When will it ever end? Is this just human nature?

The Dark Side of Whistleblowing
Neil Weinberg, 03.14.05
The government makes whistleblowers filthy rich for ferreting out fraud on the job.
Douglas Durand is the paragon of a corporate whistleblower. Shortly after stepping in as vice president of sales at TAP Pharmaceutical Products in early 1995, he began to suspect the company was conspiring with doctors to overcharge the federal government's Medicare program by tens of millions of dollars. But instead of trying to fix the problem, he spent seven months gathering evidence of supposed fraud. Then he quit in 1996 and filed a secret lawsuit against TAP. One motive: If he could prove the company was dirty, he would share a nice chunk of any money TAP paid back to the feds.

He spent eight years helping the government build its own case against the company, visiting prosecutors in four states and testifying before a grand jury in Boston. He compiled a list of alleged TAP conspirators and then called these former colleagues while the FBI listened in. Moreover, Durand later filed suit making similar allegations against a TAP rival, the former Zeneca Inc. The feds ultimately joined him, filing civil and criminal charges against TAP and prodding it into paying the government $885 million to settle the case--six times as much as the claimed overcharges. Douglas Durand cashed in: He received $126 million from the U.S. government. Now age 53, he retired and lives with his wife and daughter in the tony enclave of Tarpon Springs, Fla.

Yet TAP itself was never accused of submitting bogus Medicare bills; it was charged under a little-known provision that holds medical suppliers accountable if others falsely bill the government for the suppliers' products. On Oct. 3, 2001, the day prosecutors announced the settlement, they filed criminal fraud charges accusing TAP executives of perpetrating the overbilling scheme. This "sends a very strong signal to the pharmaceutical industry," the prosecutor in the case, Michael Sullivan, publicly declared at the time.

Then Durand's story began to fall apart. As the trial of a dozen TAP employees played out last year, defense attorneys poked holes in Durand's claims. Kickbacks he said TAP paid to doctors never happened. Price hikes he had accused the firm of imposing to overcharge Medicare hadn't actually taken place. A fancy conference Durand had described as a way to bribe doctors into selling TAP's drugs was in fact paid for by the attendees themselves.
By the Numbers
Tattle Totals

The feds have recouped billions from pharma fraud cases. The whistleblowers have done well, too.
AstraZeneca

Government's estimated loss $39 million

Settlement paid by company $355 million

Whistleblower reward $47 million
Schering-Plough

Government's estimated loss $293 million

Settlement paid by company $345 million

Whistleblower reward $32 million
Warner-Lambert

Government's estimated loss $150 million

Settlement paid by company $430 million

Whistleblower reward $25 million
TAP Pharmaceutical Products

Government's estimated loss $145 million

Settlement paid by company $885 million

Whistleblower reward $95 million
Source: Department of Justice.

In July a federal jury in Boston declared all the defendants not guilty. The judge then tossed out a guilty plea entered before trial by Kimberlee Chase, a TAP sales manager charged with bribing a health maintenance organization. The judge ruled that federal antikickback statutes don't apply to HMOs, so Chase hadn't committed a crime. Never mind that those same HMO-related allegations had been key to the government's case against the company. It was the third time in eight years that all the employees indicted in such cases were exonerated after their employers paid big fines--Caremark coughed up $161 million and Blue Cross Blue Shield of Illinois $144 million.

So it goes in the Byzantine world of whistleblowers. In the post-Enron era, these self-appointed do-gooders are granted breathless audiences by Congress, extolled on national television and lauded by Time magazine as Persons of the Year. But some whistleblowers are motivated by greed, willing to stretch the truth for profit. That owes to the whistleblower law, adopted in 1986, that hands informants as much as a 30% cut of any money recouped by the government. It was pushed by a public-interest lawyer who then launched a practice for whistleblower cases, pocketing millions (see box, p. 92).

Since then whistleblower cases have boomed, recovering $7.9 billion from offending companies--and paying out $1.3 billion to the insiders who ratted on the wrongdoers. A whistleblower bar now spans some 200 lawyers. As word of giant awards has spread--$100 million to the two guys who blew the whistle on HCA and $32 million for a suit against Schering-Plough--the number of suits has soared. Fiscal 2003 saw 326 whistleblower suits, ten times as many as cropped up in 1986; the government gets involved in only about one-sixth of the cases, but these yield 96% of recoveries. And while the law first took aim at defense contractors and sought to protect low-level tattlers, it is now used to target fraud in health care and an array of other businesses. And at times it insulates--and enriches--higher-ups like TAP's Durand.

In this hell-bent pursuit of jackpot justice, the prospect of a big payoff draws would-be whistleblowers "like moths to the flame," the 4th Circuit Court of Appeals warned in 1999, when it tossed out a suit against Roche Biomedical by two employees of a merger partner who had already collected $833,000. The Bank of China has been hit with a suit for financing mislabeled mushrooms. Money manager Mario Gabelli faces a suit for allegedly putting in sham bids at auctions of wireless spectrum. An employee ratted on Odebrecht Contractors for underbidding on a federal contract, arguing it intended to raise prices later (his suit was dismissed as "fatally flawed").

Government is often a willing accomplice, keen to look tough and cash in. It tars targets with bad press and threatens to levy fines many times the size of its own purported losses. If a company refuses to settle, the feds can move to ban it from federal business even before getting so much as an indictment. Most times companies settle, whether they are guilty or not. "It's absolutely a form of extortion," says attorney David Stetler, who successfully defended TAP exec Alan MacKenzie. MacKenzie last year became president of the $4 billion (sales) company.

Like whistleblowers themselves, the feds have a profit motive: They bring in $13 for each dollar spent prosecuting a case, and whistleblowers provide 52% of all U.S. government fraud recoveries, says Taxpayers Against Fraud, the whistleblower lawyers' lobby. "It's a tremendous return on investment," says U.S. Attorney Sullivan, who has 13 people working on health care fraud cases. Health care now accounts for more than half of all whistleblower suits. Drugmakers have paid $2.5 billion in fines in recent years. In most instances the penalty paid was several times the losses.

Some of these winnings are funneled back into the pursuit of new cases, a nifty little move the feds began using in 1996. For several consecutive years the larger enforcement budgets have led to larger settlements, which in turn have funded still larger enforcement budgets. "It's all done with a wink and a nod, with the bureaucrats going back to Congress and saying bigger budgets are justified by past results," says Robert Salcido, a former federal prosecutor who defends whistleblower suits at Akin Gump Strauss Hauer & Feld.

Supporters of the whistleblower law say it is the only way to clamp down on the intractable problem of fraud in government contracts. The U.S. government spends half a trillion dollars annually on medical care, one-quarter of its budget, and fraudulent claims could total $50 billion of that sum, says the Government Accountability Office. "There can never be enough bureaucrats to discourage fraudulent use of taxpayers' money, but knowing colleagues might squeal can be a deterrent," says Senator Charles Grassley (R-Iowa), who pushed passage of the law.

In this for-profit justice, "financial incentives are what bring people forward," concedes Michael Hertz, director of the Justice Department's civil fraud section. But thereafter, he says, "a traditional fraud investigation takes place and the facts are the facts."

Handing informants a share of the booty dates back centuries. Suits brought by citizens on a government's behalf are known as qui tam cases, derived from the first two words of the Latin phrase meaning "whoever brings an action for the king brings it for himself." President Lincoln introduced qui tam suits to the U.S. in 1863, signing the False Claims Act to target vendors of dud gunpowder in the Civil War.

The law languished for a century until it was revived in 1986 by Senator Grassley and John Phillips of the Center for Law in the Public Interest, the lawyer who later went into private practice to pursue whistleblower cases. They hiked a whistleblower's cut from 10% to as much as 30% and lowered the threshold for guilt from knowingly ripping off the government to the fuzzier notion of "deliberate ignorance" or "reckless disregard" of regulations.

The whistleblower law was in full swing by the time Doug Durand landed at TAP Pharmaceutical in 1995. He grew up in Pawtucket, R.I., one of eight children, got a degree in pharmacology at the University of Rhode Island and spent 20 years selling drugs for Merck & Co.

His career there ended in a nasty dispute in 1994 in which Durand filed an Equal Employment Opportunity Commission suit against the drugmaker. He accused Merck of retaliating against him for supporting a female colleague's claim that a Merck president had sexually harassed her. Merck paid him $255,000 to settle. Durand claimed in a related affidavit that Merck had ruined his career. Stripped of his office and duties, and exiled on paid leave, Durand applied to TAP, saying he was still a senior regional director looking to switch jobs. When he testified later before a grand jury, Durand left out all details of his Merck ouster, saying only that a headhunter had approached him.

TAP, meanwhile, was in the fight of its life. Abbott Labs and Takeda had formed the Lake Forest, Ill. company in 1977. After it developed a new monthly injection of Lupron, the first alternative to castration for advanced prostate cancer, sales jumped from $135 million in 1990 to $744 million five years later. The drug went for $400 a dose, and Medicare covered 80% of the cost.

Durand joined the company in January 1995 just as Lupron was facing fierce competition, from Zeneca's Zoladex, a lower-cost rival. As head of sales his primary mission was to launch Prevacid, a new drug for acid reflux. But early on, he says, he grew uncomfortable with the way TAP was pushing Lupron. TAP sold it fervently, putting together a slide show on Lupron's "return to practice" for doctors. It held seminars at fancy resorts and gave physicians TVs so they could show its promotional videos. Wags joked internally that TAP lawyers were in the "sales prevention department."

One of Durand's concerns involved sales reps' failure to properly account for the free samples they gave to doctors. A precise accounting is required by federal law to prevent doctors from falsely billing Medicare for samples they received free of charge. Doctors must sign for each free dose they receive, and if they falsely bill Medicare, drugmakers can be convicted of criminal fraud.

Durand became convinced the faulty record-keeping was intentional, designed to let doctors collect extra money from Medicare. At one point he proposed linking sales reps' bonuses to how well they accounted for free samples but was overruled, he claimed at the trial of his former colleagues. He had learned of a sales rep who had doctors sign for doses they hadn't received--a "big problem," he said, but didn't recall doing anything about it. Despite Durand's qualms, he didn't turn to TAP's outside counsel for advice; asked why, he testified that only two employees below the rank of vice president were allowed to do so and he was not on that short list.

In August 1995 Durand got edgier still, after people at a staff meeting discussed paying a 2% fee to Lupron doctors to cover administrative costs; federal rules allow such payments only to HMOs and other buying groups, not to individual doctors. It was tricky legal turf. "How would Doug look in [prison] stripes?" Alan MacKenzie, whom Duran outranked, joked at the meeting. Everyone else laughed, but Durand says he viewed the remark as "serious and sinister."

Durand began looking at how to protect himself. He says he feared getting swept up in a prosecution if the feds ever stumbled upon TAP's misdeeds. "I wanted to do the right thing," he says. He told a former Merck colleague about the prison-stripes comment, and a month later the colleague referred him to a lawyer--Elizabeth Ainslie, a white-collar lawyer who had run the criminal fraud section in the Philadelphia U.S. Attorney's office.

Ainslie suggested Durand begin keeping notes and collecting TAP documents for a possible whistleblower suit. Shortly afterward Durand faxed her a story headlined: "Rugby Laboratories Pays $7.5 Million to Settle Government VA Fraud Allegations; Former Employee Who Brought Qui Tam Suit Receives $1.1 Million." He asked if this is what she had in mind; it was.

Durand began supplying the lawyer with TAP documents, letters with the company's attorneys and memos it exchanged with its archrival, Zeneca. She showed the stuff to James Sheehan, a prosecutor in the Philadelphia office where she had worked, hoping to pique his interest in joining the case. For whistleblowers the key is to enlist the government--with its power to subpoena defendants and deprive a company of contracts before a case has been decided--as co-plaintiff.

As Ainslie wooed the feds, Durand put on a show of remaining a team player at TAP. In truth, he was the opposite. When word reached him of a California rep whose tactics were "out of line," he left the matter to a subordinate to handle. Then he forwarded internal TAP correspondence on the matter to Ainslie.

In February 1996 Durand brought his sales managers to a golf resort in Florida and shared his vision of TAP's future. Later that month he got his bonus for 1995 ($35,000) and quit, leaving TAP for AstraMerck. A month later he formally hired Ainslie to pursue a whistleblower case. She would cover his expenses and share in any recovery while billing defendants for her time if Durand prevailed. Three months later they filed suits against TAP and Zeneca. Like all such suits, Durand's were filed under seal. The government was required to investigate them, and it did so, unbeknownst to the defendants.

For the ensuing five years Durand made repeated visits to U.S. attorney's offices in Philadelphia, Boston, Chicago and Wilmington to prevail on prosecutors to join his suits. From his office at Astra he faxed a prosecutor in the Philadelphia office, Virginia Gibson Mason, calling her "Ginny" and boasting of "a productive morning!"--he had gotten the phone numbers of former subordinates to call and incriminate as the FBI listened in. The FBI made secret tape recordings of TAP employees discussing potential legal problems. In one Durand calls a former TAP colleague at his home, tells the child who answered the phone that a "friend" is calling and then lies to the TAP exec, pretending, in a bid to get the man to incriminate himself, that Durand himself had been subpoenaed; this employee wasn't ever indicted.

Durand's case drew the interest of prosecutors in the Boston office of the U.S. Attorney after they came across a second whistleblower, Dr. Joseph Gerstein. Gerstein oversaw drug buying at a Tufts University HMO and recently had decided to replace TAP's Lupron with rival Zoladex. It was then, he told the feds, that TAP's Kim Chase and a colleague offered him an "unrestricted" educational grant if he reversed his decision. Gerstein viewed it as a possible bribe. He approached TV and newspaper reporters but was ignored. Then he contacted Boston prosecutors.

"They were looking for potential cases to investigate since they have a big health care unit," Gerstein says. He hired a lawyer and met with prosecutors in late 1996 and filed his whistleblower suit against TAP in March 1998. At the behest of federal agents, Gerstein let the FBI hide a camera in his office and wore a wire as he twice lured the TAP reps back by pretending he might reinstate Lupron. The FBI asked Gerstein to meet again to solicit a personal bribe. Queasy about the ethics, he staged the meeting but refused to come right out and ask for a kickback.

In April 2001, five years after Durand filed his suit, the Boston U.S. Attorney's office joined it ("intervened"). Durand's lawyer, Ainslie, drafted a motion to dismiss Gerstein's suit, and his claim to part of the recovery, on the grounds that her client had filed first. The whistleblowers settled their spat, with Gerstein accepting a 3% cut of whatever the government recovered and Durand skimming a 14% share.

TAP denied the charges and argued that its sample program, educational grants and other efforts were entirely legal tactics common to many drugmakers. It was a losing hand. The feds had two highly motivated whistleblowers and had collected 500 boxes of documents. TAP pleaded guilty in October 2001 to what the government said was a nationwide conspiracy that included encouraging doctors to illegally bill for free samples, bribing them to get them to prescribe Lupron and reporting bogus wholesale prices to dupe Medicare into overpaying. It agreed to pay $885 million in restitution, fines and interest.

TAP has agreed to pay $150 million to settle a private suit brought by consumers, insurers and health benefit planners related to the charges, boosting its penalties past $1 billion. The government wrangled $355 million from AstraZeneca (formerly Zeneca) in 2003. Durand had never worked at Zeneca but says he sued the firm at the recommendation of Philadelphia Assistant U.S. Attorney James Sheehan, a former colleague of his attorney.

The carefully crafted deal let TAP remain a Medicare provider. The firm pleaded guilty to criminal charges of violating the Prescription Drug Marketing Act and was allowed to stay in business. Four doctors pleaded guilty to illegal billing. The day the settlement was finalized, H. Thomas Watkins, TAP's president at the time, conceded it had provided Lupron samples to a number of doctors who illegally billed Medicare. But he added that "We fundamentally disagree with the government's claims regarding TAP's pricing and reimbursement policies." TAP had agreed to pay the big fine, he added, only because the government had threatened to end federal reimbursements for Lupron, worth half a billion dollars a year.

That enraged William Young, the chief U.S. District Court judge in Boston who had approved the settlement. Young forbade TAP to make further claims of innocence. "I don't want some p.r. flack saying this is all just a big misunderstanding," he said.

When the separate trial of TAP employees unfolded last summer, the judge in that case, Douglas Woodlock, rejected the claims of whistleblower Gerstein wholesale. Durand testified and "had the crap beaten out of me" during a week of cross-examination, he says. His original suit claimed TAP had paid doctors 2% kickbacks, but only one customer got the fees and they were legit: Tri-State Urology, a buying group, had a legal safe harbor to receive the fees. Durand says TAP intended to kick money back to others.

He also wrongly told Chicago prosecutors that TAP fully accounted for only half of the free samples it handed out; in fact, it accounted for a far higher portion. He inaccurately testified that a meeting in Nevis, West Indies was a free junket for doctors dubbed "TAP into the Future." In fact, it was titled "A Commitment to Urology: Therapeutic Innovations in BPH and Prostate Cancer." Doctors paid their own way and earned educational credits.

"If you fixed the problems, do you think it would have helped your lawsuit?" Durand was asked at trial. His reply: "If I was allowed to fix the problems I was trying to fix, yes, the lawsuit would not have probably ever happened."

By the time the legal holes, logical leaps and inaccuracies in the case were revealed in the criminal trial last year, TAP had been shaken down. Durand picked up $79 million for his TAP case and $47 million for suing AstraZeneca, and his lawyer, Ainslie, landed $13.5 million. Gerstein shared $16 million with Tufts, and his lawyer got an undisclosed sum, plus fees and expenses.

Durand appeared with a raft of other whistleblowers on Oprah Winfrey's TV talk show in August 2002, regaling viewers with tales of his heroics. "Financially, I lost a lot," he solemnly told his popular TV host. The show made only fleeting reference to the most interesting part--that ten months earlier he had received almost $80 million of his whistleblower windfall.

TAP may have deserved to get smacked down by prosecutors, and Durand may have deserved a reward for helping deliver it. But in other areas the government caps whistleblowers' rewards at sane levels--$250,000 in customs cases and $1.6 million in those involving bank fraud. It's an odd law that makes whistleblowers centimillionaires for reporting on bad behavior after silently watching it take place under their noses.