USA et., al v. Corinthian Colleges, Ernst & Young LLP. et., al.

MEMORANDUM in Opposition to MOTION for Attorney Fees and Sanctions 244 Relators' Opposition to Sanctions Motion

C.D. Cal.May 10, 2013

CASE NO. CV 07-01984 PSG (MANx) SCOTT D. LEVY 1 Scott D. Levy & Associates PC 2 Tex. Bar No. 24000598 3 1844 Wheeler Street 4 Houston, Texas 77004 5 (713) 528-5409 Tel. 6 (713) 528-0117 Fax 7 levy.scott@mac.com 8 9 10 Attorneys for Relators 11 NYOKA JUNE LEE AND TALALA MSHUJA 12 13 U.S. DISTRICT COURT 14 15 CENTRAL DISTRICT OF CALIFORNIA - WESTERN DIVISION 16 17 18 UNITED STATES OF AMERICA, CASE NO. CV 07-01984 PSG (MANx) 19 EX REL. NYOKA LEE and 20 TALALA MSHUJA, 21 RELATORS’ OPPOSITION TO 22 Plaintiff, DEFENDANT ERNST & YOUNG 23 LLP’S MOTION FOR ATTORNEYS 24 FEES AND SANCTIONS; 25 MEMORANDUM IN OPPOSITION 26 CORINTHIAN COLLEGES INC., [DKT 244] 27 et al., 28 Defendants. 29 Place: Courtroom 880 30 Judge: Hon. Philip S. Gutierrez 31 Date: June 10, 2013 32 Time: 1:30 p.m. 33 34 35 36 37 38 39 40 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 1 of 29 Page ID #:7057 ii CASE NO. CV 07-01984 PSG (MANx) TABLE OF CONTENTS 1 INTRODUCTION ................................................................................................. 1 2 EY’S PUBLIC DISCLOSURE IS AN INDEPENDENT ISSUE ......................... 7 3 IMPROPER CONVERSION TO SUMMARY JUDGMENT MOTION ............. 9 4 STRIKING AFFIDAVIT OF NYOKA LEE WAS ERROR .............................. 11 5 ATTORNEY-CLIENT PRIVILEGE ISSUES .................................................... 13 6 CASES WHERE SUSAN NEWMAN SERVED AS RELATOR ...................... 14 7 EY IS AWARE OF THE SCHOOL’S HISTORY OF MISCONDUCT ............ 15 8 LEVESKI CASE ................................................................................................. 18 9 NOERR-PENNINGTON DOCTRINE ............................................................... 19 10 APPELLATE COURT DECISION IS REQUIRED BEFORE LITIGATION 11 IS DEEMED A “SHAM” .................................................................................... 20 12 PUBLIC DISCLOSURE IS DIFFERENT FOR EACH DEFENDANT ............ 22 13 REQUEST FOR RELIEF .................................................................................... 23 14 15 16 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 2 of 29 Page ID #:7058 iii CASE NO. CV 07-01984 PSG (MANx) TABLE OF AUTHORITIES 1 Cases 2 Barber v. Miller, 146 F.3d 707, 710 (9th Cir. 1998) ............................................ 2, 2 3 BE&K Construction Co. v. NLRB, 536 U.S. 516 (2002) ........................... 19, 20, 21 4 Bill Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731 (1983) ........................... 20 5 Boswell v. Potter, 2002 U.S. App. Lexis 23855, at **33-4 6 (9th Cir. Nov. 18, 2002) ....................................................................................... 9 7 California Motor Transport v. Trucking Unlimited, 404 U.S. 508, 8 513 (1972) ............................................................................................... 3, 21, 22 9 Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 421-422 (1978) …. 23 10 Glynn v. Edo Corp., 710 F.3d 209 (4th Cir. 2013) ……………………………. 23 11 Leidholdt v. L.F.P., Inc., 860 F.2d 890, 895 (9th Cir. 1988) ............................ 14, 18 12 Martinez v. Stanford, 323 F.3d 1178, 1182-1183 (9th Cir. 2003) .......................... 12 13 Nelson v. City of Davis, 571 F.3d 924, 928 (9th Cir. 2009) ................................... 11 14 Professional Real Estate Investors, Inc. v. Columbia Pictures 15 Industries, Inc., 508 U.S. 49 (1993), ............................................................. 3, 21 16 Sosa v. DIRECTTV, Inc., 437 F.3d 923 (9th Cir. 2006) ............................. 19, 20, 21 17 UMG Recordings, Inc. v. Bertelsmann AG, 479 F.3d 1078 (9th Cir. 2007) ........... 13 18 United States ex rel. Aflatooni v. Kitsap Physician Services, 19 163 F.3d 516, 523 (9th Cir. 1998) ...................................................................... 22 20 United States ex rel. Bott v. Silicon Valley Colleges, No. 04-0320, 21 Northern District of California .......................................................................... 14 22 United States ex rel. Graves v. ITT Educational Services, Inc. ............................. 14 23 United States ex rel. Hagood v. Sonoma County Water Agency, 24 929 F.2d 1416, 1419-1420 (9th Cir. 1991) ........................................................... 8 25 United States ex rel. Leveski v. ITT Educational Services, Inc. ............................ 18 26 United States v. Arthur Young & Co., 465 U.S. 805, 818 (1984) ............................ 6 27 Van Asdale v. International Game Tech., 28 577 F.3d 989, 998-999 (9th Cir. 2009) ............................................................... 11 29 Wang v. FMC Corp., 975 F.2d 1412, 1416 (9th Cir. 1992) .......................... 8, 22, 23 30 STATUTES 31 28 U.S.C. § 1919 .................................................................................................... 19 32 28 U.S.C. § 1927 ...................................................................................... 1, 2, 17, 23 33 OTHER AUTHORITIES 34 Noerr-Pennington doctrine .................................................... 3, 4, 18, 19, 20, 21, 23 35 RULES 36 Federal Rules of Civil Procedure 11 .......................................................... 2, 2, 3, 24 37 Federal Rules of Civil Procedure 12 ................................................ 2, 15, 15, 16, 16 38 Federal Rules of Civil Procedure 56 .............................................................. 8, 8, 10 39 Local Rule 56-1………………………………………………………….10 40 Local Rule 56-3………………………………………………………….10 41 42 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 3 of 29 Page ID #:7059 1 CASE NO. CV 07-01984 PSG (MANx) Relators Nyoka Lee and Talala Mshuja hereby oppose the motion for 1 an award of all attorneys’ fees Defendant Ernst & Young LLP (“EY”) 2 incurred between the “unsealing of the original complaint on February 25, 3 2009, through March 18, 2013, the date the Court entered its order granting 4 Defendants’ jurisdictional motions” against Relators’ Counsel, pursuant to 5 28 U.S.C. § 1927. Relators incorporate all previous filings in the case into 6 this Opposition, specifically including Relators’ Ex Parte Application For 7 Stay of Proceedings to Address Threats of Retaliation by Defense Counsel 8 [DKT 170]; Relators Opposition of Motion to Dismiss for Lack of 9 Jurisdiction [DKT 190]; and Ex Parte Application to Stay pending Appeal 10 on the Merits to the Ninth Circuit [DKT 252]. 11 INTRODUCTION 12 EY argues that Relators and their counsel should have known that the 13 case was doomed from the start, and therefore that invoking federal 14 jurisdiction on the False Claims Act (“FCA”) was a sham. The factual basis 15 of EY’s motion is that the use enrollment quotas in the recruiter 16 compensation program at the School was so well known that the FCA public 17 disclosure bar was a foregone conclusion, making the assertion of 18 jurisdiction under the FCA frivolous unless the Relators were original 19 sources. EY includes in this category its argument that prior suits against 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 4 of 29 Page ID #:7060 2 CASE NO. CV 07-01984 PSG (MANx) other for-profit education companies for recruiter compensation violations 1 constituted a public disclosure of such violation which barred suit against all 2 companies in that industry. EY next asserts that Relators’ conduct of the 3 suit was vexatious because Relators refused to concede that the public 4 disclosure bar applied, a point that EY and the School Defendants 5 considered to be so obvious that Relators were merely multiplying the 6 proceedings needlessly both in opposing their Rule 12(b)(1) motions, and in 7 opposing the one-side discovery proposed by EY and the School in the 8 Parties Joint Case Management Conference Statement. EY notes that 9 Relators refused to dismiss the lawsuit after EY sent threatening letters and 10 made telephone calls attempting to intimidate Relators into dismissing the 11 case.1 EY filed its sanctions motion after the Court granted its motion to 12 dismiss. The Ninth Circuit requires that a sanctions motion under Fed. R. 13 Civ. P. 11 must be filed before the complaint is dismissed.2 Given the safe 14 harbor provisions, a party cannot delay serving its Rule 11 motion until 15 conclusion of the case (or judicial rejection of the offending contention). 16 1 Note that in the Ninth Circuit, warnings letters and telephone calls are insufficient notice as a matter of law under Fed. R. Civ. P. 11. EY never provided the required notice. See Barber v. Miller, 146 F.3d 707, 710 (9th Cir. 1998). The Court likewise should not consider such letters and telephone calls in evaluating sanctions under 28 U.S.C. § 1927 or under its inherent authority. The letters and phone calls are evidence of EY’s strategy of retaliating against Relators and their legal counsel. 2 See Barber v. Miller, 146 F.3d 707, 710 (9th Cir. 1998. Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 5 of 29 Page ID #:7061 3 CASE NO. CV 07-01984 PSG (MANx) EY is using its sanctions motion to apply leverage on Relators’ 1 counsel and block a full adjudication of the district court’s decision by the 2 Ninth Circuit. EY’s sanction motion is made in bad faith, for the purpose of 3 obstructing and impeding appellate review of this Court’s dismissal of the 4 case. EY never filed the required Safe Harbor Notice under Fed. R. Civ. P. 5 11 in the full awareness that there is not a single public disclosure case 6 involving a public accountant’s audit obligations in the FCA context. 7 Moreover, EY’s heavy-handed use of the sanctions motion is intended to 8 burden and obstruct Relators’ access to the courts. The right to petition the 9 courts is protected under the Second Amendment to the U.S. Constitution as 10 set forth in the Noerr-Pennington doctrine. A finding that a party has 11 conducted “sham” litigation outside the immunity and protections of the 12 right to petition requires appellate review. 13 we recognized that recourse to agencies and courts should not 14 be condemned as sham until a reviewing court has "discern[ed] 15 and draw[n]" the "difficult line" separating objectively 16 reasonable claims from "a pattern of baseless, repetitive claims . 17 . . which leads the fact finder to conclude that the administrative 18 and judicial processes have been abused." 19 20 Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, 21 Inc., 508 U.S. 49 (1993), citing California Motor Transport v. Trucking 22 Unlimited, 404 U.S. 508, 513 (1972). EY’s motion seeks to have the district 23 court make a sham litigation finding, without appellate review. EY fails to 24 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 6 of 29 Page ID #:7062 4 CASE NO. CV 07-01984 PSG (MANx) establish that Relators’ assertion of False Claims Act (“FCA”) jurisdiction 1 was a sham outside the immunity of the Noerr-Pennington doctrine. 2 EY’s original source arguments do not establish sham litigation or 3 misconduct by Relators or Relators’ counsel. Relators produced 789 pages 4 of documents to EY relating to the School’s recruiter compensation 5 program. The Affidavit of Nyoka Lee, and the deposition transcript of 6 Nyoka Lee submitted in support of Relators’ opposition to EY’s motion to 7 dismiss for lack of jurisdiction [DKT 190] contained substantial evidence 8 that the School compensates its recruiters based solely on their recruitment 9 numbers. The Court disregarded this evidence, which is matter for appellate 10 review. The dismissal of Relators’ claims based on evidentiary rulings does 11 not establish sham litigation, even is such rulings were correct. The Relators 12 filed samples of the Ad Rep Performance Flash reports with the Affidavit of 13 Nyoka Lee, which the Court struck from the evidence in the case. This 14 evidentiary ruling is subject to appellate review, and cannot serve as the 15 basis of a sham litigation claim sufficient to overcome the Noerr-Pennington 16 protections. Second, the status of the Relators would never have been 17 reached unless the Court made a public disclosure finding. EY argues that 18 there were “numerous prior disclosures in the public record of the core 19 allegations in the case.” DKT 244, EY Sanctions motion, p. 8. EY could 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 7 of 29 Page ID #:7063 5 CASE NO. CV 07-01984 PSG (MANx) have asserted the public disclosure bar in its first pleading if it was so plain 1 to see. The real reason EY did not file its public disclosure motion based on 2 the recruiter enrollment quota disclosures made in Congresswoman’s Waters 3 testimony and in the securities class-action lawsuit was because EY argued 4 to the Ninth Circuit that such recruiter enrollment quotas were entirely legal 5 under the Safe Harbor regulations. 6 Relators have already apprised the Court of EY’s tactics in threatening 7 Relators and Relators’ counsel. The Court should deny EY’s motion for 8 sanctions because of Defendants’ egregious abuse of process. 9 EY makes the broad assertion that this qui tam action was a sham 10 lawsuit. EY’s argument is that “Relators’ Counsel knew or was reckless in 11 not knowing that this case was barred by the FCA’s threshold public 12 disclosure rule.” DKT 244, p. 7. EY ignores that the Court held that the 13 public disclosure involved enrollment quotas; in fact, the Court did not adopt 14 the argument made by EY that there was an independent public disclosure 15 involving EY’s audit. EY’s claim that FCA jurisdiction was lacking due to 16 the public disclosure bar was not made until the case had already made its 17 way to the Ninth Circuit, and after EY filed two (2) separate motions to 18 dismiss. The fact that EY waited almost six (6) years to file its public 19 disclosure argument is clear evidence that the public disclosure issue was not 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 8 of 29 Page ID #:7064 6 CASE NO. CV 07-01984 PSG (MANx) apparent. Moreover, assuming arguendo that the Court is correct in holding 1 that the disclosure of recruiter enrollment quotas served to bar the suit under 2 the FCA public disclosure rule as to School Defendants, EY’s audit and 3 reporting responsibilities to the U.S. Government are independent issues. 4 The Ninth Circuit has already defined EY’s responsibilities in this case. 5 Whether EY is ultimately responsible for certifying 6 Corinthian’s compliance with HEA, and whether the Financial 7 Reports they submitted failed accurately to reflect Corinthian’s 8 HEA-related liabilities, are open questions requiring further 9 factual development. 10 Ninth Circuit decision at p. 10743. EY’s audit opinions fail to disclose what 11 the impact of the School’s illegal enrollment quota practice had on the 12 company’s liability to the Government. Since ninety-percent (90%) of the 13 School’s revenues came from the U.S. Government, the amount owed to the 14 United States is “massive.” EY’s role as auditor is a “public watchdog 15 function.” United States v. Arthur Young & Co., 465 U.S. 805, 818 (1984). 16 “By certifying the public reports that collectively depict a corporations 17 financial status, the independent auditor assumes a public responsibility 18 transcending any employment relationship with the client. The independent 19 public accountant performing this special function owes ultimate allegiance 20 to the corporation's creditors and stockholders, as well as to the investing 21 public.” Id. EY failed this essential auditor’s public duty. There was no 22 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 9 of 29 Page ID #:7065 7 CASE NO. CV 07-01984 PSG (MANx) public disclosure of EY’s failure to account for the financial impact of the 1 School’s recruiter compensation violations. 2 EY’S PUBLIC DISCLOSURE IS AN INDEPENDENT ISSUE 3 The Court concluded that “where Ernst & Young’s purported 4 culpability was based entirely on its alleged participation in Corinthian’s 5 fraudulent scheme, and was not based on any independent allegations of 6 fraud against Ernst & Young, the public disclosure as to Corinthian are 7 sufficient to trigger the public disclosure bar” as to EY. [DKT 224] 8 (“Dismissal Order”), p. 11. The Dismissal Order is premised on the Court’s 9 conclusion that enrollment quotas serving as the basis for awarding recruiter 10 raises are illegal, as opposed to enrollment quotas used to terminate under-11 performing recruiters. It is these illegal enrollment quotas that EY was 12 required to evaluate and report on through its audit opinions. 13 RELATORS WERE DENIED HEARING ON “ORIGINAL SOURCE” 14 15 A pivotal question in the Dismissal Order is whether Relators were 16 required to show original source status before the public disclosure issue was 17 decided. Relators argued that under well-established Ninth Circuit 18 precedent, the burden for the Relators to put on evidence of original source 19 does not shift unless and until the court determines there has been a public 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 10 of 29 Page ID #:7066 8 CASE NO. CV 07-01984 PSG (MANx) disclosure. This necessarily means there is a second stage of the 1 proceedings to establish original source where the Relators would have the 2 burden to produce evidence. The Court skipped the second stage - the 3 original source stage - of the proceedings entirely. Relators made both a 4 written motion to obtain discovery under Fed. R. Civ. P. 56(d) [DKT 170], 5 and again orally requested a hearing on the original source question at the 6 March 11, 2013 hearing, in the event the Court should find there had been a 7 public disclosure. It is axiomatic that FCA relators are not required to 8 establish original source status unless and until a public disclosure is held to 9 have occurred. EY had the burden to establish a public disclosure before the 10 burden shifted to the Relators to show they are original sources. The two-11 step procedural sequence for ruling on a public disclosure challenge to 12 jurisdiction in the Ninth Circuit is spelled out in United States ex rel. 13 Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1419-1420 (9th 14 Cir. 1991) and Wang v. FMC Corp., 975 F.2d 1412, 1416 (9th Cir. 1992). A 15 court may inquire into a relator’s original source status only if the court first 16 finds that there has been a public disclosure of the allegations or transactions 17 set forth in the FCA lawsuit. Hagood is controlling in its holding that a 18 public disclosure must be established beforehand in order for the burden to 19 shift to relators to prove original source. There shall be no “original source” 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 11 of 29 Page ID #:7067 9 CASE NO. CV 07-01984 PSG (MANx) inquiry unless and until a public disclosure has been established. Relators 1 repeated their request for a hearing on original source at the March 11, 2013 2 hearing in the event the court should find that there was a public disclosure. 3 The lack of a hearing on the original source issue alone makes the likelihood 4 of success on appeal very high. 5 IMPROPER CONVERSION TO SUMMARY JUDGMENT MOTION 6 Fed. R. Civ. P. 56(c)(1) provides for a “point-counterpoint” procedure 7 for summary judgment motions. Each disputed fact must be separately 8 identified in statement of undisputed facts by the movant. The Central 9 District of California requires such point-counterpoint procedure in L.R. 56-10 1 and 56-3. Material facts to be decided in a motion for summary judgment 11 must be separately identified. The failure to follow such procedure is a 12 notice issue requiring reversal of summary judgment. Boswell v. Potter, 13 2002 U.S. App. Lexis 23855, at **33-4 (9th Cir. Nov. 18, 2002). The right 14 to respond to a summary judgment motion is a fundamental due process 15 right. EY failed to file a Statement of Uncontested Facts. Moreover, Fed. R. 16 Civ. P. 12(d) provides that a motion to dismiss for lack of jurisdiction under 17 Fed. R. Civ. P. 12(b)(1) may not be converted to a motion for summary 18 judgment. In addition, Relators requested a continuance of a ruling on EY’s 19 motion on the basis that Relators could not, without discovery, present all of 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 12 of 29 Page ID #:7068 10 CASE NO. CV 07-01984 PSG (MANx) the facts essential to justify its opposition pursuant to Fed. R. Civ. P. 56(d). 1 [DKT 170]. The motion was denied. Clearly Relators’ failure to respond to 2 summary judgment issues that were not identified as required by L.R. 56-1 3 and 56-33, and which discovery was disallowed on, cannot support a charge 4 that Relators’ assertion of FCA jurisdiction was a sham. The standing order 5 in this District requires a notice “Statement of Uncontroverted Facts and 6 Conclusions of Law” that must be filed concurrently with a motion for 7 summary judgment. 8 L.R. 56-1 Documents Required From Moving Party. A party 9 filing a notice of motion for summary judgment or partial 10 summary judgment shall lodge a proposed “Statement of 11 Uncontroverted Facts and Conclusions of Law.” Such proposed 12 statement shall set forth the material facts as to which the 13 moving party contends there is no genuine dispute. A party 14 seeking summary judgment shall lodge a proposed Judgment; a 15 party seeking partial summary judgment shall lodge a proposed 16 Order. 17 18 The Court made extensive fact finding on the merits of the case, even 19 though the Defendants never filed the required “Statement of 20 Uncontroverted Facts and Conclusions of Law.” The issue noticed and set 21 for hearing was the question of whether there had been a “public disclosure” 22 3 L.R. 56-3: “In determining any motion for summary judgment, the Court will assume that the material facts as claimed and adequately supported by the moving party are admitted to exist without controversy except to the extent that such material facts are (a) included in the “Statement of Genuine Issues” and (b) controverted by declaration or other written evidence filed in opposition to the motion.” Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 13 of 29 Page ID #:7069 11 CASE NO. CV 07-01984 PSG (MANx) within the meaning of the FCA. The summary judgment facts adjudicated 1 by the Court were never noticed. 2 STRIKING AFFIDAVIT OF NYOKA LEE WAS ERROR 3 The Court’s decision striking the Affidavit of Relator Nyoka Lee as a 4 sham affidavit was clear error. Striking such Affidavit after the Court 5 disallowed Relators from obtaining any discovery was highly inequitable. 6 The sham affidavit rule does not preclude a non-moving party from 7 elaborating upon, explaining, or clarifying prior testimony elicited by 8 opposing counsel on deposition. Nelson v. City of Davis, 571 F.3d 924, 928 9 (9th Cir. 2009). Minor inconsistencies that result from honest discrepancy or 10 mistake afford no basis for excluding opposition affidavit. Id.. Aggressive 11 enforcement of sham affidavit rule is justified only if the inconsistency 12 between the deposition testimony and the affidavit is clear and unambiguous 13 sufficient to justify striking affidavit. Van Asdale v. International Game 14 Tech., 577 F.3d 989, 998-999 (9th Cir. 2009). The Order of dismissal 15 completely rejects the Affidavit of Nyoka Lee, while giving wholesale 16 admission to her deposition testimony without ruling on Relators’ objections 17 on the record of the deposition transcript. Relator provided sufficient 18 evidence of original source which was rejected by the Court. The Court’s 19 broad rejection of Relators’ evidence does not support EY’s argument that 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 14 of 29 Page ID #:7070 12 CASE NO. CV 07-01984 PSG (MANx) Relators’ assertion of FCA jurisdiction was a sham based on the finding that 1 Relators were held not to qualify as original sources. The Affidavit of 2 Nyoka Lee went directly to merits of the case, as well as to her status as an 3 original source under the FCA. The Court abused its discretion when it 4 granted a motion for summary judgment where the movant’s papers were 5 insufficient for failing to separately identify the facts in dispute. Martinez v. 6 Stanford, 323 F.3d 1178, 1182-1183 (9th Cir. 2003). Such evidentiary 7 rulings do not support EY’s assertion that Relators’ assertion of FCA 8 jurisdiction was a sham. The Court’s conclusion that Lee and Mshuja had no 9 knowledge whatsoever of the School’s recruiter compensation practices, 10 disregarding altogether their combined thirteen (13) years of employment at the 11 Defendant, is categorically and evidentiarily unsustainable. 12 Nyoka Lee testified she was sure the director of admissions arrived at 13 his assessment of her performance based on her numbers. “Because he 14 based everything on numbers, you know, and then he had to fill this in 15 [Employee Performance Review] because this is the paper they gave him to 16 fill in. So he had to fill it in.” He told Lee he was recommending her for 17 promotion because she met her numbers. p. 81-82, Nyoke Lee depo. 18 Relators had sufficient basis to assert FCA jurisdiction. 19 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 15 of 29 Page ID #:7071 13 CASE NO. CV 07-01984 PSG (MANx) ATTORNEY-CLIENT PRIVILEGE ISSUES 1 Defendants’ motions argue that there was misconduct in the attorney-2 client relationship that should be considered by the Court in determining 3 whether Relators’ claims were frivolous. Allegations of improper conduct in 4 the attorney-client relationship entitle both the attorney and the clients to full 5 due process rights to obtain and present evidence at a hearing under Ninth 6 Circuit law. UMG Recordings, Inc. v. Bertelsmann AG, 479 F.3d 1078 (9th 7 Cir. 2007). Bertelsmann holds that “in civil cases where outright disclosure 8 is requested the party seeking to preserve the privilege has the right to 9 introduce countervailing evidence.” The attorney-client privilege is directly 10 at issue in the Defendants’ motions. The merits of the appeal in the Ninth 11 Circuit should be decided before Relators are required to waive their 12 attorney-client privileges to defend against the motions for sanctions, 13 attorney fees, and costs. E&Y’s sanction motion makes a direct charge of 14 misconduct in the attorney-client relationship: 15 Defendants deposed Relators on December 16 (sic) and 16 Dec 17, 2012. In addition to establishing Relators’ lack of 17 personal knowledge of the allegations in their complaints, the 18 depositions revealed that Relators’ Counsel used Susan 19 Newman - a relator in two qui tam cases previously filed by 20 Relators’ Counsel3 [footnote omitted] - to recruit Relators to 21 file this suit. 22 23 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 16 of 29 Page ID #:7072 14 CASE NO. CV 07-01984 PSG (MANx) EY’s Sanctions Motion, p. 4. This accusation against counsel is precisely 1 the situation that creates the due process protections for discovery and 2 hearing described in Bertelsmann. 3 A second attorney-client privilege issue is raised in establishing that 4 Relators qualified as original sources in this action, since the evidence 5 provided to the Government is central to an original source determination. 6 The attorney-client concerns are additional grounds to deny EY’s motion. 7 Leidholdt v. L.F.P., Inc., 860 F.2d 890, 895 (9th Cir. 1988). 8 CASES WHERE SUSAN NEWMAN SERVED AS RELATOR 9 10 EY argues that the Court needs to consider Susan Newman’s role in 11 United States ex rel. Bott v. Silicon Valley Colleges, No. 04-0320, Northern 12 District of California, in awarding sanctions. Judge Wilkens denied the 13 motion for sanctions made in the Bott case. EY also argues that the Court 14 should consider that Susan Newman was also the co-relator in the Bott case, 15 and that Susan Newman was the co-relator in the case United States ex rel. 16 Graves v. ITT Educational Services, Inc. No motion for sanctions was ever 17 filed in the Graves v. ITT case. Newman’s information, moreover, resulted 18 in a major criminal investigation against ITT Educational Services, Inc. 19 under the Racketeer Influenced Corrupt Organizations Act (“RICO”) by the 20 U.S. Department of Justice. See FBI Search Warrant attached and 21 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 17 of 29 Page ID #:7073 15 CASE NO. CV 07-01984 PSG (MANx) incorporated as Exhibit “1.” Susan Newman’s disclosures in the Graves v. 1 ITT case also led to a separate investigation into official misconduct in the 2 positions taken by the U.S. Department of Justice in court filings. See 3 “Newman Exhibits” attached and incorporated as Exhibit “2, 3 and 4” (3 4 parts). 5 EY also asserts that Relators’ counsel Scott Levy (a “Texas” lawyer) 6 and Mark Labaton used Susan Newman to “recruit” the Relators in this 7 lawsuit. Relator Talala Mshuja was a colleague of Susan Newman at IBT, 8 another for-profit education company, and that Newman and Mshuja met the 9 counsel about bringing a suit against IBT. The email from the U.S. 10 Department of Justice confirms that a draft suit against IBT was prepared 11 and submitted to the Government. See email from Abraham Meltzer, 12 Assistant U.S. Attorney, Central District of California, dated April 24, 2013, 13 attached and incorporated as Exhibit “5.” See Deposition of Talala Mshuja 14 attached and incorporated as Exhibit “6.” 15 EY IS AWARE OF THE SCHOOL’S HISTORY OF MISCONDUCT16 After the two (2) sets of Rule 12(b)(6) motions were filed, EY moved to 17 dismiss for lack of jurisdiction under Rule 12(b)(1) arguing that the allegations 18 were already publicly disclosed in testimony given by Congresswoman Maxine 19 Waters and in a securities class action lawsuit against the School, both of which 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 18 of 29 Page ID #:7074 16 CASE NO. CV 07-01984 PSG (MANx) asserted that the School had mandatory enrollment quotas as the foundation of its 1 recruiter compensation program. Congresswoman Waters and the securities class 2 action complaint both asserted that the recruiter enrollment quotas were, in and of 3 themselves, a violation of the HEA recruiter compensation ban. This was the 4 same position asserted by Relators in their original complaint, which the Ninth 5 Circuit rejected and held that enrollment quotas did not violate the HEA, and 6 therefore could not serve as a “false statement” within the meaning of the FCA. It 7 is highly noteworthy that while EY asserts that Relators should have known about 8 the public disclosures at the time the lawsuit was filed, the School’s legal counsel 9 in the securities class action suit is the same legal counsel that represents the 10 School in the instant lawsuit. Yet the School Defendants filed their rule 12(b)(1) 11 motions only after bringing two separate motions to dismiss under Rule 12(b)(6). 12 The Ninth Circuit has already vetted the case. The Court record, moreover, 13 clearly reflects that defendant Corinthian Colleges, Inc. is viewed as a peril to both 14 students and taxpayers by government officials and agencies. First, U.S. Senator 15 Frank Lautenberg, joined by seven (7) of his Senate colleagues4, sent a letter on 16 December 12, 2012 to U.S. Secretary of Education Arne Duncan requesting an 17 investigation of Corinthian Colleges, Inc. for suspected fraud against the federal 18 student financial aid programs. Second, the Attorney General for the State of 19 4 The signatories to the December 12, 2012 Letter were Senator Frank R. Lautenberg (D. NJ), Senator Richard Durbin (D. IL), Senator Richard Blumenthal (D. IN), Senator Tom Harkin (D. IA), Senator Jay D. Rockefeller IV (D. WV), Senator Al Franken (D. MN), Senator Jack Reed (D. RI), and Senator Barbara Boxer (D. CA). Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 19 of 29 Page ID #:7075 17 CASE NO. CV 07-01984 PSG (MANx) Illinois issued a subpoena to Relators’ counsel to produce copies of documents and 1 the deposition testimony given by Lee and Mshuja in this case. This evidence was 2 already under subpoena by the Illinois Attorney General directly to the Defendant. 3 Third, U.S. Congresswoman Maxine Waters testified about the falsification of 4 financial aid eligibility records of students enrolled at the Defendant’s San Jose 5 campus uncovered by the U.S. Department of Education. Fourth, Congresswoman 6 Maxine Waters, in a letter dated February 7, 2013, requested the Court to delay 7 ruling on defendants’ expedited application for protective order to seal the 8 evidence provided by Lee and Mshuja until both U.S. Attorney General Eric 9 Holder, and the Attorneys General of Illinois and other affected States could file 10 briefs making their positions known.5 The fact that eight United States Senators 11 and a Member of Congress have written letters questioning the legality of the 12 School’s conduct makes EY’s assertion that Relators filed a sham lawsuit even 13 more implausible, which provides further evidence that EY’s real motive in 14 bringing the sanctions motions is to create additional burdens in order to block 15 Relators from pursuing an appeal to the Ninth Circuit. 16 Corinthian Colleges’ Forms 10-K filed with the U.S. Securities & 17 Exchange Commission each year explicitly disclaimed giving an opinion as to 18 5 The district court ordered the letter from a Member of Congress stricken from the record as an ex parte communication, instead of circulating it to the parties and allowing comment as provided by the Local Rule cited in the Order. Remarkably, one of the grounds for sanctions asserted in Corinthian Colleges’ motion is that Relators’ counsel should be held responsible under 28 U.S.C. § 1927 for Congresswoman Maxine Waters’ February 7, 2013 letter to the district court as an example of vexatious conduct by Relators. Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 20 of 29 Page ID #:7076 18 CASE NO. CV 07-01984 PSG (MANx) compliance with the HEA recruiter compensation prohibition. In stark contrast, 1 EY gave clean unqualified opinions to the U.S. Department of Education, never 2 breathing a word about the uncertainty about compliance with the recruiter 3 compensation prohibition expressed in the Forms 10-K. EY made completely 4 opposite disclosures to the U.S. Securities & Exchange Commission and the U.S. 5 Department of Education. In this regard, EY’s explanation that it should somehow 6 be vindicated because a third-party auditor conducted the compliance portion of 7 the examination underscores how recklessly it acted. EY issued its audit opinions 8 with the full knowledge that compliance with the recruiter compensation ban was 9 unresolved, at best. Despite such material weakness impacting ninety-percent 10 (90%) of the School’s income, EY issues unqualified opinions with no warning 11 whatsoever to the U.S. Government. EY betrayed the interest of the United States 12 in order to appease the client and retain Corinthian’s business. Relators’ claims 13 against EY are supported in both law and fact. 14 LEVESKI CASE 15 EY relies in large part on the decision in United States ex rel. Leveski v. ITT 16 Educational Services, Inc., No. 1:07-cv-0867-TWP-MJD, 2012 WL 1028794 17 (S.D. Ind. March 26, 2012) to justify its request for sanctions. Leveski is now on 18 appeal in the Seventh Circuit, and oral argument was held in January 2013. No 19 12-1369, No 12-1967, No 12-1979, No 12-2008, and No. 12-2891. Where the 20 imposition of sanctions is based sanctions awarded in a similar case, the 21 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 21 of 29 Page ID #:7077 19 CASE NO. CV 07-01984 PSG (MANx) Court should be hold its decision in abeyance pending appellate review of 1 that case. Leidholdt v. L.F.P., Inc., 860 F.2d 890, 895 (9th Cir. 1988). 2 Noerr-Pennington Doctrine 3 To award sanctions in the context of the other actions taken to 4 retaliate against Relators and their legal counsel for bringing this action 5 against Defendants would be a violation of the Noerr-Pennington doctrine. 6 EY seeks sanctions of approximately $542,000 in attorney’s fees against 7 Relators and their counsel. EY brings its motion in order to interfere with 8 Relators from pursuing their appeal in the U.S. Court of Appeals for the 9 Ninth Circuit. 10 The essence of EY’s argument in its sanctions motion, which is 11 carried over into EY’s motion for costs under 28 U.S.C. § 1919, is that 12 Relators’ assertion of FCA jurisdiction was baseless from the start, i.e., that 13 the lawsuit was doomed from the beginning. Because the First 14 Amendment’s Petition Clause requires protection of “the class of reasonable 15 based but unsuccessful lawsuits,” actions that chill or restrain the filing of 16 lawsuits involves rights protected by the Bill of Rights. BE&K Construction 17 Co. v. NLRB, 536 U.S. 516 (2002). 18 “[T]he right to access to the court is … but one aspect of the [First 19 Amendment] right of petition,” which extended the immunity of the Noerr-20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 22 of 29 Page ID #:7078 20 CASE NO. CV 07-01984 PSG (MANx) Pennington doctrine to the use of “the channels and procedures of state and 1 federal … courts to advocate causes and points of view… .” Sosa v. 2 DIRECTTV, Inc., 437 F.3d 923 (9th Cir. 2006). The Supreme Court held that 3 Petition Clause protects access to judicial processes, and that laws must be 4 interpreted, where possible, to avoid burdening such access. Sosa, id., citing 5 Bill Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731 (1983). The 6 Supreme Court expanded its holding in BE&K Construction Co. v. NLRB, 7 536 U.S. 516 (2002) to make clear that principles of statutory construction 8 embodied in the Noerr-Pennington doctrine apply with full force in other 9 statutory contexts. BE&K explained that the sham litigation test requires 10 that “breathing room” should be given in evaluating whether their legal 11 assertions are baseless. “This definition overprotects baseless petitions so as 12 to ensure citizens may enjoy the right of access to the courts without fear of 13 prosecution. BE&K made this breathing room protection explicit.” Sosa, id., 14 at 934. 15 Appellate Court Decision is Required Before Litigation is Deemed a “Sham” 16 The Court found no public disclosure as to EY. Instead, the ruling 17 allows EY to piggy-back on the public disclosure found as to t he School 18 defendants. EY’s motion for sanctions, in conjunction with the separate 19 motion for sanctions brought by the School Defendants, is brought for the 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 23 of 29 Page ID #:7079 21 CASE NO. CV 07-01984 PSG (MANx) improper purpose of blocking Relators’ access to the Ninth Circuit. EY 1 employs a heavy-handed strategy in a fraudulent manner, to block appellate 2 review of the public disclosure findings made by the district court. Before a 3 case can be deemed to be outside the immunity of the Noerr-Pennington 4 doctrine, there must be appellate review of the determination that a lawsuit 5 was a “sham.” 6 we recognized that recourse to agencies and courts should not 7 be condemned as sham until a reviewing court has "discern[ed] 8 and draw[n]" the "difficult line" separating objectively 9 reasonable claims from "a pattern of baseless, repetitive claims . 10 . . which leads the factfinder to conclude that the administrative 11 and judicial processes have been abused." 12 13 Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, 14 Inc., 508 U.S. 49 (1993), citing California Motor Transport v. Trucking 15 Unlimited, 404 U.S. 508, 513 (1972). EY’s motion seeks to avoid appellate 16 review of the jurisdiction of the public disclosure issue. A sham lawsuit is 17 one that is “objectively baseless in the sense that no reasonable litigant could 18 realistically expect success on the merits.” Id 19 It would be clear error for this Court to award sanctions before the 20 appellate court can evaluate jurisdictional basis asserted by Relators. EY’s 21 charge of sham jurisdiction against Relators requires appellate review as a 22 matter of law. BE&K, id.; Professional Real Estate Investors, Inc., id.; 23 Sosa, id. Relators clearly notified the Court of EY’s pattern of retaliatory 24 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 24 of 29 Page ID #:7080 22 CASE NO. CV 07-01984 PSG (MANx) conduct against Relators and their counsel, and the Court’s supervision was 1 requested so that Relators could proceed in presenting the merits of their 2 claims. See, Dkt 170, Relators’ Ex Parte Application For Stay Of 3 Proceedings To Address Threats of Retaliation By Defense Counsel. The 4 Court is required under the Noerr-Pennington doctrine to take into 5 consideration whether the Defendants are using sanctions as a judicial 6 maneuvers for the purpose of “deterring respondents from having fee and 7 unlimited access to the agencies and the courts.” California Motor Transport 8 Co. v. Trucking Unlimited, 404 U.S. 508 (1972). Defendants’ motion for 9 costs, in conjunction with its motion for sanctions, and threats against 10 Relators’ counsel and third-party counsel considering enrolling in the case, 11 has interfered with Relators’ right to access to the courts. Id. 12 PUBLIC DISCLOSURE IS DIFFERENT FOR EACH DEFENDANT 13 The public disclosure that Corinthian Colleges utilizes illegal recruiter 14 enrollment quotas as part of its recruiter compensation program does not 15 constitute a public disclosure that EY as auditor failed to properly audit and 16 report on the HEA-related liabilities resulting from such illegal enrollment 17 quota practices. A public disclosure about one defendant affords no 18 protection to another defendant. Wang v. FMC Corp., 975 F.2d 1412 (9th 19 Cir. 1992) . EY’s violations were never publicly disclosed. See United 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 25 of 29 Page ID #:7081 23 CASE NO. CV 07-01984 PSG (MANx) States ex rel. Aflatooni v. Kitsap Physician Services, 163 F.3d 516, 523 (9th 1 Cir. 1998) (fraud was alleged “against two distinct groups of defendants.” 2 Following Wang, id at 1415-1416, the Ninth Circuit reversed the public 3 disclosure finding as to the second group of defendants: “[W]e find that the 4 district court erred in concluding that the public disclosure bar applied to all 5 Defendants….” The public disclosure regarding the School Defendants was 6 not a public disclosure as to EY. EY’s motion fails to establish that 7 Relators’ assertion of FCA jurisdiction against EY was a sham. 8 Moreover, Relators were not required to identify the submission EY 9 made to the Government. See, Glynn v. Edo Corp., 710 F.3d 209 (4th Cir. 10 2013) (relator did not have to see the submission to the government - 11 circumstantial evidence of false certification is enough). 12 EY’s motion falls far short in demonstrating that suit falls within the 13 sham litigation exception to justify awarding attorney’s fees. A district court 14 should review "the entire course of the litigation" in making this 15 determination. Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 421-16 422 (1978). Moreover, "it is important that a district court resist the 17 understandable temptation to engage in post hoc reasoning by concluding 18 that, because a plaintiff did not ultimately prevail, his action must have been 19 unreasonable or without foundation." Christiansburg, 434 U.S. at 421-22. 20 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 26 of 29 Page ID #:7082 24 CASE NO. CV 07-01984 PSG (MANx) EY argues in hindsight that the claims were clearly frivolous, clearly 1 vexatious, or brought primarily for the purposes of harassment in hindsight, 2 yet it failed to seek sanctions under Fed. R. Civ. P. 11 utilizing its safe-3 harbor provision. Although found not meritorious in hindsight, the Court 4 already concluded that relators’ “Lead-to-Conversion Ratio” claims were 5 sufficient addition facts to state a violation of the Higher Education Act 6 recruiter compensation ban. Relators came forth with evidence to support 7 the claims in the Ad Rep Performance Flash Reports. 8 The Federal Reserve issued a report on April 17, 2013 concerning the 9 long-term negative effect of the $1.0 trillion in student loans will have on 10 future economic growth in the U.S. The issue is now a national crisis. See, 11 http://libertystreeteconomics.newyorkfed.org/2013/04/young-student-loan-12 borrowers-retreat-from-housing-and-auto-markets.html 13 Relators attach and incorporated the 789 pages of documents they 14 produced, including the Ad Rep Performance Flash reports, as Exhibit “1” 15 (Lodged Under Seal). Relators attach and incorporate the Deposition of 16 Nyoka Lee as Exhibit “2.” Relators attach and incorporate the Deposition of 17 Talala Mshuja as Exhibit “3.” Relators attach and incorporate the April 24, 18 2013 email from Assistant U.S. Attorney Abraham Meltzer regarding 19 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 27 of 29 Page ID #:7083 25 CASE NO. CV 07-01984 PSG (MANx) Institute For Business & Technology by Relators Talala Mshuja and Susan 1 Newman as Exhibit “4.” 2 The auditor’s obligations to report the impact of misconduct to the 3 U.S. Government in the context of the FCA was explained by the Ninth 4 Circuit. The basis for FCA jurisdiction asserted against EY is objectively 5 reasonable. The Court dismissed the claims against EY based on the public 6 disclosure of fraud as to the School Defendants; the Court did not adopt the 7 argument asserted by EY that there was also a public disclosure of the 8 auditor’s misconduct. The claims against EY have already been vetted by 9 the Ninth Circuit. The First Amendment’s Petition Clause requires 10 protection of “the class of reasonable based but unsuccessful lawsuits,” and 11 to award sanctions in this case would violate the Noerr-Pennington doctrine 12 by burdening Relators’ prosecution of an appeal on the merits in the U.S. 13 Court of Appeals for the Ninth Circuit, which is EY’s strategy in bringing its 14 motion. The claim against EY was divested of jurisdiction based on 15 evidentiary rulings in which Relators asserted reasonable positions. 16 REQUEST FOR RELIEF 17 WHEREFORE, the Court should deny EY’s Motion For Sanctions 18 pursuant to 28 U.S.C. § 1927. 19 20 Dated: May 10, 2013 Respectfully submitted: 21 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 28 of 29 Page ID #:7084 26 CASE NO. CV 07-01984 PSG (MANx) 1 LEVY & ASSOCIATES PC By: ________// SDL //___________ SCOTT D. LEVY Attorney for Relators Nyoka June Lee and Talala Mshuja 2 Case 2:07-cv-01984-PSG-MAN Document 265 Filed 05/10/13 Page 29 of 29 Page ID #:7085