhat unique. The government alleges in its complaint that when RLH made a controlling investment in what would become PCA in 2012, it directed the conduct of the company through two RLH partners who acted as officers and directors of PCA. The complaint does not allege active participation by these two RLH partners, but rather alleges that these two RLH partners guided the strategic decisions of PCA and “knew of and approved” the marketing tactics described above, which the government contends is a sufficient basis for liability. As to knowledge, the government additionally states in its complaint that, as an investor in PCA and other healthcare companies, RLH knew or should have known that PCA had to comply with fraud and anti-kickback laws and regulations in order to be reimbursed by TRICARE.

With respect to the recent settlement involving Deloitte, the government alleged that Deloitte’s audits of Taylor Bean & Whitaker’s financial statements from 2002 to 2008 failed to detect significant misconduct, including the sale of sham and double-pledged mortgages that gave rise to FCA liability. During the audit, Deloitte specifically reviewed the financial arrangements Taylor Bean & Whitaker used to defraud the government. The government alleges that by failing to detect the fraudulent scheme, Deloitte allowed the mortgage originator to continue to sell sham mortgages until Taylor Bean & Whitaker declared bankruptcy in 2009. The government pursued Deloitte in addition to Taylor Bean & Whitaker because it argued that Deloitte allowed the fraud to continue when it should have functioned as a compliance monitor.

These cases could potentially signal a widening of the government’s proverbial net of FCA liability. It is significant that in both of the above cited cases, the government determined that the third-party investor and auditor had enough knowledge of wrongdoing or control over the alleged wrongdoer to bring claims against them. Although third-party cases have rarely been pursued in the past, Acting Assistant Attorney General Chad Readler’s pronouncement in connection with the Deloitte settlement signals a possible trend: “When auditors fail to exercise their professional judgment, and make false statements that allow bad actors to remain in government programs and submit false claims to the government, there will be consequences.”

Consultants, auditors, and investors must remain vigilant to ward against possible FCA liability in the future. Investors should ensure that, in addition to performing due diligence on their investments on the front end, they continue to monitor compliance with the FCA and other fraud statutes throughout the lifetime of their investment. Additionally, consultants and auditors should be wary of peculiar financial arrangements and should similarly monitor FCA and broader fraud compliance for their clients.