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From Securities Regulation Daily, March 2, 2017

Moody’s whistleblower cannot share in settlement

By Anne Sherry, J.D.

A former Moody’s official who blew the whistle on credit-ratings manipulation cannot share in the $864 million settlement between Moody’s and the government. Citing a recent Supreme Court decision, the Southern District of New York held that the whistleblower failed to state a False Claims Act claim as a matter of law (U.S. ex rel. Kolchinsky v. Moody’s Corp., March 2, 2017, Pauley, W.).

Universal Health defeats FCA claim. The extant claim in Ilya Eric Kolchinsky’s second amended complaint alleged that Moody’s provided ratings directly to subscribers—including federal government entities—in return for payment. Under the False Claims Act, claims can be factually or legally false; legally false claims are further divided into those that are expressly or impliedly false. The court concluded that the complaint was premised on a theory of implied legal falsity: that Moody’s implicitly promised that its ratings accurately represented the risk of the subject financial products.

But providing a service does not certify compliance with the entire universe of potentially applicable laws and regulations, the court explained. Noncompliance may open the defendant up to other forms of liability, but it only gives rise to an FCA claim if violation of the regulation has some relevant connection to the contract at issue. The Supreme Court’s decision last term in Universal Health Services, Inc. v. U.S. ex rel. Escobar established two conditions for an FCA complaint premised on implied certification: (1) that the claim made specific representations about the goods or services provided; and (2) that the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements made those representations misleading half-truths.

Universal Health further explains that if the government pays the claim despite knowing that certain requirements were violated, that is very strong evidence that the requirements are not material. At all times relevant to Kolchinksy’s complaint, the federal government was on notice of the alleged falsehoods. The complaint’s own allegations that the government continued to pay Moody’s for credit ratings each year "plead Kolchinsky out of court" under Universal Health.

Beyond that, the complaint failed under Rule 9(b) because it did not allege either specific and material false claims submitted to the government or a scheme to do so. The only relevant addition to the amended complaint was a spreadsheet of contract data copy-and-pasted from a government website. This amounts to a fishing expedition that leaves the defendant no means of conducting focused discovery, the court wrote.

Denied a share in settlement. In addition to dismissing the complaint with prejudice, the court denied Kolchinsky’s request to argue that he is entitled to a portion of the $864 million settlement among Moody’s and federal and state governments. That settlement relates to FIRREA violations and specifically carves out monetary recovery for Kolchinsky’s claims. Although Kolchinsky contended that the private settlement constitutes an "alternative remedy" to his proceeding, there is no alternative remedy because Kolchinsky’s complaint failed to state a valid FCA claim as a matter of law. The court acknowledged that this is a harsh result and that Kolchinsky provided "enormously helpful information" to Congress and investigators, but this did not cure the complaint’s deficiencies or entitle Kolchinsky to a share of the FIRREA settlement.

The case is No. 12cv1399.

Attorneys: Asa Robison Danes (Seeger Weiss LLP) for Ilya Eric Kolchinsky. Glenn Charles Edwards (Satterlee Stephens Burke & Burke) for Moody's Corp. and Moody's Investors Service, Inc.

Companies: Moody's Corp.; Moody's Investors Service, Inc.

MainStory: TopStory CreditRatingAgencies FraudManipulation WhistleblowerNews NewYorkNews

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