Not legal advice; educational only. This describes a diligence risk in general terms and makes no allegation about any company or transaction.
Here is the scenario that should worry any buyer of a government-paid business. The target looks clean. The data room is complete. Litigation search comes back quiet. You close. Eighteen months later, a False Claims Act (FCA) complaint is unsealed, one that was already on file, in a federal court, the entire time you were doing diligence, and because of how you structured the deal, it is now your problem.
That is not a hypothetical edge case. It is a structural feature of how the False Claims Act works, and standard diligence is not built to catch it.
Why the suit is invisible
When a whistleblower files a qui tam case, 31 U.S.C. § 3730(b)(2) requires it to be filed under seal. The complaint is not served on the defendant, does not appear on the public docket, and stays sealed for at least 60 days, which, as a practical matter, routinely stretches to one to three years or more while the government investigates. During that window:
- A litigation search will not find it.
- The target may not know it exists.
- Or, worse for you, the target does know, because it received a government Civil Investigative Demand or subpoena, and simply does not volunteer it.
| During the seal, a buyer can see… | …but cannot see |
|---|---|
| Public lawsuits and judgments | The sealed qui tam complaint itself |
| Settled/closed enforcement actions | The active, secret government investigation |
| LEIE (List of Excluded Individuals/Entities, providers barred from billing federal health programs) / SAM (System for Award Management, the federal contractor registration and exclusion system) exclusions already imposed | A pending intervention decision |
| The target’s own disclosures (if honest) | What the relator alleged, or who filed |
Why you inherit it
A sealed case you cannot see would be a manageable risk if it stayed with the seller. It does not. Under False Claims Act successor liability, the subject of Don’t Inherit the Fraud, an acquirer can step into liability for a predecessor’s pre-closing conduct, particularly in a stock or merger deal, and especially if any of the conduct continues after closing (which can give the acquirer its own fresh “knowing” exposure). Layer on treble damages and per-claim penalties, and a suit you never saw can dwarf the economics of the deal you thought you were doing.
How to screen for what you cannot see directly
You cannot read a sealed complaint. But you can screen for the conditions that produce one and structure the deal so the risk does not land entirely on you. Three layers:
- Run the data on the target yourself. Point the public-data outlier screen at the company you are buying, its Medicare billing, its peer-relative intensity, its position against LEIE and SAM exclusions. You are looking for the same anomalies a data-miner relator would find, because if you can see them, so can they.
- Ask the questions a litigation search won’t answer. Has the target received a Civil Investigative Demand, a subpoena, or an OIG (the HHS, or Department of Health and Human Services, Office of Inspector General) audit? Are there unresolved internal whistleblower or compliance complaints? Has it made any self-disclosures to a government program? Recent unexplained compliance hires or sudden departures in billing leadership are tells worth chasing.
- Structure for the risk you can’t eliminate. Negotiate False Claims Act, specific representations and warranties, a holdback or escrow sized to realistic exposure, indemnification that survives closing long enough to outlast a typical seal period, and consider representation-and-warranty insurance (reading the government-investigation exclusions carefully).
The honest boundary
None of this lets you read a sealed case, and any buyer-side advisor who promises certainty here is overselling. What disciplined diligence buys you is different and real: you find the anomalies that could become a case, you ask the questions that surface a hidden investigation, and you structure the deal so a predecessor’s fraud does not become the buyer’s loss. The whistleblower’s screen and the buyer’s screen are the same screen, and the buyer who runs it before signing is the one who does not get surprised after.
Sizing the risk you’re structuring around
The reason this blind spot deserves real deal-structure attention, escrow, survival periods, FCA-specific reps, is that the downside is not bounded by the target’s apparent revenue. False Claims Act liability runs to treble damages plus a per-claim penalty, and the seal that hides the case also lets the alleged conduct, and the penalties, accumulate for years before anyone outside the government knows.
| What you’re structuring against | Figure |
|---|---|
| Typical time a case sits under seal | 1 to 3 years (often longer) |
| Damages multiplier | Treble, 3× the loss |
| Civil penalty, per false claim | \$14,308, \$28,619 (2025 adjustment) |
| FY2025 FCA recoveries (record) | >\$6.8 billion (>\$5.7B health care) |
Sources: Sidley, FCA penalty figures; DOJ FY2025 recoveries.
Set those numbers against a mid-market purchase price and the asymmetry is obvious: a sealed case you could not see can resolve for a multiple of the equity you paid. That is why the disciplined buyer treats the seal period as a structuring problem, not only a diligence question, the escrow has to outlast the seal, and the reps have to reach the conduct that was hidden during it.
By Noah Green CPA CFE, for Sheepdog Prosperity Partners. Educational only; not legal advice and not a substitute for transaction counsel.
Primary sources: 31 U.S.C. § 3730(b) (qui tam, seal) · DOJ, The False Claims Act · ACFE, Report to the Nations