Investor Influence Can Trigger FCA Violations

04/02/25 • 2 min

Mergers and Acquisitions (M&A) in the healthcare sector can be highly profitable, but they carry significant legal risks, particularly for private equity investors and board members who hold excessive influence over operations. The case of US XRL Martino Fleming vs. South Bay Mental Health Centers serves as a cautionary tale, highlighting how overstepping operational boundaries can lead to False Claims Act (FCA) violations. Investors, eager to enhance efficiency and profitability, may inadvertently trigger scrutiny by imposing aggressive performance targets or controlling daily operations, which could cross the line into operational control. In this case, allegations of fraudulent billing practices arose due to the investor’s involvement in clinical and administrative operations. Such claims can result in severe financial penalties and irreparable damage to reputation, affecting future investment opportunities.

The key takeaway here is that undue influence by investors can unintentionally create compliance liabilities. It is crucial for private equity firms to maintain a balance between oversight and operational independence. As part of M&A due diligence, integrating compliance reviews is essential. The Department of Justice (DOJ) issued updated guidance in 2023 and 2024, emphasizing the need for these reviews to focus on federal healthcare program regulations. This includes everything from Medicare billing practices to compliance with the Stark Law and Anti-Kickback Statute. Investors must conduct operational audits, understand the limits of control in regulated industries, and set up post-acquisition compliance frameworks to avoid liability. Ultimately, proactive compliance strategies are crucial to safeguarding against FCA violations and ensuring M&A transactions remain successful. Reach out to the Kulkarni Law Firm for tailored legal guidance and subscribe to the DarshanTalks Podcast for more insights into healthcare M&A best practices.

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