United States of America v. Moody's Corp

Filing 108

OPINION & ORDER re: 100 MOTION to Dismiss Third Amended Complaint. filed by Moody's Corporation, Moody's Investors Service, Inc: For the foregoing reasons, Moody's motion to dismiss the Third Amended Complaint is granted. The Clerk of Court is directed to terminate the motion pending at ECF No. 100. This case remains closed. (Signed by Judge William H. Pauley, III on 3/13/2018) (jwh)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------X
:
UNITED STATES ex rel. KOLCHINSKY,
:
:
Plaintiff,
:
:
-against:
:
MOODY’S CORP., et al.,
:
:
Defendants.
:
----------------------------------X
WILLIAM H. PAULEY III, District Judge:

12cv1399
OPINION & ORDER

Moody’s Corporation and Moody’s Investors Services, Inc. (collectively,
“Moody’s”) move to dismiss Ilya Eric Kolchinsky’s Third Amended Complaint. Kolchinsky
brings this action under the qui tam provisions of the False Claims Act (“FCA”), 31 U.S.C.
§ 3729 et seq. In September 2017, this Court afforded Kolchinsky a final opportunity to satisfy
the FCA’s stringent pleading requirements. See United States ex rel. Kolchinsky v. Moody’s
Corp. (“Reconsideration Opinion”), 2017 WL 3841866, at *4 (S.D.N.Y. Sept. 1, 2017). For the
reasons that follow, Moody’s motion to dismiss is granted.
BACKGROUND
Familiarity with this Court’s prior Opinions & Orders is presumed. See United
States ex rel. Kolchinsky v. Moody’s Corp. (“Moody’s II”), 238 F. Supp. 3d 550 (S.D.N.Y.
2017); United States ex rel. Kolchinsky v. Moody’s Corp. (“Moody’s I”), 162 F. Supp. 3d 186
(S.D.N.Y. 2016). In short, Kolchinsky alleges that between 2004 and 2007, Moody’s artificially
inflated credit ratings for residential mortgage-backed securities and collateralized debt
obligations to attract more business. (Third Amended Complaint, ECF No. 94 (“TAC”)

¶¶ 14–16.) According to Kolchinsky, Moody’s duped the Government into purchasing
inaccurate credit-rating services. (TAC ¶ 40.)
On March 2, 2017, this Court dismissed Kolchinsky’s Second Amended
Complaint, holding that: (1) Kolchinsky failed to adequately plead materiality because the
Government continued to pay Moody’s despite evidence of rating inaccuracies; and
(2) Kolchinsky failed to satisfy Federal Rule of Civil Procedure 9(b)’s pleading standard.
Moody’s II, 238 F. Supp. 3d at 558–60.
Kolchinsky moved for reconsideration. (See Notice of Motion, ECF No. 84.)
Although this Court found Kolchinsky’s arguments unpersuasive, it nonetheless recognized that
Kolchinsky “did not have the benefit of . . . recent [Supreme Court] guidance on materiality
when drafting his Second Amended Complaint or opposing Moody’s motion to dismiss.”
Reconsideration Opinion, 2017 WL 3841866, at *4. Accordingly, this Court gave Kolchinsky
one last chance to re-plead. Reconsideration Opinion, 2017 WL 3841866, at *4.
DISCUSSION
I.

Rule 9(b)
Qui tam actions are subject to Rule 9(b). United States ex rel. Chorches as Tr. for
the Bankr. Estate of Fabula v. Am. Med. Response, Inc., 865 F.3d 71, 81 (2d Cir. 2017). “The
point of Rule 9(b) is to ensure that there is sufficient substance to the allegations to both afford
the defendant the opportunity to prepare a response and to warrant further judicial process.”
United States ex rel. Chorches, 865 F.3d at 87 (internal citation and alteration omitted). This
heightened standard generally necessitates that a relator “(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent.” United States ex

2

rel. Chorches, 865 F.3d at 81 (internal citation omitted). Whether particular allegations meet this
threshold is a “case- and context-specific” inquiry. United States ex rel. Chorches, 865 F.3d at
81 (internal citation omitted).
Last time, this Court found that Kolchinsky “fail[ed] to allege either (a) specific
and material false claims submitted to Government agencies after May 27, 2009 or (b) a scheme
to do so after that date.” Moody’s II, 238 F. Supp. 3d at 559. In that pleading, Kolchinsky had
attached a “twenty-page Microsoft Excel spreadsheet—printed from the internet—showing that
Moody’s had some contracts with Government agencies in the years 2007 and later.” Moody’s
II, 238 F. Supp. 3d at 554. This Court held that such data could not “satisfy the requirements of
Rule 9(b) —or even Rule 8.” Moody’s II, 238 F. Supp. 3d at 554.
Exhibit C to the Third Amended Complaint simply removes certain entries from
Kolchinsky’s earlier spreadsheet. Kolchinsky asserts that this provides “Moody’s a clear road
map for determining, based on the pleadings, which of its ratings were fraudulent” through
“search[ing] for those ratings which used the alleged fraudulent methods and methodologies
discussed hereafter.” (TAC ¶ 56.) But shifting the burden to Moody’s does not cure the
pleading deficiency.
Nor does the Second Circuit’s guidance in Chorches alter this result. In
Chorches, the bankruptcy estate of a medical technician brought an FCA claim against an
ambulance company. United States ex rel. Chorches, 865 F.3d at 75. The Second Circuit
allowed the case to proceed even though the relator had “not identified actual invoices that were
submitted to the federal government” because “the particular bills that were submitted for
reimbursement [were] peculiarly within [the defendant’s] knowledge.” United States ex rel.
Chorches, 865 F.3d at 82. The Court of Appeals held that relator’s claims were sufficient

3

because he intricately detailed the “time period . . . during which the fraudulent scheme took
place” as well as the “dates, both precise and approximate” of false claims and even “patient
names” included in fraudulent bills. United States ex rel. Chorches, 865 F.3d at 83–84. All that
he lacked was proof that the fraudulent bills had actually been submitted—i.e., the “specific
documents containing false claims.” United States ex rel. Chorches, 865 F.3d at 83–84. The
Second Circuit made clear that pleading “on information and belief” still requires adducing
“specific facts supporting a strong inference of fraud.” United States ex rel. Chorches, 865 F.3d
at 82 (internal citation omitted).
The Third Amended Complaint does not satisfy the standard articulated in
Chorches. “[A]lleging a fraudulent scheme in detail” does not demonstrate that “false claims
must have been submitted.” Ameti ex rel. United States v. Sikorsky Aircraft Corp., 2017 WL
2636037, at *6 (D. Conn. June 19, 2017); see also United States ex. rel. Bilotta v. Novartis
Pharm. Corp., 50 F. Supp. 3d 497, 510–11 (S.D.N.Y. 2014) (“Plaintiffs must allege the false
claims themselves with sufficient particularity . . . merely alleging a fraudulent underlying
scheme with particularity is not enough.”). Kolchinsky’s generalized claims do not plausibly
connect Moody’s purported ratings errors to claims submitted to the Government for payment,
nor does it create a “strong inference” of fraud. See United States ex rel. Chorches, 865 F.3d at
82.
This holding is in line with the purpose of Rule 9(b)—“to discourage the filing of
complaints as a pretext for discovery of unknown wrongs.” Madonna v. United States, 878 F.2d
62, 66 (2d Cir. 1989) (internal citation omitted). Kolchinsky invites Moody’s to find which
claims were false based on false ratings, but a relator’s contention “that discovery will unearth
information tending to prove his contention of fraud, is precisely what Rule 9(b) attempts to

4

discourage.” Madonna, 878 F.2d at 66; see also O’Brien v. Nat’l Prop. Analysts Partners, 936
F.2d 647, 676 (2d Cir. 1991) (pleading “by inference” is not a “license to base claims of fraud on
speculation and conclusory allegations”) (internal citation omitted).
In short, while Kolchinsky has been on notice of the need for particularity since
this Court’s dismissal of his first complaint, see Moody’s I, 162 F. Supp. 3d at 197, the Third
Amended Complaint does not remedy the pleading deficiencies previously identified.
II.

Materiality
This Court dismissed the prior pleading because Kolchinsky failed to demonstrate

materiality. “[A] misrepresentation about compliance with a statutory, regulatory, or contractual
requirement must be material to the Government’s payment decision in order to be actionable
under the False Claims Act.” Universal Health Servs., Inc. v. United States ex rel. Escobar, 136
S. Ct. 1989, 2002 (2016). This standard is “demanding” and requires showing more than “the
Government’s decision to expressly identify a provision as a condition of payment.” Universal
Health, 136 S. Ct. at 2003. In Universal Health, the Supreme Court determined that “if the
Government pays a particular claim in full despite its actual knowledge that certain requirements
were violated,” that demonstrates “very strong evidence that those requirements are not
material.” Universal Health, 136 S. Ct. at 2003–04.
Kolchinsky’s “claims relate to a time period at which the Government—and the
general public—was on notice of the very facts relied upon to support the fraud alleged here.”
Moody’s II, 238 F. Supp. 3d at 559 (explaining there is “no serious dispute” that “Kolchinsky’s
allegations are substantially similar to stories previously reported in the media and investigated
by Congressional committees,” and citing numerous examples). Nonetheless, “the Government
. . . continued to pay Moody’s for its credit-ratings products each year.” Moody’s II, 238 F.

5

Supp. 3d at 559. According to Universal Health’s guidance, this Court reasoned that the
Government could not have found Moody’s ratings errors to be material. Moody’s II, 238 F.
Supp. 3d at 559; see Universal Health, 136 S. Ct. at 2003–04.
The Third Amended Complaint attempts to bolster its showing of materiality.
First, Kolchinsky contends that there was “no conclusive evidence of [Moody’s] fraud” because
Moody’s “publicly denied [it].” (TAC ¶ 53.) While this is a relevant consideration, it does not
counter the substantial evidence existing at that time demonstrating misconduct, including
investigations by the Government itself. And through all of this, the Government not only
continued to pay Moody’s, but also entered into new service contracts. (TAC, Ex. C.; see also
Reconsideration Opinion, 2017 WL 3841866, at *2–3; Moody’s II, 238 F. Supp. 3d at 559–60.)
“[M]ateriality looks to the effect on the likely or actual behavior of the recipient of the alleged
misrepresentation.” Universal Health, 136 S. Ct. at 2002 (internal citation and alterations
omitted, emphasis added).
United Health never held that actual knowledge equates to clear irrefutable proof
of wrongdoing. Accord D’Agostino v. ev3, Inc., 845 F.3d 1, 7 (1st Cir. 2016) (Government’s
failure to deny reimbursement in wake of allegations “cast[ed] serious doubt” on materiality of
fraudulent misrepresentations alleged); United States v. Sanford-Brown Ltd., 840 F.3d 445,
447–48 (7th Cir. 2016) (Government’s continued payment after multiple agencies’ investigations
demonstrated lack of materiality).
Second, Kolchinsky argues that the Government found Moody’s actions material
because it ultimately prosecuted Moody’s. (TAC ¶ 51). But the Government, when filing a
Statement of Interest in this action, explained that its settlement with Moody’s bears “no nexus”
to Kolchinsky’s claims. (Statement of Interest of the United States in Connection with Relator’s

6

Rule 59(e) Motion to Alter Judgment, ECF No. 90, at 2 n.2, 6 n.4 (“The FIRREA settlement
concerned Moody’s representations to or affecting federally insured financial institutions, and
did not involve a federal victim or false claims to the Government.”).)
Kolchinsky also challenges this Court’s methods in dismissing his prior
Complaint, arguing that it took improper judicial notice of “congressional sources, studies, and
media reports” to determine whether the Government knew of Moody’s alleged fraud. (Memo.
of Law in Opp. to the Moody’s Defendants’ Mot. to Dismiss the Plaintiff-Relator’s Compl., ECF
No. 104 (“Kolchinsky’s Opp.”), at 6.) But on a Rule 12(b)(6) motion, a court “may [] take
judicial notice of matters of public record.” Reisner v. Stoller, 51 F. Supp. 2d 430, 440
(S.D.N.Y. 1999) (emphasis added). This includes press coverage and prior pleadings. Staehr v.
Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008); Eaves v. Designs for Fin., Inc.,
785 F. Supp. 2d 229, 244–45 (S.D.N.Y. 2011).
Indeed, Kolchinsky references congressional investigations and news articles
when they suit his argument. (See TAC ¶¶ 21, 23.) He cannot have it both ways by arguing that
this Court may not take notice of other articles and congressional findings. And this Court did
not use those reports to determine a disputed fact, like whether Moody’s ratings were actually
flawed. Rather, they show something indisputable—that there existed multiple “credible public
reports of inaccuracies” at the time the Government continued to pay Moody’s. Reconsideration
Opinion, 2017 WL 3841866, at *2; cf. Staehr, 547 F.3d at 425 (in securities case, court could
“take judicial notice of the fact that press coverage . . . contained certain information, without
regard to the truth of their contents”) (emphasis in original). In short, this Court was entitled to
take judicial notice of these investigations as “strong evidence” that the Government did not find
Moody’s actions material. See Universal Health, 136 S. Ct. at 2003–04.

7

While Kolchinsky is correct that the Government’s decision to keep paying is not
the be-all and end-all in determining materiality, the Supreme Court specifically identified it as a
major factor in this determination. Universal Health, 136 S. Ct. at 2003–04.
Determining “materiality is essentially a matter of common sense rather than
technical exegesis of statutes and regulations.” United States ex rel. Gelman v. Donovan, 2017
WL 4280543, at *5 (E.D.N.Y. Sept. 25, 2017); see also Ashcroft v. Iqbal, 556 U.S. 662, 679
(2009) (“Determining whether a complaint states a plausible claim for relief will . . . be a
context-specific task that requires the reviewing court to drawn on its judicial experience and
common sense.”). Common sense circles this Court back to its original conclusion. 1
III.

Fraudulent Inducement
The Third Amended Complaint adds a claim of fraudulent inducement. Under

that theory, if a contract is “‘induced by the [defendants’] frauds, claims for payment based on
those contracts [are] also fraudulent.” United States v. Wells Fargo Bank, N.A., 972 F. Supp. 2d
593, 623 (S.D.N.Y. 2013) (internal alteration omitted) (quoting United States ex rel. Marcus v.
Hess, 317 U.S. 537, 542 (1943)). Put differently, “the use of fraudulent information to induce
the Government to provide [payment] on a contract constitutes a false claim under the FCA.”
Wells Fargo Bank, N.A., 972 F. Supp. 2d at 623 (quoting United States v. Eghbal, 548 F.3d
1281, 1283 (9th Cir. 2008)); see also United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 91
(2d Cir. 2012) (“[U]nder a fraudulent inducement theory, subsequent claims for payment made

1

After briefing was complete, Kolchinsky submitted a letter attaching a statement by Senator Chuck Grassley in the
Congressional Record. (See Letter, ECF No. 107). In his statement, Senator Grassley expresses concern regarding
the weight that courts place on Government knowledge in determining materiality. See 164 Cong. Rec. S892-93
(daily ed. Feb. 13, 2018) (statement of Sen. Grassley). While this Court respects Senator Grassley’s comments,
views expressed by Congress subsequent to a statute’s enactment are generally disfavored in interpreting a statute’s
meaning. See Sullivan v. Finkelstein, 496 U.S. 617, 628 n.8 (1990); United States v. United Mine Workers of Am.,
330 U.S. 258, 281–82 (1947); see also United States v. Prince, 361 U.S. 304, 332 (1960) (“[T]he views of a
subsequent Congress form a hazardous basis for inferring the intent of an earlier one.”).

8

under the contract that were not literally false, because they derived from the original fraudulent
misrepresentation, are also actionable false claims.”) (internal citation and alterations omitted).
But fraudulent inducement, like legal falsity, requires establishing materiality.
See D’Agostino, 845 F.3d at 7; United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525
F.3d 370, 378 (4th Cir. 2008). If the Government did not find the evidence of Moody’s false
ratings to be material, it is dubious that it found the statements inducing it to purchase those
ratings services any more material.
More problematic is Kolchinsky’s failure to tie alleged fraudulent statements to
the Government’s decision to purchase Moody’s services. In a fraudulent inducement claim, a
plaintiff must show that “the defendant made fraudulent misrepresentations to the government to
induce it to enter a contract.” United States ex rel. Lacey v. Visiting Nurse Serv. of N.Y., 2017
WL 5515860, at *6 (S.D.N.Y. Sept. 26, 2017) (emphasis added). He must also “plead facts
demonstrating that the government relied on the statement”—i.e., that it was so induced. United
States ex rel. Platz v. Bank of Am. Corp., 2016 WL 1298985, at *8 (S.D.N.Y. Mar. 31, 2016).
Kolchinsky pleads that Moody’s made false misrepresentations, and that the
Government bought Moody’s rating services, but fails to connect them. No allegation plausibly
and specifically pleads that Moody’s made a misrepresentation to a government agency, that
Moody’s intended that statement to induce that agency’s purchase, and that the agency was so
induced. See United States ex rel. Lacey, 2017 WL 5515860, at *10 (dismissing fraudulent
inducement claim based on failure to show misrepresentation was made to the Government or
that the Government was induced by the misrepresentation). Allegations that fraudulent
representations “could have” or “might have” induced the Government are insufficient. Accord
D’Agostino, 845 F.3d at 7. In fact, it seems likely that altered ratings or statements concerning

9

their accuracy were not made to lure the Government into future contracts, but for Moody’s to
drum up new business with issuers. (See TAC ¶¶ 15–19.)
Kolchinsky proposes that the Court backfill the gaps in his pleading by making
certain assumptions. (Kolchinsky’s Opp. at 4–5.) First, he argues that this Court should assume
that Moody’s misrepresentations must have been made to keep the Government as a customer.
Second, he contends that this Court should assume that because the Government entered into
subsequent contracts with Moody’s, the Government must have been induced. This Court
cannot connect those dots. All that is clear from the Third Amended Complaint is that the
Government entered into new contracts with Moody’s around the same time that Moody’s made
its false statements. Kolchinsky asserts that discovery will provide the details, but when a
relator’s allegations are insufficiently pled, dismissal is the proper course. See United States ex
rel. Lacey, 2017 WL 5515860, at *10; accord Pencheng Si v. Laogai Research Found., 71 F.
Supp. 3d 73, 92–93 (D.D.C. 2014) (False Claims Act claims dismissed because although the
plaintiff alleged several false statements, he failed to show they were made to the Government in
connection with a requested claim for payment.).
IV.

Factual Falsity
Factual falsity is what the False Claims Act targets. See United States v.
McNinch, 356 U.S. 595, 599 (1958) (False Claims Act developed from congressional testimony
“paint[ing] a sordid picture of how the United States had been billed for nonexistent or worthless
goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the
necessities of war”). The paradigm for factual falsity is a government contractor requesting
payment for goods or services not provided, such as delivering “crates labeled ‘muskets’ . . .

10

[which are] in fact filled with sawdust.” Michael Holt & Gregory Klass, Implied Certification
under the False Claims Act, 41 Pub. Cont. L.J. 1, 15–16 (2011); see 31 U.S.C. § 3729(a)(1)(A).
This Court previously determined that Kolchinsky alleged legal falsity, not factual
falsity. He “d[id] not plead that Moody’s failed to provide any credit ratings, or that the ratings it
provided were entirely worthless.” Moody’s II, 238 F. Supp. 3d at 557. Rather, his allegations
were that Moody’s ratings “differed in quality and accuracy from the ratings it promised to
Government agencies.” Moody’s II, 238 F. Supp. 3d at 557. The Third Amended Complaint
does not allege that Moody’s failed entirely to provide rating services to the Government, only
that some portion of those ratings were inaccurate. The Government received what it paid for—
access to Moody’s ratings.
Although Kolchinsky avers that factual falsity can be established through a
service being “entirely worthless,” (see, e.g., TAC ¶¶ 45, 294), that requires “the performance of
the service [to be] so deficient that for all practical purposes it [was] the equivalent of no
performance at all.” Mikes v. Straus, 274 F.3d 697, 703 (2d Cir. 2001), abrogated on other
grounds by Universal Health Servs., 136 S. Ct. 1989. Kolchinsky cannot demonstrate that
Moody’s ratings service was so deficient that it was akin to no service at all—he acknowledges
that not all, only some, of Moody’s ratings were erroneous. (TAC ¶¶ 26, 31.) Kolchinsky’s
rejoinder that factual falsity can be shown through Moody’s assurances regarding the accuracy
and reliability of its sources is insufficient. Cf. United States ex rel. Hussain v. CDM Smith,
Inc., 2017 WL 4326523, at *6 (S.D.N.Y. Sept. 27, 2017) (engineering firm’s hiring of
unqualified contractors, improperly installing air-conditioning, and “general incompetence” did
not reach level of factual falsity).

11

CONCLUSION
For the foregoing reasons, Moody’s motion to dismiss the Third Amended
Complaint is granted. The Clerk of Court is directed to terminate the motion pending at ECF
No. 100. This case remains closed.

Dated: March 13, 2018
New York, New York

SO ORDERED:

_____________________________
WILLIAM H. PAULEY III
U.S.D.J.

12