Editor's note: This article is the second of a two-part series. To read part one, click here.
The recent criminal conviction of a cardiologist who, in an effort to get paid for medical reports, falsely certified his patients as so injured by diet drugs that their heart valves were leaking blood, is just the latest case to show that vast pools of money in class action and mass tort litigation can be a catalyst for fraud and other problems. But attorneys say that false claims by plaintiffs, or even claims administrators pocketing funds owed to claimants, are the exception rather than the norm.
Fraudulently taking money recouped from defendants for claimants in class actions or mass torts is not a victimless crime, said U.S. Attorney Zane D. Memeger of the Eastern District of Pennsylvania.
"The money ought to be available for those who truly suffered," Memeger said.
The attorney for defendant Dr. Abdur Razzak Tai, whose sentencing is scheduled for next month, did not respond to a request for comment Monday.
In the case of litigation involving the financial markets, money gained by false pretenses either by claimants or claims administrators "is harmful to everyone because at the end of the day ... in the financial marketplace ... the taxpayer is the ultimate insurer," Memeger said.
In another case, six defendants were charged in 2008 with receiving false and fraudulent claims of $7.2 million from the $1 billion antitrust In re Nasdaq Market-Makers Antitrust Litigation; with receiving $28.7 million from the $3 billion securities In re Cendant Litigation; and with receiving $5.9 million from the $490 million securities In re BankAmerica Securities Litigation.
The six defendants in the securities case, one of whom worked for an accounting firm and one of whom was an attorney, according to court papers, created fake corporations; opened bank accounts and established virtual offices for the fake corporations, including using professional office services to retrieve the mail and take telephone messages; and created "false brokerage account statements and other financial documents that showed the fake company's ownership in the securities necessary to share in the class action settlement funds." All of the defendants ultimately pled guilty.
In a third case, Dee Lynn Andrews was indicted in 2009 after receiving a $200,000 settlement in 2001 due to alleged injuries from taking diet drugs Pondimin and Redux, and for retaining several separate law firms that filed multiple lawsuits under different aliases for Andrews. Andrews ultimately pled guilty.
The cases show that claims administrators "should look at higher value claims under a strict scrutiny and not treat them all the same way as long as the paperwork is here," said First Assistant U.S. Attorney Louis D. Lappen of the Eastern District of Pennsylvania.
Settlements are always cents on the dollars that victims have really lost, and even less is available to the "real victims" if fraudsters grab a $40 million piece of a settlement just as the securities defendants did, Lappen said.
There are issues beyond claimants gaining funds they should not have received. Some claims administrators have taken money. And some might raise an eyebrow over the appearance of conflict of interest when claim administrators are paid by just one side.
Paul Mulholland, a certified public accountant and the founder of Strategic Claims Services in Media, Pa., which administers claims in securities, consumer and wage class actions, said that his firm works for the court.
"We can't ever show a conflict of interest in any capacity," Mulholland said. "It would kill our business if it looks like we're not objective."
Courts put in place strict guidelines based upon settlement agreements, Mulholland said.
"That's the contract we have to follow," he said.
Claims administrators sometimes are paid out of settlement funds, by defense counsel as part of settlement agreements, or by plaintiffs counsel out of the fee already negotiated as class counsel, Mulholland said. Fees also are not contingency-based, he said.
"Is there incentive for us to cheat? There really isn't," Mulholland said.
Any issue of the appearance of conflict of interest is addressed, Mulholland said, because how claims administrators are paid is determined by a negotiation between plaintiffs counsel and defense counsel and must get the approval of the court.
"If the agreement looks like it sets up a perceived conflict of interest [the attorneys for both sides] would never agree," Mulholland said.
Orran Brown, a principal with BrownGreer, a Richmond, Va., law firm that specializes in mass claims resolution and claims administration, said that, despite whoever is paying his firm's bills, his firm is in the neutral role of being a trustee or a fiduciary who has to safeguard plaintiffs' money. The ultimate duty is owed to the beneficiaries of the claims program, Brown said, and a duty is owed to the court and both sides of a case to follow the settlement agreement.
Matt Garretson, an attorney and founding partner of claim administrator and lien administrator Garretson Resolution Group, said that a firm like his charges flat fees, not contingency fees.
"A contingency creates a bit of a conflict," Garretson said. "We're seen as a neutral. In our work as a neutral administrator we have ... to ensure to all parties that the terms of their settlement are strictly carried out."
Mulholland's firm has in-house controls, such as segregating duties "so one person can't take everything through the process and perhaps create fictitious claims," Mulholland said.
His firm has a quality assurance procedure in which a sample of claims will be verified, such as in securities cases, calling brokers to ensure that claimants are seeking recovery for valid transactions, Mulholland said.
Because his firm has administered over 250 cases, Strategic Claims Services has a database of claimants, and the firm, especially in securities cases, will check to see if claimants have made multiple claims in other cases, Mulholland said.
If proof documents are being faked, that information is shared with other administrators as well as the FBI, Mulholland said.
When his firm administered class actions involving Wal-Mart in nine states, Mulholland estimated that there were 200 instances of people trying to change the checks in terms of the amount the checks were printed for or for the person the checks were issued for. But those check changes were caught by an automatic fraud detection tool, Mulholland said.
His firm participates in "Positive Pay" with banks in which a list of checks previously authorized and issued to plaintiffs is provided to the banks so banks can match the account number, check number and dollar amount of each check against the list, Mulholland said.
The "Positive Pay" system catches any claimants who try to add zeroes onto their check and "puts the burden on the bank to check for any fraudulent transactions," Mulholland said.
Michael D. Donovan, a plaintiffs consumer class action and securities class action attorney with Donovan Axler in Philadelphia, said that he is aware of instances in which claims administrators have made "massive mistakes" paying out claims to the wrong claimants or paying out the wrong amounts to claimants, which reduces the amounts available to other legitimate claimants.
Donovan also said he has heard of other claims administrators who do not do a good job of issuing class notices or communicating with class members.
But Donovan said as a plaintiffs attorney he does not have concerns that the funds he is recovering on behalf of a class might either go to plaintiffs with fake claims or that the administrators would take some of the money because they have their reputation to uphold in order to stay in business.
Michael M. Weinkowitz, a plaintiffs attorney and member of Levin, Fishbein, Sedran & Berman whose practice focuses on products liability cases, said that he "absolutely" does not have concerns that the funds he recovers on behalf of claimants might be taken by claims administrators "because the parties, with the oversight of the court, select claims administrators that have expertise and a track record of administering these programs, there are checks and balances built into the programs so that any chance of fraud is non-existent and the administrator's fees are determined at the outset."
Antitrust and securities class actions or mass torts are the most likely types of cases in which false claims might be made because the amounts involved can be more sizeable than most mass and class actions are, Donovan said.
For other class actions like consumer class actions, there are lists of credit card consumers, mortgage holders or warranty holders, and "the risk reward is not there. You're not going to lie about $100," Donovan said.
Securities class actions are backed up by records of the buy-sells of stocks and the amounts that were recovered in the action per share, Donovan said.
In the antitrust world, people involved in the industry know "who the big actors are" and a potential fraudster "would stick out like a sore thumb if you made a claim for a million dollars" and no one in the industry knew who you were, Donovan said.
Fraud is probably most prevalent in personal injury, mass tort cases where the likelihood of recovery would increase if claimants can show they were more greatly injured, Donovan said.
But claims administrators can catch such fraud, Donovan said. It was likely the claims administrator who spotted the issues involving Tai, he said.
Donald C. Le Gower, an associate with Dechert practicing in the area of products liability and mass torts, said that defendants also have concerns about the claims administration process.
While defendants do not get involved in second-guessing the distribution of payments to claimants, "defendants have a concern that the way the settlement funds are distributed is consistent" with a fair settlement agreement that puts in place procedural protections, Le Gower said.
Procedural protections in settlement agreements, including spelling out what the process for distribution of funds will be, what institution will have the custodial account, and a matrix of how money will be distributed within a group of plaintiffs depending upon their level of injury, can guarantee fairness, Le Gower said.
"Process is our best defense against those kind of problems," Le Gower said.