Fraud Enforcement Research Articles

Institutional Investors, Political Connections, and the Incidence of Regulatory Enforcement Against Corporate Fraud

We investigate two under-explored factors in mitigating the risk of corporate fraud and regulatory enforcement against fraud, namely institutional investors and political connections. The role of institutional investors in the effective monitoring of a firm’s management is well established in the literature. We further observe that firms that have a large proportion of their shares held by institutional investors have a lower incidence of enforcement actions against corporate fraud. The importance of political connections for enterprises, whether in a developed market such as the United States or an emerging market such as China, has been established by previous studies. However, we find evidence of another positive effect of political connections: they may reduce the incidence of enforcement action against corporate fraud. We also find that political connections play a more significant role in reducing regulatory enforcement incidents against non-state-owned enterprises and firms in weaker legal environments, whereas institutional ownership plays a more important role in reducing regulatory enforcement incidents against state-owned enterprises.

Caring Too Much: Misusing the False Claims Act to Target Overtreatment

As the costs of health care administration and delivery continue to grow, health care fraud enforcement actions have increased in number and severity, and, with the recently upheld Patient Protection and Affordable Care Act adding more than $350 million over the next ten years to fight health care fraud, they will likely continue to do so. Continuing a strategy it has used for decades, the federal government is relying mainly on the False Claims Act (FCA), an age-old statute with blunt penalties, to levy remarkable fines against providers in an ever-expanding net of enforcement. But recent examples indicate that the government is applying the FCA to scenarios in which its application seems unwarranted. Namely, the government is now increasingly wielding the FCA against “overtreatment” — defined as cases in which a provider has allegedly provided “too much” care in an inefficient, overly expensive, or unnecessary way — presumably to address the looming fiscal crisis. Exemplified by the Department of Justice’s ongoing implantable cardioverter defibrillator investigation, the federal government is seeking to regulate overtreatment through application of its powerful anti-fraud statute.Even though health care waste and abuse undeniably plague American health care, this Article argues that the government’s solution of applying the FCA against providers who engage in overtreatment is doctrinally unsatisfying and practically destructive. The overreliance on “data mining,” a desire to freeze vague and developing practice standards, and the FCA’s overwhelming penalties that precipitate immediate settlement make up the key components of this overtreatment enforcement model. This results in cascading settlements, allowing the government to unilaterally change developing medical practice standards with little clinical input or judicial review in what can be called “backdoor rationing.” Further, these anti-fraud initiatives often impact the wrong providers and can stifle innovation. This analysis provides an in-depth critique of this new development in health care fraud enforcement in an effort to decouple conventional health care fraud cases from overtreatment investigations. Ideally, this piece will start the conversation toward an improved and more legitimate enforcement framework. At bottom, it illustrates the doctrinal and practical problems that will likely continue to exist at the complex intersection of medical necessity, health care financing, and fraud — even as the administration of America’s health care undergoes radical change.

State Enforcement of National Policy: A Contextual Approach (with Evidence from the Securities Realm)

This Article addresses a topic of contemporary public policy significance: the optimal allocation of law enforcement authority in our federalist system. Proponents of “competitive federalism” have long argued that assigning concurrent enforcement authority to states and the federal government can lead to redundant expense, policy distortion, and a loss of democratic accountability. A growing literature responds to these claims, trumpeting the benefits of concurrent state-federal enforcement — most notably the potential for state regulators to remedy under-enforcement by captured federal agencies. Both bodies of scholarship are right, but also incomplete. What is missing from this rather polarized debate is a deep appreciation for how context matters. This Article moves beyond the abstract case for or against concurrent state-federal enforcement, and provides a systematic account of the variables that will influence its desirability in disparate regulatory settings. To illustrate the significance of these variables, the Article also provides an empirically-grounded case study of one of the most contentious areas of concurrent state-federal authority — securities fraud enforcement against nationally traded firms.

False Claims Act Prosecution Did Not Deter Off-Label Drug Use In The Case Of Neurontin

Since 2004 the United States has collected approximately $8 billion from fraud enforcement actions against pharmaceutical manufacturers accused under the federal False Claims Act of illegally promoting drugs for off-label uses. Using the case of gabapentin (Neurontin), a drug approved for epilepsy but prescribed for a variety of conditions, we sought to determine whether the enforcement action also influenced off-label prescribing rates. We conducted a segmented time-series analysis using key legal milestones: the initiation of a sealed investigation, public announcement of the investigation, and settlement of the case. Off-label use grew steadily until settlement, when gabapentin prescriptions declined for both off-label and on-label indications. Because enforcement actions targeting illegal off-label promotion might not have a substantial deterrent effect on prescription rates until after settlement, they should be combined with other efforts to combat off-label promotion. These could include additional resources for enforcement and a steep increase in penalties because settlements to this point have been dwarfed by the financial gains to pharmaceutical companies from engaging in improper off-label marketing.

The Patient Protection and Affordable Care Act: Health Care Fraud Enforcement Disguised as Reform and What It Means for Home Health and Hospice Providers

The Patient Protection and Affordable Care Act presents new challenges to home health and hospice providers. This article discusses those challenges, along with the impacts that may result from this Act’s implementation. Compliance programs and disclosure are among the implications presented.

Morrison v. National Australia Bank and the Future of Extraterritorial Application of the U.S. Securities Laws

In recent years securities markets have become increasingly interconnected, and securities fraud frequently crosses borders. The United States' welldeveloped private enforcement mechanism for securities fraud is very attractive to investors around the world who are harmed by transnational securities fraud. However, the Supreme Court's recent decision in Morrison v. National Australia Bank, in overturning nearly fifty years offederal court jurisprudence, severely limits the ability of investors to rely on the U.S. securities laws to protect them when the relevant fraud has a significant overseas component. Replacing the Second Circuit 's long-standing conduct and effects tests for determining the extraterritorial reach of the securities laws, the Supreme Court articulated a new transactional test for when the laws apply. This Article analyzes the Supreme Court's opinion and its implications for the regulation of transnational securities fraud It also examines certain provisions of the Dodd-Frank Act which attempted to overturn the Supreme Court's decision as it applies to securities fraud enforcement actions brought by the Securities and Exchange Commission. Ultimately, this Article argues that the Morrison decision significantly curtails the extraterritorial application of the securities laws, which may harm investor confidence, at least in the short term. However, it also has the potential to encourage greater international cooperation in regulating transnational securities fraud, as well as catalyzing regulatory reform in other countries.

The Supreme Court Confronts The Ghosts of Enron: Assessing The Past, Present and Future of Corporate Fraud Enforcement

The U.S. Supreme Court ended its 2010 term with a significant ruling on the appeal of former Enron CEO Jeffrey Skilling that sharply curtailed application of the “honest services” doctrine, which had figured prominently in Skilling’s conviction. The Court held that the conceptual breadth of the term “honest services” and the apparent inconsistency of rulings applying the doctrine rendered it unconstitutionally vague unless confined to cases of bribery or kickbacks. Notably, Enron and other corporate fraud cases did not involve either form of corruption. This article reviews the development of the honest services doctrine, discusses and analyzes the Skilling decision, and argues that future corporate fraud enforcement is likely to be hindered not only by the specifics of the Skilling decision but also by its underlying ethical philosophy.

Documentation Improves Your Efficiency

Documentation Improves Your Efficiency

Fraud Enforcement and Recovery Act of 2009: Congress amends money laundering and criminal fraud statutes to expand their scope and penalties

PurposeThe purpose of this paper is to explain the changes to the US federal money laundering and criminal fraud statutes contained in the Fraud Enforcement and Recovery Act of 2009 (“FERA”)Design/methodology/approachThe paper explains how FERA extends the definition of “proceeds” under the statute to include gross receipts of illegal activity, how the definition of a financial institution is revised to include a mortgage lending business, and how the federal securities fraud statute is expanded to apply to frauds involving commodity futures and options.FindingsAny prior ambiguity as to the meaning of “proceeds” has now been unequivocally resolved; alleged money launderers will no longer be able to defend themselves by arguing that they committed unprofitable criminal activities. The classification as a “financial institution” matters because a number of federal criminal statutes either only apply to financial institutions or set out different penalties or statutes when a financial institution is affected by a generally applicable crime. Under FERA, henceforth frauds involving options and futures in commodities will violate the securities fraud statute.Originality/valueThe paper presents practical guidance by an experienced white‐collar criminal defense lawyer.

The changing face of regulators' investigations into financial statement fraud

PurposeThis paper builds on the Committee of Sponsoring Organizations (COSO) Report, which examined US Accounting and Auditing Enforcement Releases (AAERs). The purpose of this paper is to provide valuable insights into the characteristics and realities of financial statement fraud in the post‐Enron regulatory environment.Design/methodology/approachThis paper analyses a sample of AAERs from 2002 to 2005. It also provides case studies of an additional five high‐profile case studies from that period.FindingsThis paper finds evidence of changes in Securities and Exchange Commission (SEC) enforcement activities since the COSO Report. Specifically, it is found that enforcement activities have increased substantially post‐Enron and the companies subject to AAERs are, on average, much larger, more profitable and the frauds are more substantial than those exhibited in the COSO Report. These findings suggest that the SEC has become more aggressive at pursuing larger companies for financial statement fraud in the post‐Enron environment.Research limitations/implicationsThis paper relies on AAERs as the source of analysis of financial statement fraud, its findings must be viewed in light of the limitations of using these documents. Specifically, the prevailing prosecutions agenda of the US SEC may be reflected in these results.Practical implicationsThe study findings are of great practical relevance to accounting regulators and practitioners as they provide valuable insights into the nature and characteristics of financial statement fraud.Originality/valueThe paper provides empirical evidence concerning the changing face of financial statement fraud enforcement and provides a more in‐depth comparison of fraud than possible with most previous studies that have tended to focus on quantitative measures. This is possible because the present investigation utilises qualitative data from AAERs to supplement quantitative findings. Its originality is also due to the use of institutional theory which is not commonly applied in the corporate governance field.

The Heat's on Medicare and Medicaid Fraud

The Heat's on Medicare and Medicaid Fraud

A Policy Review of the Role of the Royal Canadian Mounted Police in Securities Fraud Enforcement

The Royal Canadian Mounted Police has been investigating Securities Frauds for almost 40 years. There is a perception that the junior capital markets are rampant with fraud. RCMP investigators are frustrated with their lack of success in protecting the integrity of the public market place. This paper outlines some of the reasons for this ineffectiveness and provides some concrete suggestions for improvement. Comments are supported by quotations from numerous past RCMP stock fraud investigators.

Fraud, banking crisis, and regulatory enforcement: Evidence from micro-level transactions data

Can widespread fraud cause large scale banking crises? We address this issue in the context of the recent Turkish banking crisis of 2000, which was followed by a severe recession and currency crisis. Using detailed micro-level transactions data, we show that related lending and back-to-back loans across banks were used to circumvent regulation and transfer deposits to private holding companies that were ruined. Our evidence suggests that systemic fraud coupled with weak enforcement of conventional regulatory principles can be a source of banking crisis.

Reviews in Medical Ethics

In his deliciously funny book, Medicare Meets Mephistopheles, Professor David Hyman argues that Medicare corrupts our most base impulses. It urges us, for example, to grab for more than our fair share of benefits while offering providers “the prospect of staggering amounts of money – even as…actuaries were promising Congress that the Medicare program would be easily affordable.” Modeled on C.S. Lewis’ The Screwtape Letters, Professor Hyman's satirical examination of Medicare takes the form of a memo to Satan from an underling demon in the Department of Illness and Satanic Services (DISS), reporting on the success of Satan's diabolical plot to corrupt humanity. Sprinkled with political cartoons, absurd (but true) stories of Medicare's over-the-top fraud enforcement efforts, and a historical account of Medicare's genesis (replete with Congressmen and strippers), Medicare Meets Mephistopheles gives us a well-researched and easy-to-read primer on the biggest pot of gold in medicine.

Harmonizing legal and ethical standards for interactions between health care providers and industry

A complex set of federal and state laws, together with numerous voluntary codes, regulate the provision of gifts, consulting arrangements, and other interactions between industry and health care professionals. The provisions of these laws and codes are reviewed, and a suggested harmonization with respect to the most common types of interactions is proposed.

Hospice fraud and abuse: Operation Restore Trust and beyond

Medicare-funded hospice is at a crossroad. It is estimated that in the year 2000, of the 2.4 million Americans who died, one in four used hospice. The demand for hospice services is projected to grow as the baby-boomer population continues to age and experiences the health issues that come with it. Yet evidence suggests the program is failing to fulfill its statutory purpose as a meaningful benefit to many, particularly those with noncancerous conditions. The causes for this include unwieldy eligibility criteria and the chilling effect of aggressive fraud enforcement. The unique nature and scope of hospice services available under Medicare, and their complex interrelationship with other Medicare benefits, all contribute to the errors and fraud graphically illustrated by government enforcement activities. Operation Restore Trust and similar enforcement activities may be restoring confidence that inappropriate expenditures are being wrung out of the hospice system. But at the same time, they are also creating distrust, particularly among those with noncancerous conditions, about whether they will receive the benefits for which they are eligible and to which they are entitled. In part, this is a consequence of the chilling effect (real or perceived) that aggressive enforcement is having on physicians and hospice medical directors who certify eligibility to the program. This paper reviews the Medicare hospice benefit, identifies the more significant fraud and abuse issues that hospice presents, examines the impact of Operation Restore Trust and other compliance activities on hospice, and makes final observations about the future.

New Evidence on the Effects of Federal Regulations on Insider Trading: The Insider Trading and Securities Fraud Enforcement Act (ITSFEA)

New Evidence on the Effects of Federal Regulations on Insider Trading: The <i>Insider Trading and Securities Fraud Enforcement Act</i> (ITSFEA)

SEC's insider trading enforcements and target firms' stock values

The effect of SEC's insider trading enforcements on target firms' stock values is examined. Two hypotheses are tested: (1) an announcement of SEC's insider trading enforcement has a negative effect on a target firm's stock value, and (2) an association exists between market reaction to an announcement of insider trading enforcement and these six factors: trading profit relative to firm size; firm size; whether a firm is facing ongoing investigation or judgment rendered; whether a firm or its employees are the enforcement targets; whether the enforcement is after the passage of the Insider Trading Sanctions Act of 1984 (ITSA) or the passage of the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA); and whether the enforcement is announced in the financial press. Results of event-study methodology for testing the first hypothesis indicate a negative effect of SEC's enforcement action announcements on target firms' stock values. Results of cross-sectional regressions for testing the second hypothesis indicate greater negative market reaction to larger trading-profits enforcements, smaller target firms, and enforcements after enactment of ITSA and ITSFEA.

New evidence on the effects of federal regulations on insider trading: The Insider Trading and Securities Fraud Enforcement Act (ITSFEA)

This paper finds new evidence that the threat of legal sanctions significantly affects the trading behavior of insiders. Specifically, I examine the effects of the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) on insider trading around earnings announcements. Given ITSFEA's stated concern with trading on private information prior to its release, I argue that insiders may respond to the Act by altering the timing of their trades. I find that, following ITSFEA, insiders are more likely to postpone liquidity sales until after negative earnings surprises. I also find that insiders increase their relative emphasis on post-event as opposed to pre-event information based trading. Finally, earnings announcements appear to be more informative in the post-ITSFEA period, consistent with less information based trading in front of earnings announcements, after the Act.

The Reputational Penalty Firms Bear from Committing Criminal Fraud

Introduction Optimal penalties for corporate fraud require that firms face expected penalties equal to the total social costs of the crime. Yet formal courtimposed sanctions for committing fraud often represent a small fraction of the damage produced by the fraud. Sheer and Ho (1989), for example, estimate that the median and mean ratios of criminal fines to the private loss from private fraud were 0.14 and 0.73 in 1988. The corresponding median and mean ratios for government procurement fraud were 0.29 and 1.60. Including criminal restitution raises the median dollar sanction-to-loss ratio for private fraud to 0.84 and for government procurement fraud to 0.68. These ratios are for private parties convicted of fraud. The ratio of the expected court-imposed penalty to the social cost of the fraud is undoubtedly smaller. Particularly when compared to other crimes such as environmental pollution, where the median ratio of criminal fines to private loss is 3.71, the penalty for fraud seems surprisingly low. The perceived underpunishment of corporate frauds has recently affected public policy. Reflecting popular opinion that existing penalties were too low, the US Sentencing Commission – the federal agency responsible for setting the penalty guidelines used by judges – established corporate sentencing guidelines in 1991 that raised median corporate fraud penalties by over twentyfold. This article criticises the conventional wisdom about corporate fraud in two ways. First, we explain that the typical optimal criminal penalty for private corporate fraud is small because the external effects of such frauds are usually small. An increase in criminal penalties for corporate fraud can do more harm than good because it encourages the substitution of criminal penalties for reputation as a mechanism to police fraudulent behaviour.