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Fourth District Court of Appeal Finds Company May Be Liable For Causing Another Company’s False Claim to Be Presented

 

In an Illinois state qui tam lawsuit, the Fourth District Court of Appeal has ruled that an accounting company may be held liable for knowingly allowing another company to submit a fraudulent claim to the state. In Illinois Health Facilities Authority ex rel. Scachitti v. Morgan Stanley, 887 N.E.2d 601 (April 2, 2008), three individual plaintiffs brought suit against financial services company Morgan Stanley Dean Witter and accounting firm Ernst & Young for an alleged scheme to defraud the Illinois Health Facilities Authority under the Illinois Whistleblower Reward and Protection Act.

The case arose out of a bond refinancing attempt by the Authority. In order to pay off revenue bonds, it issued “advance refunding” bonds, which are normally tax-exempt. However, if the proceeds of these bonds are reinvested in securities with a higher yield, they lose their tax-exempt status unless the profits go to the U.S. Treasury. To ensure they did not lose the tax exemption, the Authority hired Morgan Stanley as an underwriter for the advance refunding bonds and Ernst & Young to verify Morgan Stanley’s work.

Defendants accuse Morgan Stanley of fraudulently “yield burning” by charging abovemarket rates for the bonds — ensuring that they would not become taxable — and pocketing the $21,000 difference. They also accuse Ernst of abetting this behavior by knowingly hiding it in its audit. They both companies for violating the Whistleblower Act, and Ernst for aiding and abetting Morgan Stanley’s violations. The Cook County trial court dismissed the claims against Ernst for failure to state a sufficient cause of action. The plaintiffs appealed.

In its analysis, the appeals court focused on the language of the Whistleblower Act. The first part of that law says a defendant is liable if it “knowingly presents or causes to be presented” a false claim “for payment or approval.” In this case, the court wrote, the defendants are alleging that Ernst and Morgan Stanley presented a materially false report, not a false claim for payment. Any misrepresentations were in the paperwork for the bonds, not in their invoices. Thus, the court struck down the part of the lawsuit that relied on that language.

It next moved to language making defendants liable if they knowingly make “a false record or statement to get a false or fraudulent claim paid or approved by the State.” Under the facts that the plaintiffs allege, the court wrote, this is a valid cause of action. Thus, it reversed the trial court’s decision on that part of the claim and remanded the case to trial court for more proceedings. In doing so, it dismissed arguments by Ernst that because it did not itself submit a false claim, it cannot be held liable. The “cause to be presented” language in the law clearly does not require that the defendant have submitted the claim itself, the court wrote, and caselaw cited by Ernst was not convincing.

Finally, the court disposed of the plaintiffs’ argument that it should have been allowed to continue its claim against Ernst for aiding and abetting Morgan Stanley’s fraud. Language permitting liability for aiding and abetting is simply not in the Whistleblower Act, it wrote, and it does not wish to find an implied claim for aiding and abetting. Thus, the trial court’s decision was affirmed in part, reversed in part and remanded.

The consumer rights law firm of DiTommaso-Lubin represents whistleblowers who are pursing qui tam lawsuits at any level of government, including claims under the Illinois Whistleblower Act, the Chicago whistleblower ordinance and the federal False Claims Act. Based in Chicago and Oak Brook, Ill., our Illinois and Wheaton, Waukegan, Naperville, Aurora, Elgin and Chicago area qui tam and False Claims Act lawyers stand ready to represent whistleblowers throughout the United States — regardless of whether prosecutors have decided to join the lawsuit. If you know about fraud against a government agency and you’re ready to speak up, you can learn more about whistleblower lawsuits at a free, confidential consultation. To set one up, please contact DiTommaso-Lubin online or call 1-877-990-4990 today.