On May 31, 2013, defendants Standard & Poor’s Financial Services, LLC (S&P) and the McGraw-Hill Companies, Inc. urged the San Francisco Superior Court to dismiss the California Attorney General’s (AG) lawsuit against them alleging that the defendants violated the California False Claims Act (CFCA). The AG claims that S&P intentionally inflated its ratings of structured finance securities, thereby causing the submission of false claims to the state’s largest pension funds, CALPERS and CALSTERS. A detailed discussion of the complaint is available here.
The defendants argued the court should dismiss the complaint on two separate and independent grounds. First, the AG’s complaint fails to state a claim because the AG did not allege a false claim for payment or that any allegedly false claim was paid with state funds. According to the defendants, the AG “expanded the notion of a false claim beyond recognition to include a subjective, forward looking opinion about something that a State entity might decide to buy.” The proper avenues to address such alleged misstatements are federal and state securities laws, not false claims act statutes.
Further, the defendants argued that CALPERS and CALSTRS held in trust the assets used to purchase the securities, and, at the time the allegedly false claims were made, the CFCA did not define the term “state funds” to include the pension funds’ assets. The defendants noted that the 2010 amendment to the definition of “state funds” to explicitly include such assets should not be applied retroactively. Accordingly, the allegedly false claims for payment did not involve state funds.
Second, the defendants claimed that the AG filed its lawsuit too late because it had notice of the alleged misconduct back in 2007 – well over three years from the date it filed suit. The defendants noted that the Ohio and Connecticut Attorney Generals, as well as CALPERS, filed lawsuits based on the same allegations over three years ago.
The defendants set their motion for hearing on August 12, 2013. The court’s decision may embolden or dampen the aggressive use of false claims act statutes, which are typically used by company whistleblowers.