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Whistleblower Whose Qui Tam Action Was Dismissed Cannot Share In Related Government Settlement

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  • Posted on: Mar 27 2017

This Blog previously wrote about a case involving a whistleblower’s claim, under the “alternate remedy” provision of Section 3730(c)(5) of the False Claims Act (“FCA”), to settlement proceeds obtained in a later-filed action brought by the government even though the whistleblower had voluntarily dismissed his earlier qui tam action. Earlier this month, Judge William H. Pauley, III had the opportunity to address the issue in United States ex rel. Kolchinsky v. Moody’s Corp., 12-cv-1399 (S.D.N.Y. Mar. 2, 2017), a qui tam action brought by a former Moody’s Corp. (“Moody’s”) managing director who claimed that Moody’s sold subscriptions for its ratings delivery service to the government, which contained false ratings.

Kolchinsky filed the action in February 2012, asserting numerous violations of the FCA. The common thread among the claims was that, prior to 2009, Moody’s issued credit ratings that a) were improperly inflated or deflated; b) entered the financial markets through various channels; and affected certain governmental entities relying on the quality of those ratings. After two years of investigation, the government declined to intervene. Following protracted settlement discussions, Kolchinsky amended his complaint in May 2015.

The amended complaint largely tracked the original complaint. The Court granted Moody’s motion to dismiss, finding that all but one of the claims alleged in the amended complaint failed to establish that Moody’s sought payment from the government, as opposed to payment from private entities. As to the surviving claim (i.e., the ratings delivery service claim), the Court gave Kolchinsky leave to replead it.

Thereafter, Kolchinsky filed a second amended complaint, which was essentially the same as his prior complaints. Judge Pauley once again dismissed the complaint. In doing so, the court found that the government was on notice of the facts Kolchinsky relied upon to support the fraud alleged in his second amended complaint. And, as that complaint established, the government nonetheless continued to pay Moody’s for its credit-ratings products. “Such allegations plead Kolchinsky out of court, because,” as the Supreme Court explained in Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 1996 (2016) (discussed here), “when the ‘Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.’” (quoting Escobar, 136 S. Ct. at 2003–40). Judge Pauley found that Kolchinsky failed to allege any facts giving rise to an inference that any listed agency could have been unaware of the alleged fraud during the proscribed time period.

Having disposed of the second amended complaint, Judge Pauley addressed Kolchinsky’s claimed entitlement to a portion of a $864 million settlement among Moody’s, the Department of Justice, several states, and the District of Columbia relating to violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) and parallel state laws. Noting the harshness of the result, Judge Pauley found that the absence of a viable complaint at the time of the “related” action negated any entitlement to alternate-source relief:

No alternate remedy is available here, however, because the Second Amended Complaint fails to state a valid FCA claim as a matter of law. Nor is the alleged “overlap” between Kolchinsky’s allegations and those described in the settlement agreement a basis for recovery by Kolchinsky. Even if a timely variant of Kolchinsky’s Ratings Delivery Service theory could have formed a basis for the settlement, that theory did not appear in his initial pleading, which was the basis on which the Government declined to intervene. Indeed, at least two of the “state cases” that formed the basis for the Government’s settlement occurred in the years before Kolchinsky’s first complaint was filed under seal. Kolchinsky is not entitled to the proceeds of a settled action he did not initiate.

This Court acknowledges that this a harsh result. The role of a whistleblower is never an easy one. Kolchinsky provided enormously helpful information to various congressional committees and government investigators. This Court is particularly sympathetic to Kolchinsky’s position in light of the serious and far-reaching effects that Moody’s conduct had on the American economy. This observation does not, however, cure the deficiencies in Kolchinsky’s pleadings or enable him to collect a share of the FIRREA settlement.

Internal citations omitted.

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