Allegations of accounting fraud at electric utility financing co-op inadequately pleaded, court rules

by Ben Vernia | April 4th, 2011

On March 15, Nebraska District Judge Laurie Smith Camp dismissed a whistleblower’s third amended complaint against the National Rural Utilities Cooperative Finance Corporation, its executives, accountants, and rating agencies. The relator alleged that the co-op obtained federal loan guarantees on the basis of investment ratings despite three fraudulent accounting schemes, and the defendants moved to dismiss the complaint for failure to state a claim under the False Claims Act and for inadequate particularity under Fed. R. Civ. P. 9(b).

Judge Camp agreed with the defendants that the relator’s complaint failed to allege violations of the FCA, concluding: “Even assuming CFC made claims against the government, the [third amended complaint] does not explain how the claims were false, or that false claims were presented knowingly.” She further noted that it was unclear from the complaint whether the co-op ever obtained funds from the federal government, because there had been no default on the loans which would trigger their federal guarantee. Moreover, Judge Camp noted that Generally Accepted Accounting Principles (GAAP) which the relator alleged had been violated provide no bright-line rules, but instead permit a range of management decisions, and the complaint failed to allege that the relator’s interpretation of GAAP were the only acceptable methods under the circumstances.

Judge Camp also found the complaint lacking in particularity, rejecting the relator’s argument that Rule 9(b) should not apply to cases brought under the FCA. Even under a relaxed 9(b) standard, the court found, the allegations against the other defendants were conclusory. As for those against the co-op – although pleaded in extensive detail – Judge Camp wrote that “it is difficult to identify the ‘who, what, when, where, and how’ of the accounting practices that allegedly resulted in fraudulent claims.”

Although the case was still at an early stage, the court refused the relator leave to amend, reasoning that he had already amended several times and that in light of her decision, any amendment would have to change the entire character of the relator’s claims.

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