First Department Upholds False Claims Act Claims Related to the Issuance of VRDOs

On December 29, 2020, the First Department issued a decision in State of New York ex rel. Edelweiss Fund, LLC v. JP Morgan Chase & Co., 2020 NY Slip Op. 08019, upholding False Claims Action claims relating to the sale of VRDOs, explaining:

We also affirm the denial of the motions to dismiss relator's claim to the extent it arises from the conduit VRDOs. Defendants have not shown, as a matter of law, that the state or local governments provided no portion of funds requested or demanded by defendants in connection with these VRDOs, notwithstanding that, as a general matter, a private company is often a conduit borrower.

False claims are actionable if the State provides any portion of the funds used to pay the false claims.

The complaint sufficiently alleges that a portion of the funds the conduit borrower received came from the state. That the state's money passed to defendant M&T Bank Corporation through private VRDO borrower entities does not make the government any less its source. By issuing conduit bonds, the state made the funds available, thereby providing money within the meaning of the New York False Claims Act.

The court's determination that government funds may have been implicated in the conduit VRDO transactions at issue here, and, in turn, that dismissal at the pleading stage was not appropriate, was not a matter of mere speculation, as defendants contend, but instead a reasonable reading of relevant documents furnished, and assertions made, by M&T itself on its motion to dismiss. A sample loan agreement in which M&T served as a letter of credit provider stated that, upon issuance of the bonds at issue there, the issuer, Town of Colonie Local Development Corp., shall lend the proceeds thereof to the private nonprofit company involved in that transaction, Shaker Pointe at Carondelet, Inc., for certain purposes. Even more broadly, M&T, in its motion papers, acknowledged that, under conduit VRDOs, a government entity issues the bonds, and then loans the proceeds from the bond issuance to the private entity for the private entity's project. Given the possible involvement of government funds in these financing transactions, the court appropriately declined to dismiss the NYFCA claim (and, in turn, the conspiracy allegations as to M&T) as to the conduit VRDOs at the pleading stage.

(Internal quotations and citations omitted).

The New York False Claims Act (as well as the federal False Claims Act on which it is modeled) provides a way for private citizens to bring claims against those who defraud the government by making false claims to the government. This decision illustrates one of the many restrictions on false claims act cases. Contact Schlam Stone & Dolan lawyer Alexandra Douglas at adouglas@schlamstone.com if you or a client have non-public information about someone who has been cheating the government.