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Appeals Court Rejects False Claims Act Complaint Against Sallie Mae

A federal appeals court in Washington today upheld the dismissal of a false claims complaint against Sallie Mae, saying the suit too closely mirrors a similar complaint filed in a federal trial court in another state.

The unanimous three-judge ruling in the U.S. Court of Appeals for the D.C. Circuit is a major win for SLM Corp., the financial services company known as Sallie Mae. U.S. District Judge Richard Leon of Washington dismissed the suit last year.

The case tested the scope of the False Claims Act's "first-to-file" rule. The rule awards a share of any damages to the first whistleblower to allege wrongdoing and blocks complaints that present similar allegations.

And it also presented a fresh issue for the court: whether an earlier-filed suit under the False Claims Act must meet the civil procedure rule that requires a complaint to state the circumstances of alleged fraud with particularity.

Sallie Mae's lawyer, Lisa Blatt, who heads Arnold & Porter's appellate and U.S. Supreme Court practice, was not immediately reached for comment this morning.

In the case before the D.C. Circuit, the whistleblower, Sheldon Batiste, argued that his suit against Sallie Mae was sufficiently different from an earlier complaint, filed in 2005 in Indiana federal district court.

Writing for the appeals court panel, Chief Judge David Sentelle said the earlier-filed complaint in Indiana "alleges the same material elements" as the suit Batiste filed in Washington in June 2008.

Both suits address Sallie Mae's granting of forbearances, and the complaints both name SLM Corp., the parent company, as defendants. Sentelle said the two civil actions both alleged a nationwide scheme.

Batiste, a senior loan associate at SLM in New Jersey, alleged the company eagerly approved forbearances while collecting subsidy payments from the federal government.

Batiste claimed Sallie Mae falsely claimed the company was complying with federal regulations that address forbearances. Sallie Mae, according to Batiste, provided incentives to loan officers to grant unlawful forbearances.

In the other suit, Michael Zahara, who worked for an SLM subsidiary in Nevada, also claimed SLM Corp. promoted fraudulent behavior. "The Zahara complaint would suffice to equip the government to investigate SLM's allegedly fraudulent forbearance practices nationwide," Sentelle said. "Batiste's additional details would not give rise to a different investigation or recovery."

Batiste's lawyer, Timothy Matusheski, a solo practitioner in Mississippi who specializes in whistleblower actions, was not immediately reached for comment.

Regarding the other issue before the D.C. Circuit, the panel said that first-filed complaints under the FCA do not need to meet the heightened pleading requirement of the rules of civil procedure.

"They must provide only sufficient notice for the government to initiate an investigation into the allegedly fraudulent practices, should it choose to do so," the appeals court said. (Click here for Judge Leon's opinion in the trial court).

The U.S. Justice Department's Civil Division, supporting Batiste, had urged the appeals court to allow Batiste's suit to proceed, saying the first-filed complaint should be required to meet the heightened pleading requirement. DOJ did not take a position on the merits of Batiste's claims against Sallie Mae.

The circuit said it was unconvinced by the Justice Department's argument.

"Imposing the heightened pleading standard, moreover, would create a strange judicial dynamic, potentially requiring one district court to determine the sufficiency of a complaint filed in another district court, and possibly creating a situation in which the two district courts disagree on a complaint's sufficiency," Sentelle wrote.

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