Illinois AG Wants Limits on Whistleblower Actions

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Michael J. Bologna Chicago Staff Correspondent Ryan C. Tuck Washington Deputy News Director

By Michael J. Bologna

Illinois Attorney General Lisa Madigan (D) said courts should only in “rare circumstances” permit whistleblowers to act as their own counsel and collect both attorneys’ fees and bounties for frauds against the state.

To find otherwise, Madigan wrote in a friend-of-the-court brief filed with the Illinois Supreme Court March 21, risks distorting the “golden mean” between fair incentives for whistleblowers and patterns of “parasitic or non-meritorious lawsuits.”

The blunt viewpoints surprised observers and raised questions about the viability of a litigation model pushed for 15 years by Chicago attorney Stephen B. Diamond, regarded as the most prolific tax whistleblower in the country.

Diamond, known to some as the “king of qui tam,” and his law firm Stephen B. Diamond P.C. have earned nearly $12 million filing approximately 1000 tax fraud lawsuits under the Illinois False Claims Act. A critical feature of Diamond’s model assumes paychecks for his tax recoveries as a relator and paychecks for his frequent trips to Cook County Circuit Court.

Madigan didn’t specifically address Diamond’s conduct, but she did express concerns about any FCA litigation model driven by a “law firm relator” motivated to gin up attorneys’ fees from minor tax violations.

“A law firm relator may have an incentive to bring a low-value lawsuit and engage in abusive discovery practices in hopes of obtaining a nuisance-value settlement that provides the relator with both a portion of the settlement and inflated attorneys’ fees,” the attorney general stated. “The result is that the prospect of an attorneys’ fee award may provide incentive for a relator law firm to bring a case regardless of the relative worth of the underlying false claim.”

Lost Attorneys’ Fees

In line with this view, Madigan called on the Supreme Court to uphold a June 2017 ruling from the Illinois Appellate Court that denied Diamond attorneys’ fees in an FCA claim against retailer My Pillow Inc.

The appeals court agreed Diamond had successfully demonstrated that My Pillow had failed to collect and remit tax on merchandise sold to Illinois customers from internet and telephone sales platforms. The court also affirmed the trial court’s award of $782,667 in the form of damages and penalties, with $266,891 reserved for Diamond as a bounty for bringing the case.

But the court stripped Diamond of $600,960 in the form of attorney fees, previously awarded by the trial court. The appeals panel held Diamond couldn’t achieve benefits in the litigation as both relator and attorney for the relator.

The My Pillow ruling was precedent-setting in the context of Diamond’s voluminous—and some would say abusive—pattern of tax litigation, potentially erasing a substantial portion of the rewards available to him. While hundreds of Diamond’s cases have either been settled or dismissed, dozens are being litigated, and new cases are being filed. Diamond recently announced in court he would file as many as 85 tax fraud claims against custom tailors based primarily in Hong Kong and the United Kingdom.

‘Rare Circumstances’

Madigan’s brief didn’t fully dismiss the possibility that an attorney or a law firm could act as both relator and counsel for the relator. But Madigan cautioned that these configurations should be “rare.”

“In rare circumstances, attorneys working at a relator law firm may be sufficiently independent from the relator to be entitled to attorneys’ fees, but in each case the court should scrutinize the relationship of the firm’s attorneys to the relator to determine whether sufficient independence exists,” the attorney general wrote. “For instance, where the individual lawyers who conducted the investigation that led to the filing of the case had no role in the subsequent litigation of the case and were not part of the leadership of the firm, sufficient independence may be established.”

Catherine A. Battin, a partner with McDermott Will & Emery in Chicago and counsel to My Pillow, said she found the attorney general’s brief surprising after years of relative silence regarding Diamond’s courtroom strategies.

“We’ve never heard that officially from the AG’s office,” Battin told Bloomberg Tax. “They’ve never taken that position in writing, in litigation, or even orally before a court. We were thrilled and surprised they went that far.”

Battin, who authored a brief in the My Pillow case filed March 21, said the Supreme Court would likely show great deference for views expressed by the attorney general.

In a separate development, the Illinois Chamber of Commerce filed its own friend-of-the-court brief in the My Pillow litigation. The court hasn’t yet scheduled a date for oral arguments in the case.

Tony Kim, representing Diamond before the Supreme Court, said the “relator has no comment” on the attorney general’s brief.

Exposing Fraud

Diamond’s legal team argued for reversal of the appeals court’s ruling in a brief submitted to the Supreme Court in December 2017. Diamond said the My Pillow precedent endangers important features of the FCA that bring incidents of fraud against the state to the attention of the attorney general, capture revenue lost to the state due to fraud, and remedy fraudulent conduct on a going-forward basis.

In the context of his own pattern of approximately 1,000 FCA lawsuits alleging tax fraud since 2001, Diamond said he had “recovered more than $25 million for State coffers and, more significantly, produced a continuing revenue stream from hundreds of violators who agreed to start collecting taxes when they settled a case against them.”

The case is Illinois ex rel. Schad, Diamond & Shedden PC v. My Pillow, Inc. , Ill., No. 122487, friend-of-the-court brief filed 3/21/18 .

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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