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Qui Tam Practice Example: Use of the Virginia Fraud Against Taxpayers Act to Combat Fraud in State Grants



An article in yesterday’s Lynchburg News and Advance provides a great chance to look at some potential uses of the Virginia Fraud Against Taxpayers Act by the Virginia Attorney General’s Office.  We will also examine how qui tam relators can come forward in the future with evidence of false claims to a grant program.   

To be clear, most of the facts discussed herein occurred roughly a decade ago, and as such they are well outside the statute of limitations.  Also, the VFATA did not become law until Jan. 1, 2003, so it was not an option for Attorney General Mark Early, who served as AG at the time.  Still, this example will hopefully prove illustrative. 

For those of you who don’t recall, the National D-Day Foundation was formed to raise the money necessary to build and maintain the National D-Day Memorial in Bedford, Virginia.  The Foundation underwent a tumultuous period when it was first formed the early part of this decade.  Various actions by Richard Burrow resulted in federal criminal charges by then-U.S. Attorney John Brownlee.  Those charges were tried and ended in a hung jury.  (Jury verdicts in federal cases must unanimous; when the jury cannot agree amongst themselves, the result is a hung jury).  After a hung jury, the defendant walks free, and the government is free to begin the process again.   

After the first hung jury, Brownlee obtained a second set of charges, and proceeded to trial.  The second trial also ended in a hung jury.  After the second hung jury, Brownlee announced that no new charges would be pursued.  There is, of course, no shame in any of that for the U.S. Attorney’s Office or for Brownlee.  The prosecution of white-collar crimes is almost always difficult, because the burden of proof is “beyond a reasonable doubt” and because such prosecutions involve educated professionals–accountants, doctors, lawyers, etc.–who must be able to exercise a certain amount of professional discretion as part of their work.

White-collar criminal defendants normally try to use one of a couple approaches.  First, they can try to convince a jury that while they may have used poor discretion–and may have engaged in “edgy” business practices, the government cannot prove beyond a reasonable doubt that they broke any laws.

Alternatively, they can try what I call the “Aw, shucks” defense–this one consists of blaming someone else and trying to convince the jury that you were in over your head, and were easily snookered by a clever co-worker, or business partner, etc.  

Also, by any account, Brownlee did the right thing professionally by not continuing to prosecute a case after a jury disagreed about the guilt of Mr. Burrrow two times in a row.            

To be clear, there is no question that Burrow engaged in activities that were untoward.  Burrow asserted strategy number one above, and thus the question all along was whether the government could prove, beyond a reasonable doubt that Burrow’s actions amounted to a crime, or whether his actions merely constituted questionable business practices. 

And that is where the Virginia Fraud Against Taxpayers Act can be used in the future, in the same way that the federal government uses the Federal False Claims Act.  The VFATA and FCA are tailor-made to prosecute cases of dishonest business practices. 

The most prominent example for our purposes today is a $3.5 million grant Burrow obtained from the Commonwealth of Virginia in the year 2000.  The grant from Virginia was a “matching grant.”  In other words, in order to get this grant from Virginia, Burrow had to show that the Foundation had raised an equivalent amount of private money.  Then, and only then, would the Foundation get the $3.5 million approved by the Virginia Legislature.  

In other words, raising $3.5 million was a mandatory “condition of participation” in the grant program.  The problem was the Burrow and the Foundation had not raised the $3.5 million they needed.  So, instead of rolling up his shirt sleeves and going to work–or instead of simply foregoing the $3.5 million grant–Burrow discreetly obtained a loan from a small California bank, and used that money to pad out the accounts of the Foundation. 

Then, in the grant application, he showed deposits of the loan money as donations in the amount of $3.5 million.  The Commonwealth had no reason to think he had not actually raised $3.5 million in private donations, and the matching $3.5 million grant was quickly approved and paid.  Burrow then paid the loan back to the bank. 

Later, Harrison, the Foundation’s legal counsel, would testify via a sworn declaration as to the following: “I ignored clear warnings and signs that Burrow was intentionally defrauding the State of Virginia,” according to a statement released by the U.S. Attorney’s office in 2003.  The declaration continued:  “I was willfully blind to the fact that the loan had to be repaid in only 90 days, and that the Foundation did not have the required matching funds to obtain the state grant.” 


The Foundation was required to raise $3.5 million  in private money in order to participate in the Virginia grant program–that requirement was a condition of participation, just a like a requirement in a contract.  Conditions of participation contain important statements of government policy, and violations of those terms are serious matters.  In this case, Virginia’s requirement that the $3.5 million grant be matched by private funds has a clear purpose–the Legislature wants to give money only to projects that are going to succeed, and one clear indicator of success is the amount of private funds raised.

And that is where the Virginia Fraud Against Taxpayers Act could have played a role in this case, if it had been law at the time.  Like the Federal False Claims Act, the VFATA should be used to prosecute clear wrongdoing that does not quite rise to the level of a crime.  Our system of laws places a high–almost impossible–burden on criminal prosecutions; but with the false claims act, proof is required only by a preponderance of the evidence, making it an effective tool to root out fraud against the public fisc.  

The fact that the burden for civil false claims prosecutions is “preponderance of the evidence” rather than “beyond a reasonable doubt” is sometimes cited by people trying to find fault with the VFATA or the FCA.  More often than not, this issue raised by those who have been caught with their hands in the cookie jar. 

It is true that if you do business with the government, you run a risk of potentially huge liability for engaging in actions that might be totally acceptable in a contract between two private parties.  You can be on the hook for enormous amounts of money in the form of treble damages, large civil penalties, mandatory attorney’s fees, and other damages for making false claims to the government.  And it is true that the prosecution, whether done by a qui tam relator and private counsel, or by the government, or both, will only have to prove its claims by a preponderance of the evidence. 

The simple fact is that constant vigilance is the price that private parties must pay for doing business with the government.  If you don’t like it, don’t do business with the government.  Make no mistake about it–the Virginia Fraud Against Taxpayers Act and the Federal False Claims Act are designed to make constant vigilance by contractors a “condition of participation” in government business. 

Zach Kitts
Cook & Kitts, PLLC          

     

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