Attorneys spell out False Claims Act elements

Nick Youngson CC BY-SA 3.0 Pix4free.org via The Blue Diamond Gallery

Two attorneys in April endeavored to articulate the elements of claims under the False Claims Act.

The False Claims Act (FCA) (DOJ, LII) facilitates lawsuits against persons who defraud the government. An important aspect of the statutory scheme is the authorization of qui tam actions, by which individual litigants may apply for government permission to sue on the public's behalf. Qui tam representatives can be entitled to a percentage of the recovery, which can mean a substantial sum of money. (Consider a case I wrote about in May 2021.)

With government subsidies characterizing recovery from the 2008 financial crisis and then, more recently, the pandemic, I added a sliver of False Claims Act content to my survey of tort-like statutory actions in my 1L Torts II class. I feel obliged to give students at least one exposure to the FCA, because I fear that they will otherwise never see a hint of it in law school. And I don't mind fantasizing that one of my alums one day will win a big qui tam award and think to throw a little love my way. Hey, that's more likely than a meaningful pay raise from my employer.

Accordingly, it's my intention to add the FCA to my Tortz textbook as I develop its second-semester coverage. I might be onto something, because, in April, two attorneys wrote articles articulating FCA fundamentals: A.J. Bolan, healthcare litigation associate at Barnes & Thornburg, wrote a piece for JD Supra, and Molly K. Ruberg, litigation partner at Bass, Berry & Sims, wrote a piece (login wall) for Lexology.

Both writers laid out these elements:

1. A false claim.
2. The false claim was made with the requisite scienter (or knowledge that it was false).
3. The false claim is material to payment.
4. The false claim caused the government to pay money.

Falsity may be express or implied, both writers explained, and most courts require objectively verifiable falsity. Scienter may be accomplished by (1) actual knowledge, (2) deliberate ignorance, or (3) reckless disregard, both writers said.

Under the statute, materiality means “having a natural tendency to influence, or be capable of influencing, the payment or receipt of property,” both writers quoted. Courts disagree over whether causation must be but-for or proximate, they agreed.

Court rejects qui tam suit against big banks because whistleblower relied on publicly available data

"Big Ballin' Money Shot" by Louish Pixel CC BY-NC-ND 2.0

A whistleblower alleged that a who's who of big banks is improperly manipulating the municipal bond market to profit at the expense of Massachusetts taxpayers.  But the Massachusetts high court today rejected the whistleblower's lawsuit because he relied on public data.

This case is of interest because it arises under, and narrows, a state false claims act.  With the federal government doling out billions of dollars in pandemic relief to corporate America, I've predicted, and it doesn't take a crystal ball, that we're going to see a rise in corruption and a corresponding rise in enforcement actions.  One key enforcement mechanism is a false claims act.  In anticipation of good work to be had for lawyers in the false claims vein in coming years, I added the subject this spring to coverage in my 1L Torts II class.

False claims cases, or "qui tam actions," allow any person, a member of the general public called "a relator," to bring a lawsuit on behalf of the government, that is, the public, to recover money lost to fraud or misfeasance.  Derived conceptually from Roman law and carried on in Anglo-American common law for centuries, "qui tam" is short for a Latin phrase meaning one who sues on behalf of the king and for oneself.  Relators are incentivized by being entitled to a cut of any recovery.  Qui tam is authorized in the United States by federal law (§§ 3729-3722, and at DOJ) and the laws of many states (at Mass. AG), varying in their particulars, and also can be a part of sectoral enforcement mechanisms, especially in healthcare and finance.

In the instant case, relator "B.J." Johan Rosenberg, an investment analyst and capital adviser with experience in municipal securities, alleged that banks are pricing municipal bonds and manipulating the market in ways that profitably breach their obligations to their public clients.  Defendants in the Massachusetts case include Chase, Citi, Bank of America, Merrill Lynch, and Morgan Stanley.

The Supreme Judicial Court (SJC) dug into the particulars, which make my eyes glaze over and remind me why I have a financial adviser.  Suffice to say that Rosenberg understands this stuff well.  In 2019, Bloomberg described him as the "mystery man behind $3.6 billion in muni lawsuits," referring to qui tam actions in California, Illinois, and Massachusetts.  In 2015, Bloomberg reported, Rosenberg patented "MuniPriceTracker," a software designed to "ferret out Wall Street chicanery."

"If we're going to have software patents, let's at least have a level playing field"

by Opensource.com CC BY-SA 2.0

Rosenberg's analytical software is key in the instant case, and there the problem arises.  The false claims act in Massachusetts law (§§ 5A to 5O), as in federal law, bars claims based on publicly available information, whether from government reports or "news media."  The theory is that a qui tam statute should incentivize whistle-blowing by persons privy to information that the government and public are not, rather than potentially rewarding someone who rushes to the courthouse with old information.  As the SJC put it: "Where the essential features of an individual's purported chicanery already have been illuminated, ... affording a private party an incentive to bring suit is unwarranted, as it would add nothing to the Commonwealth's knowledge[.]"

The tricky bit in the instant case is that Rosenberg ran his software analysis on publicly available data.  That sourcing disallowed his action.  The court reasoned: "[I]t suffices that other members of the public, albeit with sufficient expertise and after having conducted some analysis, could have identified the true state of affairs by conducting the same data-crunching exercise as did the relator, using the data publicly available on the [Electronic Municipal Market Access] website."

Well, maybe.  To me, the phrase, "with sufficient expertise" is working overtime in that reasoning.  Rosenberg's method is sophisticated enough to be patent-worthy.  I don't think the average taxpayer spends weekends crunching market numbers, however publicly available they are.  And there's no evidence that anyone's doing it at the AG's office, either.  I worry that this narrowing of false claims to exclude "sweat of the brow" extrapolation from public records ill equips society to respond to sophisticated corporate malfeasance that can be revealed only by equally sophisticated detective work.

But I've already confessed my ignorance of finance.  You can read the 36-page opinion and decide for yourself.  Or choose among the views of the amici: the CFA Institute and Taxpayers Against Fraud Education Fund supported Rosenberg, and the Greater Boston Chamber of Commerce and New England Legal Foundation supported the banks.

The case is Rosenberg v. JPMorgan Chase & Co., No. SJC-12973 (Mass. May 11, 2020).  Justice Dalila Wendlandt wrote the opinion, affirming the lower court, for a unanimous SJC of six justices.  She was an accomplished patent attorney before going on the bench.