Securities: Class Action Claims Up

A study prepared by Stanford Law School in conjunction with Cornerstone Research reports that class action filings in federal court rose 4.8% between 2009 and 2010. Interestingly, the report says that the greatest growth in filings are cases alleging disclosure violations in merger and acquisition transactions. These violations replaced traditional fraud cases, which experienced a sharp decline in filings, as the most prominent types of cases.

The growth in merger and acquisition filings resulted primarily from a large increase in the number of cases filed naming Chinese issuers. Cases against Chinese firms amounted to almost 43% of the cases filed against all foreign issuers.

The reason for the larger numbers of cases involving Chinese issuers is not readily apparent. One explanation is that Chinese companies are new to the American market. As a result, the people operating these companies are not yet very familiar with Securities and Exchange Commission disclosure rules. In a sense this theory views the issue as a acculturation process. As the Chinese business community becomes more comfortable with U.S. regulations, problems with disclosure violations should cease. A less benign explanation for the number of cases is the possibility of outright fraud. The geographic distance could lead confidence artists to conclude that the likelihood of capture for fraud is remote, thus encouraging the risk of unlawful behavior.

The study also appears to show that effects of the credit crisis are wearing off, at least in the context of federal class action filings. Plaintiffs filed only 13 such cases in 2010, a 76.4% decrease from 2009.

It will be interesting to see if 2011 shows that merger and acquisition cases remain strong or whether the spurt in activity resulted from corporate economic contraction resulting from the recent financial crisis. If that is the case, we should see traditional fraud cases returning to the forefront of federal class action securities filings.

For more about report please see http://www.housingwire.com/2011/01/20/class-action-federal-securities-fraud-cases-on-the-rise.

Healthcare: RACs Unlikely to Report Fraud

Recovery audit contractors or "RACs" are private companies that Medicare hires to identify improper payments. When a RAC identifies an improper payment to a physician or medical facility, the RAC receives a "bounty" of between 9% and 12% of the monies recovered for the government. In a three year pilot program in six states, the RACs were able to recover in excess of $1 billion for Medicare. Most of the recoveries came from hospitals.

The types of payments comprising the term "improper payments" includes honest billing errors, payments resulting from poor documentation, and other such ministerial issues. Such payments are to be understood as distinct from fraud. The RACs are required to notify criminal investigators in instances where there is suspected fraud. However, there is no incentive for the RACs to actually make such referrals. To the contrary, there is actually a disincentive to make fraud reports because Medicare requires RACs to discontinue reviewing billing records of those suspected of fraud. Thus, the RACs would forgo the possibility of the percentage reward by alleging that a payment resulted from fraud rather than a more benign explanation. In fact, during the three year pilot program RACs only referred two cases of suspected fraud.

Medicare plans to formally train the RAC auditors on detecting fraud and the process for the referral of suspected cases of fraudulent billing. The hope is that by highlighting the need to identify and report suspected instances of fraud Medicare will persuade the RACs to be more aggressive in fraud detection and reporting. It remains to be seen whether the active encouragement of Medicare can overcome the economic incentive for the RACs to treat fraud as less severe types of payment problems.

For an article about RACs and fraud detection, please see BNET, "Medicare's Bounty Hunters Turn Their Sights to Fraud," February 22, 2010, http://industry.bnet.com/healthcare/10001791/medicare-encourages-private-bounty-hunters-to-investigate-fraud/.