WASHINGTON (Legal Newsline) - The Trump Justice Department, following a tougher policy toward dubious False Claims Act lawsuits by private citizens, has moved to dismiss a pair of lawsuits by a former hedge-fund manager who shorted stock in pharmaceutical companies he accused of a wide-ranging price-fixing conspiracy.
In qui tam lawsuits filed in 2014 and 2015, Dr. John Borzelleri, a physician-turned-securities analyst, sketched out a complicated scheme under which drug manufacturers like AbbVie, Amgen, Novartis and Pfizer paid excessive “service fees” to pharmacy benefit managers including Aetna, CVS and ExpressScripts to keep prices artificially high.
Borzelleri had no special qualifications to make his allegations, as he didn’t work in the industry or have any insider information. But at some time after he filed the suits, Borzelleri shorted the stock of the target companies in a fund he was running for Boston money manager GRT Capital Partners, making an aggressive financial bet the value of those shares would fall after his allegations became public.
The government investigated Borzelleri’s claims but decided they weren’t worth pursuing, and the lawsuits were unsealed on April 4 and on April 17, 2018. Days later, GRT, now named Shepherd Kaplan Krochuk, fired Borzelleri and then sued him, accusing him of violating the firm’s code of ethics with his trading activity.
The Justice Department moved to dismiss Borzelleri’s lawsuits in December after learning of the litigation with his former employer, saying “the Government has scant confidence that he will serve the sole interests that the FCA exists to vindicate: those of the United States, not his own.”
Not only did Borzelleri make extensive efforts to interest the New York Times and other outlets in his allegations as early as 2013, emails show, but he sent emails to dozens of news outlets and financial analysts after his complaints were unsealed in an attempt to publicize his allegations against the companies he had sued.
“While the FCA provides a financial incentive for relators in the form of a share of the Government’s recovery in litigation, it is not intended to be used as a lever to further private financial dealings by a whistleblower,” the Justice Dept. said in its Dec. 21 motion to dismiss.
“In this case, the Government finds these allegations sufficiently concerning that, combined with the other factors discussed above, it does not believe Relator should proceed as the representative of its interests in litigation.”
Under the FCA, would-be whistleblowers must file a lawsuit under seal while the government investigates their claims and decides whether to support the case. If the government declines, so-called relators can still pursue their claims.
Given the prospect of treble damages, even marginal FCA suits can generate large settlements – and bounties of up to 30% for the whistleblower, plus fees for their lawyers. But the law also empowers the government to seek dismissal if the lawsuits are unfounded or work at cross-purposes with government goals.
The Justice Department formalized a tougher stand against dubious FCA suits with the Granston memo last January, urging prosecutors to dismiss “meritless” and “parasitic” qui tam lawsuits designed primarily to enrich the relators. In one of the highest-profile examples of this new approach, Justice has moved to dismiss a series of lawsuits by Health Choice Group, an entity created by Wall Street financiers and lawyers specifically to file qui tam cases against the pharmaceutical industry.
In another case in which the government didn’t directly intervene, a competitor of Trinity Industries filed qui tam lawsuits against the Texas company accusing it of selling defective highway guardrails. A federal court jury in Texas awarded $663 million in damages, even after the government informed the court it was still buying the guardrails and disputed claims they were defective.
The U.S. Court of Appeals for the Fifth Circuit reversed the decision in 2017, noting the relator, Joshua Harmon, not only had been sued for patent infringement by Trinity but had tried to raise money for his own company by describing a $1 billion opportunity for replacing guardrails after Trinity’s were determined to be defective.
Borzelleri’s case presents similar potential conflicts of interest. In court filings, Borzelleri acknowledged making “modest short positions” against companies he sued in a $10 million fund he managed. But he was coy when asked directly by the Justice Department if he shorted stock when he knew the government wasn’t supporting his lawsuits and they would soon go public.
“Regarding DOJ’s specific request about trading information (between March 8 and April 13, 2018), we are unable to provide it as it will only be available from SKK,” he said. He also said he “voluntarily avoided trading in any of the qui tam-related stocks in his fund for nearly two full years after filing his first case in Rhode Island in January 2014, due to his unreciprocated hopes of assisting the DOJ investigation.”
“On several occasions, Dr. Borzelleri offered to close his investment fund and assist DOJ gratis with its investigation,” he wrote.
Reached via email, Borzelleri said he was “hesitant to discuss the cases beyond the court documents.” Once represented by outside attorneys, he is now pursuing the cases on his own. “I would hope that you would take a balanced approach in any article,” he said.