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DOJ Complaint Names Private Equity Firm as Defendant in False Claims Act Case Targeting Health Care Portfolio Company

The U.S. Department of Justice’s recent decision to name a private equity firm as a defendant in a False Claims Act complaint against one of the firm’s portfolio companies, while uncommon, shines a spotlight on potential risk areas for private equity firms whose portfolio companies operate in industries with significant False Claims Act exposure like health care. In its complaint in intervention in United States ex rel. Medrano v. Diabetic Care Rx, LLC d/b/a Patient Care America et al. (S.D. Fla. No. 15-62617-civ), filed on February 16, 2018, DOJ alleges that compounding pharmacy Patient Care America (“PCA”) paid illegal kickbacks to several marketing firms in exchange for referrals for certain compound drugs that were reimbursed by Tricare, a federal health care program that provides health insurance for current military personnel, military retirees, and their dependents. The complaint further alleges that the pharmacy’s controlling stakeholder, private equity firm Riordan, Lewis & Haden, Inc. (“RLH”), managed and controlled PCA and participated in the charged misconduct. The government’s intervention to target both PCA and its private equity shareholder reflects a potential sea change in its approach to such cases.

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Bush Tax Bill Reduces Tax on Dividends by 61% Creating Opportunity for Private Equity Firms


Time to Read: 1 minutes Practices: Private Equity

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The Tax Bill just passed by Congress creates an opportunity for private equity firms to increase the IRR from portfolio investments. The Tax Bill:

  • Reduces the maximum federal individual income tax rates for 2003 through 2010 from 38.6% to 35% (a 9.3% reduction)
  • Reduces the federal income tax rate on long-term capital gains for sales after May 6, 2003 through Dec. 31, 2008 from 20% to 15% (a 25% reduction), and
  • Reduces the maximum federal income tax rates on most dividends from corporations received after Jan. 1, 2003 through Dec. 31, 2008 from 38.6% to 15% (a 61% reduction).

This reduction of the tax rate on dividends to the same rate as long-term capital gains creates a unique opportunity for private equity firms to increase the IRR generated from portfolio investments. Generally, because of the time value of money, the sooner money is returned to investors, the greater the IRR on a particular investment. Because the tax rate on dividends is now equal to the tax rate on capital gains, there is no tax reason for portfolio companies to retain excess cash until a realization event so that private equity funds receive the benefits of long-term capital gains rates. Thus, private equity funds should examine each of their portfolio companies to see whether it is advisable to dividend excess cash or to effect a leveraged recapitalization and distribute the excess cash as a dividend to shareholders.

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To discuss this opportunity further, please call or email your regular Ropes & Gray attorney.

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