Surpressed v. Surpressed

Filing 106

MEMORANDUM Opinion and Order Signed by the Honorable Sharon Johnson Coleman on 1/3/2014:Mailed notice(rth, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

THE UNITED STATES OF

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AMERICA, ex rel. KENNETH CONNER,

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Plaintiff,

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v.

11-cv-4458

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PETHINAIDU VELUCHAMY, et al.

Judge Sharon Johnson Coleman

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Defendant.

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MEMORANDUM OPINION AND ORDER
Kenneth J. Conner (“Conner”), filed this qui tam action on June 30, 2011, alleging that
the defendants Pethinaidu Veluchamy, Parameswari Veluchamy, Arun Veluchamy, Anu
Veluchamy, the Veluchamy Family Foundation, James Roth, Ronald Tucek, Patrick McCarthy,
James Regas, Amrish Mahajan, James Murphy, John Benik, Thomas Pacocha, Ric Barth, Adams
Valuation Corporation (“AV Corp.”), and Douglas Adams violated the federal False Claims Act
(“FCA” or “the Act”) by misrepresenting the quality of Mutual Bank’s collateral on real estate
loans to the Federal Deposit Insurance Corporation (“FDIC”). Pending before the Court are
three motions to dismiss. For the following reasons, McCarthy and Tucek’s joint motion to
dismiss is granted without prejudice. Defendant Regas’ motion to dismiss is also granted
without prejudice. All remaining motions to dismiss are denied in their entirety.
Background
Conner was employed by Mutual Bank (the “Bank”) from August 2000 until October
2007. In 2005, Conner was transferred to Mutual Bank’s headquarters in Harvey, Illinois. After
his transfer, Conner’s job responsibilities included reviewing appraisals of properties that had
secured loans on commercial real estate. While working at the Harvey headquarters, Conner
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personally reviewed about seventy-five appraisals for commercial real estate loans which he
alleges were inflated. Conner alleges that despite his repeated attempts to inform Mutual Bank
managers that the appraisals being submitted for approval were overvalued, the Bank’s
employees and managers ignored him and told him to approve the appraisals anyway.
Specifically, Conner alleges that he reviewed an inflated appraisal for a property located in
Orlando, Florida that was valued to be worth approximately twenty-two million dollars when the
property was actually worth about twelve million dollars. Similarly, Conner also cites to two
other properties located in Evansville, Indiana and Mount Olive, New Jersey that were
overvalued. Conner contends that despite his attempts to inform Mutual Bank managers of the
overvalued appraisals, the Bank employees and managers insisted upon using the overvalued
appraisals in their Call Reports and disclosures to the FDIC for determining their deposit
insurance assessments.
Under the FCA, an individual acting as a relator can bring a civil qui tam action on behalf
of the United States against a defendant who knowingly submits a false claim for payment to the
federal government. See 31 U.S.C. § 3729(a)(1)(A); see also United States v. Rush Univ. Med.
Ctr., 680 F.3d 933, 934 (7th Cir. 2012). A relator may also bring a claim if a defendant
intentionally avoids an obligation to pay the government. Under the FCA, a “reverse false
claim” is a false statement used not to obtain payments from the government, but to conceal,
avoid, or decrease an obligation to pay or transmit money or property to the Government. See
United States ex rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 835 (7th Cir. 2011) (citing
31 U.S.C. § 3729(a)(7)).1 The defendants are a collection of Mutual Bank employees, managers,
Board members, outside directors, and the appraisal company. Conner alleges that the
defendants engaged in a scheme to defraud the FDIC by misrepresenting the loan-to-value ratios
for real estate lending and submitting fraudulent Call Reports based on overvalued appraisals.
The defendants now move to dismiss the relator’s complaint for (1) lack of subjectmatter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1); (2) failure to state a claim pursuant to
Fed. R. Civ. P. 12(b)(6); and (3) failure to plead with the requisite particularity required under
Fed. R. Civ. P. 9(b). The defendants are represented by four separate sets of attorneys. With the
exception of all the Veluchamy and Mahajan defendants, the remaining defendants all move to

1

Pursuant to a May 20, 2009 amendment, §3729(a)(7) was recodified as §3729(a)(1)(G). Pub. L. 111-21, 123 Stat
1617.

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dismiss Conner’s complaint for essentially the same reasons. Accordingly, Defendants
McCarthy and Tucek jointly move for dismissal [Dkt., 74]; Defendants AV Corp and Adams
jointly move for dismissal [Dkt. 72]; and Defendants Benik, Pacocha, Murphy, Barth, and Regas
together move for dismissal [Dkt. 78]. Defendant Mahajan filed his answer to the complaint on
February 13, 2013 [Dkt. 35].

Legal Standard
Pursuant to Fed. R. Civ. P. 12(b)(1), a court must dismiss any action for which it lacks
subject matter jurisdiction. Rule 12(b)(1) motions are premised on either facial or factual attacks
on jurisdiction. Simonian v. Oreck Corp., No. 10 C 1224, 2010 U.S. Dist. LEXIS 86832, at *3-4
(N.D. Ill. Aug. 23, 2010). The court may look beyond the jurisdictional allegations in the
complaint if the defendant makes a factual attack on the plaintiff’s assertion of subject matter
jurisdiction. Id. The plaintiff must then put forth “competent proof” that the court has subject
matter jurisdiction. NLFC, Inc. v. Devcom Mid-America, Inc., 45 F.3d 231, 237 (7th Cir. 1995).
To survive a Rule 12(b)(6) motion to dismiss, the claim must comply with Rule 8(a) by
providing “a short and plain statement of the claim showing that the pleader is entitled to relief”
such that the defendant is given “fair notice of what the claim is and the grounds upon which it
rests.” See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929
(2007); see also Fed. R. Civ. P. 8(a)(2). Additionally, factual allegations in the claim must be
sufficient to raise the possibility of relief above the “speculative level,” assuming all of the
allegations in the complaint are true. E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773,
776 (7th Cir. 2007). “A pleading that offers ‘labels and conclusions’ or a ‘formulaic recitation
of the elements of a cause of action will not do.’” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.
Ct. 1937, 173 L. Ed. 2d 868 (2009) (quoting Twombly, 550 U.S. at 555).
Allegations of fraud must also satisfy the heightened pleading requirements of Rule 9(b).
Fed. R. Civ. P. 9(b). FCA claims are subject to the heightened pleading requirements of Rule
9(b), which requires that all averments of fraud or mistake, the circumstances constituting fraud
or mistake be stated with particularity. See U.S. ex rel. Gross v. Aids Research AllianceChicago, 415 F.3d 601, 604 (7th Cir. 2005); see also Fed. R. Civ. P. 9(b).
Discussion
1. Rule12(b)(6) and Rule 9(b)
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The defendants argue that Conner’s complaint should be dismissed for failure to state a
claim and for failure to plead with the specificity required pursuant to Rule 12(b)(6) and Rule
9(b). A complaint satisfies Rule 9(b) when it alleges “the who, what, when, where, and how” the
first paragraph of a newspaper story. Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502,
507 (7th Cir. 2007). Rule 9(b), read in conjunction with Rule 8, requires that the plaintiff plead
“the time, place and contents” of the purported fraud. United States ex rel. Munoz v. Computer
Sys. Ins., No. 11-cv-7899, 2013 U.S. Dist. LEXIS 153400, at *9-10 (N.D. Ill. Oct. 25, 2013).
Here, Conner alleges that defendants AV Corp. and Adams engaged in a scheme with the
Bank to defraud the FDIC by knowingly submitting inflated appraisals to be used in Call Reports
used to calculate loan assessments by the FDIC. Conner provides specific examples of alleged
inflated appraisals submitted by the Adams defendants and asserts that despite his warnings, the
Bank proceeded to use these appraisals in the creation of reports to the FDIC. Conner avers that
he informed his supervisor Murphy and the Bank vice presidents that the appraisals were
overvalued. Conner also claims that at one point Murphy told him that his job was to approve
appraisals not to challenge AV Corp.’s conclusions. Conner also claims that Murphy told him
that the Veluchamy Board members did not need him to inform them if the appraisals were
overvalued because they were already aware.2
Rule 9(b) requires a plaintiff to plead with particularity only those circumstances intrinsic
to any fraud-based claim. See Midwest Commerce Banking Co. v. Elkhart City Ctr., 4 F.3d 521,
524 (7th Cir. 1993). The Seventh Circuit has indicated that such circumstances include “the
identity of the person making the misrepresentation, the time, place, and content of the
misrepresentation, and the method by which the misrepresentation was communicated.” Wade v.
Hopper, 993 F.2d 1246, 1250 (7th Cir. 1993). Here, Conner sufficiently alleges that AV Corp.
and Adams engaged in a scheme with the Bank to defraud the FDIC by knowingly submitting
inflated appraisals to be used by the Bank in Call Reports intended to conceal material
information from the FDIC so that the Bank would pay lower loan assessments. Conner
adequately alleges that the appraisal company, the Bank management, and the Bank Board
members knowingly used overvalued appraisals to create reports resulting in lower deposit
insurance assessments between 2005 and the Bank’s closing in 2009. However, with regards to

2

There are four Veluchamy Board Members that are defendants in this case: Pethinaidu Veluchamy, Parameswari
Veluchamy, Arun Veluchamy, and Anu Veluchamy.

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the outside director defendants Regas, McCarthy and Tucek, Conner provides no details as to
their role in the scheme whatsoever. Conner fails to assert how they contributed to or knew of
any alleged plan to defraud the FDIC. Conner does not refute that as outside directors Regas,
McCarthy and Tucek were not involved in the day to day operations of the Bank and proffers no
allegations as to their role. Accordingly, Conner’s claims against the outside director defendants
Regas, McCarthy and Tucek are dismissed without prejudice. Conner’s claims as to the
remaining defendants may proceed and the remaining defendants’ motions to dismiss are denied.

2. Public Disclosure Bar
The defendants also move to dismiss plaintiff’s claims pursuant to the public disclosure
bar. Qui tam actions are subject to a jurisdictional bar when a relator’s action is “based upon the
public disclosure of allegations or transactions in a criminal, civil, or administrative hearing . . .
or from the news media, unless the action is brought by the Attorney General or the person
bringing the action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(A). Courts
conduct a three-step inquiry to determine whether the public disclosure bar prevents hearing a
qui tam suit under the FCA. Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 913 (7th
Cir. 2009). First, the court “examines whether the relator’s allegations have been ‘publicly
disclosed.’ If so, [the court] next asks whether the lawsuit is ‘based upon’ those publicly
disclosed allegations. If it is, the court must determine whether the relator is an ‘original source’
of the information upon which his lawsuit is based.” Id.
For purposes of § 3730(e)(4), “a ‘public disclosure’ occurs when ‘the critical elements
exposing the transaction as fraudulent are placed in the public domain.’” Glaser, 570 F.3d at
913 (citing United States ex rel. Feingold v. AdminaStar Fed., Inc., 324 F.3d 492, 495 (7th Cir.
2003)). A public disclosure “bring[s] to the attention of the relevant authority that there has been
a false claim against the government.” Feingold, 324 F.3d at 495. Here, the defendants argue
that Conner’s claims were publicly disclosed in a Material Loss Review issued by the FDIC’s
Office of Inspector General upon Mutual Bank’s failure and the FDIC’s appointment as receiver
for the Bank. Upon examination of the Material Loss Review this Court finds that the report
does not publicly disclose the critical elements of Conner’s fraud claims. Nowhere in the report
does the FDIC’s Office of the Inspector General state that the appraisal company, the Bank’s

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Board or the Bank’s employees improperly exercised their duties in order to knowingly defraud
the FDIC.
The Material Loss Review states that Mutual Bank failed to provide the necessary
oversight to effectively manage the risks associated with an aggressive growth strategy and that
the Bank had poor loan underwriting and credit administration. The report also states that
Mutual Bank’s failure was due to excessive and inappropriate use of interest reserves and that
bank examiners were concerned with the appraisal company used by the Bank and the lack of
objectivity and diversification of appraisal work in general. The findings contained in the
Material Loss Review assert, at best, that Mutual Bank was perhaps negligent in its operations or
that the Bank engaged in unsafe or inefficient practices. Unsafe practices however do not
necessarily reveal that such practices were intentionally deceitful or intended to defraud the
government. See United States v. Warden, 635 F.3d 866, 867-868 (7th Cir. 2011) (noting that
there is a difference between errors caused by negligence rather than fraud). Conner’s allegation
is not based on public reports; it is based on Conner’s personal knowledge of the defendants’
practices. Specifically, Conner alleges that he repeatedly informed the Bank that property
appraisals submitted by Defendants Adams and AV Corp. were significantly overvalued, but that
he was told by the Bank’s managers that the Board wanted to approve overvalued property
appraisals nonetheless.
The defendants also allege that Conner’s claims were disclosed in a 2008 state court case
in which Conner alleged retaliatory discharge claims against the Bank. Upon review of the state
court complaint, this Court finds that the state Court complaint does not reveal the essential
elements of the alleged fraud in this case. Although the state court complaint referenced
Conner’s attempts to inform Mutual Bank managers of the overvaluation of appraisals, it does
not make any allegations as to a scheme by Mutual Bank to defraud the FDIC and receive lower
insurance assessments. The state court complaint reveals at most that Conner attempted to sue
the Bank because he believed he was terminated because he reported to the Bank’s Human
Resources Department his concerns over what he thought were overvalued appraisals.
Accordingly, because both the 2008 state court case and the Material Loss Review do not reveal
the critical elements exposing the alleged transaction as fraudulent and because Conner’s suit is
based on his own knowledge rather than the published report, Conner’s claims are not barred
pursuant to the public disclosure bar.
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Conclusion
The relator’s claims against outside directors Regas, McCarthy and Tucek are dismissed
without prejudice. All motions to dismiss concerning the remaining defendants are denied.
IT IS SO ORDERED.
Date: January 3, 2014
____________________________
Sharon Johnson Coleman
United States District Judge

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