The State of New York Ex Rel Vinod Khurana et al v. Spherion Corp

Filing 84

OPINION ORDER re: 47 MOTION for Relator's Share filed by Vinod Khurana. Plaintiff Vinod Khurana ("Khurana") moves the Court to award him a relator's share of the $500 million settlement that the City of New York and the Department of Justice reached with Science Applications International Corp. in connection with a March 2012 deferred prosecution agreement. The City of New York opposes the motion. The Court denies the motion because Khurana 9;s qui tam claims have been dismissed and, thus, Khurana has failed to assert a valid qui tam action, which is a prerequisite to a relator's recovery of an alternate civil remedy under the New York State False Claims Act or an alternate action under the New York City False Claims Act. For the reasons stated above, Khurana's motion for a relator's share is denied. SO ORDERED. (Signed by Judge John F. Keenan on 3/28/2017) (anc)

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 03/28/2017

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF DISTRICT COURT
UNITED STATES NEW YORK
------------------------------ YORK
SOUTHERN DISTRICT OF NEW X
THE STATE OF NEW YORK EX REL
:
-----------------------------------------------------------x
VINOD KHURANA and MAE 2008 SECURITIES
:
In re FANNIE THE CITY OF
:
08 Civ. 7831 (PAC)
NEW YORK EX REL VINOD KHURANA, :
LITIGATION
:
09 MD 2013 (PAC)
:
:
Plaintiffs,
:
: 15 Civ. 6605 & ORDER
OPINION (JFK)
No.
:
-----------------------------------------------------------x OPINION & ORDER
-against:
:
SPHERION CORP. (N/K/A SFN
:
GROUP, INC.),
HONORABLE PAUL A. CROTTY, :
United States District Judge:
Defendant.
:
------------------------------ X
BACKGROUND1
APPEARANCES
The early years of this decade saw a boom in home financing which was fueled, among
FOR PLAINTIFF/RELATOR VINOD KHURANA:
David Kovel, Esq.
other things, by low interest rates and lax credit conditions. New lending instruments, such as
David Bishop, Esq.
KIRBY McINERNERY,(high credit risk loans) and Alt-A mortgages (low-documentation loans)
subprime mortgages LLP
John R. Newcomer, Borrowers played a role too; they took on unmanageable risks on the
kept the boom going. Jr., Esq.
Elaine Stromgren, Esq.
Jillian Estes,the market would continue to rise and that refinancing options would always be
assumption that Esq.
JAMES HOYER, P.A.
available in the future. Lending discipline was lacking in the system. Mortgage originators did
FOR THE CITY OF NEW YORK:
Zachary W. Carter, Esq.
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Gail Rubin, Esq.
Sabita Krishnan, Esq.
originators sold their loans into the secondary mortgage market, often as securitized packages
Lilia Toson, Esq.
CORPORATION COUNSEL OF THE CITY OF NEW YORK
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.

John F. Keenan, United States District Judge:
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
Plaintiff Vinod Khurana (“Khurana”) moves the Court to
and home prices began to fall. In light of the changing housing market, banks modified their
award him a relator’s share of the $500 million settlement that
lending practices and became unwilling to refinance home mortgages without refinancing.
the City of New York and the Department of Justice reached with
Science 1Applications International Corp. or to the “Complaint” are withAmended Complaint,
Unless otherwise indicated, all references cited as “(¶ _)” in connection to the a
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

March 2012 deferred prosecution agreement.
1

1

The City of New York

opposes the motion.

The Court denies the motion because

Khurana’s qui tam claims have been dismissed and, thus, Khurana
has failed to assert a valid qui tam action, which is a
prerequisite to a relator’s recovery of an alternate civil
remedy under the New York State False Claims Act or an alternate
action under the New York City False Claims Act.
I.

Background

A. Procedural Background
Familiarity with this Court’s prior opinion and order, (Op.
& Order, ECF No. 70 (filed Nov. 10, 2016)), is presumed, however
a brief review of the history of this action is appropriate.
Khurana originally filed this action under seal on March 31,
2011, in New York Supreme Court. (See Def.’s Notice of Removal
Ex. A, ECF No. 1-1 at 74 (filed Aug. 20, 2015).)

The essence of

Khurana’s original complaint is that, over the course of several
years, multiple parties perpetuated a scheme to defraud the City
of New York (the “City”) through the large-scale CityTime
project, which aimed to automate timekeeping and payroll
functions for the City. (See id.)

Khurana asserted qui tam

claims on behalf of the State of New York (“the State”) and the
City under the New York State False Claims Act (“NYS FCA”). (See
id. at 75, 79.)

Khurana also claimed retaliatory discharge

under the NYS FCA and New York City False Claims Act (“NYC
FCA”). (See id. at 97.)
2

On April 22, 2013, the State filed a Notice of Election in
New York Supreme Court, declining to file a complaint against
any of the defendants named in Khurana’s action or to intervene
in the action. (Id. at 103-04.)

The State’s Notice of Election

authorized the City to intervene in Khurana’s action, convert
the action into a civil enforcement action, or decline to do
either. (Id.)

On October 14, 2013, Khurana filed an amended

complaint, also under seal, in New York Supreme Court. (Id. at
36.)

The amended complaint largely resembled the original.
On March 4, 2015, the City filed under seal a Notice of

Election in New York Supreme Court declining to intervene in
Khurana’s action or convert it to a civil enforcement action.
(Id. at 106.)

On July 13, 2015, Khurana filed a second amended

complaint, which is the operative complaint here.1 (“Second
Amended Complaint,” Def.’s Notice of Removal Ex. A, ECF No. 1-1
at 4.)

The second amended complaint named only Spherion Corp.2

as a defendant and added a count for false claims under the NYC
FCA. (Id. ¶¶ 1, 70-73.)

On August 20, 2015, Spherion removed

“It is well established that an amended complaint ordinarily
supersedes the original and renders it of no legal effect.”
Int’l Controls Corp. v. Vesco, 556 F.2d 665, 668 (2d Cir. 1977).
1

As the Court has previously noted, Spherion Corp. changed its
name to SFN Group, Inc. in 2011, after much of the activity
relevant to this case transpired. The Court refers to the
company as “Spherion” throughout this Opinion, however, for sake
of clarity and convenience.
2

3

the case to federal court on the basis of diversity. (See Def.’s
Notice of Removal, ECF No. 1 (filed Aug. 20, 2015).)
On January 8, 2016, Khurana moved for a relator’s share of
a $500 million settlement between the Department of Justice and
Science Applications International Corporation (“SAIC”), who was
named as a defendant in Khurana’s original and amended
complaints, but omitted from the second amended complaint. (See
Pl.’s Mem. of L. in Supp. of Mot. for Relator’s Share, ECF No.
48 (filed Apr. 15, 2016).)

Khurana primarily relied on the NYS

FCA, but also referred to the NYC FCA. (See, e.g., id. at 18
n.78.)

The motion was fully briefed on April 15, 2016.

On November 10, 2016, the Court dismissed the qui tam
claims Khurana brought under the NYS FCA and NYC FCA. (See Op. &
Order, ECF No. 70 (filed Nov. 10, 2016).)

As to certain of

Khurana’s claims, the Court held that they were precluded by the
“public disclosure bar,” which prohibits a relator from relying
on publicly disclosed information when commencing a qui tam
action. (See id.)

As to Khurana’s remaining qui tam claims, the

Court held that they failed to satisfy the applicable pleading
requirements. (See id. at 35–42.)

The Court did not dismiss

Khurana’s claims regarding retaliatory discharge.
B. Factual Background
The City launched the CityTime project in 1998 with the aim
of automating timekeeping and payroll functions for
4

approximately 180,000 City employees by 2010. (Second Am. Compl.
¶ 13.)

Over the course of the project, various contractors and

subcontractors worked on CityTime, including SAIC and Spherion.
(Id. ¶¶ 14, 15.)

Spherion hired Khurana as a consultant to work

on CityTime in 2004 and terminated him in 2007. (Id. ¶ 9.)
As alleged in Khurana’s second amended complaint, in late
2004, Khurana began noticing problems with the performance
capabilities of CityTime software and started voicing concerns
to various individuals, including employees of SAIC and
Spherion. (Id. ¶¶ 29-30.)

Khurana also witnessed CityTime

contractors engaging in “fraudulent conduct,” including billing
for, among other things, severance packages for previously
terminated employees, overtime hours incurred despite express
prohibition against overtime expenditures, and one employee’s
personal travel expenses. (Id. ¶ 45.)

Khurana alleges that from

2004 to 2007 he repeatedly informed Spherion employees that
CityTime had “serious problems” and would inevitably fail, but
Spherion “continued with the project as if those problems did
not exist” and ultimately retaliated against Khurana by
terminating his employment in May 2007. (Id. ¶¶ 34, 36, 57–58.)
In 2009, Khurana drafted a complaint that memorialized his
knowledge related to CityTime and sent it to the City’s
Department of Investigations (“DOI”). (Id. ¶ 62.)

Khurana then

conducted an “extensive” media campaign by posting comments to
5

articles on the websites of several news outlets, including CNN
and the New York Daily News. (Id. ¶¶ 62-63.)

Beginning in late

2010, Khurana met with DOI investigators and provided them with
a “full accounting” of his knowledge regarding CityTime. (Id. ¶
64.)
The news media began reporting problems with CityTime in
2004 and the project received criticism from a committee of the
New York City Council in 2008. (See, e.g., Decl. of Sabita
Krishnan Exs. A, D, E, ECF No. 53 (filed Apr. 15, 2016).)

On

December 15, 2010, the U.S. Attorney’s Office for the Southern
District of New York and the DOI jointly unsealed a criminal
complaint and announced charges against six individuals
connected to the CityTime scheme. (See Krishnan Decl. Exs. A, G,
H.)

The criminal complaint included substantially detailed

allegations of, among other things, fraudulent billing and a
concealed kickback scheme conducted by various CityTime
contractors and the defendant employees. (See Krishnan Decl.
Exs. A, H.)
On March 8, 2012, SAIC signed a deferred prosecution
agreement (the “DPA”) with the U.S. Department of Justice. (See
Krishnan Decl. Exs. A, O.)

Under the terms of the DPA, SAIC

admitted to having defrauded the City and agreed to a civil
forfeiture of $500 million, with the majority of the funds
intended to repay the City (the “SAIC Settlement”). (See
6

Krishnan Decl. Exs. A, O, P, Q.)

The DPA released all claims by

the City against SAIC related to the CityTime project. (See
City’s Mem. of L. in Opp’n to Mot. for Relator’s Share 4, ECF
No. 50 (filed Apr. 15, 2016).)

Khurana argues that the DPA and

SAIC Settlement effectively released his qui tam claims, but
without compensating him.
II. Legal Standard
A. Overview of the NYS FCA and NYC FCA
The NYS FCA’s purpose is to prevent and uncover fraud on
the State. See, e.g., State ex rel. Seiden v. Utica First Ins.
Co., 943 N.Y.S.2d 36, 39 (N.Y. App. Div. 2012) (stating that the
NYS FCA “applies to any sort of looting of the public purse”).
As relevant here, it accomplishes this by imposing liability on
any person who “knowingly presents, or causes to be presented a
false or fraudulent claim for payment or approval,” or
“knowingly makes, uses, or causes to be made or used, a false
record or statement material to a false or fraudulent claim.”
N.Y. STATE FIN. LAW § 189(1)(a), (b).

The NYS FCA permits a

private person, known as a “relator,” to bring a civil action,
known as a qui tam action, on behalf of the government for
violations. See id. § 190(2).
The NYS FCA is modeled on the federal False Claims Act (the
“FCA”). See United States ex rel. Bilotta v. Novartis Pharm.
Corp., 50 F. Supp. 3d 497, 509 (S.D.N.Y. 2014).
7

“Because the

[NYS FCA] mirrors the FCA in many respects, ‘it is appropriate
to look toward federal law when interpreting the New York act.’”
United States v. N. Adult Daily Health Care Ctr., No. 13-CV-4933
(MKB), 2016 WL 4703653, at *3 (E.D.N.Y. Sept. 7, 2016) (quoting
Seiden, 943 N.Y.S.2d at 39); see also United States v. N.Y. Soc.
for the Relief of the Ruptured & Crippled, Maintaining the Hosp.
for Special Surgery, No. 07 Civ. 292 (PKC), 2014 WL 3905742, at
*11 (S.D.N.Y. Aug. 7, 2014) (“New York courts rely on federal
FCA precedents when interpreting the [NYS FCA].”).
Under the NYS FCA, once a relator files a qui tam action,
the government has multiple options.

The government may

intervene in the relator’s qui tam action or convert the action
into a civil enforcement action. See N.Y. STATE FIN. LAW §
190(5)(a).

The government may also refrain from intervening in

or converting a qui tam action and, instead, allow the relator
to pursue it to a resolution. See id. § 190(6)(b).

Notably, the

NYS FCA does not foreclose the government from electing to
pursue “any remedy available” with respect to alleged false
claims. Id. § 190(5)(c).
Like the NYS FCA, the NYC FCA closely tracks the federal
FCA. See Ping Chen ex rel. United States v. EMSL Analytical,
Inc., 966 F. Supp. 2d 282, 305 (S.D.N.Y. 2013).

The NYC FCA

also permits a relator to submit a “proposed civil complaint,”
N.Y.C. ADMIN. CODE § 7-804(b)(1), and authorizes the City’s
8

Corporation Counsel to commence a civil enforcement action based
on the relator’s information, designate the relator for the
purpose of filing a civil enforcement action, or decline to
commence a civil enforcement action or designate the relator to
do so. See id. § 7-804(b)(2).

Significantly, a civil

enforcement action under the NYC FCA may only be brought by the
Corporation Counsel or with the Corporation Counsel’s
permission. See id. § 7-804(e); Chen, 966 F. Supp. at 305.
B. Relator Awards under the NYS FCA and NYC FCA
If a qui tam suit succeeds, the relator generally may
receive a portion of the recovered funds.

Under the NYS FCA,

there are three categories of award for relators.

First, an

award of between 15 to 25 percent of the proceeds recovered is
appropriate when the New York attorney general or a local
government intervenes in a qui tam civil action or converts the
action into a civil enforcement action. N.Y. STATE FIN. LAW §
190(6)(a).

Second, a court has discretion to award a maximum of

10 percent of the proceeds recovered when it finds that the qui
tam civil action is based primarily on public disclosures of
information. Id.

Last, a relator may receive between 25 and 30

percent of the proceeds recovered in a successful action if the
attorney general or local government does not elect to intervene
in or convert the action. Id. § 190(6)(b).

9

The NYS FCA permits the attorney general or a local
government to pursue “any remedy available” with respect to
false claims. Id. § 190(5)(c).

For example, the attorney

general or local government may decide that initiating an
administrative proceeding or referring a medicaid-related matter
to the office of the medicaid inspector may be the preferable
remedy. See id.

In the event that such an “alternate civil

remedy” is pursued, a relator retains “the same rights in such
proceeding as such person would have had if the action had
continued under” the NYS FCA. Id.

Similarly, the NYC FCA

contains a provision that preserves the right of a relator to
share in the proceeds recovered if an “alternate action” is
pursued. See N.Y.C. ADMIN. CODE § 7-804(f)(2).
III. Discussion
There is no dispute that the State and the City did not
intervene in Khurana’s original action or otherwise convert it
to a civil enforcement action.

Nevertheless, Khurana moves for

a relator’s share, arguing that the DPA and SAIC Settlement
constitute an “alternate civil remedy” (under the NYS FCA) and
an “alternate action” (under the NYC FCA), and that he is
entitled to receive a percentage of the proceeds.

The Court

denies Khurana’s motion because he is not entitled to share in
an alternate civil remedy or an alternate action absent a valid
qui tam claim.
10

At the outset, the Court is skeptical that the DPA and SAIC
Settlement constitute an “alternate civil proceeding” under the
NYS FCA or an “alternate action” under the NYC FCA.

Assuming

that the contours of the state and city “alternate” provisions
mirror those of the federal FCA’s “alternate remedy” provision,
lower courts appear divided on the question of whether a
proceeding with criminal dimensions constitutes an “alternative
remedy.” Compare United States v. Kurlander, 24 F. Supp. 3d 417,
424 (D.N.J. 2014) (holding, under the circumstances, that “a
criminal proceeding does not qualify as an alternate remedy”
under the federal FCA); United States v. WellCare Health Plans,
Inc., No. 8:09-CR-203-T-27EAJ, 2011 WL 4431157, at *1 (M.D. Fla.
Sept. 21, 2011) (same); United States v. Lustman, Criminal No.
05-40082-GPM, 2006 WL 1207145, at *3 (S.D. Ill. May 4, 2006)
(“Surely Congress would have explicitly specified criminal
prosecutions as an ‘alternate remedy’ if it intended the result
urged here.”), with United States v. Bisig, 2005 WL 3532554, at
*3–5 (S.D. Ind. Dec. 21, 2005) (holding that a criminal
prosecution and criminal forfeiture proceeding constituted an
alternate remedy and permitting award to relator).

However,

even if the DPA and SAIC Settlement qualify as an alternate
civil remedy under the NYS FCA or an alternate action under the
NYC FCA, Khurana’s claim to a relator’s award must fail in the
absence of a complaint asserting a valid qui tam claim.
11

Relying on the reasoning of several federal courts of
appeals decisions analyzing the federal FCA,3 several courts in
this Circuit recently have held that a valid qui tam action is a
prerequisite to a relator’s right to recover an alternate
remedy. See United States ex rel. Lee v. N. Adult Daily Health
Care Ctr., 174 F. Supp. 3d 696, 704 (E.D.N.Y. 2016) (“[T]he
right to recover an alternate remedy is dependent upon the
existence of a valid qui tam action in which the relator is
entitled to seek a recovery.”); see also United States ex rel.
Kolchinsky v. Moody’s Corp., 12cv1399, 2017 WL 825478, at *8
(S.D.N.Y. Mar. 2, 2017) (“No alternate remedy is available here,
however, because the Second Amended Complaint fails to state a
valid FCA claim as a matter of law.”); United States v. L-3
Commc’ns Eotech, Inc., No. 15-cv-9262 (RJS), 2017 WL 464431, at
*4 (S.D.N.Y. Feb. 3, 2017) (“[A] relator cannot claim a share of
an ‘alternate remedy’ unless he has an existing qui tam action,
thereby providing the government with the option to
intervene.”).

This rule follows from a commonsense reading of

the federal FCA:

if there is no valid qui tam action for the

government to take over, then any remedial option that the

See United States ex rel. Newell v. City of St. Paul, 728 F.3d
791, 799-800 (8th Cir. 2013); United States ex rel. Godfrey v.
KBR, Inc., 360 F. App’x 407, 413 (4th Cir. 2010); United States
ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 522
(6th Cir. 2007); United States ex rel. Hefner v. Hackensack
Univ. Med. Ctr., 495 F.3d 103, 112 (3d Cir. 2007).
3

12

government might pursue is not, in fact, an “alternate” to
taking over a qui tam action. See L-3 Commc’ns, 2017 WL 464431,
at *3.

The logic is that, if a relator has no right to recovery

in the original qui tam action, then the relator also lacks a
right to recover in an “alternate remedy” scenario. See N. Adult
Daily Health Care Ctr., 174 F. Supp. 3d at 703.

This logic

applies with equal force to the NYS FCA. See id. at 704 (“Under
the [NYS FCA], like the [federal] FCA, a relator only has a
right to recovery if there is a valid qui tam action.”).
Accordingly, under the NYS FCA, a valid qui tam claim is a
prerequisite to a relator’s right to recover a portion of an
alternate civil remedy.
Khurana has not asserted a valid qui tam claim and he is
not entitled to recover a portion of an alternate civil remedy.
The Court previously held that the qui tam claims asserted in
Khurana’s second amended complaint were precluded by the NYS
FCA’s public disclosure bar or otherwise defective. (See Op. &
Order, ECF. No. 70.)

Surely a qui tam claim is no longer

“valid” once it has been dismissed. See L-3 Commc’ns, 2017 WL
464431, at *4-5 (finding that relator’s voluntary dismissal of
his qui tam suit precluded him from recovering, under “alternate
remedy” theory, a portion of the proceeds the government
ultimately obtained); see also N. Adult Daily Health Care Ctr.,
174 F. Supp. 3d at 700 (finding relators’ motion for a share of
13

proceeds recovered “premature” because a motion to dismiss the
qui tam action was pending and, thus, relators “may ultimately
lack a valid qui tam claim”).

Because Khurana’s qui tam claims

have been dismissed, he has no right to recover any proceeds
under § 190(6)(a) or § 190(6)(b) or under the NYS FCA’s
“alternate civil remedy” provision.
Khurana’s claim based on the NYC FCA suffers the same
infirmity as his claim based on the state statute.

Although

Khurana relies primarily on provisions of the NYS FCA, (see,
e.g., Pl.’s Mem. at 1 n.1, 23-24, ECF No. 48), he also
occasionally references the NYC FCA. (See id. at 1, 18 n.78;
Pl.’s Reply Mem. of L. in Supp. of Mot. for Relator’s Share at 4
n.9, ECF No. 54 (filed Apr. 15, 2016).)

As noted previously,

the qui tam claims Khurana brought under the NYS FCA and NYC FCA
have been dismissed.

Accordingly, there is no valid qui tam

action upon which to base Khurana’s claim to a share of proceeds
recovered in an “alternate action.”4

It follows that Khurana is

not entitled to a relator’s share under the NYC FCA.

Additionally, the Court notes that Khurana did not allege that
he has received authorization from the Corporation Counsel to
sue under the NYC FCA. This failure also undermines the
validity of Khurana’s qui tam claims under the NYC FCA. See
Chen, 966 F. Supp. 2d at 305-06 (finding plaintiff’s NYC FCA
claim “deficient” due to failure to plead grant of authority
from Corporation Counsel to sue).
4

14

In his papers, Khurana focuses partially on his
"whistleblowing" activities prior to filing any qui tam
complaint.

(See, e.g.,

Pl.'s Mem. at 5, 7,

8-9, ECF No.

48.)

As

it relates to Khurana's motion for a relator's share, this focus
is misplaced. See, e.g., Bledsoe, 501 F.3d at 522

("Absent a

valid complaint which affords a relator the possibility of
ultimately recovering damages,

there is no compelling reason for

allowing a relator to recover for information provided to the
government.").

To the extent that this information is relevant,

Khurana's pre-filing activities go to the question of whether he
qualifies for an original source exception to the public
disclosure bar, a matter that the Court has already decided.
(See Op.

& Order, ECF. No. 70.)

CONCLUSION
For the reasons stated above, Khurana's motion for a
relator's share is denied.-

SO ORDERED.
Dated:

New York, New York
March
2017

2.-8 ,

United States District Judge

15