Why it matters: Given the proliferation of False Claims Act (FCA) activity at the DOJ and in the courts, we've decided to make our "Spotlight on the False Claims Act" a regular feature. Each month, we will highlight a few of the FCA matters that specifically caught our eye. This month, we discuss a recent colorfully-written ruling by a Southern District of New York judge that dismissed a qui tam complaint against ratings organization Moody's Corporation for failure to state a claim under the FCA as well as a couple of significant FCA resolutions announced by the DOJ in the healthcare field.

Detailed discussion: Following is a recap of the False Claim Act (FCA) matters that caught our eye this month.


U.S. ex rel. Kolchinsky v. Moody's Corporation et al.: On February 2, 2016, Southern District of New York Judge William H. Pauley III dismissed for failure to state a claim the amended complaint that had been filed by a former managing director (relator) against statistical ratings organizations Moody's Corporation and Moody's Investment Service, Inc. (collectively, Moody's) under the qui tam provisions of the FCA. First, a brief summary of the procedural background that got us to this point: The relator had originally filed his complaint against Moody's in 2012 under seal. The government investigated but declined to intervene in 2014, at which point the complaint was unsealed and Moody's served. After "protracted compromise negotiations," Moody's moved to dismiss the relator's amended complaint, which Judge Pauley granted on February 4, 2016 subject to granting the relator leave to replead one claim.

Judge Pauley began his analysis by referring to the relator's amended complaint as a "sprawling … Homeric 'Catalogue of Ships' for the 2008 financial crisis." Like that "tome," the judge continued, the relator's amended complaint "has grown by accretion, recounting each new episode that roiled the financial markets over the past decade." The Judge then went on to summarize "in a few broad strokes" the "hydra-like allegations" in the relator's amended complaint, including allegations that Moody's engineered false credit ratings (to be "either fraudulently optimistic or fraudulently pessimistic") of residential mortgage-backed securities, credit default swaps and collateralized debt obligations, among other securities, that concealed "massive losses" involving such financial products; and that these false credit ratings as well as Moody's deficient ratings practices and overall "lack of independence and conflicts of interest" led to, among other things, the underpayment of Federal Deposit Insurance Corporation insurance premiums, the overvaluation of the AIG bailout and the undercapitalization of financial institutions that triggered violations of the FCA.

Judge Pauley dismissed the relator's amended complaint in its entirety for failure to state a claim. The Judge noted that the "crux" of the relator's amended complaint was that private financial institutions—not the government—relied on Moody's false and misleading credit ratings and practices in making payments or taking actions. The Judge stated that to successfully plead an FCA cause of action, it must be shown that the defendant either submitted directly, or caused to be submitted, false claims to the government for payment, or that the government relied to its detriment on the defendant's false claims in making payment. Here, the Judge "sifted through" the amended complaint and found only one cause of action that "theoretically" fit the bill, regarding the relator's claim that the government paid for a subscription to the electronic delivery service that emailed Moody's knowingly false credit ratings (thus "paying" for a "false claim"). The Judge found, however, that this claim needed to be pleaded with more particularity as the relator did not provide any example of a government agency that actually paid for the Moody's electronic delivery service, and gave the relator leave to do so in a "substantially narrowed" second amended complaint.

DOJ healthcare resolutions:

March 8, 2016—DOJ announced that 21st Century Oncology Group agreed to pay $34.7 million to settle FCA charges related to use of medically unnecessary procedure and improper billing: The DOJ alleged that Florida-based 21st Century Oncology Group, described as the "nation's largest physician led integrated cancer care provider," and its subsidiary South Florida Radiation Oncology LLC (collectively, Oncology Group), "performed and billed for procedures that were not medically necessary." The allegations, which were neither admitted or denied by the Oncology Group, related to the Oncology Group's use on patients of a "medically unnecessary" procedure known as the Gamma function (which measures "the exit dose of radiation from a patient after receiving radiation treatment") and then "knowingly and improperly" billing Medicare for the procedure. Qui tam whistleblower to receive $7 million.

February 17, 2016—DOJ announced that 51 hospitals in 15 states agreed to pay $23 million to resolve FCA claims related to improper implantation of cardiac devices: The allegations, which were neither admitted or denied by the hospitals, were that the hospitals implanted the cardiac devices in Medicare patients from 2003 to 2010 in violation of Medicare coverage requirements. Qui tam whistleblowers to split $3.5 million award. The DOJ said that these settlements represented the final stage of a nationwide investigation into the practices of hundreds of hospitals that improperly billed Medicare for the cardiac devices and that, to date, its investigation had to yielded settlements with more than 500 hospitals totaling more than $280 million.

See here to read the 2/4/16 Memorandum and Order in U.S. ex rel. Kolchinsky v. Moody's Corporation et al.

See here to read the DOJ's 3/8/16 press release entitled "United States Settles False Claims Act Allegations Against 21st Century Oncology for $34.7 Million."

See here to read the DOJ's 2/17/16 press release entitled "Fifty-One Hospitals Pay United States More Than $23 Million to Resolve False Claims Act Allegations Related to Implantation of Cardiac Devices."