False Claims Act Complaint — U.S. ex rel. Lesko v. LaFontaine Management, Inc. (E.D. Mich.)
Summary
A False Claims Act Complaint filed 12/08/23 as ECF No. 1 in United States of America ex rel. Patricia Lesko and Bram Lesko v. LaFontaine Management, Inc., Case 2:23-cv-13130-MFL-KGA, Civil Action No. 23-13130, U.S. District Court for the Eastern District of Michigan, marked Filed Under Seal under 31 U.S.C. § 3730(B)(2), with a jury trial demanded. The complaint alleges that the Defendant violated the False Claims Act by certifying that it was eligible to receive a Paycheck Protection Program (PPP) loan and knowingly concealing facts in order to receive forgiveness of the loan. It states that Defendant is alleged to be liable for the amount of PPP funds received for which it was ineligible, the loan forgiveness received over the initial loan, and the loan processing fees paid by the SBA to a lender.
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“False Claims Act Complaint — U.S. ex rel. Lesko v. LaFontaine Management, Inc. (E.D. Mich.).”
Original at archive.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/court-filing-no-2-23-cv-13130-dkt-1-e-d-mich-b706e6fc6f/
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Case 2:23-cv-13130-MFL-KGA ECF No. 1, PageID.84 Filed 12/08/23 Page 1 of 21
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
UNITED STATES OF AMERICA, §
ex rel. PATRICIA LESKO AND §
BRAM LESKO, §
§ CIVIL ACTION NO. 23-13130
Plaintiff and Relators, §
§
vs. §
§
§ FILED UNDER SEAL
LAFONTAINE MANAGEMENT, §
INC. §
§ JURY TRIAL DEMANDED
Defendant. §
FALSE CLAIMS ACT COMPLAINT FILED UNDER SEAL
UNDER 31 U.S.C. § 3730(B)(2)
The United States of America ex rel. Patricia Lesko and Bram Lesko files
this action against Defendant LaFontaine Management, Inc. (“LaFontaine
Management”), and in support thereof alleges the following:
I. NATURE OF THE ACTION
1. This action arises out of Defendant’s violation of the False Claims
Act (the “FCA”) by certifying that it was eligible to receive a Paycheck
Protection Loan and knowingly concealing those facts in order to receive
forgiveness of its obligation to repay that loan. The certification and acts of
concealment were material facts relied upon by the Small Business
COMPLAINT 1
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Administration (“SBA”) in approving the loan application and loan forgiveness
application.
2. Defendant is liable for (1) the amount of PPP funds received by
LaFontaine Management for which it was ineligible; (2) the amount of loan
forgiveness received by LaFontaine Management over and above the amount of
the initial loan received; and (3) the loan processing fees paid by the SBA to a
Lender for the loan disbursed and forgiven due to the fraudulent conduct alleged
herein, as well as for the additional penalties enumerated in the False Claims
Act.
II. PARTIES
3. Relator Patricia Lesko is a United States citizen and a resident of
Michigan. She brings this action as an original source based upon direct and
unique information she has obtained based in part on her experience as an
investigative reporter. To her knowledge, the information contained herein has
not been publicly disclosed.
4. Relator Bram Lesko is a United States citizen and a resident of
Michigan. He brings this action as an original source based on direct and unique
information he has obtained in part due to his experience in working with
Defendant, its associated companies, and other automotive groups. To his
knowledge, the information contained herein has not been publicly disclosed.
COMPLAINT 2
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5. The United States is the real plaintiff in interest with respect to the
claims asserted in this matter. The defrauded loan programs are administered
and supervised by the Small Business Administration, an independent, cabinet-
level agency of the Federal Government.
6. Defendant LaFontaine Management, Inc., is a Michigan
corporation that was incorporated in 2005 and has its principal place of business
at 4000 W. Highland Rd., Highland, Michigan 48357. It may be served through
its registered agent, Michael T. LaFontaine Sr., at 4000 W. Highland Rd.,
Highland, Michigan 48357.
III. JURISDICTION AND VENUE
7. This Court has personal jurisdiction over Defendant as Defendant
has adequate minimum contacts with the State of Arizona.
8. This Court has jurisdiction over this action under 28 U.S.C. § 1331
and 31 U.S.C. §§ 3732(a) and 3730(b), which provide this Court with original
jurisdiction to hear a qui tam action. Relators are “original sources” and bring
this action in the name of the United States as contemplated by the FCA, 31
U.S.C. §§ 3729-33.
9. Venue is proper in this district because Defendant can be found in,
resides in, and/or transacts business in this judicial district. Moreover, acts
prohibited by 31 U.S.C.§ 3729 have been committed by Defendants in this
COMPLAINT 3
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judicial district, making venue proper under 28 U.S.C. § 1391(c) and 31 U.S.C.
§ 3732(a).
10. There has been no public disclosure of the “allegations or
transactions” in this Complaint, including in any criminal, civil, or
administrative hearing, nor in any congressional, administrative or General
Accounting Office or Auditor General’s report, hearing, audit, or investigation,
or in the news media. As detailed below, Relators have direct and personal
knowledge of such allegations and transactions. To the extent that any such facts
herein become public, Relators voluntarily provided disclosures of these
allegations and transactions to the United States pursuant to FCA requirements
prior to such public release or knowledge.
IV. FACTS
A. The CARES Act and PPP Loans
11. The Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) is a law intended to address the economic effects of the COVID-19
pandemic in the United States.
12. The CARES Act led to, among other things, the Paycheck
Protection Program (“PPP”). See CARES Act, No. 116-136 (March 27, 2020).
The PPP is a loan program that was designed to provide eligible small businesses
low-interest loans that would be guaranteed by the SBA with support from the
COMPLAINT 4
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Department of the Treasury.
13. The PPP provided small businesses with funds to pay up to 24
weeks of payroll costs, including benefits. While similar in most ways to existing
SBA loan programs, the CARES Act suspended the ordinary requirement that
borrowers must be unable to obtain credit elsewhere, as defined in the Small
Business Act. 15 U.S.C. § 632(h). The PPP section of the CARES Act also
expanded eligibility for SBA loans beyond the limitations of the Small Business
Act. 15 U.S.C. §§ 632, 636.
14. The following entities that were affected by COVID-19 were
eligible to apply for PPP funding:
a. Any small business concern that met SBA’s size standards (either the
industry-based size standard or the alternative size standard);
b. Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans
organization, or tribal business concern (sec. 31(b)(2)(C) of the Small
Business Act) with the greater of:
i. 500 employees, or
ii. That meets the SBA industry standard size if more than 500;
c. Any business with a NAICS code that begins with 72
(Accommodations and Food Services) that has more than one physical
location and employs less than 500 per location.
COMPLAINT 5
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15. The size of a business concern is determined under the SBA’s size
standards as they apply to the “concern whose size is at issue and all of its
domestic and foreign affiliates.” 13 C.F.R. § 121.301(f)(6).
16. An entity could also be eligible for a PPP loan as a small business
if, 1) as of March 27, 2020, the maximum tangible net worth of the business was
not more than $15 million and 2) the average net income of the business after
federal income taxes (excluding any carry-over losses) for the two full fiscal years
before the date of the application was not more than $5 million.
17. To apply for a PPP loan, entities submitted their First Draw
Borrower Application Form to a federally insured depository institution or
credit union, or a Farm Credit System, of their choice. That chosen lender
processed the applications and, if approved, funded the loans.
18. The SBA guaranteed 100% of the outstanding balance of these
loans, and this guarantee was backed by the full faith and credit of the United
States. 15 U.S.C. § 636(a)(2)(F).
19. The SBA also paid processing fees to each lender who funded PPP
loans. These processing fees were based on the size of the loan funded. For first
draw PPP loans, those fees were: five percent for loans up to $350,000; three
percent for loans between $350,000 and $2,000,000; and one percent for loans
of at least $2,000,000.
COMPLAINT 6
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20. Most loans made under the PPP have been forgiven. As of January
2023, NPR analyzed publicly available data and found that 92% of PPP loans,
including loans to companies with wealthy owners, had been forgiven. See
https://www.npr.org/2023/01/09/1145040599/ppp-loan-forgiveness, last
accessed on November 19, 2023.
21. To be eligible for loan forgiveness, PPP borrowers were required to
complete SBA Form 3508, 2508S, or 3508EZ to calculate eligible payroll and
nonpayroll costs that qualified to be forgiven. To achieve forgiveness of their
loans, borrowers were required to certify that the amount for which forgiveness
was requested:
a. Did not exceed the principal amount of the PPP loan;
b. Was used to pay business costs that were eligible for forgiveness
(payroll costs to retain employees; business mortgage interest
payments; business utility payments; covered operations expenditures;
covered property damages costs; covered supplier costs; or covered
worker protection expenditures);
c. Included all applicable reductions due to decreases in the number of
full-time equivalent employees and salary/hourly wage reductions;
d. Included payroll costs equal to at least 60% of the forgiveness amount;
and
COMPLAINT 7
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e. For any owner-employee with an ownership stake of 5% or more, or
any self-employed individual or general partner, did not exceed more
than 2.5 months’ worth of compensation received during the year used
to calculate the loan amount, capped at $20,833 per individual in total
across all businesses.
Paycheck Protection Program Loan Forgiveness Application Form 2508,
Revised July 30, 2021.
22. Borrowers were further required to certify that they submitted all
required documentation to their Lender, verifying payroll costs, the existence of
obligations and service prior to February 15, 2020, and eligible business
mortgage interest payments, rent or lease payments, and utility payments. Id.
23. Finally, borrowers were not entitled to forgiveness of a PPP loan
unless they certified that all information provided in the loan application,
supporting documents, and other forms was true and correct in all material
respects. Id.
B. SBA Limitations on Affiliation and Loan Eligibility with Exceptions
24. To apply for a PPP loan, all applicants were required to submit SBA
Form 2483, which required the applicant to indicate “yes” or “no” to the
question, “Is the Applicant or any owner of the Applicant an owner of any other
business, or have common management with any other business? If yes, list all
COMPLAINT 8
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such businesses and describe the relationship on a separate sheet identified as
addendum A.” SBA Form 2483, “Paycheck Protection Program Borrower
Application Form” (April 2020).
25. SBA explained that “applicants in SBA’s Business Loan Programs
(which include the PPP) are subject to the affiliation rule contained in 13 CFR
§ 121.301.” SBA Interim Final Rule “Business Loan Program Temporary
Changes; Paycheck Protection Program.” 85 Fed. Reg. 20,819 (April 15, 2020).
26. Under the relevant provisions of the Code of Federal Regulations,
entities that have the power to control another are affiliates of one another.
Entities that are controlled by the same third party are affiliates of each other
and of the third party. 13 CFR § 121.301(f).
27. Moreover, if a principal of one entity controls the management of
another, or if a single individual controls the management or Board of Directors
of multiple entities, those entities are affiliates of one another. 13 CFR §
121.301(f)(3).
28. The CARES Act waived the § 121.301 affiliation provisions for a
limited category of business concerns: 1) businesses in the Accommodation and
Food Services sector as determined by their North American Industry
Classification System (NAICS) code, 2) businesses operating as a franchise that
has been assigned a franchise identifier code by the SBA, and 3) businesses
COMPLAINT 9
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receiving financial assistance from a licensed Small Business Investment
Company (SBIC). 15 U.S.C. § 636(a)(36)(D)(iv).
29. On the PPP Loan Borrower Application Form, the loan applicant
must indicate whether or not it is a franchise listed in the SBA’s Franchise
Directory, although the applicant is not required to list the Franchise Identified
Code issued by the SBA on this form. SBA Form 2483, “Paycheck Protection
Program Borrower Application Form” (April 2020).
C. The False Claims Act
30. The False Claims Act, or FCA, as set out in 31 U.S.C. § 3729(a)(1),
prohibits knowingly presenting, or causing to be presented, or conspiring to
present to the United States any false or fraudulent claim for payment. Further,
as set out in 31 U.S.C. § 3729(a)(2), the FCA prohibits knowingly presenting,
causing to be presented, or conspiring to make or use a false record or statement
to obtain payment or approval for a false or fraudulent claim.
31. Each violation of the FCA is a violation of federal law that is
punishable by three times the amount of the actual damages sustained by the
government, as well as a civil penalty of between $13,508 and $27,018 per claim
for violations that occurred after November 1, 2015, and for which penalties are
assessed after January 30, 2023.
COMPLAINT 10
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32. Under the FCA, the term “knowingly” means that a person, with
respect to information, (1) has actual knowledge of the information; (2) acts in
deliberate ignorance of the truth or falsity of the information; or (3) acts in
reckless disregard of the truth or falsity of the information. The FCA does not
require proof of a specific intent to defraud.
33. Defendant’s actions, described below, constitute the submission of
false and fraudulent claims in violation of the FCA. Defendant submitted a false
loan application, improperly received PPP funds, and improperly received
forgiveness of its loan.
B. Defendant’s Business and Affiliates
34. Defendant is a management company associated with the
“LaFontaine Automotive Group,” which includes 54 retail franchises, 9
collision centers, and 34 Michigan retail locations (together with Defendant, the
“LaFontaine Companies”). Defendant serves as the overall manager of the retail
locations and collision centers, handling finances, personnel, and vendor
relationships for the other LaFontaine Companies.
35. Defendant and the other LaFontaine Companies share officers,
directors, personnel, and management, and all have the same registered agent.
On information and believe, all LaFontaine Companies maintain their financial
accounts at The State Bank, and all such accounts are controlled by Defendant.
COMPLAINT 11
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Defendant maintains financial control over the operations of all other
LaFontaine Companies. All LaFontaine Companies are managed by the officers
of Defendant, who include Michael LaFontaine, Maureen LaFontaine, and
Ryan LaFontaine. Kelley LaFontaine, while not an officer of Defendant, also
acts as an executive and manager of the LaFontaine Companies.
36. Due to this common ownership and control, Defendant and the
other LaFontaine Companies are affiliates of each other under 13 C.F.R. §
121.301.
37. Under the affiliate rules of the SBA, the LaFontaine Companies do
not qualify as a small business enterprise. Together, the companies employ 2600
people and have an annual revenue of over $2 billion. See
https://www.familydeal.com/about-us/ , last accessed on November 21, 2023.
C. Defendant Wrongfully Applies for, Receives, and Obtains Forgiveness
for a PPP Loan.
38. On April 4 and 5, 2020, 17 of the LaFontaine Companies, including
Defendant, were approved for PPP loans through The State Bank. Each loan
application listed the same address and the same agent and was signed by the
same company representative. Together, the 17 LaFontaine Companies
received PPP loans in the amount of $14,635,000, as follows (with Defendant’s
loan highlighted):
COMPLAINT 12
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Borrower Name Loan Amount Date Approved Originating Lender
LAFONTAINE
BUICK GMC OF
ANN ARBOR INC $557,500 4/4/20 The State Bank
LAFONTAINE CDJR
LANSING INC $847,500 4/4/20 The State Bank
LAFONTAINE
FORD INC $664,500 4/4/20 The State Bank
LAFONTAINE
BUICK GMC INC $557,500 4/5/20 The State Bank
LAFONTAINE CDJR
OF FENTON INC $1,226,500 4/4/20 The State Bank
LAFONTAINE
FORD OF
FRANKENMUTH
INC $588,500 4/5/20 The State Bank
LAFONTAINE
IMPORT OF
FARMINGTON
HILLS INC $588,500 4/4/20 The State Bank
LAFONTAINE
CADILLAC BUICK
GMC INC $3,129,500 4/4/20 The State Bank
LAFONTAINE
MOTORS INC $1,259,000 4/5/20 The State Bank
LAFONTAINE
MANAGEMENT
INC $1,000,000 4/5/20 The State Bank
LAFONTAINE
SUBARU INC $706,000 4/5/20 The State Bank
LAFONTAINE
VOLKSWAGEN INC $456,000 4/4/20 The State Bank
LAFONTAINE
IMPORT MOTORS
INC $672,500 4/5/20 The State Bank
LAFONTAINE
CHEVROLET INC $1,025,000 4/4/20 The State Bank
LAFONTAINE CDJR
OF CLINTON INC $435,000 4/4/20 The State Bank
LAFONTAINE
SALINE INC $712,000 4/5/20 The State Bank
LAFONTAINE
IMPORTS OF ANN
ARBOR INC $209,500 4/5/20 The State Bank
COMPLAINT 13
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39. Of the LaFontaine Companies who obtained PPP loans, sixteen of
them are Michigan automotive dealerships that have dealership agreements with
the automobile manufacturers for whom they sell cars. Because these
automotive manufacturers have franchise identifier codes, those sixteen
borrowers were eligible for PPP loans, despite failing to qualify for such loans
due to their size, due to the franchise exception under the CARES Act. Such
loans therefore appear to have been lawfully obtained.
40. However, Defendant LaFontaine Management, Inc. does not sell
cars and does not operate under a franchise agreement. As such, Defendant did
not qualify for PPP funds under any of the applicable small business size
standards, including affiliation rules, used by the SBA for purposes of the PPP
and did not fall into any available exceptions. Defendant was thus not eligible
to receive a PPP loan in the amount of $1,000,000.
41. As a result of Defendant’s fraudulent PPP loan, The State Bank
received a 3% loan processing fee from the SBA in the amount of $30,000.
42. On June 11, 2021, all seventeen PPP loans taken by the LaFontaine
Companies were forgiven. Defendant received loan forgiveness in the amount
of $1,011,534 – slightly more than the amount it had “borrowed” from the
federal government.
COMPLAINT 14
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D. Relators’ Knowledge of the Fraud
43. Relator Patricia Lesko is an independent investigative journalist
who has worked to expose fraud and corruption for over 14 years. In 2020, in
the course of writing a data-driven piece for The Ann Arbor Independent, of
which she is the editor, Ms. Lesko familiarized herself with PPP loan eligibility
requirements and consulted with the president of a local bank to learn about and
understand the PPP loan process. She also developed a proprietary dataset
combining information about PPP loan application data, NAICS code size
standards, and affiliate groupings.
44. As the result of intensive investigation and the careful review and
aggregation of public data from several different sources, Ms. Lesko and her son,
Bram Lesko, identified automotive groups as a potential source of PPP loan
fraud, and ultimately identified Defendant as an automotive-related company
who had fraudulently received, and been forgiven, such a loan.
45. Relator Bram Lesko works in marketing and class administration at
Detroit Training Center and is also a freelance videographer/photographer. Mr.
Lesko has recently worked in the automotive sales industry as a photographer
and manager for a company called CarData Inc. In that role, Mr. Lesko worked
with several dealerships and automotive groups, including the LaFontaine
Automotive Group and some of the LaFontaine Companies.
COMPLAINT 15
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46. In his business dealings with the LaFontaine Companies, Mr. Lesko
became aware that the companies were all managed by the same people, who
are officers, directors, executives, or employees of Defendant LaFontaine
Management. For example, one LaFontaine Management employee, Courtney,
handled the negotiations for a corporate price structure for photography of
automobiles for all the LaFontaine retail dealership locations. This experience
in working with the LaFontaine Companies, combined with his knowledge of
PPP loan fraud from his mother’s work and a press release regarding a
settlement between the United States Government and another automotive
group relating to fraudulent PPP loans, led Mr. Lesko to suggest to his mother
that they investigate the loans obtained by the LaFontaine Companies.
47. Relators now bring this action on behalf of the United States of
America to recover the damages caused by Defendant’s fraud against the PPP
program and the SBA.
V. CAUSES OF ACTION
COUNT I
FALSE CLAIMS ACT – PRESENTATION OF FALSE CLAIMS
48. The preceding paragraphs are incorporated.
49. Relator brings this civil action on behalf of the United States of
America against Defendants under the False Claims Act, 31 U.S.C. §§ 3729-33.
COMPLAINT 16
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50. During the relevant period, Defendant knowingly presented or
caused to be presented a materially false or fraudulent claim for payment to the
United States, through the Small Business Administration, in violation of 31
U.S.C. § 3729(a)(1)(A).
51. Defendant did so by knowingly presenting or causing to be
presented an application for approval of a PPP loan for which it was ineligible.
52. Defendant’s knowingly false certification on its PPP loan
application was material to the government’s decision to award it a PPP loan
intended for small businesses in the amount of $1 million. When submitting a
PPP loan application, an applicant was required to certify that it was eligible,
and that all information included in the application form was true and accurate
in all material respects.
53. Defendant had actual knowledge of the falsity of its claims or
deliberately ignored or recklessly disregarded their truth or falsity, within the
meaning of the FCA.
54. But for Defendant’s submission of its false claim, the SBA would
not have approved the loan or paid the Lender the processing fee for the loan
application.
55. The United States suffered damages because of the false claim that
Defendant made or caused to be made and is entitled to recover its losses of
COMPLAINT 17
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approximately $1,030,000, and to obtain other relief available under the FCA,
including treble damages and civil penalties.
COUNT II
FALSE CLAIMS ACT – CREATING A FALSE RECORD OR
STATEMENT MATERIAL TO A FALSE CLAIM
56. The preceding paragraphs are incorporated.
57. Defendant knowingly made or caused to be made false records or
statements to support a false claim submitted to the SBA in violation of 31
U.S.C. § 3729(a)(1)(B).
58. Defendant’s creation of a knowingly false loan application
supported The State Bank’s claim to the SBA for a loan processing fee for a loan
that was falsely or fraudulently obtained by Defendant.
59. Defendants had actual knowledge of the falsity of these records and
statements or deliberately ignored or recklessly disregarded their truth or falsity,
within the meaning of the FCA.
60. The United States suffered damages because of the false records and
statements that Defendants made, used, and caused to be made and used, and
is entitled to recover its losses in the amount of $30,000, and to obtain other
relief available under the FCA, including treble damages and civil penalties.
COMPLAINT 18
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COUNT III
FALSE CLAIMS ACT – IMPROPER AVOIDANCE OF OBLIGATION
TO GOVERNMENT
61. The preceding paragraphs are incorporated.
62. Defendant knowingly concealed or knowingly and improperly
avoided an obligation to pay or transmit money or property to the government
in violation of 31 U.S.C. § 3729(a)(1)(G).
63. Defendant did so by falsely certifying compliance with the PPP
program in applying for forgiveness of its PPP loan, by falsely concealing its
affiliation with the other LaFontaine Companies, and by failing to repay the
PPP loan it received..
64. But for Defendant’s concealment, the SBA would not have forgiven
Defendant’s obligation to repay the PPP loan, including interest.
65. The United States suffered damages because of these
misrepresentations and is entitled to recover its losses in the amount of
$1,011,534, and to obtain other relief available under the FCA, including treble
damages and civil penalties.
VI. JURY DEMAND
66. Relators respectfully demand a trial by jury.
VII. PRAYER
67. Relators respectfully request the following relief:
COMPLAINT 19
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(a) That judgment be entered in favor of the United States and Relators
and against Defendant in the amount of all damages sustained
because of Defendant’s actions, multiplied by three as provided by
31 U.S.C. § 3729(a), plus a civil penalty for each and every such
claim in the amount of between $13,508 and $27,018 per claim;
(b) That Relators be awarded the maximum amount permissible under
31 U.S.C. § 3730(d), including the costs and expenses of this action
and reasonable attorneys’ fees;
(c) That, pursuant to 31 U.S.C. § 3730(c)(5), Relators be awarded a
share of any alternate remedy that the United States elects to pursue;
(d) That permanent injunctive relief be granted to prevent any
recurrence of the False Claims Act conduct described above for
which redress is sought in this Complaint;
(e) That the United States and Relators be awarded prejudgment and
post-judgment interest; and
(f) That the United States and Relators receive all such other and
further relief, at law or in equity, to which they show themselves to
be justly entitled.
COMPLAINT 20
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DATED: December 8, 2023
Respectfully submitted,
/s/ Elizabeth K. Stepp
Elizabeth K. Stepp
Texas Bar No. 00788467
eks@federal-lawyer.com
Nick Oberheiden
NY Reg. No. 4679011
nick@federal-lawyer.com
OBERHEIDEN P.C.
440 Louisiana St., Suite 200
Houston, Texas 77002
(214) 334-7648 (Telephone)
(972) 559-3365 (Facsimile)
ATTORNEYS FOR RELATOR
COMPLAINT 21
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