Born in Civil War scandals, ‘Lincoln Law’ reaches 150 years as potent US fraud weapon

President Abraham Licoln, “Honest Abe” (Right) and Michigan Repbulican Senator Jacob Howard, “Honest Jake” (Left)

ACFCS is commemorating the 150th Anniversary of the False Claims Act with a tribute edition of Financial Crime 360 which includes a comprehensive history of the law, a profile of the Senator who proposed the bill and various infographics explaining statistics of FCA cases. This is the first part of a two-part series. Part 2 will be published on March 12.

Through all wars in which the blood of US soldiers has been shed, from the Civil War to the Iraq and Afghanistan wars, the False Claims Act has stood as a sentry against profiteering, corruption and fraud.

Enacted on March 2, 1863, at the height of the Civil War, and nicknamed the “Lincoln Law,” the False Claims Act has expanded its reach far beyond its original focus as a tool to combat war profiteering by providers of war material to the Union Army. Today, the law is applied extensively to many types of financial fraud perpetrated against government, including health care and mortgage fraud.

At its 150th anniversary, the False Claims Act (FCA) is stronger than ever. Cases brought under its provisions are now more frequent and collect more monetary recoveries than at any time in its history. Last year alone, the US Justice Department recovered nearly $5 billion in FCA lawsuits it pursued.

The FCA, which is not a criminal statute, has also served as a model for several states, which have adopted laws modeled on its provisions. Some states, such as California, have been increasingly aggressive in enforcing their “Little FCAs” in recent years.

The FCA, also known in its early days as the “Informer’s Act,” was not always the financial crime-fighting powerhouse it is today. Its long, tumultuous history shows roots that stretch back to the fires, corruption and intrigue of the US Civil War.

“Few lawmakers in 1863 could have predicted that the False Claims Act…would one day be applied to every department and agency of the federal government, and affect business practices in a large part of the nation’s commerce,” said Benjamin Vernia, attorney at The Vernia Law Firm in Washington D.C. Vernia has represented and currently represents qui tam cases under the FCA.

In midst of Civil War, US Congress exposed ‘mania’ for fraud

As the war raged in 1862, the Union Army was battling an internal threat nearly as dangerous as the Confederate forces arrayed against it. Desperate for materials and without a reliable supply chain, Lincoln’s Army faced an epidemic of fraud from profiteers who found easy targets in government contracts.

Prompted by outcries from Union Army officers and Lincoln administration civilian officials, the Select Committee on Government Contracts of the US House of Representatives launched an investigation into the abuses. Chaired by Congressman Charles Van Wyck, of New York, the Committee compiled an “immense volume” of documents revealing a stunning array of fraudulent acts by profiteering contractors.

The Committee’s findings were published in a multi-part exposé, which was covered in detail by the New York Times. Their reporting revealed contractors who sold sawdust-filled crates purporting to be ammunition, spoiled food rations, broken and obsolete rifles, and even lame mules and horses to the needy Union army at the apex of the War.

Some federal officials, such as the US Quartermaster, Brigadier General Montgomery C. Meigs, were implicated in the wrongdoing. The New York Times said evidence in the Committee report “left no doubt” in the minds of committee members that “the Quartermaster had colluded with corrupt and unprincipled men, who combined… to swindle the government” into purchasing overpriced, low quality mules and horses.

Van Wyck told the House of Representatives in 1862:

“The mania for stealing seems to have run through all the relations of the government- almost from the general to the drummer-boy…. Nearly every man who deals with the government seems to feel or desire that it would not long survive, and each had a common right to plunder…. Colonels, entrusted with the power of raising regiments, [were] colluding with contractors, bartering away and dividing contracts for horses and other supplies to enrich personal favorites, purchasing articles and compelling false invoices….”

Sen. ‘Honest Jake’ Howard, of Michigan, championed Senate bill 

In the wake of Van Wyck’s exposé, Senator Jacob Merritt Howard, Republican of Michigan, known as “Honest Jake,” proposed a bill to create “an act to prevent and punish frauds upon the government.”

President Lincoln is said to have supported the bill, saying, “Worse than traitors in arms are the men who pretend loyalty to the flag, feast and fatten on the misfortunes of the nation while patriotic blood is crimsoning the plains of the south and their countrymen are moldering in the dust.”

Learn more about Senator Howard here.

FCA established whistleblower provisions

The FCA instituted civil money penalties for fraudulent claims presented to the government. Under its so-called “qui tam” provision, it also allowed private citizens to file civil actions against persons who had submitted “a false or fraudulent claim for payment” to the US government. “Qui tam” is derived from the Latin phrase “qui tam pro domino rege quam pro se ipso in hac parte sequitur.” It means he “who sues on behalf of the king as well as himself.” The precept has deep roots in early British law.

In its modern-day application, once a citizen files an action against a fraudulent claimant, the US Department of Justice has 60 days to investigate and decide if it wishes to assume the case. Extensions of this time period may be granted. While it is under investigation, the case is kept under seal. Even if the government declines to take over a case, a private citizen may choose to pursue the case.

As compensation for citizens who help the government identify financial criminals, including fraudsters, the FCA authorizes that the private citizens, or “relators” as they are known in FCA terminology, to retain 50% of the money recovered. Under the original terms of the FCA, persons found liable of having submitted false claims, were required to pay twice the amount of damages caused by the fraud, as well as $2,000 for every false claim they submitted.

From the start, the FCA was used in a handful of cases, from a paymaster’s clerk accused of embezzlement on a Navy ship in 1869, to a private attorney who overcharged the US Treasury for legal services in 1871. The FCA was even used against fraudulent conduct that predated the Civil War. In 1885, a relator in an FCA case alleged that a supplier of military equipment used “false vouchers, rolls, etc.” and committed fraud against the US during the Oregon Indian war of 1854. But the law was not used popularly until the 1940s.

‘Parasitic’ FCA lawsuits brought qui tam clause into disrepute

The FCA resurfaced as a fraud-fighting weapon against military contractors during World War II. The contractors were not the only profiteers, however. Private citizens recognized the profits they could make under the qui tam clause and flocked to courthouses, waiting for the government to file a criminal case against a contractor. These sham relators would pounce on the opportunity and file civil qui tam cases, hoping to earn 50% of the recovery. These became known as “parasitic cases.”

These practices were brought to light by a 1943 “qui tam” suit brought by Morris L. Marcus against the Electrical Contractors Association, of Pittsburgh. The Association was found to have rigged the bidding on the federal Public Works Administration electrical jobs in Pittsburgh and was ordered to pay $315,000 in damages.

Before Marcus filed his case, the Association had been indicted for conspiring to defraud the government and fined in another criminal case for the same acts. As the “informer,” Marcus received half of the amount just for filing the suit.

Outraged by the misuse of the qui tam provision, Attorney General Francis Biddle asked Congress to remove the “qui tam” clause from the FCA. He pointed to the Electrical Contractors Association case as evidence that the FCA was being abused.

Congress adopted restrictions on the qui tam provision, thereby amending the FCA for the first time in its 80-year history. The amendments eliminated the possibility of “parasitic lawsuits.” At the same time, they also crippled the law’s effectiveness.

Amendments emasculated FCA

Under the 1943 amendments, if the government had prior knowledge of the act before a private citizen filed a civil case, the citizen’s case was rendered null and void. In addition, relators were required at the time they filed their lawsuit to produce all evidence in their possession.

If the Department of Justice pursued the case, the relator could only receive a maximum of 10% of the damages recovered. If the US declined to pursue the case and the relator pursued it individually, the reward rose to 25% of the amount recovered. In all cases, the court had the final say and could choose to lessen or eliminate the recovery of the private citizen.

The 1943 amendments essentially crushed the effectiveness of qui tam suits by private citizens, which had been the heart and soul of the Act. The law went virtually unused for more than 40 years after these amendments. It took another war and fresh scandals to revive the Lincoln Law.

Read part 2 of this article in next week’s Financial Crime 360!