THE FEDERAL FRAUD INJUNCTION STATUTE

A REVIEW FOR HEALTH CARE FRAUD LAWYERS, BANK FRAUD ATTORNEYS

& SECURITIES FRAUD LAW FIRMS

The health care fraud, bank/mortgage fraud and securities fraud practitioner should be aware of
the Fraud Injunction Statute, 18 U.S.C. § 1345, which permits the federal government to file a
civil action to enjoin the commission or imminent commission of a federal health care offense,
bank fraud offense and other offenses under Title 18, Chapter 63 (Mail Fraud and Other Fraud
Offenses). A court may freeze the assets of persons or entities who have obtained property as a
result of a past or ongoing federal bank fraud, health care fraud, securities fraud, or other covered
federal fraud offense. This statutory authority to restrain fraudulent conduct and to freeze a
defendant’s assets is powerful tool in the federal government’s arsenal for combating fraud. The
Fraud Injunction Statute has not been widely used by the federal government in the past in
connection with its prosecution of health care fraud, bank and mortgage fraud and securities
fraud cases, however, when an action is filed by the government, it can have a tremendous effect
on the outcome of a health care fraud, bank/mortgage fraud, securities fraud case. Health care
fraud lawyers, bank and mortgage fraud attorneys, and securities fraud law firms must
understand that when a defendant’s assets are frozen, the defendant’s ability to maintain a
defense can be fundamentally impaired. The white collar criminal defense attorney should advise
his health care fraud, bank fraud, mortgage fraud and securities fraud clients that parallel anti-
fraud injunctive proceedings can be brought simultaneously with a criminal fraud indictment.

The provisions of 18 U.S.C. § 1345 provide that the U.S. Attorney General may commence a
civil action in any Federal court to enjoin a person from (A) violating or about to violate 18
U.S.C. §§ 287, 1001, 1341-1351, and 371 (involving a conspiracy to defraud the United States or
any agency thereof), (B) committing or about to commit a banking law violation, or (C)
committing or about to commit a Federal health care offense. The Fraud Injunction Statute
further provides that the U.S. Attorney General may obtain an injunction (without bond) or
restraining order prohibiting a person from alienating, withdrawing, transferring, removing,
dissipating, or disposing property obtained as a result of a banking law violation or a federal
health care offense or property which is traceable to such violation. The court must proceed
immediately to a hearing and determination of any such action, and may 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 or to any person or class of persons for whose protection
the action is brought. Generally, a proceeding under the Fraud Injunction Statutes is governed
by the Federal Rules of Civil Procedure, except when an indictment has been returned against the
defendant, in which such case discovery is governed by the Federal Rules of Criminal Procedure.

The government successfully invoked the Fraud Injunction Statute in the federal health care
fraud case of United States v. Bisig, et al., Civil Action No. 1:00-cv-335-JDT-WTL (S.D.In.).
The case was initiated as a qui tam by a Relator, FDSI, which was a private company engaged in
the detection and prosecution of fraudulent billing practices and other types of Medicaid fraud
hired by the State of Indiana and given access to Indiana's Medicaid billing database. After
investigating co-defendant Home Pharm, FDSI filed a qui tam action in February, 2000, pursuant
to the civil False Claims Act, 31 U.S.C. §§ 3729, et seq. The government soon joined FDSI's
investigation of Home Pharm and Ms. Bisig, and, in January, 2001, the United States filed an
action under the Fraud Injunction Statute, 18 U.S.C. § 1345, to enjoin the ongoing criminal fraud
and to freeze the assets of Home Pharm and Peggy and Philip Bisig. In 2002, an indictment was
returned against Ms. Bisig and Home Pharm. In March, 2003, a superseding indictment was filed
in the criminal prosecution charging Ms. Bisig and/or Home Pharm with four counts of Health
Care Fraud in violation of 18 U.S.C. § 1347, one count of Unlawful Payment of Kickbacks in
violation of 42 U.S.C. § 1320a-7b(b)(2)(A), and one count of mail fraud in violation of 18
U.S.C. § 1341. The superseding indictment also asserted a criminal forfeiture allegation that
certain property of Ms. Bisig and Home Pharm was subject to forfeiture to the United States
pursuant to 18 U.S.C. § 982(a)(7). Pursuant to her guilty plea agreement, Ms. Bisig agreed to
forfeit various pieces of real and personal property that were acquired by her personally during
her fraud scheme, as well as the assets of Home Pharm. The United States seized about
$265,000 from the injunctive action and recovered about $916,000 in property forfeited in the
criminal action. The court held that the relator could participate in the proceeds of the recovered
assets because the relator’s rights in the forfeiture proceedings were governed by 31 U.S.C. §
3730(c)(5), which provides that a relator maintains the "same rights" in an alternate proceeding
as it would have had in the qui tam proceeding.

A key issue when the Fraud Injunction Statute is invoked is the scope of the assets which may be
freezed. Under 18 U.S.C. § 1345(a)(2), the property or proceeds of a federal health care offense,
bank fraud offense or securities fraud offense must be “traceable to such violation” in order to be
freezed. United States v. DBB, Inc., 180 F.3d 1277, 1280-1281 (11th Cir. 1999); United States
v. Brown, 988 F.2d 658, 664 (6th Cir. 1993); United States v. Fang, 937 F.Supp. 1186, 1194
(D.Md. 1996) (“All courts which have addressed the issue suggest that any assets to be frozen
must in some way be traceable to the allegedly illicit activity”); United States v. Quadro Corp.,
916 F.Supp. 613, 619 (E.D.Tex. 1996) (court may only freeze assets which the government has
proven to be related to the alleged fraud). Even though the government may seek treble damages
against a defendant pursuant to the civil False Claims Act, the amount of treble damages and
civil monetary penalties does not determine the amount of assets which may be frozen. Again,
only those proceeds which are traceable to the criminal offense may be frozen under the statute.
United States v. Sriram, 147 F.Supp.2d 914 (N.D.Il. 2001).

The majority of courts have found that injunctive relief under the statute does not require the
court to make a traditional balancing analysis under Rule 65 of the Federal Rules of Civil
Procedure. Id. No proof of irreparable harm, inadequacy of other remedies, or balancing of
interest is required because “passage of the statute is, in a sense, an implied finding that
violations will harm the public and ought, if necessary, be restrained.” Id. The government
need only prove, by a preponderance of the evidence standard, that an offense has occurred. Id.
However, other courts have balanced the traditional injunctive relief factors when faced with an
action under the Fraud Injunction Statute. United States v. Hoffman, 560 F.Supp.2d 772
(D.Minn. 2008). Those factors are (1) the threat of irreparable harm to the movant in the absence
of relief, (2) the balance between that harm and the harm that the relief would cause to the other
litigants, (3) the likelihood of the movant's ultimate success on the merits and (4) the public
interest, and the movant bears the burden of proof concerning each factor. Id. ; United States v.
Williams, 476 F.Supp2d 1368 (M.D.Fl. 2007). No single factor is determinative, and the primary
question is whether the balance of equities so favors the movant that justice requires the court to
intervene to preserve the status quo until the merits are determined. If the threat of irreparable
harm to the movant is slight when compared to likely injury to the other party, the movant carries
a particularly heavy burden of showing a likelihood of success on the merits. Id.

In the Hoffman case, the government presented evidence of the following facts to the court:

• Beginning in June 2006, the Hoffman defendants created entities to purchase apartment
buildings, convert them into condominiums and sell the individual condominiums for sizable
profit.

• To finance the venture, the Hoffman defendants and others fraudulently obtained mortgages
from financial institutions and mortgage lenders in the names of third parties, and the Hoffmans
directed the third party buyers to cooperating mortgage brokers to apply for mortgages.

• The subject loan applications contained multiple material false statements, including inflation
of the buyers' income and bank account balances, failure to list other properties being purchased
at or near the time of the current property, failure to disclose other mortgages or liabilities and
false characterization of the source of down payment provided at closing.

• The Hoffman defendants used this method from January to August 2007 to purchase over 50
properties.

• Generally, the Hoffmans inherited or placed renters in the condominium units, received their
rental payments and then paid the rent to third-party buyers to be applied as mortgage payments.
The Hoffmans and others routinely diverted portions of such rental payments, often causing the
third-party buyers to become delinquent on the mortgage payments.

• The United States believe that the amount traceable to defendants' fraudulent activities is
approximately $5.5 million.

While the court recognized that the appointment of a receiver was an extraordinary remedy, the
court determines that it was appropriate at the time. The Hoffman court held that “due to the
complex financial structure of defendants' holdings, involvement of third-party renters and straw
buyers and the possibility of legitimate business coexisting with fraudulent schemes, the court
finds that a neutral party is best equipped to organize and administer the various holdings at issue
in this action. Further, because the fraud alleged involves rent skimming and potential
foreclosures, there is a danger of continuing harm to property interests that necessitates
intervention.” Id.

Like other injunctions, the defendant subject to an injunction under Fraud Injunction Statute is
subject to contempt proceedings in the event of a violation of such injunction. United States v.
Smith, 502 F.Supp.2d 852 (D.Minn. 2007) (defendant found guilty of criminal contempt for
withdrawing money from a bank account that had been frozen under 18 U.S.C. § 1345 and
placed under a receivership).

If the defendant prevails in an action filed by the government under the Fraud Injunction Statute,
the defendant may be entitled to attorney’s fees and costs under the Equal Access to Justice Act
(EAJA). United States v. Cacho-Bonilla, 206 F.Supp.2d 204 (D.P.R. 2002). EAJA allows a
court to award costs, fees and other expenses to a prevailing private party in litigation against the
United States unless the court finds that the government’s position was “substantially justified.”
28 U.S.C. § 2412(d)(1)(A). In order to be eligible for a fee award under the EAJA, the defendant
must establish (1) that it is the prevailing party; (2) that the government's position was not
substantially justified; and (3) that no special circumstances make an award unjust; and the fee
application must be submitted to the court, supported by an itemized statement, within 30 days of
the final judgment. Cacho-Bonilla, supra.

Health care fraud attorneys, bank and mortgage fraud law firms, and securities fraud lawyers
should be cognizant of the government’s authority under the Fraud Injunction Statute. The
federal government’s ability to file a civil action to enjoin the commission or imminent
commission of federal health care fraud offenses, bank fraud offenses, securities fraud offenses,
and other offenses under Chapter 63 of Title 18 of the United States Code, and to freeze a
defendant’s assets can dramatically change the course of a case. While the Fraud Injunction
Statute has been infrequently used by the federal government in the past, there is a growing
recognition by federal prosecutors that health care fraud, bank and mortgage fraud and securities
fraud prosecutions can be more effective when an ancillary action under the Fraud Injunction
Statute is instigated by the government. Health care fraud lawyers, bank and mortgage fraud
attorneys, and securities fraud law firms must understand that when a defendant’s assets are
frozen, the defendant’s ability to maintain a defense can be greatly imperiled.

© 2010 Joseph P. Griffith, Jr.

Joseph P. Griffith, Jr.

SC Health Care Fraud Attorney
SC Bank-Mortgage Fraud Lawyer
SC Securities Fraud Law Firm
SC Qui Tam-Whistleblower Attorney
Joe Griffith Law Firm, LLC
7 State Street
Charleston, South Carolina 29401
(843) 225-5563
http://www.joegriffith.com

South Carolina Attorney Joe Griffith is a former SC federal prosecutor who handles white collar
criminal defense health care fraud cases, bank and mortgage fraud cases, securities fraud cases,
and False Claims Act qui tam whistleblower cases in South Carolina and the United States.

© 2010 Joseph P. Griffith, Jr.