Asset Forfeitures and Freezes in Health Care Fraud Litigation
Robert W. Biddle, Esq.
Nathans & Biddle, LLP
120 East Baltimore Street,
Baltimore, Maryland 21202
Michael Schatzow, Esq.
Allison Lowery, Esq.
Venable, Baetjer and Howard, L.L.P.
2 Hopkins Plaza
1800 Mercantile Bank & Trust Building
Baltimore, Maryland 21201
Phone: 410.244.7400 (DID: 244.7592)
Author Biography: Robert W. Biddle is of counsel in the Baltimore office of Nathans & Biddle, LLP. His practice includes representation of health care providers in civil and criminal cases, including forfeiture actions. He formerly was an Assistant U.S. Attorney in the Criminal Division in the Eastern District of New York.
Author Biography: Michael Schatzow is a partner in the Investigations and Defense Group at Venable, Baetjer and Howard, LLP, in Baltimore, Maryland. Mr. Schatzow has extensive experience as a trial lawyer who has both defended and prosecuted complex white collar criminal cases and business crimes. Mr. Schatzow formerly served as an Assistant United States Attorney in the District of Maryland and was the Chief of Fraud cases.
INTRODUCTION AND SUMMARY
Federal law allows the Government to freeze and forfeit assets held by providers and other defendants, including assets held by third parties, in health care fraud litigation. The Government can bar providers from accessing their bank accounts, and can seize such accounts and other property, in connection with health care fraud actions. Such actions can strip providers of the ability to pay legal counsel, and can be used to recover legal fees already paid to health care attorneys.
A. CRIMINAL ASSET FORFEITURES INCLUDING ASSET FREEZES AND RESTRAINING ORDERS
Criminal asset forfeitures are the principal means by which the Government can forfeit assets in health care fraud litigation. Criminal forfeitures are authorized by 18 U.S.C. § 982, which also includes by reference several portions of 21 U.S.C. § 853, the narcotics forfeiture statute, as the criminal forfeiture provisions governing asset forfeitures in health care fraud actions are not self-executing. See 18 U.S.C. § 982(b)(1)(A) (cross-referencing 21 U.S.C. §§ 853 (c) and (e) through (p)). The procedural provisions in 21 U.S.C. § 853 are essential to the operation of the criminal forfeiture statute.
Section 982 provides in relevant part as follows: "The court, in imposing sentence on a person convicted of a Federal health care offense, shall order the person to forfeit property, real or personal, that constitutes or is derived, directly or indirectly, from gross proceeds traceable to the commission of the offense." 18 U.S.C. § 982(a)(6). Federal health care offenses are defined at 18 U.S.C. § 24 as, among other things, violations of the mail and wire fraud statutes relating to a health care benefit program, and the health care fraud offense found at 18 U.S.C. § 1347. Similar language in the statute permits the forfeiture of the gross proceeds, indirectly or directly obtained, from a variety of other types of offenses such as armed robbery of an automobile, mail or wire fraud involving Resolution Trust Company assets, or credit card fraud. Unlike narcotics asset forfeiture actions, the statute does not allow the Government to forfeit property which merely facilitated criminal activity, and is limited to property derived from particular offenses.
Although the statute limits the value of property which may be forfeited from a defendant to the amount of gross proceeds directly and indirectly derived from criminal activity, the statute allows the Government on a proper showing to seize assets belonging to a defendant which are equal in value to the fraudulently obtained assets if the fraudulently obtained assets have been spent or are otherwise too difficult for the Government to readily forfeit. This "substitute asset provision," is applicable to health care fraud forfeitures by 18 U.S.C. § 982(b)(1)(A), cross-referencing 21 U.S.C. § 853(p). The substitute asset provision allows the Government to forfeit assets up to the amount in value of the assets derived directly or indirectly from the fraud if the assets directly or indirectly derived from the fraud are too difficult to locate or if other factors are present. Id. Thus, if a provider obtained $500,000 through fraudulent criminal activity, and if the Government couldn't obtain the $500,000 which had already been spent by the defendant, the Government could obtain $500,000 of other assets of the defendant, even if they were totally unrelated to fraud, or could seek to obtain $500,000 in assets held by third party nominees received from the defendant.
Unless it relies on the substitute asset provision, the Government must show a connection between the property sought to be forfeited and the fraud to forfeit the property. United States v. Voigt, 89 F.3d 1050, 1087 (3d Cir. 1996). The substitute asset provision does not require the Government to trace the proceeds of the fraud into particular assets, although it is required to show that it cannot readily obtain the original gross proceeds of the fraud. Id."An asset cannot logically be both forfeitable and a substitute asset. To allow such an anomaly would render the substitute assets provision meaningless. Assets involved in or traceable to the offense are forfeitable once the requisite nexus is established."United States v. Bornfield, 145 F.3d 1123, ___ (10th Cir. 1998).
Criminal forfeiture actions must be brought against persons or legal entities, not initially against the property to be forfeited itself, and compel forfeiture of assets held or formerly owned by such defendant persons or entities. Thus, criminal forfeiture proceedings are in-personam actions and are inescapably connected to federal criminal prosecutions. They are governed by the Federal Rules of Criminal Procedure and the applicable customs forfeiture procedures. See 21 U.S.C. § 853(j) (referencing 21 U.S.C. § 881(d)).
Parties with claims to property sought to be forfeited are known as "claimants." A claimant may be a person or entity holding title to property or a creditor of the owner. Thus, if the Government seeks to forfeit a health care provider's assets, an attorney to the provider may become a claimant. The general rule is that the burden is on the Government to show by a preponderance of the evidence that it is entitled to forfeit the defendant's property in a criminal forfeiture action. See United States v. Voigt, 89 F.3d 1050, 1081-82 (3d Cir. 1996). This standard of proof is lower than the normal criminal standard of proof of beyond a reasonable doubt.
Unless assets are restrained prior to indictment, health care fraud criminal forfeiture actions begin with an allegation in an indictment. See Federal Rule of Criminal Procedure 7(c)(2) which provides that "[no judgment of forfeiture may be entered in a criminal proceeding unless the indictment or the information shall allege the extent of the interest or property subject to forfeiture." Thus, the Government must identify the defendant's assets sought to be forfeited in the indictment. Id. Similarly, a criminal forfeiture charge is a separate count of the indictment subject to a verdict by the jury. See Federal Rule of Criminal Procedure 31(e) which provides in relevant part that "a special verdict shall be returned as to the extent of the interest or property subject to forfeiture, if any."
In connection with the preparation or filing of an indictment, the Government is authorized to restrain or even seize assets pending entry of a judgment of forfeiture. 21 U.S.C. §§ 853(e) and (f), cross referenced at 18 U.S.C. § 982(b)(1)(A). The Government is entitled to freeze assets by "protective orders" to protect its interest in property. Accordingly, courts can "enter a restraining order or injunction, require the execution of a satisfactory performance bond, or take any other action to preserve the availability of property" either before or after an indictment is filed. Id. See United States v. Kirschenbaum, 1998 U.S. App. LEXIS 24431 at *2 (7th Cir. 9/30/98) (pre-indictment restraint of hospice owner's assets) If restraint is sought prior to indictment, the Government is required to show the following:
(i) there is a substantial probability that the United States will prevail on the issue of forfeiture and that failure to enter the order will resulting the property being destroyed, removed from the jurisdiction of the court, or otherwise made unavailable for forfeiture; and
(ii) the need to preserve the availability of the property through the entry of the requested order outweighs the hardship on any party against whom the order is to be entered" Id. Defendants are entitled to a hearing on notice if restraint is sought prior to indictment. Id. Pre-indictment restraining orders can last no longer than 90 days unless "extended by the court for good cause shown or unless an indictment . . . has been filed." Id.
The Government may restrain a defendant's property without prior notice to the defendant if it "demonstrates that there is probable cause to believe that the property with respect to which the order is sought would, in the event of conviction, be subject to forfeiture under this section and that provision of notice will jeopardize the availability of the property for forfeiture." Id. Following entry of an ex parte order prior to indictment, a defendant is entitled to a hearing. Id.
Although not explicitly authorized in the statute, courts may grant defendants a hearing to contest restraining orders even after the defendant is indicted, although normally courts will defer to the grand jury's probable cause finding and will not require the Government to make any additional showing of the merits of its case. See Kirschenbaum, 1998 U.S. App. LEXIS 24431 *20-26 (discussing issue); United States v. Harvey, 814 F.2d 905, 931 (4th Cir. 1987); United States v. Musson, 802 F.2d 384, 386-87 (10th Cir. 1986); United States v. O'Brien, 836 F. Supp. 438, 441 (S. D. Oh. 1993). The court is not required to conduct a mini-trial on the merits of the offense. Id.
Unlike defendants, assets of third parties cannot be frozen under § 982(b)(1). Kirschenbaum at *30-36.
The Government is also entitled to seize property subject to forfeiture before obtaining a forfeiture judgment. "The Government may request the issuance of a warrant authorizing the seizure of property subject to forfeiture under this section in the same manner as provided for a search warrant. If the court determines that there is probable cause to believe that the property to be seized would, in the event of conviction, be subject to forfeiture and that an order under subsection (e) of this section may not be sufficient to assure the availability of the property for forfeiture, the court shall issue a warrant authorizing the seizure of such property." 21 U.S.C. § 853 (f).
The statute provides that after a judgment of forfeiture is entered, title to the illegally obtained property is retroactively presumed to vest in the Government, thus undermining the claims to the property of any third party. 21 U.S.C. § 853(c) (incorporated by reference by 18 U.S.C. § 982(b)(1)(A)). However, during the pendency of the criminal prosecution, third parties such as claimants to the property have no standing to intervene in the criminal action prior to the entry of judgment against the defendant. See 21 U.S.C. § 853(k) (incorporated by reference by 18 U.S.C. § 982(b)(1)(A)). In fact, prior to entry of judgment against the defendant, a third party holding property received from a defendant which the Government may contend is the proceeds of fraud is not entitled to notice of the Government's claim as such notice is not required until after judgment is entered against the defendant. 21 U.S.C. § 853(n) (incorporated by reference by 18 U.S.C. § 982 (b)(1)(A)).
Once judgment is secured against the defendant, notice is required to third parties. 21 U.S.C. § 853(n)(1). If at the time of entry of judgment property derived from the health care offense is held in the hands of third parties, the third party is required to file a petition with the court asserting its right, title and interest in the property. 21 U.S.C. §§ 853(n)(2) and (3). Absent such a claim, the Government by default can forfeit and seize the property held by the third party which originally derived from the criminal defendant's health care offense. 21 U.S.C. § 853(n)(7).
The third party is not entitled to a jury trial on its claim but is entitled to an evidentiary hearing before the Court. 21 U.S.C. § 853 (n)(6). In any hearing conducted by the Court on a third party claim, to prevail the third party claimant ("petitioner") must show either of the following by a preponderance of the evidence:
(A) the petitioner has a legal right, title, or interest in the property, and such right, title, or interest renders the order of forfeiture invalid in whole or in part because the right, title, or interest was vested in the petitioner rather than the defendant or was superior to any right, title, or interest of the defendant at the time of the commission of the acts which gave rise to the forfeiture of the property under this section; or
(B) the petitioner is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture under this section.
The Government is entitled to take depositions to prepare for the hearing. 21 U.S.C. § 853(m). However, there is no similar statutory right for third party claimants to take such depositions.
Following a hearing, a court decides the competing claims of the Government and the third parties and then either modifies its original order of forfeiture entered after the criminal trial or plea to recognize the third party claims, or affirms its original order, granting the Government clear title to the property. 21 U.S.C. §§ 853 (n)(6) and (n)(7).
B. CIVIL FORFEITURES
The civil forfeiture statute, 18 U.S.C.§ 981, contains no specific provision allowing civil forfeitures in health care fraud cases, unlike the criminal forfeiture statute. However, some provisions may apply to prosecutions involving health care fraud allegations. For example, a health care fraud could be charged as a mail or wire fraud affecting a financial institution, allowing civil forfeiture of the proceeds of such an offense. See 18 U.S.C. § 981(a)(1)(C). A health care billing fraud could be charged as a series of false statements violating 18 U.S.C. § 1001, allowing civil forfeiture of the proceeds. 18 U.S.C. § 981(a)(1)(D). Health care fraud could be charged as federal program fraud violating 18 U.S.C. § 666(a)(1) or major fraud against the Government violating 18 U.S.C. § 1031, both of which can support civil forfeiture claims. Id. Civil forfeitures are governed by the Supplemental Rules for Certain Admiralty and Maritime Claims, and the Federal Rules of Civil Procedure are also applicable unless they are inconsistent with the Supplemental Rules. The customs laws on forfeiture also apply.See 21 U.S.C.§ 981(d).
C. FORFEITURE OF ATTORNEYS FEES
There is no reason why payments from providers which are derived directly or indirectly from health care fraud which happen to be made to attorneys as opposed to other third parties will be immune from forfeiture actions. Already in other contexts involving narcotics prosecutions, fees held by attorneys have been sought to be forfeited by the Government using statutes similar to those which now apply to health care fraud prosecutions. See, e.g., United States v. Moffitt, Zwerling & Kemler, P.C., 83 F.3d 660, 663 (4th Cir. 1996) ( held that funds properly seized from law firm where firm received payment of $86,800 in cash in a cracker or shoe box carton from a client, but failed to inquire in detail about the source of the funds despite stating it could not accept "funny money"), cert. denied, 117 S. Ct. 788 (1997). Statutes would similarly allow actions against attorneys providing legal advice to providers. There is no reason to believe that over time the Government will pass up the opportunity to forfeit legal fees from counsel to a health care provider.
Consider for example a provider which consistently engages in what is later proven to be fraudulent billing, and uses the funds earned from the fraudulent billing to lease medical equipment, purchase an office building, acquire an automobile, and retain an attorney. The Government can seek to forfeit the automobile or the office building directly from the provider, seek to forfeit lease payments made by the provider to the equipment supplier, or seek to forfeit attorneys fees already paid to the attorney by the provider.
The Government is entitled to learn the details of fee arrangements and to obtain proof of payments made to counsel. The Government may develop this information by subpoenaing the attorney or the client as such records are not privileged. See, e.g., In Re Grand Jury Proceedings No. 92-4, 42 F.3d 876, 879 n.1 (4th Cir. 1994). It is difficult at best for counsel or the client to refuse on Sixth Amendment and privilege grounds to disclose the identity of the client and the records relating to the way in which the fee was paid and the amounts. Id. ("attorney fee record subpoenas generally do not violate the attorney-client privilege"). Thus, counsel should keep in mind that their records relating to representation of a client could be subject to a subpoena, and, as a result of said subpoenas, and other aspects of a Government investigation, previously earned and received fees might be forfeited from counsel. Id. at 665 ("[We find no impropriety in the procedures employed by the government in this case to subject the fee to forfeiture").
Thus, counsel advising health care providers would be well advised to assure themselves of the legitimacy of the source of their fees. For example, suppose a client specializes in providing billing for one narrow type of service which may be marginal in the eyes of the law. If Government enforcement priorities shift, the client could be considered a target of a criminal investigation and the Government could eventually deem all of its revenue as fraudulent proceeds. In such circumstances, the Government could then demand repayment of any legal fees the provider paid to transactional health care attorneys.
On the other hand, the more varied the source of income for a provider, the less likely that the property will be deemed the proceeds of unlawful activity. If there are a variety of sources of revenue for the client, it is unlikely that the Government could deem the entire client's operation to be fraudulent. The task of separating the lawful and unlawful streams of income received by the client, and their uses, can be very difficult and may deter a forfeiture action against attorneys fees.
Thus, counsel should take steps to determine that the client has non-fraudulent sources of income to pay counsel. The failure to do so can strip counsel of the key defense in an action for attorney's fees. See Moffitt, 83 F.3d at 666 ("[The firm's partners tiptoed around the most pertinent questions. They did not ask [the client] what legitimate sources of income he had...[They avoided asking [the client] where he obtained the $103,800 in cash to pay his legal fee").
An important question is how to verify the fee. The law requires counsel to take reasonable steps to verify the source of funds. Health care counsel needs to know enough about the client's business to show that counsel took reasonable steps to verify non-fraudulent sources of revenue and payment to counsel. Counsel should memorialize in the file any notes regarding what the client has said about the source of the provider's income.
In addition, there are other steps counsel can take. Counsel should not receive payment in cash. Health care attorneys may rarely be paid in cash, but don't accept it. Cash is fungible and impossible to trace. The receipt of cash payment in an amount greater than $10,000, whether in one payment or in a series of even loosely related payments, may fall within the scope of the currency reporting requirements. These requirements require filing a form which discloses the source of the payment in cash and other details of the client.
Counsel should also consider using a written retainer agreement that provides some degree of protection on the source of the fee. Representations in a retainer agreement about the source of funds paid to the attorney can help protect the attorney in later litigation. The retainer agreement should include a representation that the funds to be paid are derived from a lawful source, and do not come directly or indirectly from illegal activity.
Counsel should evaluate any criminal case for its forfeiture potential before accepting the representation. Cases which have a high potential for forfeiture claims should be reviewed particularly carefully. Moffitt, 83 F.3d at 671 ("The law firm in this case was dealing with a client who already had most of his assets seized as the result of a major drug trafficking investigation").
In the future, given the statutes on the books, nothing may be able to guarantee that the Government will not review a case for possible forfeiture of attorneys fees. However, these steps may help protect counsel's fee if an inquiry is made.
ASSET FREEZES PURSUANT TO 18 U.S.C.§ 1345
The Government is not limited to the restraining order provisions in the forfeiture statute, 21 U.S.C. §§ 853(e) and (f), to ensure that assets it wants to subsequently forfeit are available once substantive legal proceedings conclude. The Government can use 18 U.S.C. § 1345, a companion to the mail and wire fraud statutes, to freeze assets in health care fraud cases before charges are filed.
B. THE STATUTE (18 U.S.C. § 1345)
The statute provides as follows:
(a)(1) If a person is - . . .
(C) committing or about to commit a Federal health care offense.
the Attorney General may commence a civil action in any Federal court to enjoin such violation.
(2) If a person is alienating or disposing of property, or intends to alienate or dispose of property, obtained as a result of a banking law violation (as defined in section 3322(d) of this title or a Federal health care offense) or property which is traceable to such violation, the Attorney General may commence a civil action in any Federal court -
(A) to enjoin such alienation or disposition of property; or
(B) for a restraining order to -
(i) prohibit any person from withdrawing, transferring, removing, dissipating, or disposing of any such property or property of equivalent value; and
(ii) appoint a temporary receiver to administer such restraining order.
(3) A permanent or temporary injunction or restraining order shall be granted without bond.
(b) The court shall proceed as soon as practicable to the hearing and determination of such an action, and may, at any time before final determination, enter such a restraining order or prohibition, or take such other action, as is warranted to prevent a continuing and substantial injury to the United States as to any persons for whose protection the action is brought. A proceeding under this section is governed by the Federal Rules of Civil Procedure, except that, if an indictment has been returned against the respondent, discovery is governed by the Federal Rules of Criminal Procedure.
C. HIPAA- KENNEDY KASSEBAUM AMENDMENT
The Health Insurance Portability and Accountability Act (HIPAA - popularly known and referred to as the Kennedy Kassebaum amendment), Pub. L. No. 104-19, 110 Stat. 1936 (1996), amended 18 U.S.C. §1345 to include "federal health care offenses," as set forth above. The amendment provides the Government with an additional means to freeze the assets of providers it suspects of being involved in health care fraud offenses, in addition to the procedures in the forfeiture statute. HIPAA defines a "health care offense" to include a violation of 18 U.S.C. §1341, the mail fraud statute, "if the violation... relates to a health care benefit program." 18 U.S.C. § 24.
Even before the HIPAA amendment, the government had used 18 U.S.C. §1345 to freeze assets involved in health care fraud. The statute was invoked as the basis for preliminary injunctions based on mail or wire fraud, even though it did not specifically provide for such use. U.S. v. Quadro Corp., 928 F.Supp. 688 (E.D. Texas 1996).
D. RECENT CASES
Recent cases have relied on the HIPAA amendments or the parallel bank fraud provisions to authorize asset freezes. See, e.g., United States v. Cohen, 1998 U.S. App. LEXIS 18546 at *7-12 (4th Cir. 8/11/98). Even before the statute was amended, the Government used 18 U.S.C. §1345 to freeze the assets of providers the Government believed had engaged in health care fraud. Two cases among others have focused on the conditions under which the Government can freeze a health care provider's assets. See United States v. G-4 Medical Centers, Inc. No. 95-7171 (S.D.Fl. 1995); United States v. Fang, 937 F. Supp 1186 (D. Md. 1996). These cases were both briefed before the HIPAA amendments were enacted. In the Fang case, District Judge Peter Messitte's opinion granting the Government's motion for a preliminary injunction was written after the HIPAA amendments.
1. United States v. G-4 Medical Centers
The Government alleged that the defendants, Ahmad and Lourdes Moradi, presented false and fraudulent claims in violation of 18 U.S.C. §287. The Government alleged that the providers had fraudulently obtained in excess of $950,000 by submitting false claims. The Government brought an action to protect Medicare funds by restraining the defendant's unlawful conduct. The Government also sought to "protect and restrain... the transfer of funds and assets." Complaint For Temporary Restraining Order, Preliminary And Permanent Injunction (December 21, 1995).
The Government filed a motion for a temporary restraining order to restrain the defendants from continuing to obtain Medicare funds through false claims and to prevent the dissipation or concealment of funds and assets which the Government alleged were obtained by submitting false claims. The Government sought injunctive relief pursuant to Federal Rule of Civil Procedure 65(b), which, in effect, allowed the Government to freeze the assets of the defendants without notice to the defendant. This approach allows the Government to freeze assets before the suspected violator has an opportunity to transfer the funds beyond the Government's reach.
The Government argued that the traditional standard for issuing injunctions did not apply where the Government requests an injunction pursuant to a federal statute enacted to protect the public interest. The Government argued that it only need demonstrate probable cause to believe that the statute had been violated. The burden of proof, the Government argued, then shifted to the defendant to prove that the funds sought to be frozen were unrelated to the fraud.
The Court granted the government's injunction, relying on the Government's affidavits and declarations. The Court accepted the Government's argument regarding the proper standard for issuing an injunction. It wrote that although a showing of irreparable harm is not necessary, the Court agreed with the Government that irreparable harm would result if the injunction was not issued. The Court allowed the defendants to withdraw $12,000/month from their corporate account, $6,000 of which was allocated to cover Lourdes Moradi's personal expenses.
The Court also allowed the defendants to use some of their monthly stipend to pay attorney's fees as well as expenses associated with the costs of litigation. The parties were instructed to petition the Court if a dispute ensued regarding the freeze.
2. United States v. Fang, 937 F.Supp 1186 (D. Md. 1996)
United States v. Fang provides another example where the Government used 18 U.S.C. §1345 to freeze the assets of a health care provider prior to indictment. In Fang, the Government alleged that the defendants improperly obtained in excess of $500,000 in reimbursements from health care insurers.
The Government's tactics in the Fang case illustrate the power of 18 U.S.C. §1345, and how it can be used to the Government's advantage. In Fang, an eight month undercover investigation culminated in the execution of three search warrants. Approximately three weeks after the execution of the search warrants, the Government sought and obtained an ex parte Temporary Restraining Order (TRO) based on 18 U.S.C. §1345, despite the fact that counsel for the defendants was known to the Government and in discussions with the Assistant United States Attorneys supervising the criminal matter at the time the TRO was sought and obtained. Indeed, the Government so advised the District Court in its request for the TRO.
The Government's certification pursuant to Rule 65(b)(2), Fed. R. Civ. P., and its sole justification for not giving notice to defendants of the effort to freeze assets, was that the defendants would be likely to withdraw and conceal assets if they received notice of the request for the TRO. The Government offered no facts specific to these defendants in support of this request.
The Government sought (as in G-4) and obtained an ex-parte TRO prohibiting the defendants from transferring or disposing of their assets held at any financial institutions, trust funds, or brokerage agencies. The TRO included custodial accounts in the names of the defendant's minor children. The TRO also prohibited the defendants from transferring, dissipating, selling or disposing of any real or personal property. Thus, literally read, the TRO prohibited the defendants from purchasing food to feed their minor children.
The TRO provided that, upon petition by the defendants, the Court could order that the defendants be permitted to conduct normal day-to-day business activities and pay for the same on a monthly basis, in an amount not to exceed that determined by the Court. The price the defendants would have to pay for that relief, aside from justifying it, was to provide a verified disclosure of all assets and liabilities. However, the defendants were under an active and aggressive criminal investigation by the Government at that time.
Thereafter, the Court modified the TRO to allow the defendants use of certain funds until the Court issued a decision about whether to issue a preliminary injunction.
Evidentiary hearings were conducted, the case was briefed, and oral argument heard before the effective date of the Kennedy-Kassebaum Amendments. The Court, in its lengthy published opinion, 937 F. Supp. 1186, significantly reduced the Government's duty under the old statute to trace the proceeds of any alleged illegal activity. The Government need only establish with reasonable probability that the defendants had received funds from questioned sources, and commingled those funds among various accounts, to broadly freeze a defendant's accounts. The Court also agreed with the Government that once the Government determined that any fraudulently obtained assets went into a particular account, the burden of production would then shift to the defendant to establish the extent to which other assets in that account were the product of independent, unrelated sources of income. In effect, the Government will not automatically prevail if it proves that funds have been commingled, but the defendant runs the risk of an adverse decision if the Government's proof is not answered. In Fang, the Court agreed with the defendants that income derived from rental property owned by the defendants jointly was not subject to an asset freeze since the income was generated independently of any alleged fraud.
While the Court's treatment of the Government's tracing obligations may cause problems for defendants in other contexts, it is rendered largely irrelevant by the HIPAA amendments. 18 U.S.C. §1345(a)(2) now allows the government to attempt to freeze not only the property obtained as a result of a federal health care offense, or property traceable to such a violation, but any property having an equivalent value. The Government can seek to freeze property "of equivalent value" under 18 U.S.C. § 1345 without meeting the criteria for forfeiture of such assets set forth at 21 U.S.C. § 853 (p). Once the government has proven the amount subject to an asset freeze, it is entitled to freeze any assets having an equivalent value. 18 U.S.C. §1345(a)(2)(B)(i).
Aggressive use of 18 U.S.C. §1345 allows for significant Government and judicial latitude and possible abuse. First, a provider's assets may be frozen before the Government has procured an indictment (as done in the Fang case). This can have devastating personal and business effects because the Government is able to effectively cripple a provider's business before proving or even formally alleging the substance of the allegations. Even if only a small percentage of a provider's income is allegedly derived from health care fraud, the provider's entire business could be affected by an asset freeze.
Additionally, broad judicial interpretation of the statute allows the Government to freeze the assets of a provider before the provider has an opportunity to retain an attorney. It is possible, then, that the defendant could not retain an attorney in the face of the proceedings.
Finally, as Judge Messitte demonstrated in the Fang case, the Government need only meet a low burden in determining which funds are the proceeds of a health care violation. This degree of latitude allows the Government to freeze a provider's assets without insuring that the funds it seeks to freeze are the by-products of the alleged violation.
F. PRACTICAL ISSUES
Once the Government has successfully obtained an ex parte TRO, or once a defendant learns that the Government is seeking a TRO, there are some steps counsel can take to seek to modify the draconian effect of a TRO. First, some carve-out provision should be made for the payment of legal fees, both in defending against the TRO and preliminary injunction, and in defending against the criminal investigation. Second (and perhaps first to the defendants, if not to their counsel), carve-out provisions should exist for the payment of ongoing necessary expenses, including for individuals, rent, food, clothing and support of dependents.
One advantage to the putative criminal defendant from defending against a TRO or preliminary injunction is the availability of discovery. 18 U.S.C. §1345(b) provides that the Court must proceed promptly to a hearing and determination of the request for preliminary injunction, and that proceedings are governed by the Federal Rules of Civil Procedure unless an indictment has been returned. In that case, discovery is governed by the Federal Rules of Criminal Procedure.
To obtain a preliminary injunction, the Government will be compelled to present evidence. While its entire case will not be disclosed, in the typical case it will be forced to call witnesses to the stand who can be subjected to cross-examination. It may also be possible for the defendants to seek discovery depositions of these witnesses and others. In addition, documents will be made available by way of discovery.
Unfortunately for those defending against a preliminary injunction seeking to freeze assets, civil discovery is not a one-way street. The Government may attempt to seek discovery from the defendants. However, because the time set for hearing, particularly if an ex parte TRO has been granted, is usually so short (within 10 days, pursuant to Rule 65, Fed. R. Civ. P.), it will be difficult for the Government to force much discovery. The Government bears the burden of proof at the hearing, and thus will typically have to provide discovery first. However, the Government may very well be in the position of calling the provider or the provider's employees to testify at the hearing on the preliminary injunction. While such an individual but not a corporate defendant has a fifth amendment privilege, and should certainly exercise it if he or she is indeed a target of an ongoing criminal investigation, it is possible, if not likely, that the invocation of the fifth amendment could be used against an individual in the civil proceeding.
As a practical matter, it is often possible for a defendant to agree to a freeze of sufficient assets to provide the Government with enough security so that it is confident that in the event of a successful criminal prosecution, there will be funds available to make restitution. Whether a defendant should agree to do so prior to gaining the discovery advantages which may result from an evidentiary hearing will typically be decided on a case by case basis, with a defendant having to evaluate the financial cost of going forward with an evidentiary hearing, the risk to the defendant from the Government's potential ability to take discovery, and the potential prejudice to the defendant from having the judge who may ultimately sentence that defendant hearing evidence with regard to a possible preliminary injunction.