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United States ex rel. Casady v. American International Group, Inc.

United States District Court, S.D. California

March 29, 2014

UNITED STATES, ex rel. DEREK CASADY, NANCY CASADY, et al., Plaintiffs,


GONZALO P. CURIEL, District Judge.

Presently before the Court is a second amended complaint ("SAC") filed by Relators Derek and Nancy Casady ("Relators" or "the Casadys") under the False Claims Act ("FCA") 31 U.S.C. §3729, et seq. (Dkt. No. 103.) On August 9, 2013, Defendants Merrill Lynch International and its successor Bank of America ("MLI"), Deutsche Bank AG, Deutsche Bank AG Cayman Islands Branch, Goldman Sachs Group Inc., Goldman Sachs International, Goldman Sachs Bank USA as successor-in-interest to Goldman Sachs Capital Markets, L.P., and Societe Generale (collectively, "Counterparty Defendants") and Defendant American International Group, Inc. ("AIG") (collectively, "Defendants") filed two motions to dismiss the SAC. (Dkt. Nos. 112, 113.) The parties have fully briefed both motions. (See Dkt. Nos. 124, 127, 128, 129.) For the following reasons, the Court GRANTS Defendants' motions to dismiss, and DISMISSES WITH PREJUDICE Relators' Second Amended Complaint.


I. Factual Background

As set forth in the Court's April 19, 2013 Order dismissing Relators' First Amended Complaint ("April 19, 2013 Order"), this False Claims Act ("FCA") qui tam action arises out of the federal government's loan to AIG and its investors during the 2008 financial crisis. Bringing this action on behalf of the United States, the Casadys claim Defendants operated fraudulently in the over-the-counter collateralized debt obligation ("CDO") market and recovered their losses by filing false claims with the government. (Dkt. No. 108, "SAC" ¶ 1.)

The first 214 paragraphs of the Casadys' SAC remains substantively unchanged from the allegations in the First Amended Complaint. The gravamen of the Casadys' allegations are 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 the "Maiden Lane II Loan, " and 3) an emergency $30 billion loan known as the "Maiden Lane III Loan" (collectively, "the FRBNY Loans"). (SAC ¶¶ 2-4, 6.) According to the Casadys, the Counterparty Defendants further made and conspired to make false claims in connection with the use of proceeds from the FRBNY Loans. (Id.)

The Casadys allege that, leading up to the FRBNY Loans, AIG engaged in a lengthy course of fraudulent practices designed to load AIG's financial statements with false value assets and then knowingly used these false statements to induce the Government to extend financial support to AIG. The Casadys allege the Counterparty Defendants lent money to AIG to help facilitate AIG's purchase of residential mortgage backed securities ("RMBS") which, in turn, supported the inflated market value of CDOs. AIG suffered a liquidity crisis as a result of these investments and exchanges. The Casadys generally assert that AIG and the Counterparty Defendants, in connection with the FRBNY Loans, submitted false statements; failed to disclose accurate financial statements; and underwrote CDOs with par values that substantially and materially exceeded their actual values.

The SAC adds 307 paragraphs of allegations spanning more than 140 pages. The Casadys' new allegations provide further detail regarding the Counterparty Defendants' role in arranging mortgage backed security and CDO mortgage pools guaranteed by AIG in the years leading up to the 2008 bail out. (SAC ¶ 216-229.) According to the Casadys, the Counterparty Defendants engaged in numerous fraudulent lending practices, including: issuing mortgages without accurate and documented credit ratings; transferring high risk loans to investors without disclosure; marketing and extending adjustable rate mortgage products to subprime borrowers; qualifying borrowers for loans with low initial payments without adequate analysis of the borrower's ability to repay the debt at the fully-indexed rate; approving borrowers without verifying income; providing borrowers with inadequate or confusing information relative to product choices; and paying incentives to employees and brokers to place borrowers into subprime loans. (SAC ¶ 236.) The SAC describes each Defendant's participatory role in the mortgage backed security and CDO mortgage pools. (SAC ¶¶ 251-341; see also SAC ¶¶ 472-92.)

The SAC also includes two sections of allegations responsive to the Court's previous finding that the Court lacks jurisdiction over Relators' qui tam action. (Dkt. No. 100 at 5-10.) The first section, titled "False Statements to Federal Officials, " chronicles various meetings and communications between Defendants and federal government officials and committees in which Defendants failed to disclose critical information; misled the government; and induced the Federal Reserve Board to approve emergency loans to AIG. (SAC ¶¶ 342-367.) The second section, titled "The Claims Alleged in the Casady False Claims Complaint were not Publicly Disclosed, " claims that "[n]o federal agency has made, or is making, the allegations in the operative complaint." (SAC ¶ 369; see also SAC ¶¶ 371, 374.) The Casadys further allege that Ken Roberts, a family member of the Casadys, "learned first-hand the protocols being implemented by the banks and why they were important to the bank and the market" in his position as a loan originator and mortgage planner. (SAC ¶¶ 378, 379-80, 382.)

In addition, the SAC includes lengthy allegations that "material and substantial" conflicts of interest prevent the Department of Justice from pursuing the claims in this action. (SAC ¶¶ 401-67.)

II. Procedural Background

The Casadys filed the original complaint under seal on February 25, 2010, and filed the first amended complaint on September 30, 2010. (Dkt. 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. (Dkt. Nos. 29-30.) On October 4, 2012, the case was transferred to the undersigned judge.

On April 19, 2013, the Court granted Defendants' motions to dismiss the first amended complaint, allowing Relators twenty-one days to further amend the complaint. (Dkt. No. 100.) In doing so, the Court: (1) dismissed Relators' entire complaint for lack of jurisdiction due to Relators' failure to demonstrate that their allegations are not based on publicly disclosed information or that they are the original source of the information; (2) as an alternative holding, dismissed Relators' entire complaint for failure to meet the heightened pleading requirements of Federal Rules of Civil Procedure 9(b); and (3) dismissed Relators' claims against Defendants MLI and Goldman Sachs International for Relators' failure to effectuate proper service of process. (Id.)

On May 24, 2013, Relators filed the SAC, the current operative complaint, against AIG and the Counterparty Defendants. (Dkt. No. 103.) On August 9, 2013, Defendant AIG filed a motion to dismiss[1] the SAC on the grounds that: (1) the Casadys have again failed to demonstrate that their claims survive the public disclosure bar to this Court's jurisdiction; (2) the Casadys have failed to show they are the original source of the information at issue; and (3) the SAC fails to plead a plausible claim for relief or plead allegations of fraud with specificity, Fed.R.Civ.P. 8(a), 9(b). (Dkt. No. 112.) In support of its motion, AIG has re-lodged with the Court the 130 exhibits originally lodged in support of its motion to dismiss the First Amended Complaint, as well as 32 additional exhibits. (See Dkt. No. 112-3, Exhibit Table of Contents.) The Counterparty Defendants, though they join AIG's motion, move separately to dismiss the SAC on the ground that the SAC "focuses almost entirely on the conduct of AIG" and fails to state a claim as to the Counterparty Defendants with sufficient particularity. (Dkt. No. 113-1 at 1-2.)

On March 21, 2014, the Court held a hearing to consider Relators' SAC, Defendants' motions to dismiss, and the declarations and exhibits filed by Defendants in support ...

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