The health care fraud, bank/mortgage fraud and securities fraud practitioner should be aware of 18 U.S.C. § 1345, a law which permits the federal government to file a civil action to enjoin the commission or imminent commission of a federal health care offense, bank-mortgage offense, securities offense, and other offenses under Title 18, Chapter 63. Otherwise known as the federal Fraud Injunction Statute, it also authorizes a court to freeze the assets of persons or entities who have obtained property as a result of a past or ongoing federal bank violations, health care violations, securities violations, or other covered federal offenses. This statutory authority to restrain such conduct and to freeze a defendant’s assets is powerful tool in the federal government’s arsenal for combating fraud. Section 1345 has not been widely used by the federal government in the past in connection with its fraud prosecution of health and hospital care, bank-mortgage and securities cases, however, when an action is filed by the government, it can have a tremendous effect on the outcome of such cases. Health and hospital care fraud lawyers, bank and mortgage fraud attorneys, and securities fraud law firms must understand that when a defendant’s assets are frozen, the defendant’s ability to maintain a defense can be fundamentally impaired. The white collar criminal defense attorney should advise his health and hospital care, bank-mortgage and securities clients that parallel civil injunctive proceedings can be brought by federal prosecutors simultaneously with a criminal indictment involving one of the covered offenses.
Section 1345 authorizes the U.S. Attorney General to commence a civil action in any Federal court to enjoin a person from:
• violating or about to violate 18 U.S.C. §§ 287, 1001, 1341-1351, and 371 (involving a conspiracy to defraud the United States or any agency thereof)
• committing or about to commit a banking law violation, or
• committing or about to commit a Federal health care offense.
Section 1345 further provides that the U.S. Attorney General may obtain an injunction (without bond) or restraining order prohibiting a person from alienating, withdrawing, transferring, removing, dissipating, or disposing property obtained as a result of a banking law violation, securities law violation or a federal healthcare offense or property which is traceable to such violation. The court must proceed immediately to a hearing and determination of any such action, and may enter such a restraining order or prohibition, or take such other action, as is warranted to prevent a continuing and substantial injury to the United States or to any person or class of persons for whose protection the action is brought. Generally, a proceeding under Section 1345 is governed by the Federal Rules of Civil Procedure, except when an indictment has been returned against the defendant, in which such case discovery is governed by the Federal Rules of Criminal Procedure.
The government successfully invoked Section 1345 in the federal healthcare fraud case of United States v. Bisig, et al., Civil Action No. 1:00-cv-335-JDT-WTL (S.D.In.). The case was initiated as a qui tam by a Relator, FDSI, which was a private company engaged in the detection and prosecution of false and improper billing practices involving Medicaid. FDSI was hired by the State of Indiana and given access to Indiana’s Medicaid billing database. After investigating co-defendant Home Pharm, FDSI filed a qui tam action in February, 2000, pursuant to the civil False Claims Act, 31 U.S.C. §§ 3729, et seq. The government soon joined FDSI’s investigation of Home Pharm and Ms. Bisig, and, in January, 2001, the United States filed an action under 18 U.S.C. § 1345 to enjoin the ongoing criminal fraud and to freeze the assets of Home Pharm and Peggy and Philip Bisig. In 2002, an indictment was returned against Ms. Bisig and Home Pharm. In March, 2003, a superseding indictment was filed in the criminal prosecution charging Ms. Bisig and/or Home Pharm with four counts of violating 18 U.S.C. § 1347, one count of Unlawful Payment of Kickbacks in violation of 42 U.S.C. § 1320a-7b(b)(2)(A), and one count of mail fraud in violation of 18 U.S.C. § 1341. The superseding indictment also asserted a criminal forfeiture allegation that certain property of Ms. Bisig and Home Pharm was subject to forfeiture to the United States pursuant to 18 U.S.C. § 982(a)(7). Pursuant to her guilty plea agreement, Ms. Bisig agreed to forfeit various pieces of real and personal property that were acquired by her personally during her scheme, as well as the assets of Home Pharm. The United States seized about $265,000 from the injunctive action and recovered about $916,000 in property forfeited in the criminal action. The court held that the relator could participate in the proceeds of the recovered assets because the relator’s rights in the forfeiture proceedings were governed by 31 U.S.C. § 3730(c)(5), which provides that a relator maintains the “same rights” in an alternate proceeding as it would have had in the qui tam proceeding.
A key issue when Section 1345 is invoked is the scope of the assets which may be frozen. Under § 1345(a)(2), the property or proceeds of a fraudulent federal healthcare offense, bank offense or securities offense must be “traceable to such violation” in order to be frozen. United States v. DBB, Inc., 180 F.3d 1277, 1280-1281 (11th Cir. 1999); United States v. Brown, 988 F.2d 658, 664 (6th Cir. 1993); United States v. Fang, 937 F.Supp. 1186, 1194 (D.Md. 1996) (any assets to be frozen must be traceable to the allegedly illicit activity in some way); United States v. Quadro Corp., 916 F.Supp. 613, 619 (E.D.Tex. 1996) (court may only freeze assets which the government has proven to be related to the alleged scheme). Even though the government may seek treble damages against a defendant pursuant to the civil False Claims Act, the amount of treble damages and civil monetary penalties does not determine the amount of assets which may be frozen. Again, only those proceeds which are traceable to the criminal offense may be frozen under the statute. United States v. Sriram, 147 F.Supp.2d 914 (N.D.Il. 2001).
The majority of courts have found that injunctive relief under the statute does not require the court to make a traditional balancing analysis under Rule 65 of the Federal Rules of Civil Procedure. Id. No proof of irreparable harm, inadequacy of other remedies, or balancing of interest is required because the mere fact that the statute was passed implies that violation will necessarily harm the public and should be restrained when necessary. Id. The government need only prove, by a preponderance of the evidence standard, that an offense has occurred. Id. However, other courts have balanced the traditional injunctive relief factors when faced with an action under Section 1345. United States v. Hoffman, 560 F.Supp.2d 772 (D.Minn. 2008). Those factors are (1) the threat of irreparable harm to the movant in the absence of relief, (2) the balance between that harm and the harm that the relief would cause to the other litigants, (3) the likelihood of the movant’s ultimate success on the merits and (4) the public interest, and the movant bears the burden of proof concerning each factor. Id.; United States v. Williams, 476 F.Supp2d 1368 (M.D.Fl. 2007). No single factor is determinative, and the primary question is whether the balance of equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined. If the threat of irreparable harm to the movant is slight when compared to likely injury to the other party, the movant carries a particularly heavy burden of showing a likelihood of success on the merits. Id.
In the Hoffman case, the government presented evidence of the following facts to the court:
• Beginning in June 2006, the Hoffman defendants created entities to purchase apartment buildings, convert them into condominiums and sell the individual condominiums for sizable profit.
• To finance the venture, the Hoffman defendants and others deceptively obtained mortgages from financial institutions and mortgage lenders in the names of third parties, and the Hoffmans directed the third party buyers to cooperating mortgage brokers to apply for mortgages.
• The subject loan applications contained multiple material false statements, including inflation of the buyers’ income and bank account balances, failure to list other properties being purchased at or near the time of the current property, failure to disclose other mortgages or liabilities and false characterization of the source of down payment provided at closing.
• The Hoffman defendants used this method from January to August 2007 to purchase over 50 properties.
• Generally, the Hoffmans inherited or placed renters in the condominium units, received their rental payments and then paid the rent to third-party buyers to be applied as mortgage payments. The Hoffmans and others routinely diverted portions of such rental payments, often causing the third-party buyers to become delinquent on the mortgage payments.
• The United States believe that the amount traceable to defendants’ fraudulent activities is approximately $5.5 million.
While the court recognized that the appointment of a receiver was an extraordinary remedy, the court determined that it was appropriate at the time. The Hoffman court found that there was a complex financial structure which involved straw buyers and a possible legitimate business coexisting with fraudulent schemes and that a neutral party was necessary to administer the properties due to the potential for rent skimming and foreclosures.
Like other injunctions, the defendant subject to an injunction under Section 1345 is subject to contempt proceedings in the event of a violation of such injunction. United States v. Smith, 502 F.Supp.2d 852 (D.Minn. 2007) (defendant found guilty of criminal contempt for withdrawing money from a bank account that had been frozen under 18 U.S.C. § 1345 and placed under a receivership).
If the defendant prevails in an action filed by the government under the Section 1345, the defendant may be entitled to attorney’s fees and costs under the Equal Access to Justice Act (EAJA). United States v. Cacho-Bonilla, 206 F.Supp.2d 204 (D.P.R. 2002). EAJA allows a court to award costs, fees and other expenses to a prevailing private party in litigation against the United States unless the court finds that the government’s position was “substantially justified.” 28 U.S.C. § 2412(d)(1)(A). In order to be eligible for a fee award under the EAJA, the defendant must establish (1) that it is the prevailing party; (2) that the government’s position was not substantially justified; and (3) that no special circumstances make an award unjust; and the fee application must be submitted to the court, supported by an itemized statement, within 30 days of the final judgment. Cacho-Bonilla, supra.
Healthcare fraud attorneys, bank and mortgage fraud law firms, and securities fraud lawyers should be cognizant of the government’s authority under the Fraud Injunction Statute. The federal government’s ability to file a civil action to enjoin the commission or imminent commission of federal health care fraud offenses, bank fraud offenses, securities fraud offenses, and other offenses under Chapter 63 of Title 18 of the United States Code, and to freeze a defendant’s assets can dramatically change the course of a case. While Section 1345 has been infrequently used by the federal government in the past, there is a growing recognition by federal prosecutors that prosecutions involving healthcare, bank-mortgage and securities offenses can be more effective when an ancillary action under the Section 1345 is instigated by the government. Health and hospital care lawyers, bank and mortgage attorneys, and securities law firms must understand that when a defendant’s assets are frozen, the defendant’s ability to maintain a defense can be greatly imperiled.