GOVERMENT : Rewards Encourage Workers to Blow the Whistle on Fraud


Whistle-blowers are finally getting their due in federal cases.

The rewards come under a 1986 amendment to the federal False Claims Act, which gives those who expose fraud or rip-offs a hefty 15% to 30% of any damages resulting from any wrongdoing that they report.

Since the amendment was enacted into law, complainants--usually government employees who have come forward to expose corruption or malfeasance--have received $12 million in reward money.

And the number of cases being filed under the act has jumped from 33 in 1987 to 66 during the first half of this year. In all, about 101 lawsuits are pending involving such cases. Attorneys familiar with these cases say several hundred million dollars could be saved.

BACKGROUND: The False Claims Act dates back to the Civil War, when President Abraham Lincoln discovered that some government suppliers were filling bullets with sawdust, while others were selling the same horses to the cavalry several times.


The legislation was intended to encourage citizens who were aware of corruption to report it. But, during World War II, defense contractors succeeded in weakening the act, undercutting its effectiveness.

The amendments passed in 1986 empowered citizens to force a government investigation by filing a complaint. The government then decides whether to join the suit; if it does not, the citizen may still proceed alone.

To sweeten the pot, the lawmakers also added the possibility of financial reward--an important benefit in cases where whistle-blowers end up being fired and later find it difficult to obtain new jobs.

“The defense industry is pretty close, and anybody who files one of these cases is putting his or her job on the line,” says Mary Louise Cohen, an attorney with Hall & Phillips, a Los Angeles law firm that is handling some of the false claim cases.

“This is the way they can do the right thing and still not find themselves out on the street without two nickels to rub together at the end of it,” Cohen says.

THE RESULTS: More than half of the complaints under the new, tougher law have involved the Defense Department. Another 14% arose in the Health and Human Services Department--primarily stemming from Medicare fraud.

In one case, Avco Corp.'s Textron Lycoming Division, which makes engines for Coast Guard helicopters, agreed to pay the government $17.9 million after an inquiry found that the engines deteriorated faster than expected.

Robert C. Ballew, a former Avco procurement official who filed the complaint, received $2.7 million as part of the settlement.

Most recently, Northrop Corp. agreed to pay $8 million to settle a suit by two former employees who said the company falsified tests on parts for the Air Force’s cruise missiles. The whistle-blowers will receive at least $1.2 million of the settlement.

Often, an initial complaint will lead to an investigation that reveals more widespread fraud. In such cases, the whistle-blower receives a percentage of the damages relating only to his specific claim.

The exact amount is based on the importance of the complainant’s contributions to the case.

“It’s exceeded my expectations,” says Rep. Howard L. Berman (D-Panorama City), co-author of the new legislation. “There will be over $1 billion in recoveries over a relatively short period of time from these cases. And, ultimately, they will be a deterrent.”

THE OUTLOOK: How much the whistle-blower program will be expanded remains to be seen. Berman, for one, maintains that the Justice Department could be recovering even larger sums if it assigned more attorneys to handle False Claims cases.

Four lawyers in the U.S. attorney’s office in Los Angeles alone, he says, have produced settlements totaling $25 million in the past two years. The current load there is more than 50 cases--with a potential recovery exceeding $800 million.

Berman says additional slots “would pay for themselves and reap substantial benefits for the federal Treasury.”