United States of America v. Moody's Corp
Filing
79
OPINION & ORDER re: 63 MOTION to Dismiss the Second Amended Complaint, filed by Moody's Corporation, Moody's Investors Service, Inc.; 76 AMENDED LETTER MOTION for Conference Request for Pre-Motion Conference addressed to Judge William H. Pauley, III from Stephen A. Weiss dated January 18, 2017, filed by Ilya Eric Kolchinsky. For the foregoing reasons, Moody's motion to dismiss is granted, and this action is dismissed with prejudice. The Clerk of Court is directed to terminate the motions pending at ECF Nos. 63 and 76 and mark this case as closed. (Signed by Judge William H. Pauley, III on 3/2/2017) (cla)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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UNITED STATES ex rel. KOLCHINSKY,
:
Plaintiff,
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12cv1399
-against-
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OPINION & ORDER
MOODY’S CORP., et al.,
:
Defendants.
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WILLIAM H. PAULEY III, District Judge:
Ilya Eric Kolchinsky brings this action on behalf of the United States of America
against Moody’s Corporation and Moody’s Investors Service, Inc. (collectively, “Moody’s”) and
various John Does under the qui tam provisions of the False Claims Act (“FCA”), 31 U.S.C.
§§ 3729 et seq. Kolchinsky, a former Managing Director of Moody’s, alleges that he attempted
to criticize inaccurate credit rating practices at the company in 2009 and was constructively
discharged after protesting against a practice of issuing false credit ratings. 1 (See Second
Amended Complaint (“SAC”) ¶ 29.) Moody’s now moves to dismiss the Second Amended
Complaint, arguing that, like the First Amended Complaint, it fails to state a sufficiently
particularized claim under the FCA. For the following reasons, Moody’s motion is granted and
this action is dismissed.
BACKGROUND
While familiarity with this Court’s prior opinion and order, United States ex rel.
Kolchinsky v. Moody’s Corp. (“Moody’s I”), 162 F. Supp. 3d 186 (S.D.N.Y. 2016) is presumed,
1
The constructive-discharge and retaliation claims were dropped after Moody’s argued
that they were barred by res judicata because of Kolchinsky’s stipulation to dismiss with
prejudice similar claims filed in a prior action. See ECF No. 18, at 3; see also United States ex
rel. Kolchinsky v. Moody’s Corp., 162 F. Supp. 3d 186, 192 n.1 (S.D.N.Y. 2016).
a brief review of the history of this action is appropriate. Kolchinsky filed this action on
February 24, 2012, asserting a bevy of FCA claims under varying theories of relief. The
common thread among those claims was that credit ratings issued by Moody’s prior to 2009
were improperly inflated or deflated; that the ratings entered the financial markets through
various channels; and that certain governmental entities were ultimately affected by the quality
of those ratings. (See ECF No. 1.) After two years of investigation, the Government declined to
intervene. (See ECF Nos. 2–8.) Thereafter, this Court entered orders unsealing the Complaint
and authorizing Kolchinsky to serve Moody’s. (See ECF Nos. 9–10, 13.) Following protracted
settlement discussions, Kolchinsky interposed an Amended Complaint in May 2015. (ECF Nos.
28–30.)
The Amended Complaint was a 124-page tome: a lengthy catalogue exhaustively
chronicling the major events of the 2008 financial crisis, and alleging in substance that Moody’s,
a Nationally Registered Statistical Rating Organization (“NRSRO”), defrauded financial markets
nationwide by issuing inaccurate credit ratings. See Moody’s I, 162 F. Supp. 3d at 191. The
Amended Complaint largely tracked the original Complaint, alleging that Moody’s pre-2009
credit ratings were insufficiently accurate (see, e.g., Am. Compl. ¶ 4); that Moody’s anticipated
that the financial markets would rely those ratings (see, e.g., Am. Compl. ¶ 2); and accordingly,
that each of the “466,700 false [credit] ratings” issued by Moody’s during this period, with a
“face value of over $2.3 trillion,” were “false claim[s] for payment to the Government” within
the meaning of the False Claims Act (Am. Compl. ¶ 4). While the Amended Complaint did not
clearly demarcate the different theories on which Kolchinsky relied, this Court’s prior opinion
endeavored to do so. To that end, this Court grouped Kolchinksy’s claims into five categories
2
and dismissed four of them 2 in Moody’s I. Specifically, this Court held that the four dismissed
categories of claims failed to establish the “sine qua non” that is required for FCA liability—
seeking payment from Government, as opposed to payment from private entities. See Moody’s
I, 162 F. Supp. 3d at 195 (quoting United States ex rel. Kester v. Novartis Pharms. Corp., 23 F.
Supp. 3d 242, 253 (S.D.N.Y. 2014) (emphasis omitted)). This Court permitted Kolchinsky to
attempt to replead the fifth category—the Ratings Delivery Service claims. The Ratings
Delivery Service claims alleged that Moody’s provided ratings directly to subscribers (including
Government entities) in return for payment. (See Am. Compl. ¶¶ 77–80.)
In Moody’s I, this Court reasoned that Kolchinsky might be able to state a valid
claim under his Ratings Delivery Service theory. This Court concluded that charging the
Government for inaccurate credit ratings—if Moody’s had promised to provide truthful ratings—
could satisfy the basic elements required by the FCA. See Moody’s I, 162 F. Supp. 3d at 197.
This Court noted, however, that the Amended Complaint pleaded no Government agency that
actually agreed to pay Moody’s for its credit ratings, or any credit rating that had been received
in return. See Moody’s I, 162 F. Supp. 3d at 197. Further, this Court held that because the
Ratings Delivery Service claims were not pleaded until the May 27, 2015 Amended Complaint,
any such claims accruing prior to May 27, 2009 were time-barred, 3 even under the more
generous of the FCA limitations periods. See 31 U.S.C. § 3731(b)(1) (providing that a civil FCA
The Nationally Registered Statistical Ratings Organization Claims (see Am. Compl. ¶¶
12–24, 81–83, 229–83, 248–51, 252–62); the Federal Deposit Insurance Corporation Claims (see
Am. Compl. ¶¶ 25, 58, 65–67); the American International Group Claims (see Am. Compl. ¶¶
207–28); and the Securities and Exchange Commission Claims (see Am. Compl. ¶¶ 27, 57, 286).
3
This Court rejected Moody’s argument that relation-back was categorically unavailable,
Moody’s I, 162 F. Supp. 3d at 199, but concluded that no relation-back theory was available as
to the Ratings Delivery Service claims because there was no “adequate notice” that they were
being asserted in the original Complaint. See Fed. R. Civ. P. 15(c)(1)(B); see also Slayton v.
Am. Exp. Co., 460 F.3d 215, 228 (2d Cir. 2006).
2
3
action may not be brought more than “6 years after the date on which the violation of [the FCA]
is committed”). Accordingly, this Court authorized Kolchinsky to “file a substantially narrowed
Second Amended Complaint” that pleaded, with particularity, Ratings Delivery Service claims
accruing after that date. Moody’s I, 162 F. Supp. 3d at 197.
Kolchinsky filed a Second Amended Complaint which was—for all relevant
purposes—no different from his prior two pleadings. (See ECF No. 54.) Indeed, even after this
Court had dismissed four of Kolchinsky’s five theories, and instructed that any amended
pleading be streamlined, the Second Amended Complaint was even longer than its predecessors,
and failed to identify which specific claims submitted after May 27, 2009 were submitted to
which specific entities. Instead, Kolchinsky attached to his Amended Complaint 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. A few rows in the spreadsheet
related to “Ratings Delivery Service” contracts. (See SAC Ex. C, “Excerpts of data from
www.usaspending.gov,” at 1–23.)
Moody’s now moves to dismiss the Second Amended Complaint for failure to
state a claim, arguing (1) that Kolchinsky failed to plead with specificity any particular “false
claim for payment” to the Government; (2) that none of the claims for payment were “factually”
or “legally” false under the FCA; and (3) that Kolchinsky’s claims accrued before the May 27,
2009 statute-of-limitations cutoff. Kolchinsky argues that the motion is procedurally barred
because Moody’s previously filed a 12(b)(6) motion, and that the presence of pre-2009 false
ratings suggests that Government agencies also received false ratings on and after May 27, 2009.
4
DISCUSSION
I.
Fed. R. Civ. P. 12(g) Bar
Kolchinsky argues that Moody’s 12(b)(6) motion is procedurally barred by reason
of prior motion to dismiss. Specifically, Kolchinsky contends that he was prejudiced by
Moody’s alleged failure to “raise[] any arguments that [Kolchinsky’s] [Ratings Delivery
Service]-related allegations of false claims failed under 9(b) or under the theories of factual or
legal falsity,” or issues regarding the “statute of limitations . . . in connection with [the Ratings
Delivery Service] claim.” (Pl.’s Opp. to Motion to Dismiss, ECF No. 66, at 6–7.) Kolchinsky
then relies on the text of Rule 12, which provides that a “party that makes a motion under this
rule must not make another motion under this rule raising a defense or objection that was
available to the party but omitted from its earlier motion.” Fed. R. Civ. P. 12(g). In short,
Kolchinsky argues that once a defendant makes a Rule 12(b)(6) motion, it cannot make
additional 12(b)(6) motions if the relevant argument could have been asserted at an earlier time.
Kolchinsky’s argument rests on a misunderstanding of Rule 12, which bars
successive motions premised on the differing defenses listed in Fed. R. Civ. P. 12(b)(2)–(5), not
differing arguments raised on a Fed. R. Civ. P. 12(b)(6) motion. As Rule 12(h) explains, the
only defenses that are “waive[d]” if not asserted in the first pre-answer motion are listed in Rules
12(b)(2)–(5). 4 Indeed, Rule 12 provides an exception to waiver for any motion to dismiss for
“[f]ailure to state a claim,” which may be raised not only in a pleading or motion, but as late as
trial itself. See Fed. R. Civ. P. 12(h)(2). In sum, Rule 12 provides that while procedural
defenses are waived if omitted from a pleading or pre-answer motion, a defendant cannot waive
the more fundamental 12(b)(6) defense—that the plaintiff has no legal right to recovery in the
4
The waivable defenses are personal jurisdiction, improper venue, insufficient process,
and insufficient service of process.
5
first place. See Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir.
2001) (explaining that “the defense of failure to state a claim is not waivable” and is “preserved
from the waiver mechanism in Rule 12(h)”) (quoting 5A WRIGHT & MILLER, FEDERAL PRACTICE
AND PROCEDURE § 1361 (2d
ed. 1990)); accord Ennenga v. Starns, 677 F.3d 766, 773 (7th Cir.
2012) (“The exception at issue here—contained in Rule 12(h)(2)—makes it clear that a litigant
need not consolidate all failure-to-state-a-claim arguments in a single dismissal motion.”)5
In any event, Kolchinsky’s contention that Moody’s failed to object to the legal
validity of the Ratings Delivery Service claims in its prior motion is incorrect. While the prior
12(b)(6) motion did not focus solely on the Ratings Delivery Service claims—given additional
multifaceted claims addressed in the lengthy Amended Complaint—it specifically noted that
Kolchinsky had failed to identify any particular government agency that paid for any false
claims, including with respect to the Ratings Delivery Service theory. (See ECF No. 39, at 25 &
n.10.) Moreover, the prior motion included an entire section titled, “The Amended Complaint is
Barred by the Statute of Limitations,” which argued that any claims “based on an alleged
violation of [the FCA] occurring prior to May 27, 2009” were time-barred. (ECF No. 39, at 17.)
To the extent that Moody’s challenges to the Ratings Delivery Service claims have been refined
and narrowed, that argument is elsewhere addressed in this Opinion and Order.
5
The Ninth Circuit recently held that successive failure-to-state-a-claim motions should
technically cite Rule 12(c) rather than Rule 12(b)(6), but that failure to cite the latter Rule is no
bar where the motion is not filed for an improper purpose. See generally In re Apple Iphone
Antitrust Litig., 846 F.3d 313 (9th Cir. 2017).
6
II.
False Claims Act Liability Generally
Moody’s argues that Kolchinsky’s current Ratings Delivery Service theory fails to
state a valid claim under the False Claims Act. For the reasons set forth below, this Court
agrees.
A.
Theories of “Falsity” Under the False Claims Act
“Enacted in 1863, the False Claims Act ‘was originally aimed principally at
stopping the massive frauds perpetrated by large contractors during the Civil War.” Universal
Health Servs., Inc. v. United States, 136 S. Ct. 1989, 1996 (2016) (quoting United States v.
Borenstein, 423 U.S. 303, 309 (1976)). “Sensational congressional investigations” resulted in
hearings that “‘painted 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.’” Universal Health, 136 S. Ct. at 1996 (quoting United States
v. McNinch, 356 U.S. 595, 599 (1958)). Congress responded “by imposing civil and criminal
liability for 10 types of fraud on the Government,” later amending the Act to include both
requests for Government payment and “reimbursement requests made to recipients of federal
funds under federal benefits programs.” Universal Health, 136 S. Ct. at 1996. The modern
variant of the FCA permits “private persons known as ‘relators’” to “file qui tam actions and
recover damages on behalf of the United States” in return for a contingency fee, even if the
Government deems its own intervention unwarranted. United States ex rel. Kester v. Novartis
Pharms. Corp., 23 F. Supp. 3d at 245 (citing 31 U.S.C. § 3730(b), 31 U.S.C. § 3729).
Drawing from this historical context, it is clear that “[t]he FCA is not a general
‘enforcement device’ for federal statutes, regulations, and contracts,” but a narrow statute
7
focused on fraud against the Government. Bishop v. Wells Fargo & Co., 823 F.3d 35, 49 (2d
Cir. 2016) (quoting United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th
Cir. 2010)). As the Second Circuit “has long recognized, the FCA was ‘not designed to reach
every kind of fraud practiced on the Government.’” Bishop, 823 F.3d at 48 (quoting Mikes v.
Straus, 274 F.3d 687, 697 (2d Cir. 2001)). Rather, actionable fraud is limited to the classes
specifically enumerated in the statute. Accordingly, even when a relator makes a very plausible
“accusation[] of widespread fraud” in the public markets, the FCA is not the appropriate means
of relief unless those accusations can be “plausibly connected . . . to express or implied false
claims submitted to the Government for payment,” and the relator must satisfy each applicable
element of a valid claim. Bishop, 823 F.3d at 49.
An FCA complaint must allege that the defendants “(1) made a claim, (2) to the
United States government, (3) that is false or fraudulent, (4) knowing of its falsity, and (5)
seeking payment from the federal treasury.” Bishop, 823 F.3d at 43 (quoting Mikes, 274 F.3d at
695). “Because the False Claims Act is an anti-fraud statute, ‘claims brought under the FCA fall
within the express scope of Rule 9(b),’” and must therefore be plead with heightened specificity.
United States ex rel. Bilotta v. Novartis Pharms. Corp., 50 F. Supp. 3d 497, 507 (S.D.N.Y. 2014)
(quoting Gold v. Morrison–Knudsen Co., 68 F.3d 1475, 1477 (2d Cir. 1995)). To provide the
requisite degree of specificity, the relator must “(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 rel. Kester v.
Novartis Pharms. Corp., 23 F. Supp. 3d 242, 253 (S.D.N.Y. 2014).
8
B.
Factual Falsity
Courts in this circuit recognize that claims may be either “factually” or “legally”
false for purposes of the FCA. Under a factual falsity theory, the defendant agrees to provide an
item or service, but does not in fact provide it—as where a contractor “delivers a box of sawdust
to the military but bills for a shipment of guns.” Bishop, 823 F.3d at 43. A “‘factually false’
certification, [] involves an incorrect description of goods or services provided or a request for
reimbursement for goods or services never provided,” Mikes, 274 F.3d at 697; see United States
ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94, 112–13 (2d Cir. 2010), or “[i]n an
appropriate case, knowingly billing for worthless services,” Mikes, 274 F.3d at 703.
While Kolchinsky contends that the credit ratings Moody’s submitted to
Government agencies were “factually false,” the Second Amended Complaint does not plead that
Moody’s failed to provide any credit ratings, or that the ratings it provided were entirely
worthless. Rather, Kolchinsky’s claim is one of legal falsity—that its ratings differed in quality
and accuracy from the ratings it promised to Government agencies. (See, e.g., SAC ¶¶ 15, 77,
84, 131, 140.)
C.
Legal Falsity
1.
Express Legal Falsity
A promise to provide the Government with a service in return for payment may be
“expressly” or “impliedly” legally false. See Bishop, 823 F.3d at 43 (citing Mikes, 274 F.3d at
697). The former theory of falsity—express legal falsity—arises when a contractor agrees to
provide services satisfying certain requirements, with which it later fails to comply. Because the
Second Amended Complaint and Kolchinsky’s motion papers fail to identify which ratings
violated which legal requirements, Kolchinsky’s counsel explained that his pleading does not
9
turn on an express-certification theory, but rather Moody’s implied representation that any
ratings it issued were accurate representations of credit risk:
THE COURT: Let me ask you this: Which of the following two situations is the basis for
the false claim here: Is the false claim inherent in Moody’s request that
the government pay for a credit rating that Moody’s knows to be
inaccurate, or is the false claim that Moody[’s] did not disclose its
noncompliance with its NRSRO certifications when it asked the
government to pay for those ratings?
[Counsel]: The first one, your Honor, you said is it inherent in the request for payment
whether there’s a fraudulent statement at issue . . . To me the issues seemed
more muddled or merged . . . . [T]he products incorporated the false ratings.
. . . [I]t’s [that] they passed on these ratings and they held them out to be,
you know, valid ratings, not false or inaccurate.
(See August 18, 2016 Oral Arg. Tr., ECF No. 69, at 6:17–7:20.) Accordingly, this Court
concludes that the Second Amended Complaint is premised on a theory of implied legal falsity:
that Moody’s implicitly promised, after May 27, 2009, that the credit ratings it issued were
accurate representations of the risk of the financial products they rated.
2.
Implied Legal Falsity
Under an FCA theory of implied legal falsity, a relator alleges that the “very
submission” of the defendant’s claim for payment to the Government implicitly constitutes a
certification of compliance with certain applicable regulations. However, because “[t]he
universe of potentially applicable laws or regulations is vast,” the mere provision of a service
does not certify compliance with all applicable regulations if not specified in the relevant
contract. Bishop, 823 F.3d at 45. For example, in Bishop, the relators “contend[ed] that
Wachovia and . . . Wells Fargo defrauded the government in violation of the FCA” by certifying
compliance with all “applicable banking laws and regulations when they borrowed money at
favorable rates from the discount window operated by the Federal Reserve.” The relators
contended that because the defendants were below minimum capitalization thresholds during
10
certain periods, each use of the Fed’s discount window to take out a loan constituted a “fraud” on
the Government. See Bishop, 823 F.3d at 38–39. The Court of Appeals disagreed. “[T]he FCA
was not intended to police general regulatory noncompliance,” and “does not encompass those
instances of regulatory noncompliance that are irrelevant to the government’s disbursement
decisions.” Bishop, at 44. Accordingly, while a defendant’s non-compliance with a government
regulation may give rise to other forms of liability, or civil or criminal violations, it does not give
rise to an FCA claim unless violation of the regulation has some relevant connection to the
contract at issue. See, e.g., Bishop, 823 F.3d at 46 (“The federal government has many tools
other than the FCA at its disposal to discipline banks and to ensure compliance with banking
laws and regulations, ranging from informal reprimands to fines to involuntary termination of a
bank's status as an insured depository institution.”).
As the Supreme Court recently explained, an FCA complaint premised on implied
certification must satisfy “two conditions”: “first, the claim . . . makes specific representations
about the goods or services provided; and second, the defendant’s failure to disclose non
compliance with material statutory, regulatory, or contractual requirements makes those
representations misleading half-truths.” Universal Health, 136 S. Ct. at 2001. Materiality turns
on the “effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”
Universal Health, 136 S. Ct. 1989 at 2002. To plead materiality with the requisite particularity, a
relator may draw inferences from various sources, including the Government’s history of
declining to pay claims for failure to comply with the applicable regulation. See Universal
Health, 136 S. Ct. at 2003 (noting that materiality may be premised on “evidence that the
defendant knows that the Government consistently refuses to pay claims in the mine run of cases
based on noncompliance with the particular statutory, regulatory, or contractual
11
requirement[s]”). By contrast, materiality is absent at the pleading stage when the relator’s
chronology suggests that the Government knew of the alleged fraud, yet paid the contractor
anyway. See Universal Health, 136 S. Ct. at 2003–04 (“[I]f 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. Or, if the Government regularly pays a
particular type of claim in full despite actual knowledge that certain requirements were violated,
and has signaled no change in position, that is strong evidence that the requirements are not
material.”).
For this reason, Universal Health defeats Kolchinsky’s claims in this action
because—as this Court has previously explained—credible public reports of inaccuracies in
Moody’s ratings spawned inquiries by the federal Government well before the May 27, 2009
statute-of-limitations cutoff:
There is no serious dispute that Kolchinsky’s allegations are substantially similar
to stories previously reported in the media and investigated by Congressional
committees. See, e.g., The Role and Impact of Credit Rating Agencies on the
Subprime Credit Markets, 110th Cong. 931 (Sept. 26, 2007), available at
https://www.gpo.gov/fdsvs/pkg/CHRG–110shrg50357/html/CHRG110shrg
50537.htm. Sources abound regarding pre–2009 studies of AIG's collapse, the
failure of RMBS-related products, and ultimately, media reports holding credit
ratings agencies responsible for aspects of the financial crisis. See, e.g., CONG.
RESEARCH SERV., R40613, CREDIT RATING AGENCIES AND THEIR REGULATION
(2009) (describing 2008 study on lack of independence and non-competitive ratings
criteria at Moody’s, S&P, and Fitch); Gretchen Morgenson, Debt Watchdogs:
Tamed or Caught Napping ?. N.Y. TIMES, Dec. 6, 2008, at A1 (criticizing Moody's
for its “rosy ratings of mortgage securities,” noting that bank capital requirements
were based on credit-rating agencies' ratings, and alleging a lack of independence
at the ratings agency).
Moody’s I, 162 F. Supp. 3d at 193–94. Accordingly, the sole surviving 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. And as the Second Amended Complaint and its
12
spreadsheet appendix establish, the Government has nonetheless continued to pay Moody’s for
its credit-ratings products each year. Such allegations plead Kolchinsky out of court, because
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.” Universal Health, 136 S. Ct. at 2003–40. Kolchinsky provides no allegation giving
rise to an inference that any listed agency could have been unaware of the alleged fraud during
the proscribed time period.
III.
Rule 9(b) Pleading Requirement
Even if Kolchinsky had pleaded an actionable theory of falsity under Universal
Health, he fails to satisfy the applicable pleading standard. See Fed. R. Civ. P. 9(b); Moody’s I,
162 F. Supp. 3d at 192. Whether a complaint complies with this standard “depends upon the
nature of the case, the complexity or simplicity of the transaction or occurrence, the relationship
of the parties and the determination of how much circumstantial detail is necessary to give notice
to the adverse party and enable him to prepare a responsive pleading.” Novartis, 50 F.Supp.3d at
508 (internal quotation marks omitted). Thus, a relator’s complaint may survive by alleging a
“scheme to submit false claims paired with reliable indicia that lead to a strong inference that
[such] claims were actually submitted.” United States ex rel. Resnick v. Weill Cornell Med.
Coll., No. 04-cv-3088, 2010 WL 476707 (WHP), at *5 (S.D.N.Y. Jan. 21, 2010) (emphasis
added). Here, however, the Second Amended Complaint fails 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.
It now appears that Kolchinsky cannot plead additional facts that would support
his claims. The relevant additions to the Second Amended Complaint—the twenty-page
13
spreadsheet of contract data—were created not from Kolchinsky’s experience at Moody’s, but by
performing the following tasks: (1) opening an Internet browser; (2) typing
“http://www.usaspending.gov”; (3) downloading a spreadsheet of the contracts Moody’s had
with the Government after 2007; and (4) pasting that spreadsheet into the Second Amended
Complaint. (See SAC ¶¶ 250–59; Ex. C.) Such a practice cannot satisfy the requirements of
Rule 9(b)—or even Rule 8—because a defendant faced with a complaint such as this has no
means of conducting any focused discovery. If, as Kolchinsky contends, the allegedly false
claims could be implicit in any of hundreds of thousands of credit ratings that Moody’s issued to
numerous government agencies, then the Second Amended Complaint fails to plead the required
elements. Which ratings were false, and why? Which agency received those ratings? Where
might the defendant look to find an answer to those questions? See Bishop, 823 F.3d at 43
(explaining that FCA complaint must establish, inter alia, existence of claim, its falsity, and that
claim was made to the Government). Such a complaint is the paradigmatic “fishing expedition,”
and insufficient as a matter of later to survive dismissal in an False Claims Act case. See United
States ex rel. Lissack v. Sakura Global Capital Mkts., Inc., No. 95-cv-1363, 2003 WL 21998968,
at *3 (S.D.N.Y. Aug. 21, 2003), aff’d, 377 F.3d 145 (2d Cir. 2004) (concluding that relator’s
attempt to attach to second amended complaint a “partial, nonexclusive list of transactions . . .
without any further detail is insufficient to satisfy the pleading requirement of Fed. R. Civ. P.
9(b)”).
Moreover, the Second Amended Complaint fails to adequately plead the
continuing falsity of specific credit ratings by Moody’s after Kolchinsky left Moody’s.
Accordingly, whether viewed through the lens of the statute of limitations or applicable pleading
standards, Kolchinsky’s third attempt to state an actionable FCA claim fails.
14
IV.
Dismissal with Prejudice
In a footnote, Kolchinsky requests a fourth opportunity to plead. While leave to
amend should generally be freely granted, see Fed. R. Civ. P. 15(a)(2), denial of leave is
appropriate here, where the plaintiff’s request—raised only in a footnote—is “inconspicuous and
never brought to the court’s attention,” 6 and, moreover, “gives no clue as to how the complaint’s
defects would be cured,” Loreley Financing (Jersey) No. 3 Ltd. v. Wells Fargo Secs., LLC, 797
F.3d 160, 190–91 (2d Cir. 2015). This is particularly so where this Court specifically directed
Kolchinsky to provide particularized allegations of the false Ratings Delivery Service claims. 7
Further, this Court sees no means by which Kolchinsky could provide this information, insofar as
the statute of limitations restricts any further amended pleading to claims submitted after May
27, 2009, a time by which the Government was aware of the allegedly false ratings. Thus, they
would be immaterial under Universal Health. Accordingly, this Court concludes that dismissal
of the Second Amended Complaint with prejudice is required.
V.
Pre-Motion Conference Request
Recently, Kolchinsky filed an application for a pre-motion conference, arguing
that he is entitled to a portion of the $864 million settlement among Moody’s, the Department of
Justice, several states, and the District of Columbia. (See ECF No. 76, at 1.) As the settlement
6
This Court is not obligated to consider arguments raised in such a fashion. See, e.g., Dial
Corp. v. News Corp., 314 F.R.D. 108, 121 (S.D.N.Y. 2015).
7
Kolchinsky further argues that dismissal would only be appropriate if he could prove “no
set of facts in support” of his complaint. (Pl.’s Opp. to Motion to Dismiss, at 25 n.9 (quoting
Pangburn v. Culbertson, 200 F.3d 65, 71 (2d Cir. 1999). The “no set of facts” standard of pleading
to which Relator refers, see Conley v. Gibson, 355 U.S. 41 (1957), was notably “abandoned” by
the Supreme Court’s decisions in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp.
v. Twombly, 550 U.S. 544 (2007). Vega v. Hempstead Union Free Sch. Dist., 801 F.3d 72, 83 (2d
Cir. 2015).
15
documents explain, however, that settlement relates to violations of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) and parallel state laws. (See ECF
No. 76-1, ¶ 8(a)–(b).) Moreover, that agreement specifically carves out monetary recovery for
“[a]ny liability for the claims or conduct alleged in United States ex rel. Kolchinsky v. Moody’s
Corp., Civ. No. 12-cv-01399-WHP (SDNY).” (ECF No. 76-1, ¶ 14(n).)
Kolchinsky nonetheless contends that the private settlement constitutes an
“alternate remedy” to this proceeding. See 31 U.S.C. § 3730(c)(5) (“If an[] . . . alternative
remedy is pursued in another proceeding, the person initiating the action shall have the same
rights in such proceeding as such person would have had if the action had continued under this
section.”); see also United States ex rel. Bledsoe v. Community Health Sys., Inc., 501 F.3d 493,
500 (6th Cir. 2007) (noting that “fact that the government had pursued settlement negotiations, as
opposed to intervening in Relator’s suit” would not “foreclose the possibility of Relator’s
recovery as a matter of law”).
No alternate remedy is available here, however, because the Second Amended
Complaint fails to state a valid FCA claim as a matter of law. See Bledsoe, 501 F.3d 493, 521–
23 (6th Cir. 2007) (providing that a “valid qui tam action must exist with respect to the FCA
violations covered by the Settlement agreement” for entitlement to alternate-source relief);
United States ex rel. Newell v. City of St. Paul, 728 F.3d 791, 799–800 (8th Cir. 2013) (same);
United States ex rel. Hefner v. Hackensack Univ. Med. Ctr., 495 F.3d 103 (3d Cir. 2007) (same).
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
16
declined to intervene. See Bledsoe, 501 F.3d at 522–23 (noting that qui tam proceeds are only
available when government proceeds “with an action” on the basis of relator’s allegations).
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.
CONCLUSION
For the foregoing reasons, Moody’s motion to dismiss is granted, and this action
is dismissed with prejudice. The Clerk of Court is directed to terminate the motions pending at
ECF Nos. 63 and 76 and mark this case as closed.
Dated: March 2, 2017
New York, New York
SO ORDERED:
_____________________________
WILLIAM H. PAULEY III
U.S.D.J.
17
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