United States of America v. International Business Machine Corporation et al

Filing 64

OPINION AND ORDER.....The defendants December 5, 2016 motion to dismiss claims against IBM is granted. The defendants motion to dismiss the FCA and Dodd-Frank retaliation claims is also granted. (Signed by Judge Denise L. Cote on 8/1/2017) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------- X
:
WILLIAM LAWRENCE,
:
Plaintiff,
:
:
-v:
:
INTERNATIONAL BUSINESS MACHINE
:
CORPORATION and SETERUS, INC.,
:
:
Defendants.
:
:
-------------------------------------- X

12cv8433(DLC)
OPINION AND ORDER

For the Plaintiff:
Andrew M. Witko
David Scher
R. Scott Oswald
The Employment Law Group, P.C.
888 17th Street, NW, Suite 900
Washington, D.C. 20006
For the Defendants:
Michael E. DeLarco
Allison J. Schoenthal
Hogan Lovells US LLP
875 Third Avenue
New York, New York 10022
Ty Cobb
Jessica Ellsworth
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, D.C. 20004
DENISE COTE, District Judge:
Plaintiff William Lawrence (“Lawrence”) brings this action
against his former employer Seterus, Inc. (“Seterus”) and its
parent company, International Business Machine Corporation
(“IBM”), pursuant to the whistleblower provisions of the False

Claims Act (“FCA”), 31 U.S.C. § 3730(h)(1), and the Dodd-Frank
Wall Street Reform and Consumer Protection Act (“Dodd-Frank”),
15 U.S.C. § 78u-6 et seq.

The defendants have moved to dismiss

the Second Amended Complaint (“SAC”) pursuant to Fed. R. Civ. P.
12(b)(6).

For the reasons set forth below, the defendants’

motion to dismiss is granted.
BACKGROUND
The following facts are drawn from the SAC and are
construed in favor of the plaintiff.

See Keiler v. Harlequin

Enters. Ltd., 751 F.3d 64, 68 (2d Cir. 2014).
experienced Certified Public Accountant.

Lawrence is an

Lawrence was employed

by Seterus as a Line Business Controls Analyst from at least
late 2011 until December 10, 2012.
Seterus is a loan servicing company.

Pursuant to a

contract between its parent IBM and the Federal National
Mortgage Association (“Fannie Mae”), Seterus managed mortgage
payments and worked to ensure that property values would remain
intact during foreclosure.

Lawrence’s allegations principally

concern Seterus’s participation in two Fannie Mae Programs: the
Form 571 Expense Claims Process (the “Form 571 Program”) and the
Borrower Response Package Collection Incentive/Fee Program (the
“BRP Program”).

2

I.

Form 571 Program
When a home loan goes into default, certain expenses must

be paid in order to protect the mortgage owner’s property
interest in the home.

Loan servicers can be reimbursed by

Fannie Mae for these expenses through the Form 571 Program.
There is a three-step process for submitting a Form 571 Cash
Disbursement Request (hereinafter, a “Form 571 claim”).

First,

the servicer must complete Form 571 and submit it via Fannie
Mae’s Asset Management Network.

Second, the servicer must

gather supporting documentation related to the Form 571
submission and compile it in PDF format.

Finally, the servicer

must attach the PDF to an email and send the supporting claim
documentation to Fannie Mae.

Fannie Mae reviews each expense

claim and reimburses the servicer for foreclosure-related costs
incurred every six months, or when the expense for a specific
loan is greater than $500.
In late 2011, Lawrence learned from a Vice President of
Accounting (“V.P.”) at Seterus that its President and Treasurer
had placed “extreme pressure” on her to record “inappropriate
accounting entries” related to Seterus’s Form 571 claims.
During a March 9, 2012 meeting, Lawrence was asked to perform an
independent analysis of Seterus’s accounting for the Form 571
claims.

During his review of the 571 claims accounting,
3

Lawrence uncovered a violation of Generally Accepted Accounting
Principles (“GAAP”), specifically the requirement that costs
incurred in a period be matched against revenue generated in the
same period when an entity reports its net income for a
specified accounting period.

Lawrence discovered that Seterus

did not record "all" foreclosure-related expenses at the time
the expenses were paid from Fainnie Mae's bank account, thereby
causing Seterus to overstate its financial position.
On May 10, 2012, Lawrence approached his direct manager at
Seterus to ask whether he could inquire of the V.P. if the Form
571 accounting was correct.

The manager responded: “No, let’s

not do that” or words to that effect.

Lawrence also asserts

that he subsequently informed a Managing Director of Business
Controls at Seterus about the pressure the V.P. experienced.
On June 26, Lawrence issued his “Review of Form 571
Processes Report” (the “Form 571 Report”), in which he described
how Seterus’s internal “controls” appeared to involve “nothing
more than to send over an enormous number of expense claims to
Fannie Mae and force Fannie Mae to identify those that were
improper.”

Lawrence circulated the Form 571 Report to Seterus

executives and to a Service Business Controls Program Director
for IBM.
In July, Lawrence met with the IBM employee to discuss the
4

alleged “accounting fraud” he had identified in his Form 571
Report.1

On September 15, Lawrence met with a member of IBM’s

Corporate Investigations unit to discuss Seterus’s failure to
remedy the “financial risks” he identified in his Form 571
Report.
II.

BRP Program
When a homeowner’s property is in jeopardy of foreclosure,

a loan servicer will send the homeowner a Borrower Response
Package (“BRP”).

The BRP offers information and resources to

mitigate the potential for foreclosure.

Included in the BRP is

a foreclosure prevention solicitation letter, a Uniform Buyer
Assistance Form (Form 710A), and an IRS Form 4506T-EZ.

Once a

borrower receives the BRP, the borrower must complete the forms
and provide additional “hardship documentation” explaining the
reasons for missing mortgage payments.

Upon receipt of a

completed package, the loan servicer will evaluate the response
and make the necessary foreclosure determinations.
On September 2, 2011, Fannie Mae announced its BRP Program.
The BRP Program provides incentives for the collection of

The SAC refers to other efforts Lawrence made to speak with IBM
employees in August and early September, about “accounting and
billing improprieties,” “internal control weaknesses” at
Seterus, and concerns about the possibility of retaliation. The
SAC does not indicate precisely what these attempts to discuss
issues with these IBM employees concerned or that the
conversations occurred.
5
1

complete BRPs.

Under the program, if a loan servicer produces

complete BRPs for at least 60% of a given pool, the servicer
will receive a $500 bonus payment for each completed BRP.

If a

servicer produces complete BRPs for 50 to 60% of a given pool,
the servicer will not receive a bonus payment, but will not owe
Fannie Mae a fee for the uncollected BRPs.

Lastly, if the

servicer collects less than 50% completed BRPs, the servicer
must pay Fannie Mae an unspecified fee for the uncollected BRPs.
A contractor with IBM discovered that Seterus had been
overreporting to Fannie Mae the number of complete BRPs it had
collected.

Apparently, “faulty business logic” within Seterus’s

database resulted in the submission of “claims to Fannie Mae for
payments which were not earned.”
perform an audit.

The contractor was asked to

The audit of a statistically significant

sample found that only 42% of claims identified to Fannie Mae as
complete were actually complete.
Lawrence independently analyzed the database and came to a
similar conclusion.

The SAC estimates that Seterus received

approximately $12,954,500 in erroneous bonus payments over the
first three quarters of 2012.
In November, Lawrence learned that Seterus had passed
Fannie Mae’s audit of the BRP Program.

The SAC asserts that

“Seterus leadership” never identified the overreporting of
6

completed BRPs to Fannie Mae.
On December 5, Lawrence provided Seterus’s Vice President
of Line Business Controls with an Employee Fraud Prevention
Scorecard for November 2012.

Lawrence’s scorecard identified

potential risk areas within the company’s “internal controls,
and disclosed his concerns regarding the overstated BRP
collection rates.”

On December 7, Lawrence reminded both that

VP and the Managing Director of Business Controls that there was
no existing control in place to ensure the accuracy of the BRP
reports collection rate and that Seterus “had a duty to ensure
the accuracy of its claims and disbursements.”

On December 10,

Seterus terminated Lawrence’s employment.
III. Procedural History
On November 16, 2012, approximately one month before the
termination of his employment, Lawrence filed a qui tam action
under seal alleging that Seterus and IBM were violating 31
U.S.C. § 3729 of the FCA by requesting reimbursement from Fannie
Mae for foreclosure-related expenses and by overstating the
number of BRPs collected in order to receive bonus payments.
After an investigation that ran over three years, the Government
declined on June 27, 2016 to intervene pursuant to 31 U.S.C. §
3730(b).

The qui tam complaint was unsealed on July 27, 2016.

Lawrence had already amended his complaint once before, on
7

January 16, 2013, and with the permission of the Court, Lawrence
filed a second amended complaint (“SAC”) on September 6, 2016,
in which he dropped his substantive FCA claims.
retaliation claims described below.

He retained the

On December 5, 2016, the

defendants filed a motion to dismiss pursuant to Rule 12(b)(6).
On December 9, at an initial conference with the parties,
Lawrence declined the opportunity to amend his complaint for a
third time in response to the pending motion to dismiss.

The

Court noted:
The plaintiff is requesting a substantial amount of
time to respond [to the motion to dismiss], until
January 19, and [the Court] wants to make sure . . .
given the age of this case and the length of time
that’s passed since June, among other things, that
this motion to dismiss when addressed will finally
resolve the legal issues raised in the motion.
When asked whether the plaintiff intended to amend his
complaint, counsel replied: “No, your Honor.”

Nevertheless, as

memorialized in a December 9 Order, the plaintiff was provided
until December 16 to amend his complaint.
complaint was filed.

No third amended

The motion to dismiss became fully

submitted on February 10, 2017.
On March 6, Lawrence requested that the Court take judicial
notice of three documents in support of his opposition to the
motion to dismiss.

On March 8, the defendants filed a motion to

strike the plaintiff’s request for judicial notice.
8

The motion

to strike became fully submitted on March 17.
For the reasons set forth below, the defendants’ motion to
strike is granted.

The defendants’ motion to dismiss is also

granted.
DISCUSSION
When deciding a motion to dismiss, a court must “accept all
allegations as true and draw all inferences in the non-moving
party’s favor.”

LaFaro v. New York Cardiothoracic Grp., PLLC,

570 F.3d 471, 475 (2d Cir. 2009) (citation omitted).

“To

survive a motion to dismiss under Rule 12(b)(6), a complaint
must allege sufficient facts which, taken as true, state a
plausible claim for relief.”

Keiler, 751 F.3d at 68; Ashcroft

v. Iqbal, 556 U.S. 662, 678 (2009) (“[A] complaint must contain
sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.” (citation omitted)).

A

claim has facial plausibility when “the factual content” of the
complaint “allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.”
Tongue v. Sanofi, 816 F.3d 199, 209 (2d Cir. 2016) (citation
omitted).

“Where a complaint pleads facts that are merely

consistent with a defendant’s liability, it stops short of the
line between possibility and plausibility of entitlement to
relief.”

Iqbal, 556 U.S. at 678 (citation omitted).
9

In sum, “a

plaintiff’s obligation to provide the grounds of his entitlement
to relief requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will
not do.”

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)

(citation omitted).
I.

Lawrence’s Request for Judicial Notice
Lawrence seeks judicial notice of three documents.

In

deciding a motion to dismiss, courts generally do not look
beyond facts stated on the face of the complaint, documents
appended to the complaint or incorporated in the complaint by
reference, documents integral to the complaint, and matters of
which judicial notice may be taken.

Goel v. Bunge, Ltd., 820

F.3d 554, 559 (2d Cir. 2016) (citation omitted).

A court may

properly take judicial notice of “relevant matters of public
record.”

Giraldo v. Kessler, 694 F.3d 161, 164 (2d Cir. 2012).

It is also “proper to take judicial notice of the fact that
press coverage, prior lawsuits, or regulatory filings contained
certain information, without regard to the truth of their
contents.”

Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d

406, 425 (2d Cir. 2008).
The first two documents at issue include excerpts from a
2005 IBM Annual Report and a 2007 IBM Press Release.

These

documents describe unrelated IBM accounting issues concerning a
10

separate client that predate the conduct at issue in this case.
The third document -- a Financial Agency Agreement between the
U.S. Department of the Treasury and Fannie Mae -- is proffered
as evidence that Fannie Mae is a Government-Sponsored Enterprise
(“GSE”).

These three documents are irrelevant or unnecessary to

resolve the present motion.

Accordingly, the defendants’ motion

to strike the request for judicial notice is granted.
II.

IBM was not Lawrence’s “employer” under the FCA or DoddFrank.
Lawrence was employed by Seterus.

He has chosen, however,

to sue not just Seterus but also its parent, IBM, for
retaliation.

The parties contest whether IBM was Lawrence’s

“employer” for purposes of his FCA and Dodd-Frank retaliation
claims.

Because Lawrence has not plausibly alleged a basis for

claims of liability against IBM as his employer, the claims
against IBM are dismissed.
Generally, “a parent is considered a legally separate
entity from its subsidiary, and cannot be held liable for the
subsidiary’s actions based solely on its ownership of a
controlling interest in the subsidiary.”

N.Y. State Elec. & Gas

Corp. v. FirstEnergy Corp., 766 F.3d 212, 224 (2d Cir. 2014).
Neither the FCA nor Dodd-Frank define the term “employer.”
Where a statute does not define a term, “absent other
indication, Congress intends to incorporate the well-settled
11

meaning of the common-law terms it uses.”

Universal Health

Servs., Inc. v. United States, 136 S. Ct. 1989, 1999 (2016)
(citation omitted) (applying this principle of interpretation to
the False Claims Act).

Put differently,

[w]here Congress borrows terms of art in which are
accumulated the legal tradition and meaning of
centuries of practice, it presumably knows and adopts
the cluster of ideas that were attached to each
borrowed word in the body of learning from which it
was taken and the meaning its use will convey to the
judicial mind unless otherwise instructed.
Sekhar v. United States, 133 S. Ct. 2720, 2724 (2013) (citation
omitted).

Thus, “if a word is obviously transplanted from

another legal source, whether the common law or other
legislation, it brings the old soil with it.”

Id. (citation

omitted).
Where remedial statutes (such as employment discrimination
statutes) have failed to define the term “employer,” the Second
Circuit has applied common law agency principles to determine
whether an employment relationship exists.

See Salamon v. Our

Lady of Victory Hosp., 514 F.3d 217, 226 (2d Cir. 2008) (Title
VII case).

The determination of an employment relationship

involves a fact-specific analysis of thirteen factors
articulated by the Supreme Court in Community for Creative NonViolence v. Reid, 490 U.S. 730 (1989).
226.

The Reid factors include:
12

Salamon, 514 F.3d at

[1] the hiring party's right to control the manner and
means by which the product is accomplished[;] .... [2]
the skill required; [3] the source of the
instrumentalities and tools; [4] the location of the
work; [5] the duration of the relationship between the
parties; [6] whether the hiring party has the right to
assign additional projects to the hired party; [7] the
extent of the hired party's discretion over when and
how long to work; [8] the method of payment; [9] the
hired party's role in hiring and paying assistants;
[10] whether the work is part of the regular business
of the hiring party; [11] whether the hiring party is
in business; [12] the provision of employee benefits;
[13] and the tax treatment of the hired party.
Id. at 227 (citing Reid, 490 U.S. at 751-52).
“non-exhaustive.”

Id.

This list is

The “most important” factor in

determining the existence of an employment relationship is
that control or right of control by the employer which
characterizes the relation of employer and employee .
. . . What is at issue is not merely the right to
dictate the outcome of the work, but the right to
control the ‘manner and means’ by which the hiree
accomplishes that outcome.
Id. at 228 (citation omitted).
Applying the relevant Reid factors here, the SAC does
not allege that IBM controlled the manner or means by which
Lawrence performed his accounting duties for Seterus.

For

instance, there is no allegation that Lawrence was paid by
IBM, nor any suggestion that IBM was involved in the hiring
or daily supervision of Lawrence.

Accordingly, pursuant to

common law agency principles, Lawrence has not plausibly
alleged that IBM was Lawrence’s employer.
13

In opposition to this motion to dismiss, Lawrence
urges the application of the single employer and joint
employer doctrines to hold IBM liable under the FCA and
Dodd-Frank.

The single employer and joint employer

doctrines were “developed to allow a plaintiff to assert
employer liability in the employment discrimination context
against entities that are not [the employee’s] formal,
direct employer.”

Griffin v. Sirva Inc., 835 F.3d 283, 292

(2d Cir. 2016) (citation omitted).
A “single employer” relationship exists where “an
employee, formally employed by one entity, has been
assigned to work in circumstances that justify the
conclusion that the employee is at the same time
constructively employed by another entity.”

Brown v.

Daikin Am. Inc., 756 F.3d 219, 226 (2d Cir. 2014) (citation
omitted).

Factors in determining whether a single employer

relationship exists include: “(1) interrelation of
operations; (2) centralized control of labor relations; (3)
common management; and (4) common ownership or financial
control.”

Griffin, 835 F.3d at 292.

No one factor is

determinative, but control of labor relations is the
central concern.

Id.

A “joint employer” relationship exists where “two employers
14

handle certain aspects of their employer-employee relationship
jointly.”

Id. (citation omitted).

Immediate control over the

employees is an “essential element” of any joint employer
determination.

Serv. Employees Int’l Union, Local 32BJ v. NLRB,

647 F.3d 435, 442 (2d Cir. 2011) (citation omitted).

In

determining whether a joint employer relationship exists, courts
look to whether the alleged joint employer:
(1) did the hiring and firing; (2) directly
administered any disciplinary procedures; (3)
maintained records of hours, handled the payroll, or
provided insurance; (4) directly supervised the
employees; or (5) participated in the collective
bargaining process.
Id. at 443 (citation omitted).
The Second Circuit has not addressed whether a corporate
parent may be held liable for an FCA or Dodd-Frank retaliation
claim under a single employer or joint employer theory of
liability.

Assuming, arguendo, that these doctrines are

applicable, the SAC does not plead facts to support their
application here.
The SAC largely engages in group pleading, alleging that
various actions were taken by the “defendants.”

But group

pleading will not suffice to hold a parent corporation liable
under either the joint employer or single employer doctrines.
The SAC’s more concrete allegations do not allege facts from
which a joint employer or single employer relationship between
15

IBM and Seterus can be plausibly inferred.

For example, the SAC

alleges that “employees for IBM and Seterus often work out of
the same facility” and “many IBM employees have transitioned to
Seterus and vice versa.”

It does not allege, for instance, that

IBM exercised immediate control over Seterus’s employees, that
IBM controlled Seterus’s labor relations, or that operations
between IBM and Seterus were interrelated in a way that is
relevant to this analysis.

While IBM entered into the contract

at issue with Fannie Mae, as described in the SAC, the loan
servicing work was performed by Seterus and it was Seterus that
Fannie Mae audited.

And, while Lawrence sent copies of one

report and spoke to certain IBM employees, his reporting
obligations were owed to Seterus and he sent his written reports
to his superiors at Seterus for their review.
The joint employer and single employer doctrines frequently
require discovery to resolve.

See, e.g., Brown, 756 F.3d at 226

(“Whether two related entities are sufficiently integrated to be
treated as a single employer is generally a question of fact not
suitable to resolution on a motion to dismiss.”).

But where the

facts alleged on a pleading do not plausibly support the claims
against a parent corporation, the claims against the parent
corporation may properly be dismissed on a Rule 12(b)(6) motion.
In sum, because the SAC does not plausibly allege that IBM was
16

Lawrence’s direct employer, or that a joint employer or single
employer relationship may have existed between IBM and Seterus,
the motion to dismiss the retaliation claims against IBM is
granted.
III. FCA Retaliation Claim
The FCA is a statutory scheme designed to discourage fraud
against the federal government.
136 S. Ct. at 1996.

See Universal Health Servs.,

It “authorizes private citizens to sue on

behalf of the United States to recover treble damages from those
who knowingly make false claims for money or property upon the
Government or who knowingly submit false statements in support
of such claims or to avoid the payment of money or property to
the Government.”

United States ex rel. Lissack v. Sakura Glob.

Capital Mkts., Inc., 377 F.3d 145, 146 (2d Cir. 2004); 31 U.S.C.
§ 3729(a)(1)(A)-(B).
The SAC alleges a violation of the FCA’s whistleblower
provision, 31 U.S.C. § 3730(h)(1) (“Section 3730(h)(1)”), which
provides in relevant part:
Any employee . . . shall be entitled to all relief
necessary to make that employee . . . whole, if that
employee . . . is discharged . . . or in any other
manner discriminated against in the terms and
conditions of employment because of lawful acts done
by the employee . . . in furtherance of an action
under this section or other efforts to stop 1 or more
violations of this subchapter.
An employee seeking to bring a cause of action under
17

Section 3730(h)(1) must prove that: “(1) he engaged in
conduct protected under the statute, (2) the employer was
aware of such activity, and (3) the employer took adverse
action against him because he engaged in the protected
activity.”

United States ex rel. Chorces as Trustee for

Bankr. Estate of Fabula v. Am. Med. Response, Inc., 2017 WL
3180616, at *17 (2d Cir. July 27, 2017).

“[P]roving a

violation of § 3729 is not an element of a § 3730(h) cause
of action.”

Graham Cty. Soil & Water Conservation Dist. v.

U.S. ex rel. Wilson, 545 U.S. 409, 416 n.1 (2005).

Thus,

Section 3730(h) “protects an employee’s conduct even if the
target of an investigation or action to be filed was
Id. at 416.

innocent.”

To determine whether an employee’s conduct was
protected under the FCA, courts must evaluate whether “(1)
the employee in good faith believes, and (2) a reasonable
employee in the same or similar circumstances might
believe, that the employer is committing fraud against the
government.”

United States ex rel. Uhlig v. Fluor Corp.,

839 F.3d 628, 635 (7th Cir. 2016) (citation omitted).2

The defendants urge the adoption of the “distinct possibility”
standard, which previously governed FCA retaliation claims.
Prior to its amendment, the FCA’s whistleblower provision
defined protected activity as employee conduct “in furtherance
of an action under this section, including investigation for,
18
2

“[M]ere investigation of an employer’s non-compliance with
federal regulations is not enough” to constitute protected
activity under Section 3730(h)(1).

Fisch v. New Heights

Acad. Charter Sch., No. 12cv2033 (DLC), 2012 WL 4049959, at
*5 (S.D.N.Y. Sept. 13, 2012) (citation omitted).
“[A]lthough correcting regulatory problems may be a
laudable goal, those problems [are] not actionable under
the FCA in the absence of actual fraudulent conduct, and so
reporting them [falls] outside the purview of the FCA’s
anti-retaliation provision.”

United States ex rel. Booker

initiation of, testimony for, or assistance in an action filed
or to be filed under this section.” See False Claims Amendment
Act of 1986, Pub. L. 99-562, § 4, 100 Stat. 3153, 3157-58. In
interpreting this earlier version of § 3730(h)(1), courts
adopted a “distinct possibility” standard, holding that “an
employee engages in protected activity when litigation is a
distinct possibility, when the conduct reasonably could lead to
a viable FCA action, or when . . . litigation is a reasonable
possibility.” Eberhardt v. Integrated Design & Constr., Inc.,
167 F.3d 861, 869 (4th Cir. 1999) (citation omitted). In 2009
(and again in 2010), the retaliation provision was amended to
cover employee conduct “in furtherance of an action under this
section or other efforts to stop 1 or more violations of this
subchapter.” 31 U.S.C. § 3730(h)(1). The addition of this
second prong necessarily broadens the provision’s coverage by
premising coverage on “efforts to prevent 1 or more violations”
rather than on the distinct possibility of litigation. See
Fabula, 2017 WL 3180616, at *19 (“Prior to 2009, § 3730(h)
provided a non-exclusive list of specific ‘lawful acts’ done in
furtherance of an FCA action that protected an employee . . . .
[T]he 2009 amendment had the effect of broadening the universe
of protected conduct under § 3730(h), at least with respect to
‘efforts to stop’ FCA violations.”).
19

v. Pfizer, Inc., 847 F.3d 52, 60 (1st Cir. 2017) (citation
omitted).

In other words, “[m]erely grumbling to the

employer about job dissatisfaction or regulatory violations
does not . . . constitute protected activity.”

United

States ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 743
(D.C. Cir. 1998).

Rather, the employee’s investigation

“must be directed at exposing a fraud upon the government.”
Fisch, 2012 WL 4049959, at *5 (citation omitted).
With respect to the notice requirement, a plaintiff
claiming retaliation must establish that the employer had
knowledge of the employee’s protected activity.

The

standard for notice is “flexible”: “[T]he kind of knowledge
the defendant must have mirrors the kind of activity in
which the plaintiff must be engaged.”

United States ex

rel. Williams v. Martin-Baker Aircraft Co., Ltd., 389 F.3d
1251, 1260 (D.C. Cir. 2004) (citation omitted).

“Unless

the employer is aware that the employee is investigating
fraud, the employer [cannot] possess the retaliatory intent
necessary to establish a violation of
1260-61 (citation omitted).

§ 3730(h).”

Id. at

An employee who simply engages

in behavior wholly consistent with his job description will
not, without more, provide notice that he is engaging in
protected activity.

Id. at 1261.
20

“[P]laintiffs alleging

that performance of their normal job responsibilities
constitutes protected activity must overcome the
presumption that they are merely acting in accordance with
their employment obligations to put their employers on
notice.”

Id. (citation omitted).

Thus, where an employee

is tasked with investigating fraud, he must go beyond the
assigned task, for example, by alerting a party outside the
usual chain of command, id., or “[c]haracterizing the
employer’s conduct as illegal [and] recommending that legal
counsel become involved,” Fisch, 2012 WL 4049959, at *6
(citation omitted).
Finally, while the Second Circuit has not defined the
standard of causation for FCA retaliation claims, the
Supreme Court has clarified that the term “because of”
typically “imports, at a minimum, the traditional standard
of but-for causation.”

EEOC v. Abercrombie & Fitch Stores,

Inc., 135 S. Ct. 2028, 2032 (2015) (Title VII); see also
Univ. of Tex. Sw. Med. Ctr. v. Nassar, 133 S. Ct. 2517,
2533 (2013) (holding that Title VII retaliation claims
“must be proved according to traditional principles of butfor causation, not the lessened [motivating-factor]
causation test,” and describing but-for causation as the
background standard against which Congress legislates).
21

Temporal proximity between the protected activity and the
retaliatory action may strengthen the inference of a causal
connection.

See Gorman-Bakos v. Cornel Co-Op Extension of

Schenectady Cty., 252 F.3d 545, 554 (2d Cir. 2001).
A. Whether Fannie Mae is a Covered Entity Under the FCA
The defendants contend that Fannie Mae is not a covered
entity under the FCA and that Lawrence was therefore not engaged
in protected conduct when he complained about Seterus’s dealings
with Fannie Mae.

The FCA defines a “claim” as a request or

demand for money or property that is either presented to an
“officer, employee, or agent of the United States,” 31 U.S.C. §
3729(b)(2)(A)(i), or “made to a contractor, grantee, or other
recipient, if the money or property is to be spent or used on
the Government’s behalf or to advance a Government program or
interest,” id. § 3729(b)(2)(A)(ii).3
The SAC relies solely on the assertion that Fannie Mae is a
GSE as the basis for Lawrence’s belief that his complaint
concerned a claim made to an “officer, employee, or agent of the
United States.”

In opposing this motion, Lawrence relies as

Section 3729(b)(2)(A)(ii) further requires that the United
States Government provide “any portion of the money or property
requested or demanded” or “reimburse such contractor, grantee,
or other recipient for any portion of the money or property
which is requested or demanded.” Id. § 3729(b)(2)(A)(ii)(I)(II).
3

22

well upon the 2008 legislation that created a federal government
conservatorship to put Fannie Mae in a solvent condition after
that year’s financial crisis.

See 12 U.S.C. § 4617.

Lawrence

argues that this temporary federal conservatorship provided him
with a good faith belief that his employer had committed, or was
about to commit, fraud against the government, and that a
reasonable employee in the same or similar circumstances might
agree with that assessment.

Given the other deficiencies in the

SAC, it is unnecessary to resolve whether Fannie Mae was a
covered entity or whether a mistaken but good faith belief that
it was would support an FCA claim.
B.

Form 571 Claims

As described above, the Form 571 Program allowed Seterus to
obtain reimbursement from Fannie Mae for expenses incurred
during the foreclosure process.

The SAC alleges that Lawrence,

who is a CPA and was functioning for Seterus as a Lines Business
Controls Analyst, became concerned that Seterus was not
recording its foreclosure-related expenses and reimbursements
from Fannie Mae in the same reporting period and that Seterus
was therefore violating GAAP principles when it prepared its
financial statements.
In March 2012, Lawrence performed an analysis of the
accounting at Seterus of its Form 571 Program.
23

The SAC asserts

that Lawrence’s June 26, 2012 Form 571 Report identified
weaknesses in Seterus’s internal controls over that accounting.
In that report, Lawrence observed that Seterus’s internal
"controls" appeared to involve "nothing more than to send over
an enormous number of expense claims to Fannie Mae and force
Fannie Mae to identify those that were improper.”

In July,

Lawrence met with an IBM employee to discuss the alleged
“accounting fraud” identified in his Form 571 Report.4

In

September, Lawrence discussed with an IBM investigator Seterus’s
failure to remedy the “financial risks” he identified in his
Form 571 Report.
As described in the SAC, Lawrence’s Form 571 Report about
the accounting of the Form 571 Program expenses and receipts did
not constitute “protected conduct” under the FCA, and neither
that report nor his conversations about it put his employer on
notice that he was engaged in protected activity.

Nor does the

SAC plausibly plead but-for causation.
1.

Protected conduct

The SAC’s allegations regarding the Form 571 Program
describe Lawrence's concerns regarding Seterus’s financial
reporting -- in particular, Seterus’s controls over its

The SAC does not actually allege that the Form 571 Report
itself described any “accounting fraud.”
24
4

accounting of expenses incurred in connection with, and receipts
from, the Form 571 Program.

The SAC does not describe a concern

that Seterus was engaged in defrauding Fannie Mae by filing
false claims with Fannie Mae.

It does not allege, therefore,

that Lawrence engaged in protected activity.
For example, the SAC does not allege that Lawrence believed
any of the following: that Seterus was presenting false claims
to Fannie Mae in connection with the Form 571 Program; that
Seterus had omitted any potentially material information from
the Form 571 claims that it submitted to Fannie Mae; that
Seterus was receiving any money pursuant to these claims to
which it was not entitled; that Seterus’s submitted claims
failed to comply with any statutory, regulatory, or contractual
requirements; or that compliance with such requirements was a
prerequisite to payment.

Cf. United States ex rel. Ladas v.

Exelis, Inc., 824 F.3d 16, 26 (2d Cir. 2016) (“The FCA is not a
general enforcement device for federal statutes, regulations,
and contracts.

A false certification of compliance, without

more, does not give rise to a false claim for payment unless
payment is conditioned on compliance.” (citation omitted)).
Accordingly, Lawrence’s internal complaints about the quality of
Seterus’s internal controls over its accounting does not
constitute FCA-protected activity.
25

2.

Notice

For these same reasons, the SAC does not allege that
Lawrence gave notice to his employer of any protected activity,
to wit, that Seterus was defrauding Fannie Mae.

In his Form 571

Report, Lawrence “identified weaknesses" in Seterus’s "internal
controls as they relate to the Form 571 process.”

This appears

to relate directly to his responsibilities as an internal
auditor for Seterus.
The SAC also alleges that the Form 571 Report characterized
Seterus’s deficient controls as “nothing more" than sending over
"an enormous number of expense claims to Fannie Mae and
forc[ing] Fannie Mae to identify those that were improper.”
This allegation is also insufficient to plead that Lawrence put
his employer on notice that he perceived that Seterus was
engaged in a fraud on the government.
3.

Causation

The SAC does not allege facts to support an inference that
Lawrence’s employment would not have been terminated but for his
Form 571 Report and his discussion of it.

Lawrence’s Form 571

Report was circulated in June 2012 -- almost six months before
he was fired.

Furthermore, the SAC does not assert that

Lawrence’s communications with his supervisors in the days
leading up to the termination of his employment referenced the
26

Form 571 accounting issues.

The SAC's conclusory assertion that

Seterus’s reason for terminating Lawrence employment was “false”
and a “pretext for unlawful retaliation" are entitled to no
deference on a motion to dismiss.

"[W]hile a court must accept

all of the allegations contained in a complaint as true, that
tenet is inapplicable to legal conclusions, and threadbare
recitals of the elements of a cause of action, supported by mere
conclusory statements.”

Balintulo v. Ford Motor Co., 796 F.3d

160, 165 (2d Cir. 2015) (citation omitted).
C.

BRP Response Collection Rate

The BRP Program, as explained above, allowed Seterus to
obtain incentive payments from Fannie Mae if it collected
complete BRP responses from 60% of a given pool.

According to

the SAC, in September 2012, Lawrence learned that “faulty” logic
within Seterus’s database resulted in the submission of BRP
responses incorrectly marked as “complete” to Fannie Mae.

An

audit of a statistically significant sample of the claims found
that only 42% identified within the database as complete were
actually complete.

On December 5 and 7, Lawrence reported to

Seterus that the deficiencies in its internal controls meant
that Seterus could not ensure that accuracy of its reports to
Fannie Mae of its BRP collection rate.
on December 10.
27

Seterus fired Lawrence

The SAC does not allege either that Lawrence engaged in
protected activity, as that term is defined under the FCA, or
that he reported to Seterus a concern that it was defrauding
Fannie Mae.

Accordingly, the FCA retaliation claim premised on

Seterus’s BRP Program is dismissed as well.
1. Protected conduct
Lawrence was not engaging in protected activity when
he reported his concerns about the adequacy of Seterus’s
internal controls over the BRP database and its potential
effect on Seterus’s BRP submissions.

First, as an internal

auditor, and as an employee completing the Seterus Employee
Fraud Prevention Scorecard, the identification of
weaknesses in internal controls was part and parcel of his
job responsibilities.

Second, a report of concerns over

the adequacy of internal controls is not a statement of
belief that Seterus was engaged in a fraud upon Fannie Mae.
Far from it, the SAC explains that the misidentification of
certain BRP responses in the internal database was due to
"faulty" business logic in the computer program as opposed
to the submission of knowingly false claims for bonus
payments.
Moreover, it is helpful to remember that the
entitlement to bonus payments from Fannie Mae under the BRP
28

Program was premised on the collection of 60% of BRP
responses from a given pool.

The BRP responses themselves

were not requests for payment.
2.

Notice

For these same reasons, the SAC does not allege that
Lawrence gave notice to his employer of a perceived fraud on
Fannie Mae.

In December 2012, Lawrence responded to an Employee

Fraud Prevention Scorecard5 with the observation that he was
concerned about “overstated BRP collection rates.”

When Seterus

followed up on that expressed concern, Lawrence observed that
Seterus had a duty to ensure the accuracy of its claims and to
institute controls to do so.

These statements appear to involve

nothing more than what he was obligated to disclose as an
auditor and as an employee responding to the Scorecard.
Moreover, the SAC does not allege that in communicating his
concerns regarding the BRP collection rates, Lawrence ever
discussed a perceived fraud on Fannie Mae.
In opposition to this motion, Lawrence essentially concedes
that he never reported a concern that Seterus was actually
engaged in defrauding Fannie Mae.

He argues that he relied upon

his supervisors to draw this connection: “Any [Seterus] employee

The SAC does not explain what an Employee Fraud Prevention
Scorecard is, nor what, specifically, Lawrence disclosed within
his scorecard.
29
5

with even a minimal understanding of the BRP program would
recognize that ‘overstat[ing] BRP collection rates’ is the
equivalent of submitting a false claim for payment.”

Where

there is nothing in the SAC to suggest that Lawrence’s
complaints concerned anything beyond Seterus’s internal controls
and the accuracy of its BRP database, the SAC fails to satisfy
the FCA’s notice requirement.
IV.

Dodd-Frank Act Retaliation Claim
The whistleblower provision of Dodd-Frank provides:
No employer may discharge . . . or in any other manner
discriminate against, a whistleblower in the terms and
conditions of employment because of any lawful act
done by the whistleblower -(i) in providing information to the Commission in
accordance with this section;
(ii) in initiating, testifying in, or assisting in any
investigation or judicial or administrative action of
the Commission based upon or related to such
information; or
(iii) in making disclosures that are required or
protected under the Sarbanes-Oxley Act of 2002 . . .
this chapter . . . and any other law, rule, or
regulation subject to the jurisdiction of the
Commission.

15 U.S.C. § 78u-6(h)(1)(A) (citation omitted).

The Sarbanes-

Oxley Act, incorporated by reference into 15 U.S.C. § 78u6(h)(1)(A)(iii), provides that a publicly traded company or its
subsidiary cannot discharge an employee because the employee
provides information “regarding any conduct which the employee
30

reasonably believes constitutes a violation of section 1341,
1343, 1344, or 1348, any rule or regulation of the Securities
and Exchange Commission, or any provision of Federal law
relating to fraud against shareholders.”

18 U.S.C. §

1514A(a)(1).
The elements of a retaliation claim under Dodd-Frank are
“(1) that the plaintiff engaged in a protected activity, (2)
that the plaintiff suffered an adverse employment action, and
(3) that the adverse action was causally connected to the
protected activity.”

Vista Outdoor Inc. v. Reeves Family Trust,

16cv5766 (JSR), 2017 WL 571017, at *9 (S.D.N.Y. Feb. 13, 2017).
To state a claim under Dodd-Frank, a plaintiff must
plausibly allege that he had an objectively reasonable belief
that the defendant’s conduct violated one of the enumerated
provisions of law.
222 (2d Cir. 2014).

Nielsen v. AECOM Tech. Corp., 762 F.3d 214,
“The statute does not specify what, in

particular, a purported whistleblower must establish to
demonstrate that criminal fraud or securities-related
malfeasance is afoot.”

Id. at 221.

While a whistleblower need

not establish that the employer’s conduct actually violated an
enumerated provision of the securities laws, see Guyden v.
Aetna, Inc., 544 F.3d 376, 384 (2d Cir. 2008) (“[A]
whistleblower need not show that the corporate defendant
31

committed fraud to prevail in her retaliation claim.”)
(discussing 18 U.S.C. § 1514A), the Second Circuit has expressed
skepticism toward the proposition that a whistleblower’s
complaint “need not even approximate specific elements of the
enumerated provisions alleged violated, or that there is no
requirement that the violation must be material.”
F.3d at 221 n.6.

Nielsen, 762

In other words, a whistleblower must plausibly

allege that he “reported information based on a reasonable
belief that the employer violated one of the enumerated
provisions set out in the statute.”
1514A(a)(1)).

Id. (analyzing 18 U.S.C. §

Thus, “to be reasonable, the purported

whistleblower’s belief cannot exist wholly untethered from these
specific provisions.”

Id.

The “critical focus” of the statute is “whether the
employee reported conduct that he or she reasonably believes
constituted a violation of federal law.”
omitted).

Id. at 221 (citation

The “reasonable belief” standard contains both

subjective and objective components: a plaintiff “must show not
only that he believed that the conduct constituted a violation,
but also that a reasonable person in his position would have
believed that the conduct constituted a violation.”
(citation omitted).

Id.

“The objective prong of the reasonable

belief test focuses on the basis of knowledge available to a
32

reasonable person in the circumstances with the employee’s
training and experience.”

Id. (citation omitted).

Like the FCA, the Dodd-Frank whistleblower provision uses
the phrase “because of” to describe the causal connection that
must be established between the protected conduct and the
adverse employment action.

Accordingly, for the reasons set

forth above, the plaintiff must demonstrate that his employment
would not have been terminated but for his protected conduct.
See Abercrombie, 135 S. Ct. at 2032.
The SAC alleges that Lawrence engaged in activity protected
by Dodd-Frank when he spoke of concerns regarding the Form 571
Program accounting.

In opposition to this motion, Lawrence

seeks to add to this claim his concerns, expressed in December
2012, about overstated BRP response collection rates in the
Seterus database.

This latter claim, which is not fairly stated

in the SAC, is also addressed below.
A.

Form 571 Accounting

Lawrence claims that he discovered a violation of GAAP
while analyzing the accounting for the Form 571 Program, and
that such “irregular” accounting practices constituted
securities fraud.

Lawrence has failed to state a retaliation

claim because he has not plausibly pled that this alleged GAAP
violation was material to shareholders, that he believed that it
33

might be, that such a belief would have been reasonable, or that
he ever expressed such a concern during his employment.
In assessing the materiality of an omission or
misstatement, courts must evaluate “whether there is a
substantial likelihood that the disclosure of the omitted
information would have been viewed by the reasonable investor as
having significantly altered the total mix of information made
available.”

Stadnick v. Vivint Solar, Inc., 861 F.3d 31, 37 (2d

Cir. 2017) (citation omitted).

In other words, there must be a

“substantial likelihood that a reasonable investor would find
the omission or representation important in making an investment
decision.”

United States v. Vilar, 729 F.3d 62, 88 (2d Cir.

2013) (citation omitted).

“[B]ecause materiality is a mixed

question of law and fact . . . [a] complaint may not properly be
dismissed on the ground that the alleged misstatements or
omissions are not material unless they are so obviously
unimportant to a reasonable investor that reasonable minds could
not differ on the question of their importance.”

Ind. Pub. Ret.

Sys. v. SAIC, Inc., 818 F.3d 85, 96 (2d Cir. 2016) (citation
omitted).
Here, the SAC does not plausibly allege that Lawrence held
a reasonable belief that his disclosures regarding the Form 571
accounting would have materially impacted the relevant
34

financials.

As a wholly owned subsidiary, Seterus’s financial

results were reported on IBM’s financial statements.6

According

to the SAC, Lawrence’s Form 571 Report expressed concern
regarding Seterus’s poor internal controls and the effect that
those imperfect controls had on the company's submissions to
Fannie Mae.

It is assumed for purposes of this discussion,

although this is not clearly alleged, that the report and
Lawrence's subsequent discussions of the report also expressed
concern over whether the Form 571 Program expenses and receipts
were being reported together, in the appropriate period, on
publicly filed financial statements, as required under GAAP.
The SAC does not describe, however, that during his employment
Lawrence ever developed a belief of the extent to which this
GAAP error might affect the accuracy of the IBM financial
statements, much less that he expressed to anyone at Seterus or
IBM that the error in the GAAP accounting of the Form 571
Program expenses and receipts could have a potentially material
effect on those statements.

Accordingly, the SAC has not

The SAC does not identify the financial statements at issue.
The parties' motion papers acknowledge that the Seterus
financial results were reported on IBM's financial statements.
Because the Dodd-Frank claim rests on the SAC’s assertion that
Lawrence believed the financial statements violated GAAP
accounting principles, and because the SAC identifies him as a
CPA working for Seterus in an audit capacity, for this limited
purpose it is appropriate to deem the relevant financial
statements as integral to the SAC's claims.
35
6

plausibly alleged that Lawrence, an experienced accountant, held
a reasonable belief of a securities law violation, much less
that he ever expressed such a concern.
This conclusion is particularly appropriate when a
plaintiff functions, as Lawrence did, as an internal auditor and
is charged with responsibility for evaluating and commenting on
the quality of internal controls and compliance with GAAP
accounting.

Every observation by such an employee about

imperfections in the internal controls and accounting systems in
an organization does not and should not constitute protected
activity under Dodd-Frank.

Where, however, such an employee has

a reasonable basis to believe that a filing governed by the
securities laws contains a materially false statement, and
alerts his employer of that concern, then that employee is
protected from retaliation by Dodd-Frank.
B.

BRP Response Collection Rate

As noted above, the SAC's Dodd-Frank claim does not rest on
Lawrence's reports to Seterus about the "faulty logic" in
Seterus's database regarding BRPs.

The thrust of the SAC's

assertions regarding the BRP Program is a concern with the
impact on Fannie Mae, not on the securities markets.

It claims

that the faulty logic in the database led Seterus to incorrectly
identify "completed" BRP responses to Fannie Mae.
36

In opposition to this motion, however, Lawrence argues that
his Dodd-Frank claim should be read to encompass the allegations
regarding the BRP Program.

He points out that the SAC

calculates that the database errors resulted in “an erroneous
cost to Fannie Mae of $12,954,500” over approximately three
quarters of a year.7

He reasons that erroneous receipt of income

necessarily overstates a company's financial position.

These

allegations fail to support a plausible Dodd-Frank retaliation
claim.
The SAC does not allege that Lawrence ever reported to
anyone at Seterus or IBM his belief that the BRP database error
was affecting the accuracy of any financial reporting.

Nor does

the SAC allege that Lawrence ever quantified for himself or
anyone during his employment the extent to which the database
error could be affecting the accuracy of reported financial
results.

There is no basis to infer based on the SAC's

allegations that Lawrence held a reasonable belief during his

The SAC's description of the BRP Program and its calculation of
erroneously received payments are not consistent with each
other. As described in the SAC, no single completed BRP
entitled Seterus to a payment, and a BRP did not constitute a
claim for a payment. Instead, payments to Seterus were
predicated on the calculation of a rate of completed BRPs in a
designated pool. Nonetheless, for purposes of this motion, it
is assumed that there is an adequate basis to allege Seterus's
receipt of almost $13 million from Fannie Mae to which Seterus
was not entitled.
37
7

employment that, in effect, the securities laws were being
violated in connection with the BRP Program accounting or that
he reported such a belief.
In opposition to this motion, Lawrence speculates that the
discovery by Fannie Mae of the irregularities in the BRP
completion rate reports “[c]ould have led to some kind of
additional penalty” and perhaps “a complete cancellation of
Defendants’ contract with Fannie Mae,” and that that
cancellation would have materially impacted a shareholder’s
decision to invest in IBM.

Of course, the SAC reports both that

Fannie Mae conducted an audit of the BRP program at Seterus in
the month before Lawrence was fired, and that Seterus passed the
audit.

In any event, the SAC does not allege that Lawrence

considered and described this parade of horribles to Seterus and
was fired in retaliation for doing so.

Nor does the opposition

memorandum suggest that such allegations could be properly
included in a pleading.
C.

Lawrence’s Request to Amend the SAC

In opposition to this motion, Lawrence seeks leave to amend
his complaint to add assertions regarding materiality.

He does

not identify any addition that would alter the analysis on which
this Opinion rests.

“Leave to amend may properly be denied if

the amendment would be futile.”

Krys v. Pigott, 749 F.3d 117,
38

134 (2d Cir. 2014).

“A proposed amendment to a complaint is

futile when it could not withstand a motion to dismiss.”
Balintulo, 796 F.3d at 164-65 (citation omitted); see also
Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797
F.3d 160, 190 (2d Cir. 2015) (leave to amend properly denied
“where the request gives no clue as to how the complaint’s
defects would be cured” (citation omitted)).
In addition, Lawrence's request comes too late.

The

defendants filed their motion to dismiss on December 5.
Lawrence was aware of this motion and the defendants’ arguments
regarding materiality and other matters in advance of the
December 9 conference.

At the conference Lawrence’s counsel

confirmed that he did not intend to file a third amended
complaint.

Nevertheless, the December 9 Order afforded Lawrence

an additional opportunity to do so.

Lawrence did not avail

himself of this additional opportunity to amend.

Accordingly,

Lawrence’s request to amend his complaint is denied.

39

CONCLUSION
The defendants’ December 5, 2016 motion to dismiss claims
against IBM is granted.

The defendants’ motion to dismiss the

FCA and Dodd-Frank retaliation claims is also granted.

Dated:

New York, New York
August 1, 2017
____________________________
DENISE COTE
United States District Judge

40