Some criticize whistle-blowers as bounty hunters

June 16, 1996|By BLOOMBERG BUSINESS NEWS

WASHINGTON -- To hear Hughes Electronics Corp. tell it, there's only one thing worse than a tattletale -- and that's a tattletale with borrowed information.

Now, the Supreme Court may be ready to hear Hughes' complaint that it was tagged with a fraud suit by a whistle-blower who made claims that the government already knew about.

The federal law that protects whistle-blowers was supposed to encourage workers to point out secret misdeeds by their employers. Instead, some legal expert say, whistle-blowers are spurred by the prospect of getting rich and simply reporting what is already public or about to be voluntarily disclosed. "It's become a license for bounty hunting," said Michael Gerrard, an attorney at New York's Arnold & Porter.

Since the federal False Claims Act was beefed up in 1986, more than 1,100 companies have been sued by whistle-blowers for defrauding the government, compared with 20 in the previous decade. The law lets whistle-blowers share in court awards and settlements, making some of them instant millionaires.

Hughes, a publicly traded subsidiary of General Motors Corp., has challenged the constitutionality of the law, saying the act "encourages a race to the courthouse among opportunistic employees." The Supreme Court last month asked the government to submit its views on the matter, indicating that it may hear the company's legal challenge.

An industry group, meanwhile, is organizing a lobbying arm to press Congress for major changes in the law. "It's starting to be recognized as a big problem for the entire business community," said Robin Conrad, a U.S. Chamber of Commerce attorney.

All this fuss is over a 133-year-old law. Originally passed during the Civil War to punish profiteers bilking the Union Army, the False Claims Act was revamped by Congress in 1986. The idea behind the amendments was simple: Make it easier and more lucrative for company insiders to expose fraud that would otherwise be hidden from the government.

Congress may have gone overboard. Take the whistle-blower suit against Hughes. Filed in 1989, it claims that Hughes used fraudulent accounting techniques on contracts to develop new radar systems to be used on both the Air Force's B-2 stealth bomber and F-15 fighter aircraft.

The whistle-blower, employee William Schumer, hardly provided the government with a hot tip. Schumer learned about the alleged fraud from government auditors, who began the investigation after getting complaints from the B-2's prime contractor, Northrop Corp. Still, a federal appeals court in San Francisco let the suit go forward, saying the law bars whistle-blower suits only when the suspected fraud has been disclosed to the public.

Crane Co. also is crying foul. The industrial valve and pump maker was sued by a former shareholder who claimed that Crane's 1985 spinoff of CF&I Steel Corp. was fraudulently designed to shift the unit's pension liabilities from the company to the federal Pension Benefit Guaranty Corp. If successful, shareholder Stanley Rabushka could claim a cut of the government's alleged $270 million in fraud losses.

There's one problem. CF&I's pension fund problems were widely disclosed in press reports about the spinoff, and were discussed at length in court after CF&I filed for bankruptcy in 1990 -- a year before Rabushka went to court. That didn't stop a federal appeals court from allowing the suit to go forward.

The False Claims Act gives whistle-blowers an incentive to come forward by giving them as much as a quarter of any damages or settlement.

That's as it should be, says Neil Getnick, a New York lawyer who handles whistle-blower cases. He contends that rich rewards are needed to compensate whistle-blowers, many of whom are fired by their companies or ostracized by their co-workers after disclosing wrongdoing.

"The statute isn't anti-business, it's anti-fraud," Getnick said.

Many companies disagree. They claim that the suits often hinder their own efforts to detect fraud by encouraging employees to make an end run around the company and go straight to court. Sometimes, it's the very employee hired to address, say, billing irregularities who exposes the problem and files suit, corporate defense attorneys say.

"Accountants, consultants, attorneys -- everybody is filing them these days," said Houston attorney Linda Robinson.

Century Healthcare Corp. was sued in 1993 by an auditor it had hired to make sure the company was complying with Medicaid claims at a mental health facility in Oklahoma. When employee Susan Ramsmeyer discovered irregularities in the billings, she sued. Her suit was dismissed in 1994.

Even government regulators get into the act. Take the suit filed by Harold Fine, an auditor with the Department of Energy, against MK-Ferguson Co. While conducting an audit, Fine claimed, he discovered improper billing of the government by the company for its construction work as a uranium mining site in New Mexico.

A federal court in Albuquerque in 1994 acknowledged that allowing government regulators to sue under the act could lead to their "withholding information out of greed" to win a big damage award. Still, Judge Juan Burciaga said, nothing in the law prevented government employees from acting as whistle-blowers.

Pub Date: 6/16/96

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