Private Equity Investors at Risk: A New Defendant in False Claims Act Cases?
As a generally held principle, mere investment or ownership interest in a company does not expose the investor to liability for acts undertaken by the company. However, that principle is being called into question in the context of private equity firms investing in healthcare companies. In two recent cases, healthcare companies along with their sole or majority private equity firm owners settled False Claims Act (“FCA”) cases. These cases illustrate the risk that private equity investors in the healthcare space may face under the FCA, particularly to the extent that they actively manage their portfolio companies.
On July 21, 2021, the Department of Justice announced that Alliance Family of Companies LLC (“Alliance”), a national electroencephalography (“EEG”) testing company based in Texas, paid $13.5 million to resolve allegations that it submitted false claims that resulted from kickbacks to referring physicians or that sought payment for work not performed or for which only a lower level of reimbursement was justified. In addition to Alliance settling, Texas-based private investment company Ancor Holdings LP (“Ancor”) paid $1.8 million for causing false billings resulting from the kickback scheme through its management agreement with Alliance. The United States alleged in the case that Ancor learned of the kickbacks based on due diligence it performed prior to investing in Alliance and then caused false claims by allowing that conduct to continue once it entered into an agreement to manage Alliance.
On October 14, 2021, relator’s counsel announced a settlement in a case in which the Department of Justice had declined to intervene. The relator’s attorney announced that private equity firm H.I.G. Growth Partners, LLC, and H.I.G. Capital, LLC (“HIG”) and two executives of a HIG subsidiary that owned South Bay Mental Health Center, Inc. (“South Bay”) in Massachusetts, agreed to pay a total of $25 million to settle an FCA lawsuit alleging they caused fraudulent billing to Medicaid for mental health services provided by unlicensed, unqualified, and improperly supervised mental health counselors at South Bay. South Bay had previously settled its portion of the case. The settlement follows a ruling in May where the trial judge denied the HIG defendants’ motions for summary judgment, allowing the case to go forward to trial had it not settled. The court found that there were disputes of material facts – the standard required to deny a motion for summary judgment – where there was evidence that the private equity group had information about South Bay’s non-compliance with certain Medicaid regulations from due diligence when it made its investment in South Bay. Additionally, principals of the private equity firm were on the board of the portfolio company that owned and operated South Bay. As such, they had the power to address and rectify any regulatory violations but allegedly did not.
These settlements illustrate the potential risk private equity funds may have when they invest in healthcare companies and undertake some level of active management of the portfolio companies, including becoming aware of regulatory violations and failing to act to rectify them.
- Aaron M. Danzig