Lawsuits & Settlements

SAN FRANCISCO -- Attorney General Kamala D. Harris today filed a lawsuit against one of the nation's major credit rating companies for inflating its ratings of structured finance investments, which caused California's public pension funds and other investors to lose billions of dollars.

The complaint, filed today in San Francisco Superior Court, alleges that the McGraw-Hill Companies, Inc. and Standard and Poor's Financial Services LLC violated the False Claims Act and other state laws by using a ratings process based on what senior executives described as "magic numbers" and "guesses."

"For years, S&P placed its priority on maintaining its market share, instead of the investors who trusted in its supposedly objective ratings," said Attorney General Harris. "When the housing bubble burst, S&P's house of cards collapsed and California paid the price—in billions. S&P must be held accountable for its conduct that contributed to one of our country's worst financial crises."

Investors relied on S&P and its competitors to rate these securities because they had access to only general descriptions of the assets backing their investments, which often included mortgages. California's public pension funds also relied on S&P because they are often required to buy securities that received a coveted "AAA" rating, signaling that the investment was top-tier and bore minimal risk.

The complaint alleges that, from 2004 to 2007, S&P systematically misrepresented to the public, and to CalPERS and CalSTRS, that its ratings of structured finance securities were based on an independent, objective and reliable analysis, and not influenced by S&P's economic interests.

In doing so, S&P lowered its standards for rating securities to gain market share and increase profits, and violated the False Claims Act by making false statements about the nature and risk of investments. The complaint also describes the company's efforts to suppress the development of new and more accurate ratings models.

In mid-2007, the housing bubble burst. After securities that S&P had deemed the least risky began defaulting, S&P downgraded many residential mortgage backed securities investments. The market collapsed, and of those securities issued in 2007, more than 90 percent were downgraded to junk status.

The California Public Employees Retirement System (PERS) and the California State Teachers Retirement System (STRS) – two of the nation's largest institutional investors – lost approximately $1 billion.

Attorney General Harris today joined the U.S. Department of Justice and 12 other states and the District of Columbia in announcing lawsuits in Washington, D.C. The other lawsuits allege violations of the federal Financial Institutions Reform, Recovery and Enforcement Act and state unfair competition laws.

However, California's suit is unique because it is being filed not only under California's unfair competition laws but also under the state's False Claims Act. This suit includes a claim for triple damages – because when the state makes a purchase based on a false statement, the defendant is responsible for the amount lost times three.

The lawsuit arises from a 20-month investigation into the issuance and rating of mortgage-backed securities by Attorney General Harris's California Mortgage Fraud Strike Force, which she formed in May 2011 to comprehensively investigate misconduct in the mortgage industry. The Attorney General's additional efforts to investigate the mortgage crisis include securing an estimated $18 billion for California in the National Mortgage Settlement and sponsoring the California Homeowner Bill of Rights, a package of laws instituting permanent mortgage-related reforms.

The complaint is attached to the online version of this press release at http://oag.ca.gov/.

OAKLAND-- Attorney General Kamala D. Harris filed a civil lawsuit on February 1 against BP West Coast Products, BP Products North America, Inc. and Atlantic Richfield Company for allegedly violating state laws governing hazardous materials and hazardous waste by failing to properly inspect and maintain underground tanks used to store gasoline for retail sale at more than 780 gas stations in California.

"Safe storage of gasoline is not only common sense, it is essential to protecting the integrity of California's groundwater resources," Attorney General Harris said. "California's hazardous waste laws safeguard public health and this lawsuit ensures proper maintenance of the tanks that store fuel beneath California’s communities."

Attorney General Harris was joined in this enforcement action by Alameda County District Attorney Nancy E. O'Malley, Glenn County District Attorney Robert Maloney, Merced County District Attorney Larry D. Morse II, Nevada County District Attorney Clifford Newell, Placer County District Attorney R. Scott Owens, San Bernardino County District Attorney Michael A. Ramos, Stanislaus County District Attorney Birgit Fladager and Yuba County District Attorney Patrick McGrath.

The complaint filed February 1 in Alameda County Superior Court alleges that, since October 2006, the BP companies and ARCO have improperly monitored, inspected and maintained underground storage tanks used to store gasoline for retail sale. The complaint alleges that the defendants tampered with or disabled leak detection devices, and failed to test secondary containment systems, conduct monthly inspections, train employees in proper protocol, and maintain operational alarm systems, among other violations. The lawsuit also alleges that the defendants improperly handled and disposed of hazardous wastes and materials associated with the underground storage tanks at retail gas stations throughout the state.

The complaint follows a recent statewide investigation led by Attorney General Harris's office, which found violations of hazardous materials and hazardous waste laws and regulations at BP gas stations in 37 counties across the state.

In January 2012, the Attorney General's office filed a similar lawsuit against Phillips 66 and ConocoPhillips:

http://oag.ca.gov/news/press-releases/attorney-general-kamala-d-harris-sues-phillips-66-and-conocophillips-over.

Deputy Attorney Generals Brett J. Morris and Deborah Halberstadt are prosecuting the case for Attorney General Harris's Environment Section.

A copy of the complaint, which contains the addresses of the gas stations, is attached to the online version of this release at http://oag.ca.gov.

LOS ANGELES -- Attorney General Kamala D. Harris today filed lawsuits against two international apparel manufacturers for gaining an unfair competitive advantage over American companies by using pirated software in the production of clothing imported and sold in California.

The companies, based in China and India, did not pay licensing fees for software, including products manufactured by Adobe, Microsoft, Symantec and others. The complaints allege that the foreign apparel manufacturers who have not paid software licensing fees have a significant cost advantage in the low-margin business of apparel manufacturing, shipment and sales.

“Companies across the globe should be on notice that they will be held accountable in California for stealing our intellectual property,” Attorney General Harris said. “This is an anticompetitive practice which harms our state’s economy and is illegal. These lawsuits go after overseas companies whose unlawful actions are eroding California’s garment industry and placing California companies who legally pay for computer software at a disadvantage.”

The lawsuits, filed in Los Angeles County Superior Court, charge Pratibha Syntex Ltd. of India and Ningbo Beyond Home Textile Co. Ltd., and its sister companies, of China with violating California’s Unfair Competition Law. Since 2010, the Ningbo Companies shipped approximately 713,000 pounds of apparel products into California. Pratibha has shipped more than 19,000 pounds into the state.

Ningbo Beyond Group exports men’s suits, blazers, coats and jackets, as well as fleece cargo pants, fleece jackets and caps to California. Pratibha Syntex exports women’s cotton tops and other clothes for men, women, and children.

The complaints also allege that these companies obtain an unfair advantage because they can redirect money saved by using pirated software to hire employees and to expand their facilities and their research and development efforts. Furthermore, American companies that are developing software, particularly software that is used in the garment industry, are discouraged from investing in new technology and products if they know their software will be used illegally.

California’s apparel manufacturers, which are largely based in Los Angeles County, employed more than 58,000 people last year and generated more than $5 billion in annual revenues since 1990. In 2010, the industry employed 40,872 workers in Los Angeles County, which accounts for nearly 70 percent of the industry’s workforce in the state.

A study by the Orange County Business Council found that California has lost nearly 400,000 manufacturing and technology jobs over the past decade to countries where piracy rates are as high as 80 percent. This activity has resulted in a loss of $1.6 billion in economic activity and $700 million in tax revenue for California.

The complaints are attached to the online version of this release at http://oag.ca.gov/news.

SAN FRANCISCO -- Attorney General Kamala D. Harris today filed a civil lawsuit against Phillips 66 and ConocoPhillips for allegedly violating state law by failing to properly inspect and maintain underground tanks used to store gasoline for retail sale at more than 560 gas stations in California.

"The state's hazardous waste laws help protect our residents from contaminated groundwater," Attorney General Harris said. "This lawsuit safeguards public health by ensuring proper maintenance of the tanks that store fuel beneath many California communities."

The Attorney General's office was joined in this enforcement action by Alameda County District Attorney Nancy E. O'Malley, El Dorado County District Attorney Vern Pierson, Merced County District Attorney Larry D. Morse II, Nevada County District Attorney Clifford Newell, Placer County District Attorney R. Scott Owens, San Bernardino County District Attorney Michael A. Ramos, and Stanislaus County District Attorney Birgit Fladager.

The complaint filed today in Alameda County Superior Court alleges that, since November 2006, Phillips 66 and ConocoPhillips have improperly monitored, inspected and maintained underground storage tanks used to store gasoline for retail sale. The complaint alleges that the defendants tampered with or disabled leak detection devices, and failed to test secondary containment systems, conduct monthly inspections, train employees in proper protocol, and maintain operational alarm systems, among other violations. The lawsuit also alleges that the defendants improperly handled and disposed of hazardous wastes and materials associated with the underground storage tanks at retail gas stations throughout the state.

A statewide investigation led by the Attorney General's office found violations of hazardous materials and hazardous waste laws and regulations at gas stations in 34 counties across the state.

Deputy Attorney Generals Brett J. Morris and Deborah Halberstadt are prosecuting the case for Attorney General Harris' Environment Section.

A copy of the complaint is attached to the online version of this release at http://oag.ca.gov.

SAN FRANCISCO -- Attorney General Kamala D. Harris today filed a lawsuit against eBay for entering into a “handshake” hiring agreement with Intuit that prohibited the company from recruiting and hiring one another's employees.

The complaint alleges that from 2006 to 2009, senior executives at eBay and Intuit agreed not to recruit employees who worked for the other company, and eBay agreed not to hire any Intuit employees. As a result, employees of both companies were prevented from seeking potentially better-paying positions. The companies passed on talented employees because of their anticompetitive agreement.

“The pact harmed employees and it harmed competition,” said Attorney General Harris. “If California is going to continue to be the high-tech capital of the world, we can’t allow anticompetitive conduct that prevents talent from going where it’s put to its highest use.”

The complaint filed by Attorney General Harris alleges that senior executives at eBay entered into a “no-poach” agreement to restrict their ability to recruit and hire employees of the other company. Intuit is being named a co-conspirator. The agreement prohibited either company from soliciting one another’s employees for employment opportunities and for over a year, prevented eBay from hiring any employees at all from Intuit.

The agreement was enforced at the highest levels of the company. The complaint alleges that emails exchanged between eBay’s chief executive officer and Intuit’s founder and chairman detail their intention not to recruit or hire one another’s employees.

Harris' complaint alleges that the agreement between the companies violated California’s Unfair Competition Law, the Sherman Anti-Trust Act and the Cartwright Act.

The California Justice Department worked closely with the U.S. Department of Justice on this matter. The U.S. Department of Justice also has filed a case against eBay for their “no poach” agreement. The U.S. DOJ already has an injunction in place against Intuit relating to a similar agreement Intuit reached with other companies. Harris' separate lawsuit, however, is significant because it seeks to enforce California laws which contain stronger protections against anti-competitive conduct than federal law.

California seeks to recover damages for each act of unfair competition, as well as injunctive relief to prevent any such agreement from occurring again.  

SAN FRANCISCO -- Attorney General Kamala D. Harris today announced a settlement with one of California’s largest health insurers over allegations the company failed to protect the personal information of its members.

The lawsuit, which was filed in Los Angeles Superior Court today along with the settlement, alleges that Blue Cross of California, which does business under the trade name Anthem Blue Cross, printed Social Security numbers on letters mailed to more than 33,000 of its Medicare Supplement and Medicare Part D subscribers between April 2011 and March 2012. The complaint states that Anthem’s conduct violated a state law that restricts the disclosure of Social Security numbers.

"Our office is committed to protecting the privacy of Californians," said Attorney General Harris. "This settlement requires the company to make significant improvements to its data security procedures to ensure this type of error does not happen again."

After the incident, Anthem sent a letter to all affected members whose Social Security numbers were visible through the mailed envelope, notifying them of the breach and offering each a year of free credit monitoring services.

The settlement also requires Anthem to implement new technical safeguards for its data management system, restrict employee access to members’ Social Security numbers and provide enhanced data security training for all of its associates.

The company must also pay $150,000 to settle the claim. The complaint and settlement reflect Attorney General Harris’ continued efforts to protect Californians’ privacy particularly where thousands of consumers can have their personal information released with a mere push of a button.

Copies of the complaint and judgment submitted to the court for approval are attached to the online version of this release at www.oag.ca.gov.

BAKERSFIELD -- Attorney General Kamala D. Harris today announced a plea agreement with the owner of a garbage collection company that illegally dumped Los Angeles County garbage in a Kern County landfill.

Paul Michael Benz, 68, owner and operator of Benz Sanitation, pled guilty today in Kern County Superior Court to one felony charge of presenting a fraudulent claim for payment to the government. As part of today’s plea agreement, Benz will pay nearly $2.4 million in restitution, and take other actions to prevent illegal conduct in the future.

Between January 2008 and September 2012, Benz Sanitation had a waste removal services contract with Kern County that allowed it to take Kern County’s residential garbage and deposit it at local landfills at no charge. During this time, Benz Sanitation also contracted with almost 1,500 residents and businesses in Los Angeles County to remove their residential and commercial garbage. Benz then manipulated these contracts by fraudulently mislabeling the Los Angeles County garbage as originating in Kern County so that he could dump it free of charge in Kern County’s landfills.

Benz Sanitation’s dumping practices were first questioned when deposits in the local Kern County landfill dropped dramatically after the City of Ridgecrest ended its contract with Benz and hired a new garbage collection company. Further investigation revealed that Benz Sanitation was hauling garbage from Los Angeles County to the Material Recovery Facility in Kern County and falsely reporting that the garbage had originated in Kern County, defrauding the county of approximately $2 million.

As a result of today’s plea agreement, Benz is required to leave the company and pay $2,375,000 in restitution. He will also be placed on felony probation. To prevent future illegal conduct, Benz Sanitation will place GPS trackers on all vehicles to provide location data to Kern County. County officials will randomly audit the company’s records, will review weight tickets in the company’s scale house, and barcode all vehicles by route.

The California Attorney General’s Office was initially asked to look into CalRecycle’s concerns about violations of statewide disposal reporting in Kern County. The office then coordinated with local law enforcement agencies during the investigation of Benz and his company.

A copy of the agreement is attached to the electronic version of this release at http://oag.ca.gov/news.

SACRAMENTO -- Attorney General Kamala D. Harris today announced that claim forms will be sent to approximately 432,584 California borrowers who lost their homes to foreclosure between January 1, 2008 and December 31, 2011 and may be eligible for a settlement payment under the $25 billion national mortgage foreclosure settlement.

Borrowers receiving the claim forms had mortgages serviced by Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo, the servicers that agreed to the settlement with the federal government and attorneys general of 49 states and the District of Columbia.

The settlement, which was signed by the Court in April 2012, earmarked approximately $1.5 billion in payments for 2 million borrowers nationwide. The actual payment amount will depend upon the total number of borrowers who decide to participate. Payment checks are expected to be mailed in mid-2013.

Last week, the national settlement administrator mailed notification postcards to eligible borrowers across the nation. In California, packets containing a letter from the California Department of Justice, a claim form and answers to frequently asked questions are being mailed to eligible borrowers starting this week and continuing through October 12.

Eligible California borrowers should complete the claim form and return it as soon as possible in the envelope provided, or file the claim form online at www.nationalmortgagesettlement.com. The deadline for all claims is January 18, 2013.

The one-page claim forms are simple to complete. Borrowers who have questions or need help filing a claim should contact the settlement administrator, toll-free, at 866-430-8358, or send questions by email to administrator@nationalmortgagesettlement.com. The information line is staffed Monday through Friday from 5 a.m. to 5 p.m. PST.

Eligible borrowers do not need to prove financial harm to receive a payment, nor do they give up their rights to pursue a lawsuit against their mortgage servicer or to participate in the Independent Foreclosure Review Process being conducted by federal bank regulators. More information about that program is available at www.independentforeclosurereview.com.

Eligible borrowers may receive payment from this settlement even if they participate in another foreclosure claims process. However, any payment received may reduce payments that a borrower may be eligible to receive in any other foreclosure claim process or legal proceeding.

Borrowers who believe they may qualify for a payment, but did not receive a notice because they have moved, should contact the settlement administrator, toll-free, at 866-430-8358, or send an updated address by email to administrator@nationalmortgagesettlement.com. The line is staffed Monday through Friday from 5 a.m. to 5 p.m. PST.

Attorney General Harris also is warning all homeowners to be aware of settlement-related scams. Do not provide personal information or pay money to anyone who calls or emails and claims to provide settlement-related assistance. The official claim form does not ask for personal financial information. If you believe someone is conducting a settlement-related scam, please file an online complaint with the Attorney General’s Public Inquiry Unit at http://oag.ca.gov/consumers/general.

The national settlement followed state and federal investigations, which alleged that the five mortgage servicers routinely signed foreclosure-related documents outside the presence of a notary public and without personal knowledge that the facts contained in the documents were correct. This civil law enforcement action also alleged that the servicers committed widespread errors and abuses in their foreclosure processes.

The settlement resulted in broad reform of the mortgage servicing process, as well as financial relief for borrowers who are still in their homes via direct loan modification relief, including principal reduction.

SACRAMENTO -- Attorney General Kamala D. Harris today announced a $323.67 million settlement with a Los Angeles-based health maintenance organization over excess Medi-Cal and Medicare payments.

The settlement with SCAN Health Plan, Senior Care Action Network, and Scan Group (collectively known as SCAN), which provides health care and support services in Southern California to the elderly and disabled, constitutes the largest Medi-Cal recovery in the state’s history.

“Californians have lost millions of dollars that should have been going toward the health care of our most vulnerable citizens,” said Attorney General Harris. “This settlement will bring a significant amount of those funds back to the state when it is dearly needed, and I commend all of those involved in this action.”

The matter was initially investigated by the State Controller's Office.  The state Attorney General’s Bureau

of Medi-Cal Fraud and Elder Abuse then commenced its own investigation in cooperation with the United

States Attorney’s Office in Los Angeles. The investigation was conducted with the assistance of the California Department of Health Care Services (DHCS), which administers the Medi-Cal program.

A small component of the settlement resolves certain federal Medicare allegations brought by James M. Swoben in a lawsuit filed in July 2009 in federal court in the Central District of California. Mr. Swoben is a former employee of SCAN.  The lawsuit was filed pursuant to the federal and state False Claims Acts, which provide that any person with information about a false claim can file a sealed lawsuit on behalf of the government to recover the government’s losses.

The federal government will be receiving $3.82 million for the Medicare portion of the settlement. For the Medi-Cal portion of the settlement, $319.85 million will be split between the federal government and California, with the federal government receiving $129.38 million and the state $190.47 million. 

The settlement resolves the state’s allegations that SCAN failed to provide contractually required financial information to DHCS, thereby impairing the department from revising capitation rates for SCAN.

“This settlement is a victory for the Medi-Cal beneficiaries we serve,” said DHCS Director Toby Douglas.

“Using the scarce resources available in the most efficient way possible is a top priority for the state. We will continue our ongoing efforts to strengthen programs that protect the integrity of Medi-Cal.”

A copy of the Third Amended Complaint and copies of the settlement agreement; Joint Notice of Election to Intervene in Part; and the Notice of Dismissal and Order Thereon are attached to the online version of this release at www.oag.ca.gov.

RIVERSIDE -- Attorney General Kamala D. Harris yesterday filed a civil lawsuit seeking the removal of officers and directors of Help Hospitalized Veterans, a California charity. The complaint alleges that those running the organization engaged in self-dealing, paid excessive executive compensation and engaged in fraudulent fundraising and other unlawful activities.

The lawsuit also seeks to recover more than $4.3 million in funds improperly diverted from Help Hospitalized Veterans. Those funds were meant to support several programs serving veterans and active-duty military, including providing arts and craft kits to hospitalized veterans. Instead, they were used to enrich the organization’s officers and fundraisers.

“The officers of Help Hospitalized Veterans improperly diverted money that hard-working and patriotic Americans donated to support injured vets,” said Attorney General Kamala D. Harris.  “We must protect veterans, active-duty military and donors from scam artists who see them as little more than prey for their financial frauds.”

The lawsuit alleges that the directors and officers of Help Hospitalized Veterans breached their fiduciary duty by wasting its charitable assets on such things as golf memberships and a condominium (for use by officers), and authorizing excessive executive compensation to the group’s former President (Roger Chapin) and its current President (Michael Lynch). 

The suit alleges Chapin received more than $2.3 million in excessive compensation during the final seven years of his tenure and excessive compensation to Lynch totaled over $900,000.  Chapin is additionally charged with self-dealing as a result of substantial diversions of the charity’s funds to entities in which he had a financial interest. Those diversions include loans Help Hospitalized Veterans made to a firm called American Target Advertising, which was making substantial payments to Chapin. American Target Advertising is a for-profit business (founded by Chapin’s close friend Richard Viguerie) that directs Help Hospitalized Veterans’ vast direct-mail fundraising operation.

The lawsuit further alleges that the nonprofit used increasingly-common accounting gimmicks to inflate the amount of income purportedly spent on providing veterans’ services while artificially minimizing the amount reportedly spent on fundraising. For example, Help Hospitalized Veterans’ use of one of these gimmicks resulted in decreasing its reported fundraising costs from 65 percent of total costs to less than 30 percent. As a result, the filings to both the IRS and the Attorney General’s office were substantially false. Donors and charity watchdog groups rely on both of those reported expenditure categories in evaluating a charity’s efficiency. 

Controversy around the performance of veteran’s charities like Help Hospitalized Veterans was brought to the public’s attention in 2007 by Rep. Henry A. Waxman who, as Chairman of the House Oversight and Government Reform Committee Hearings, held hearings into their fundraising practices and overhead.   

The lawsuit seeks general and punitive damages, restitution, civil penalties and the removal of those officers and directors named in the lawsuit.

Named defendants in the lawsuit include: Help Hospitalized Veterans; its former president Roger Chapin (California); former employee Elizabeth Chapin (California); current president Michael Lynch (California); the following officers or directors of the charity: Robert Beckley, Jr. (Arizona), Thomas Arnold (Florida), Leonard Rogers (Florida), and Gorham Black (Florida); accountant Robert Frank and the company Frank & Company, PC (Virginia); and direct-mail professional fundraiser Creative Direct Response, Inc. (Maryland).

The Complaint alleges seven causes of action:  (1) breach of fiduciary duty (against Help Hospitalized Veterans directors and officers); (2) aiding and abetting a breach of fiduciary duty (against Frank and Frank & Co.); (3) engaging in self-dealing transactions in violation of Corporations Code section 5233 (against Chapin); (4) excessive executive compensation in violation of Corporations Code section 5235 (against Chapin and Lynch); (5) wrongful acquisition of property/unjust enrichment (against Chapin and his wife Elizabeth); (6) misrepresentations in solicitations to donors in violation of Government Code section 12599.6 (against Help Hospitalized Veterans, its directors and officers, and Creative Direct Response); and (7) unfair business practices (against all defendants other than Elizabeth Chapin and Creative Direct Response).

More than 2 million of the nation’s 22 million veterans live in California, the highest number for any state. Protecting these veterans, and active-duty military, from financial scams has been a priority for Attorney General Harris. This focus resulted from a survey of veterans who work in the Department of Justice that was undertaken to inform Department efforts on the matter.  Attorney General Harris and Holly Petraeus of the Consumer Financial Protection Bureau recently spoke at Travis Air Force Base to warn of financial scams that target military members.