Wednesday, October 3, 2007

The health care fraud statute requires that the defendant “knowingly and willfully executes . . . a scheme” to defraud a health care benefit program.

CASE TO PERUSE REGARDING HEALTHCARE FRAUD LAWSUITS........This disappointing Hall decision is primarily concerned with the adequacy of evidence in a health care fraud trial. Buried in some -- terse -- analysis, however, is a troubling erosion of mens rea requirements in fraud cases (with implications for other white-collar fraud cases, such as securities fraud).

Players: Judge Hall authors, Canby and Callahan join.

Facts: Art Dearing was a part-owner of a health care facility with his brother. 2007 WL 276957, *1. Art’s brother ran the place, and had repeated problems with (fraudulent) Medicaid billing. Id. Evidence at trial suggested that Art was aware of these problems, although he wasn’t involved in day-to-day operations and didn’t personally submit for reimbursements. Id. at *1-*2. For example, he allegedly told an employee complaining about fraudulent activity, "loose lips sink ships." The health care fraud statute requires that the defendant “knowingly and willfully executes . . . a scheme” to defraud a health care benefit program. Id. at *3. The trial court, however, instructed the jury that the “intent to defraud” could be shown if the defendant acted “with reckless indifference to the truth or falsity of the statements.” Id. at *4. After conviction, Dearing challenged this instruction (among other issues) on appeal.

Issue(s): “Dearing . . . claims that the district court erred in permitting a jury instruction that allowed a finding of guilt based upon reckless indifference rather than willful intent.” Id. at *4. “Dearing . . . asserts that a second instruction effectively lowered the mens rea requirement from willfulness to recklessness.”

Held: “We hold that the phrasing of this additional instruction was not erroneous and did not effectively relieve the government of its burden of proving that Dearing’s actions were willful. . . .” Id. at *5. “We have repeatedly held that the intent to defraud may be proven through reckless indifference to the truth or falsity of statements.” Id. “[T]he ‘reckless indifference’ instruction that Dearing challenges was tethered to the ‘specific intent to defraud’ element, which the government was required to prove in addition to the first element. Therefore its inclusion did not negate the separate instruction that to convict, the jury had to find that Dearing acted ‘knowingly and willfully.’” Id. (emphasis in original).

Of Note: Buried in Dearing is some bad law for white collar and fraud cases – and it doesn’t help that the analysis isn’t the model of clarity. The specific instruction at issue was a definition of “intent to defraud.” Id. at *4. The contested instruction allowed the government to show “intent to defraud” by proving the defendant acted with “reckless indifference to the truth or falsity of the statements.” Id. Dearing persuasively argued that this means that a defendant who acted with reckless indifference could be convicted of the crime of knowingly and willfully executing a scheme to defraud. In rejecting this argument, Judge Hall relied on a footnote from a prior Ninth Circuit case for the proposition that a “reckless indifference” instruction can support a securities fraud conviction. Id. at *5, quoting United States v. Tarallo, 380 F.3d 1174, 1189 & n.5 (9th Cir. 2004).

Backdating folks, take note: Dearing solidifies a suspect trend in law, that allows the “willful” element to be satisfied by mere reckless indifference in fraud cases (including securities fraud). See Tarralo, 380 F.3d at 1188-89. This doesn’t make sense – willful action, and reckless indifference, are traditionally very different mental states. This deteriorating mens rea trend in fraud cases is fertile ground for a law review article, and cries out for a cert. petition.

How to Use: One thing that saved the conviction in Dearing was that the “reckless indifference” instruction was “tethered” to other instructions requiring higher mens rea showings. Id. at *5. Don’t let the government argue that a “reckless indifference” instruction – standing alone – suffices for a fraud case: in Dearing, the jury could not have relied on reckless indifference alone to find the required mental state, given other instructions that were structured to also require proof of a “specific intent to defraud.” Id.

For Further Reading: We’ve reviewed the oddities of federal mens rea requirements in the Lombera-Valdovinos blog. See blog here. Try to explain this area to a lay person: attempted illegal reentry requires specific intent, but simple illegal reentry has no mens rea requirement. Health care fraud requires the defendant “knowingly and willfully” executed a scheme to defraud – but “reckless indifference” is close enough for a conviction? For an interesting article criticizing the American approach to the concept of mens rea, see Keren Shapira-Ettinger, The Conundrum of Mental States: Substantive Rules and Evidence Combined, 28 Cardozo L. Rev. 2577 (2007).

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at


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