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United States, Ex Rel. Derek Casady, Nancy Casady,Et Al v. American International Group

April 19, 2013

UNITED STATES, EX REL. DEREK CASADY, NANCY CASADY,ET AL.,
PLAINTIFFS,
v.
AMERICAN INTERNATIONAL GROUP, INC. ET AL,
DEFENDANTS.



The opinion of the court was delivered by: Hon. Gonzalo P. Curiel United States District Judge

ORDER (1) GRANTING DEFENDANT AIG'S MOTION TO DISMISS (2) DENYING AS MOOT COUNTERPARTY DEFENDANTS MOTIONS TO DISMISS [ECF Nos. 54, 59, 61, 71]

Relators Derek and Nancy Casady ("Relators" or the "Casadys") bring a qui tam suit against Defendants American International Group, Inc. ("AIG"), Merrill Lynch International and its successor Bank of America ("MLI"), Deutsche Bank, Goldman Sachs Group Inc. ("Goldman Sachs"), and Societe Generale under the False Claims Act ("FAC") 31 U.S.C. §3729, et seq. Relators allege that Defendants operated fraudulently and recovered their losses by filing false claims with the federal government. For the following reasons, the Court DISMISSES Relators' first amended complaint.

PROCEDURAL HISTORY

The Casadys filed the original complaint under seal on February 25, 2010, and filed the first amended complaint on September 30, 2010. ECF Nos. 1, 18. On April 28, 2011, the United States advised the Court of its intention to decline intervention, and the case was unsealed on the same date. ECF Nos. 29-30. Defendants have filed four motions to dismiss Relators' first amended complaint. On October 14, 2011 Defendant Merrill Lynch International filed a motion to dismiss Relators' first amended complaint for insufficient service of process. ECF No. 54. On the same date, Defendant American International Group, Inc. ("AIG") filed a motion to dismiss with prejudice Relators' first amended complaint for lack of subject matter jurisdiction pursuant to the False Claims Act "public disclosure bar," and failure to state a claim with sufficient particularity pursuant to Federal Rule of Civil Procedure 9(b). 31 USC §3730(e)(4). ECF No. 59. Separately, Counterparty Defendants Bank of America, Deutsche Bank AG, Deutsche Bank Cayman Islands Branch, Societe Generale, The Goldman Sachs Group, Inc., and Goldman Sachs Bank USA, filed a motion joining Defendant AIG's motion to dismiss. ECF No. 61. In the same motion, Counterparty Defendants allege additional grounds for dismissal of Plaintiffs' first amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), 8(a), and 9(b). Id. On December 12, 2011, Defendant Goldman Sachs International filed a motion to dismiss Relators' first amended complaint for insufficient service of process and failure to prosecute. ECF No. 71.

BACKGROUND

This False Claims Act ("FCA") qui tam action arises out of the federal government's loan to AIG and it's investors during the 2008 financial crisis. Under the False Claims Act, any person who defrauds the United States Government is liable for civil penalties. United States ex rel. Biddle v. Bd. of Trustees of Leland Stanford, Jr. University, 161 F.3d 533, 535 (9th Cir. 1998). The FCA provides for liability for any person who, among other things, "knowingly presents...a false or fraudulent claim for payment" to the United States government. 31 U.S.C. § 3729 (a). Although the FCA requires the Attorney General to investigate possible violations, § 3730(a), civil actions under the FCA may be brought either by the United States or as a qui tam action by a private person. See Id. § 3730(a), (b). In a qui tam action, the private person, the relator, sues on behalf of the government as well as himself. §3730(b)(1). The action must be brought in the name of the government. Id. The government may elect to intervene or may decline to intervene. Id; §3730(b)(2), (4). If the government declines to intervene, the relator has the right to conduct the action. § 3730(b)(4), (c)(3).

The Parties

Relators Derek Casady and Nancy Casady are residents of the State of California and bring this action on behalf of the U.S. government. ECF No. 18, hereinafter "First Amended Complaint" or "FAC". The government has declined to intervene. ECF No. 29. The Casadys claim that they "obtained information forming the basis of this complaint by direct first-hand examination of information from inside the mortgage industry [and] by conducting first-hand analysis using methods used by certified fraud examiners." FAC at 31. Defendant AIG is a Delaware corporation headquartered in New York, and serves as a holding company for numerous subsidiaries engaged in the business of life insurance, retirement services, and property and casualty insurance in the United States and globally. Id. Defendant AIG Financial Products is a financial services subsidiary of AIG which historically engaged in a "diverse range of financial transactions (including derivative transactions), involving commodities, credit, currencies, energy, equities and interest rates. ECF No. 59 at 4. Defendants Merrill Lynch International (now a wholly owned subsidiary of Bank of America Corporation), Bank of America Corporation, Deutsche Bank, Goldman Sachs, and Societe General are additional defendants that the Casadys assert engaged in fraudulent business transactions with Defendant AIG. FAC at 12-27. For purposes of this order, these Defendants shall be known as the Counterparty Defendants.

Factual Allegations

The Casadys attempt to chronicle one of the most widely publicized global financial disasters that resulted in the historic government "bailouts" to address the crisis. The Casadys allege that Defendant AIG and Counterparty Defendants conspired to defraud the government by making false claims to secure financial assistance. FAC ¶¶ 2-4. The Casadys assert that Defendant AIG made false claims to induce the government to issue three loans made by the Federal Reserve Board of New York ("FRBNY") to AIG: 1) an emergency $85 billion loan made in September 2008, 2) an emergency $22.5 billion loan known as Maiden Lane II Loan, and 3) an emergency $30 billion loan known as the Maiden Lane III Loan. Id. The Casadys thoroughly review the history of AIG and the financial crisis, and the actions that Defendants took leading up to the federal government's financial assistance to AIG.

The Casadys allege that AIG engaged in a "long course of fraudulent practices designed to load up AIG's financial statements with assets with inflated, false values." Id. at 9. Relators assert that Defendants knowingly perpetrated fraud on the Government by using these false statements to induce the Government to extend financial support to AIG. FAC ¶¶ 2-4. To support the allegations of fraud, the Casadys cite three Securities and Exchange Commission fraud injunctions, two U.S. Department of Justice criminal prosecutions, and lay out AIG's practice of selling high risk residential mortgage backed securities (RMBS) and insuring high risk collateralized debt obligations (CDOs). FAC at 10-32. Relators assert that Counterparty Defendants Goldman Sachs, Deutsche Bank, Societe Generale, and Merrill Lynch International lent money to AIG to help facilitate AIG's purchase of RMBS which, in turn, supported the inflated market value of collateralized debt obligations (CDOs). Id. As a result of these investments and exchanges, according to the Relators, AIG suffered a liquidity crisis. FAC ¶¶ 39, 155, 160. The Casadys further allege that AIG engaged in numerous fraudulent and unlawful business practices leading up to the government issuance of loans. FAC ¶ 97. To support these allegations, Plaintiffs reference previous criminal prosecutions against AIG for federal securities fraud and the subsequent settlement agreements. FAC ¶ 100-108. The Casadys further assert that AIG and other Counterparty Defendants submitted false statements and failed to disclose accurate financial statements to the federal government, which caused the government to issue the loans. FAC ¶¶ 130-143, 171, 174, 179, 180, 183, 186, 189, 192. Relators also allege that AIG and Counterparty Defendants "engaged in a pattern of fraud whereby the multi-sector CDOs were underwritten with par values that substantially and materially exceeded their actual values." FAC ¶ 200. Relators assert that Defendants knowingly presented the false claims to the U.S. government, conspired to defraud the government and misrepresented facts to the government to obtain payment of the "bailout" funds. FAC ¶ 205-212. The Casadys assert these claims against AIG and each Counterparty Defendant. FAC ¶ 212-264. Relators pray for relief in the form of damages three times the amount damages sustained by the federal government as a result of the false claims, as well as reasonable attorneys' fees, costs, and expenses, and maximum amount to the Plaintiffs permitted by the False Claims Act. FAC at 77.

DISCUSSION

The Casadys' first amended complaint is dismissed based on the court's lack of subject matter jurisdiction pursuant to 31 U.S.C. § 3730 (e)(4)(A) and failure to state a fraud claim with sufficient particularity under Fed. Rule Civ. P. 9(b). Public Disclosure Bar "Congress enacted the False Claims Act to 'enhance the Government's ability to recover losses sustained as a result of fraud against the Government.'" United States ex rel. Barajas v. Northrop Corp., 5 F. 3d 407, 409 (9th Cir. 1993). A district court's jurisdiction over false claims actions is limited by the provisions of the FCA. "In making its determination the district court may resolve factual disputes based on the evidence presented where the jurisdictional issue is separable from the merits of the case." United States ex rel. Biddle v. Board of Trustees of the Leland Stanford, Jr. University, 147 F.3d 821 (9th Cir. 1998). "[N]o court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing...or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information." 31 U.S.C. § 3730 (e)(4)(A)(emphasis added). An original source means "an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section. 31 U.S.C.A. § 3730(e)(4(B). "A relator's allegations are 'based upon' publicly disclosed information when 'the allegations or transactions of the complaint have been publicly disclosed.'" U.S. ex rel. Aflatooni v. Kitsap Physicians Services, 163 F.3d 516, 521 (9th Cir. 1999)(quoting Biddle, 147 F.3d at 821).*fn1 "The publicly disclosed facts need not be identical with, but only substantially similar to, the relator's allegations." U.S. ex rel. Meyer v. Horizon Health Corp., 565 F.3d 1195,1199 (9th Cir. 2009). Moreover, the relator has the burden of establishing subject matter jurisdiction by a preponderance of the evidence. U.S. ex rel. Harshman v. Alcan Elec. & Eng'g, Inc., 197 F.3d 1014, 1018 (9th Cir.1999).

The Court finds that the Casadys have failed to demonstrate by a preponderance of the evidence that the allegations are not "based upon" publicly disclosed information. As described in the background section above, much of the Casadys first amended complaint reviews the history of the 2008 financial crisis, with a focus on the government's financial assistance to AIG. In the motion to dismiss, AIG accurately observes that most of the Casadys' first amended complaint tells the same story already reported by the government and the news media. ECF No. 59 at 26. The Court agrees. In reviewing the FAC, the Court finds that most of the information relied upon by the Casadys has been made publicly available. As a starting point, the FAC contains 49 foot notes that cite public sources and at least 56 paragraphs include direct quotes from public sources. See ECF No. 59 at 17-18. An ...


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