The Honorable Chuck Grassley

United States Senator
Iowa
January 26, 2011

Prepared Statement of Ranking Member Chuck Grassley
U.S. Senate Committee on the Judiciary
Hearing on "Protecting American Taxpayers: Significant Accomplishments and Ongoing Challenges in the Fight Against Fraud"
Wednesday, January 26, 2011

Mr. Chairman, thank you. This committee has a lot of work to do. And, our work could not come at a more critical time for our country. Every move we make must take a painstaking look at the fiscal realities of our time, the constitutional responsibilities we hold, and the will and desires of the American people we represent. I'll have more to say tomorrow at our first mark-up, but I look forward to working with you as we move this committee forward in a productive manner, consistent with our relationship over the years.

Today's hearing is a good way to start my time as Ranking Member of the Judiciary Committee. Fighting fraud is something we've worked on together over many years in the Senate. I'm glad to be in this chair as we begin the 112th Congress and focus on continued efforts to protect federal tax dollars from fraud. As the author of the 1986 amendments to the federal False Claims Act, which have recovered nearly $28 billion back to the taxpayer, I've spent a great deal of my time in the Senate working to combat fraud against taxpayers. I welcome the opportunity to begin this Congress on such an important issue.

Combating fraud is not a partisan issue. It is an American taxpayer issue and one every Senator and member of Congress should focus on. However, given the current fiscal condition of the federal government, combating fraud has become more important than ever. As Congress looks for ways to cut federal spending and reevaluates which federal programs are worthy of hard earned taxpayer funds, we need to be cognizant that every dollar lost to fraud is a dollar of funding siphoned away from legitimate programs. This is especially important given the significant government expenditures in the last few years including the President's trillion dollar stimulus funding, the AIG bailout, auto industry bailout, conservatorship of Fannie Mae and Freddy Mac, and the Troubled Asset Relief Program (TARP).

In an effort to better understand the vulnerabilities that exist and efforts to combat fraud, this Committee held a number of hearings focusing on various types of fraud. Those hearings were helpful in flushing out some of the problems that existed and highlighted where gaps in the law limited the government's ability to recoup taxpayer money and bring fraudsters to justice. These hearings played an important part in helping Chairman Leahy and me craft the Fraud Enforcement and Recovery Act of 2009 which was signed into law with bi-partisan support of both the House and Senate. The Fraud Enforcement Recovery Act addressed a number of problems with the federal criminal code related to mortgage and securities fraud. It also overturned a number of court decisions that limited the scope and applicability of the False Claims Act. Additionally, the Fraud Enforcement and Recovery Act provided a temporary increase in funding to the Justice Department, the Federal Bureau of Investigation, the Securities and Exchange Commission, the U.S. Secret Service, and other agencies, to combat fraud. Today's hearing offers another opportunity to follow-up on the Justice Department's implementation of the Fraud Enforcement and Recovery Act and to ask questions to help us determine what is and isn't working.

First, I would like to talk about health care fraud and the False Claims Act. The federal False Claims Act remains one of the most important statutes for fraud recovery utilized by the federal government. Since 1986 when it was amended, the False Claims Act has recovered over $28 billion and it has prevented countless billions of fraud that others would have attempted. The False Claims Act's qui tam whistleblower provisions have been among the most successful elements of the Act. This year alone, the Department brought in $3 billion in recoveries under the False Claims Act, with $2.5 billion from health care fraud cases alone. Of the $3 billion in recoveries, nearly $2.4 billion was the result of cases filed by qui tam whistleblowers who courageously came forward and risked their livelihoods to bring fraudsters to justice. While this civil recovery is a great victory in the fight against fraud, it represents a small fraction of the actual estimated fraud in federal health care programs.

For example, in fiscal year 2009, the federal government spent $502 billion on Medicare and $379 billion on Medicaid. The general estimate for fraud in Medicare and Medicaid is between 5 and 8 percent. So, while recovering $2.5 billion is a significant win, it represents a mere fraction of the estimated $40-70 billion in health care fraud. To address the significant amount of fraud, I wrote to Attorney General Holder and Secretary Sebelius late last year raising my concerns with health care fraud enforcement and the falling number of criminal prosecutions. I received a response to my letter late Monday evening--which I'll note, came after the Department released the information publicly.

While it would have been nice to have an opportunity to review the information before a public release, the letter does answer a number of my questions. It appears that the new data for fiscal 2010 shows a marked improvement in efforts to fight fraud. Civil recoveries, criminal investigations, prosecutions and convictions are all increasing. However, I want to ask Mr. Breuer about why some of the information included in the response is not included in the annual Health Care Fraud and Abuse Control Account reports.

For example, the public data available does not include the number of defendants in closed cases or a final conviction rate for health care fraud defendants. I want to know why the Department of Justice has traditionally avoided making this information public and whether they will consider adding it in the future. I also want to ask about funding for the Department and whether the discretionary money Congress appropriated under the Health Care Fraud and Abuse Control program has been helpful to the Justice Department, as this accounts for most of the funding for the Health Care Fraud Prevention & Enforcement Action Team strike forces. I am especially interested because nearly 75 percent of that discretionary money, $251 million out of $311 million, goes to the Centers for Medicare and Medicaid Services for vague initiatives labeled "oversight". I want to hear whether the Department of Justice thinks this money is going to good use or could be better spent elsewhere.

Additionally, the letter sought information from the Justice Department regarding settlements it reached under the False Claims Act. Year after year, the Department holds this information close to the vest, only releasing it reluctantly when asked. The information is helpful to Congress in conducting oversight to determine if the law is being faithfully executed and that taxpayers are getting the best deal possible. For years, I've been concerned that settlements under the False Claims Act are simply becoming the cost of doing business for these large corporate fraudsters. The only way we can tell if taxpayers are getting a good deal is to request these numbers annually and review them. However, because there is no statutory obligation to report the details, we often have to wait weeks, months, or sometimes years to get this information in response to questions for the record. That sort of delay is unacceptable. So, I'll be introducing legislation this Congress that will require the Attorney General to annually report details about False Claims Act settlements to Congress. This is a straightforward piece of legislation that simply builds upon the longstanding effort Chairman Leahy and I have undertaken to bring sunlight and transparency to the Department.

I also want to ask the witnesses about the role the Department of Justice plays in combating securities fraud and efforts to bring accountability and integrity to Wall Street. In the past couple of years, the American people have become the backstop for all sorts of wrongdoing and malfeasance on Wall Street. Whether it is the taxpayer funded bailout of AIG, the TARP bailouts of major banks, or the conservatorship of Fannie and Freddie, American taxpayers have become Wall Street's safety net. I want to ask the witnesses about some high profile settlements that the Securities and Exchange Commission has signed off on in the last year. Specifically, I want to know what the Justice Department knew about these settlements in advance and whether they signed off on them or otherwise agreed to them. For example, I want to know what level of involvement the Department played in the Securities and Exchange Commission's settlement with Citibank in response to allegations the bank misled investors about the bank's outstanding liability for mortgage backed securities. The Securities and Exchange Commission agreed to settle with the bank for $75 million and two executives agreed to pay $100,000 and $80,000. A U.S. District Court Judge questioned this settlement stating that the settlement did very little to assure that senior management who were responsible would feel any pain.

In another recent example, the Securities and Exchange Commission settled fraud allegations with investment firm Goldman Sachs for $550 million and a promise to remedy its offering process and create a new training program. This settlement seems very small considering a prominent law professor said the allegations were very severe and that it wasn't impossible criminal charges would follow. This settlement represented only 4 percent of Goldman Sachs yearly profits. I want to know what role the Justice Department had in this case and why it chose not to file criminal charges. It seems to me that these civil settlements are similar to health care settlements and that fraud by large entities may simply be the cost of doing business passed on to consumers.

I'd also like to learn more about why so many of these complex financial fraud cases seem to end in settlements where the shareholders are punished, and yet there are so few ending in criminal prosecutions where the senior executives are held accountable. How much coordination and communication is there between senior Justice Department officials and the Securities and Exchange Commission on the decision to settle these cases?

Time permitting, I'd like to ask about mortgage fraud and some questions about proposals to amend the Foreign Corrupt Practices Act. I have concerns about decisions by some U.S. Attorneys not to pursue complex mortgage fraud cases. Additionally, I have some questions about way the Financial Fraud Enforcement Task Force is operating and how mortgage fraud prosecutions and investigations are coordinated among various federal law enforcement partners. With regard to the Foreign Corrupt Practices Act, the Committee held a hearing on this topic in November and a number of proposed modifications to the statute were discussed. I want to hear from the Justice Department what it thinks of some of these proposals.

Finally, Mr. Chairman, I'd like to note that regardless of the substantive laws we pass, the investigative and law enforcement resources appropriated, and the prosecutions brought so far, criminal fraud will not be adequately deterred unless we revisit the Supreme Court's decision in United States v. Booker. In that case, the Supreme Court held that mandatory Sentencing Guidelines violated the Sixth Amendment. Now that the Guidelines have been held to be merely advisory, the disparity and unfairness in judicially imposed sentences that we sought to eliminate on a bipartisan basis are returning, especially in two areas: child pornography and fraud cases of the type we are discussing today. If potential fraudsters view the lenient sentences now being handed down as merely a cost of doing business, efforts to combat criminal fraud could be undermined.

Supporting this position is a Reuters analysis of 15 insider trading cases that were brought by the United States Attorney in New York in 2009 and 2010, which concluded that in 13 of them, or 87 percent, the sentences imposed were lighter than the terms prescribed by the Sentencing Guidelines, and seven, nearly half, contained no prison term. By contrast, in other cases, New York federal judges issued sentences below those called for in the guidelines 57 percent of the time, in itself a shocking change from the system that the Sentencing Reform Act of 1984 created until the Supreme Court's Booker decision. Nationwide, 42 percent of all federal sentences were below the guidelines. Federal judges often seem not to understand the seriousness of these crimes. At one sentencing proceeding in an insider trading case, Judge Alvin Hellerstein said, "[T]here are no victims in this crime, at least not in any real sense." Rather than imposing a sentence in keeping with the guidelines of 37 to 46 months, he noted that the defendant was an accomplished academic with an autistic son, and gave three years' probation. Most of the defendants who received lenient sentences did not cooperate with the government. As a result, defense lawyers are now arguing that to avoid disparity, their non-cooperating insider trading clients should also receive sentences below the guidelines.

I appreciate the opportunity to raise these important issues today with the witnesses and look forward to working with the Chairman, and all my colleagues on the Committee in the 112th Congress. Thank you.