State v. Pricewaterhousecoopers, A095918.

Citation125 Cal.App.4th 1219,23 Cal.Rptr.3d 529
Decision Date20 January 2005
Docket NumberNo. A097793.,No. A095918.,A095918.,A097793.
CourtCalifornia Court of Appeals
PartiesThe STATE of California ex rel. Kamala HARRIS, as District Attorney, etc., et al., Plaintiffs and Appellants, v. PRICEWATERHOUSECOOPERS LLP, Defendant and Appellant. The State of California ex rel. Kamala Harris, as District Attorney, etc., et al., Plaintiffs and Appellants, v. Old Republic Title Company et al., Defendants and Appellants.

Ellen M. Forman, Donald P. Margolis, Deputy City Attorneys, Cotchett, Pitre, Simon & McCarthy, Niall P. McCarthy, Burlingame, Richard A. Dana, Gross & Belsky, Terry Gross, Adam C. Belsky, San Francisco, Moscone, Emblidge & Quadra, James A. Quadra, San Francisco, Robert D. Sanford, Mogin Law Firm, Daniel J. Mogin, Counsel for appellants State of California, etc.

Bill Lockyer, Attorney General, Christopher M. Ames, Senior Assistant Attorney General, Larry Raskin, Ronald A. Reiter, Supervising Deputy Attorneys General, Karen Z. Bovarnick, Deputy Attorney General, Counsel for amicus curiae on behalf of appellants State of California, etc.

Crosby, Heafey, Roach & May, Reed Smith Crosby Heafey, Peter W. Davis, Kathy M. Banke, Michael J. George, Jayne E. Fleming, Oakland, Leland, Parachini, Steinberg, Matzger & Melnick, Los Angeles, Steven R. Walker, El Centro, Counsel for appellants Old Republic Title Company et al.

Greines, Martin, Stein & Richland, Robin Meadow, Cynthia Tobisman, Los Angeles, Counsel for amicus curiae on behalf of appellants Old Republic Title Company et al.

REARDON, J.

Under the rein of Donald Barr, who personally embezzled millions of dollars while serving as chief financial officer (CFO) of Old Republic Title Company (ORTC) and related entities,1 the management of the company initiated a variety of illegal practices. The continuation of these practices ultimately led to an action by the District Attorney and City Attorney of the City and County of San Francisco (City) against Old Republic, as well as consumer class actions. Along the way these actions were consolidated and the governmental plaintiffs also sued PricewaterhouseCoopers LLP (PwC), the accounting firm that prepared the independent audit reports for ORTC that were submitted annually to the California Department of Insurance (DOI).

This consolidated litigation splits into two branches: One follows the False Claims Act (FCA),2 the other follows the unfair competition law (UCL).3

The FCA actions against Old Republic and PwC focused on the systematic failure of ORTC to honor its obligation to escheat dormant funds to the state under the unclaimed property law (UPL).4 The government sued Old Republic for not disclosing its escheat liability in filings with the DOI and pursued PwC for allegedly submitting false audit reports that also masked this liability.

As a threshold matter the trial court ruled that the City, through its district attorney and city attorney, had standing to pursue its FCA claims as a qui tam plaintiff on behalf of the State of California. Old Republic and PwC vigorously oppose this ruling on appeal. The ruling is correct. On the merits the government prevailed against Old Republic but met defeat at the hands of PwC, failing to convince the trial court that the allegedly false audit reports were material under the FCA. In appeal No. A097793, the government and Old Republic both find fault with the trial court's measure of damages against Old Republic. Again, we conclude the trial court got it right. In appeal No. A095918, the government challenges the summary judgment in PwC's favor on its FCA claim. We conclude the trial court acted improvidently and therefore reverse.

In the UCL litigation, the trial court concluded that certain cost avoidance and arbitrage practices of ORTC generated millions of dollars in illegal interest that belonged to ORTC's escrow customers. The court entered orders for restitution as well as penalties for violations related to these and other practices, and granted injunctive relief. Old Republic challenges the arbitrage ruling as well as the trial court's decision awarding interest to class plaintiffs on certain lender funds. Class plaintiffs and the People challenge rulings related to the statute of limitations and class certification, as well as the disbursement float; class plaintiffs attack the order for injunctive relief as insufficient. All of these rulings were correct. Finally, the People contest the dismissal of its UCL claim following the sustaining of PwC's demurrer without leave to amend. This claim should proceed and therefore we reverse the judgment of dismissal.

I. FACTS
A. The Company

ORTC is an underwritten title company licensed by the DOI to conduct business as a title and escrow agent in California. (See, e.g., Ins.Code, § 12389.) It provides title and escrow services for real estate transactions in California. As a regulated entity, ORTC has disclosure and reporting obligations to the DOI. (Id., § 12389, subd. (a)(4).)

Donald Barr was ORTC's CFO from approximately 1979 until July 1996, when he was fired for embezzlement in connection with the company's cost avoidance program, discussed below. ORTC referred these allegations to the San Francisco District Attorney (SFDA). The SFDA opened a criminal investigation leading to Barr's arrest and subsequently charged him with multiple counts of grand theft, perjury, embezzlement and tax evasion. Barr negotiated a disposition in exchange for information concerning certain alleged illegal business practices of ORTC (discussed below), and pleaded guilty to two counts of tax evasion.

B. Business Practices Subject to Litigation
1. Failure to Escheat Unclaimed Funds

As escrow agent, ORTC receives funds from purchasers, sellers, borrowers and lenders; prepares documents and closing account statements; and disburses escrow funds at the close of escrow. The company routinely aggregates its customers' escrow funds in demand deposit5 accounts with various banks throughout California. At times, customers would fail to instruct ORTC to disburse all the funds on deposit. On other occasions a party to whom ORTC disbursed funds from the escrow account at the close of escrow would fail to cash the check. In both cases these dormant funds accumulated and remained in the accounts after the close of escrow. By the late 1980's, ORTC began sweeping some of the dormant funds from escrow accounts into its general fund and recognizing these funds as income. Under the UPL, holders of unclaimed funds such as ORTC are charged with submitting holder reports to the State Controller on an annual basis that disclose the nature, and last known owner, of the unclaimed funds. (See Code Civ. Proc., § 1530.) At the same time, the reporting holders are to deliver all escheated property identified in the reports to the State Controller. (Id., § 1532, subd. (a).)

At relevant times, PwC or its predecessor Coopers & Lybrand was the independent public accountant for ORTC. PwC's scope of work included preparing the annual audit report for the Commissioner of Insurance (Commissioner), as required by Insurance Code section 12389, subdivision (a)(4).6

Gerard Fisher, PwC's audit manager on ORTC's account during 1990, indicated he understood that ORTC had a policy of clearing dormant funds out of trust accounts. He suspected that the company had been violating the "laws related to escheat." Fisher testified that the majority of dormant funds taken from the accounts did not belong to ORTC. In 1990, PwC recommended that ORTC evaluate the dormant escrow amounts which remained unclaimed and review its policies to ensure compliance with state law. ORTC indicated it would do so "`insofar as practical.'" Between 1990 and 1994, PwC raised the issue of dormant funds with the company.

Karman Pejman, a former PwC auditor, testified that there was always a concern about ORTC's practice of purging funds from escrow accounts and rerouting them to the company's operating income. He noted that ORTC's liability for funds that should have been escheated accumulated year after year. For example, for the period 1989 and 1990, nearly $1.7 million was purged from ORTC escrow accounts, with $1.3 million taken in as income. According to Pejman, ORTC never, in recent history, complied with the UPL.

Richard Baker, PwC auditor partner on the Old Republic account, was also aware of the company's dormant funds practices and knew they were recurrent.

Nonetheless, PwC issued an unqualified, "clean" audit opinion letter, which ORTC submitted to the Commissioner along with its financial statements. PwC understood that its opinion was so submitted. E. John Larsen, a certified public accountant and professor of accounting, gave his expert opinion that once PwC learned of the escheat violations, minimum auditing standards required the firm to take steps to estimate ORTC's potential liability. It did not. Without an estimate, PwC should not have issued unqualified opinion letters.

Alfred Bottalico, bureau chief of DOI's Field Examination Division (FED), explained that his division conducts field audits at company offices, whereas the Financial Analysis Division of the DOI receives and monitors the audit reports and financial statements...

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    ...Supreme Court involves the public disclosure bar but not the original source provision. See State ex rel. Harris v. Pricewaterhouse-Coopers LLP, 23 Cal.Rptr.3d 529, 547-49 (2005), review granted, 28 Cal.Rptr.3d 646, 111 P.3d 921 (2005); see also Cal. R. Ct. 976(d) (stating that unless other......

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