New York Attorney General Schneiderman Acts Quickly to Target Government Fraud

And he’s off!

In the short time since he assumed office on January 1, 2011, New York Attorney General Eric Schneiderman has made unmistakably clear his commitment to combating fraud against the state.

▪ In announcing the settlement of an $18 million Medicaid whistleblower case on January 18, 2011, he proclaimed that “cracking down on those who try to defraud the taxpayers” will be one of his “top priorities.”  

Nine days later, he unveiled his “aggressive plan” to fight government fraud by creating a new Taxpayer Protection Unit, dedicated to cracking down on fraudulent contractors, “pension con-artists,” and “large-scale tax cheats,” and by adding “dozens of new prosecutors, investigators, and auditors” to his Medicaid Fraud Control Unit.

▪ Before the week was over, in comments issued in connection with Governor Andrew Cuomo’s budget proposal, he again observed that, given New York’s budget deficit, his “office will leave no stone unturned in rooting out fraud, corruption, and waste in government.”

▪ In a pair of press releases issued on February 10, the attorney general repeated the same theme. In one press release, he announced the settlement of three Medicaid fraud cases and observed that his office “will work every day to ensure that those who cheat the taxpayers are caught and forced to pay for their crimes.”

▪ In the second press release issued on February 10, he announced the arrest of a Rochester pharmacist for Medicaid fraud and observed that his office is “committed to recovering every tax dollar stolen as a result of Medicaid fraud and other kinds of theft from the people of this state. In this time of fiscal crisis, we can’t afford to waste a single penny.”

The attorney general’s focus on government fraud should not come as a surprise for those who followed his election campaign. As state senator, he was instrumental in the adoption of New York’s False Claims Act in 2007, and he was the primary proponent of the historic 2010 amendments to the act that were adopted with the unanimous support of the Legislature. Among other things, these amendments expanded the act to cover cases involving serious tax fraud by high-end cheats, added new protections for whistleblowers, and extended the statute of limitations for whistleblowers to a very generous 10 years.

With the adoption of the tax whistleblower provisions, New York became the first state in the nation to expressly authorize false claims lawsuits based on knowing violations of the tax law. He campaigned on a promise to use New York’s False Claims Act and its new tax whistleblower provisions aggressively and, as evidenced by the flurry of press releases, all indications are that he is intent on delivering on that promise.

The attorney general’s focus on combating fraud should be welcome news to honest taxpayers, especially in these difficult economic times. It is, after all, honest taxpayers who end up footing the bill when people cheat the state. Whether the fraud involves Medicaid fraud, pension fraud, contractor fraud, or tax fraud, the victim is always the taxpayer.

Some commentators have expressed reservations concerning the new tax whistleblower provisions, fearing that whistleblowers seeking an easy payday will harass legitimate businesses or that the state will be overly aggressive. Given the power of the new laws, such concerns are certainly not to be dismissed. It is incumbent on the attorney general to make certain that the screening process is rigorous enough to avoid cases that do not merit investigation or prosecution. Likewise, given the breadth of situations that could be viewed as involving “knowingly” false claims under the whistleblower laws, the attorney general and the Department of Taxation and Finance need to be vigilant to make certain that the asserted false claims are not merely a manifestation of a difference of opinion between the taxpayer and the Tax Department regarding how the tax law ought to be interpreted. But with careful screening of the cases by the attorney general and, for tax cases, the Tax Department, the risks should be minimal while the potential gain for the state is significant.

Will the new laws work? Will they be successful in curbing fraud and producing the millions in revenue that the attorney general has predicted? Time will tell, but . . .

Unless potential whistleblowers learn about the law, there is little chance that they will come forward. Right now, notwithstanding the attorney general’s efforts to promote awareness of his fraud-fighting efforts and New York’s new whistleblower laws, few citizens in the state even know that New York has a whistleblower statute. In just the last few months, I have given presentations to thousands of accountants and tax advisors around the state and without question the overwhelming majority of these professionals were not aware that New York has a new tax whistleblower statute until I told them about it. Until word gets out, whistleblowers will not even know that they have an option to report fraud.

Whistleblowers, of course, are not the only sources of potential False Claims Act cases. Cases can be self-generated by the attorney general, or they can be based on referrals from state agencies or local governments. But will those agencies and local jurisdictions cooperate with the attorney general and refer cases for prosecution under the False Claims Act? Will they devote resources to help the attorney general investigate the cases? The Tax Department supported the adoption of the tax whistleblower statute and, given the current fiscal crisis, it is likely that it will be actively reviewing its inventory of audits and investigations for appropriate cases to refer to the attorney general. It is less clear whether other agencies will follow that lead. If agencies like New York’s comptroller, or the Office of General Services, Department of Labor, or Insurance Department actively look for cases where contractors or others have swindled the state, the Attorney General’s office should have plenty of leads. My guess is that the attorney general will be reaching out to establish partnerships with other agencies that can lead to successful False Claims Act prosecutions.

The final question is whether, in this season of budget cuts, the attorney general will have the resources he will need to investigate and prosecute these cases. Major and often complex false claims investigations are unquestionably labor intensive, and while the attorney general can look to the federal government for help in staffing his Medicaid Fraud Control Unit, the state’s general fund will have to pay for his newly created Taxpayer Protection Unit. Even though it is clear that investing in fraud detection and prosecution more than pays for itself in both direct recoveries and in increased deterrence*, it may be difficult, given the current budget situation, for the attorney general to secure the level of resources he needs to protect the public fisc. If that is the case, a good argument could be made that the state is being penny wise and pound foolish.

But, as I said before, time will tell.

*The attorney general’s Medicaid Fraud Control Unit is a prime example. Since 2004, ithas repeatedly set records for Medicaid dollars recovered (in fiscal years 2004, 2005, 2006, and 2008), and has brought in many times more in recoveries than it costs. The unit’s annual reports, including the 2008 report, are on the attorney general’s website.

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