Erhart v. Bofi Holding, Inc.

• Citation: 269 F.Supp.3d 1059
• Decision Date: 11 September 2017
• Docket Number: Case No. 15–cv–02287–BAS–NLS,C/w 15–cv–02353–BAS–NLS
• Court: U.S. District Court — Southern District of California
• Parties: Charles Matthew ERHART, Plaintiff, v. BOFI HOLDING, INC., Defendant. BofI Federal Bank, Plaintiff, v. Charles Matthew Erhart, Defendant.

269 F.Supp.3d 1059

Charles Matthew ERHART, Plaintiff,

v.BOFI HOLDING, INC., Defendant.

BofI Federal Bank, Plaintiff,

v.Charles Matthew Erhart, Defendant.

Case No. 15–cv–02287–BAS–NLS

C/w 15–cv–02353–BAS–NLS

United States District Court, S.D. California.

Signed September 11, 2017

Carol Gillam, Sara Heum, The Gillam Law Firm, Los Angeles, CA, for Plaintiff.

Polly Towill, Andre J. Cronthall, Sheppard Mullin Richter and Hampton LLP, Los Angeles, CA, for Defendant.

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS AND STRIKE ALLEGATIONS FROM FIRST AMENDED COMPLAINT

[ECF No. 35]

Hon. Cynthia Bashant, United States District JudgePlaintiff Charles Matthew Erhart commenced this whistleblower retaliation action against Defendant BofI Holding, Inc. alleging violations of the Sarbanes–Oxley Act of 2002, the Dodd–Frank Wall Street Reform and Consumer Protection Act, and California state law.¹ In a consolidated countersuit, BofI claims Erhart, a former internal auditor, violated California state law and the Computer Fraud and Abuse Act by disseminating BofI's confidential information to The New York Times —causing its stock price to plummet—and by deleting hundreds of files from his company-issued laptop.

Previously, the Court dismissed Erhart's federal whistleblower retaliation claims with leave to amend. (ECF No. 31.) Erhart filed a First Amended Complaint, and BofI now moves to again dismiss Erhart's federal whistleblower retaliation claims, as well as several of his state law causes of action. (ECF No. 35.) In addition, BofI seeks to strike numerous allegations from the First Amended Complaint. (Id. ) Erhart opposes. (ECF No. 36.)

The Court finds BofI's motion suitable for determination on the papers submitted and without oral argument. See Fed. R. Civ. P. 78(b) ; Civ. L.R. 7.1(d)(1). For the following reasons, the Court GRANTS IN PART and DENIES IN PART BofI's motion to dismiss and strike allegations from Erhart's First Amended Complaint.

I. BACKGROUND ²

A. BofI's Internal Audit Department

In September 2013, Erhart began working as an internal auditor for BofI at its headquarters in San Diego, California. (First Amended Complaint ("FAC") ¶¶ 3–4, 9, ECF No. 32.) Erhart reported to Jonathan Ball, Vice President ("VP")—Internal Audit. (Id. ¶ 9.) One level above VP Ball on the corporate hierarchy was John Tolla, Senior Vice President ("SVP")—Audit and Compliance. (Id. ¶ 10.) VP Ball and the internal audit department were to report to SVP Tolla "for administrative purposes only" to allow the audit department "to have independence to do its function without undue pressure from senior management." (Id. ) However, as detailed below, Erhart alleges SVP Tolla repeatedly interfered with the audit department's investigations and independence. (See id. ¶¶ 15, 24–25, 30, 42, 47, 49, 52, 56.)

B. Alleged Wrongdoing

From late 2013 to early 2015, Erhart claims he repeatedly encountered conduct at BofI that he believed to be wrongful, and he provides over a dozen examples of this conduct. (See FAC ¶¶ 11–45.) The conduct he describes runs the gamut from BofI allegedly miscalculating an accounting entry to making loans to notorious criminals. (See id. ) The Court will highlight several of Erhart's examples.

1. Deposit Concentration Risk Findings and Negative Performance Review

In November 2014, Erhart sent an e-mail to Chief Risk Officer Thomas Williams regarding the Bank's deposit concentration risk—the risk posed to a bank "when a large percentage of its deposits are derived from a few depositors" and these depositors may suddenly withdraw their funds. (FAC ¶ 22.) Erhart allegedly reported to Williams "that a mere four customers accounted for approximately 25% of total deposits, and nine customers accounted for approximately 40% of total deposits" at the Bank. (Id. ¶ 23.) In doing so, Erhart "was aware that other banks had gotten into trouble with regulators for deposit concentration levels lower than this." (Id. ) SVP Tolla, however, later commented on Erhart's e-mail to Williams and instructed Erhart "not to put his concerns in writing." (Id. ¶ 24.) Management had previously chastised Erhart for stating in an internal audit report that he believed BofI was violating the law. (Id. ¶¶ 13–16.)

About a month later, Erhart received his performance review from SVP Tolla. (FAC ¶ 25.) His rating was downgraded, with SVP Tolla specifically referencing Erhart's practice of putting findings into writing. (Id. ) Erhart's bonus was also adversely affected. (Id. )

2. SEC Subpoena

On December 12, 2014, the Securities and Exchange Commission ("SEC") "served a subpoena on BofI, requesting account identifying information for a certain investment advisory firm with initials ETIA LLC." (FAC ¶ 26.) BofI "responded to the SEC that it did not have any information regarding ETIA." (Id. ) In early January 2015, Erhart "became aware of the SEC subpoena, and knew that the Bank did indeed have a loan file containing information regarding ETIA." (Id. ¶ 27.) He also became aware "that a file had been created in response to the SEC subpoena, containing the information located regarding ETIA." (Id. ) "In the course of investigating why the file was not turned over to the SEC in response to its subpoena, [Erhart] learned from a Bank employee...that she had informed the Bank's legal department of the existence of the file on or about December 17, 2014, before the Bank sent its response to the SEC denying the existence of any such files." (Id. ) Shortly thereafter, VP Ball informed Erhart that Chief Lending Officer Brian Swanson was upset that Erhart interviewed an employee about the issue and said that Erhart "should cease performing his duties to the extent they involved interviewing ‘his’ employees." (Id. ¶ 28.) Erhart then "placed a call to the SEC to be sure it was aware of the situation regarding the ETIA subpoena." (Id. ¶ 29.)

In February 2015, Erhart "submitted two whistleblower tips to the SEC, one regarding the ETIA subpoena issue, and another regarding a suspicious loan customer, whom [Erhart] suspected of operating as an unregistered broker/investment advisor. He submitted them through his work computer, and BofI had knowledge of his whistleblowing." (FAC ¶ 31.) Later, in 2016, federal law enforcement officials would arrest "the Founder and Chief Operating Officer of Florida-based Elm Tree Investment Advisors LLC (ETIA) on charges that they engaged in a scheme to defraud investors out of more than $17 million." (Id. ¶ 31A.)

3. BofI's CEO's Personal Accounts

In early 2015, Erhart participated in a review of personal deposit accounts held by senior management. (FAC ¶ 44.) Erhart allegedly discovered that Chief Executive Officer ("CEO") Gregory Garrabrants "was depositing third-party checks for structured settlement annuity payments into a personal account, including nearly $100,000 in checks made payable to third parties." (Id. ) Erhart also learned that CEO Garrabrants's depositing of third-party checks "had previously been raised to the Audit Committee before [Erhart] started working at the Bank, and that restrictions were imposed on [CEO Garrabrants]." (Id. )

In addition, Erhart allegedly discovered the "largest consumer account at the Bank" had a taxpayer identification number belonging to CEO Garrabrants's brother. (FAC ¶ 45.) "The account had a balance of approximately $4 million, and the CEO was the signer on the account." (Id. ) Erhart alleges that because the CEO's brother "was a minor league baseball player earning poverty wages, [Erhart] could find no evidence of how he had come legally into possession of the $4 million wired into the account." (Id. ) Based on the foregoing, Erhart was concerned about whether CEO Garrabrants "could be involved in tax evasion and/or money laundering." (Id. )

Erhart alleges he believed this conduct and the other actions described in his allegations violated various federal laws, including the Dodd–Frank Act, fraud statutes, and "rules and regulations promulgated by the Securities and Exchange Commission." (FAC ¶ 74A.) He also claims he believed that "because BofI was regulated by so many different federal agencies, and because its stock was publicly traded, that additional federal statutes, rules, and regulations were likely being violated, including without limitation, Rule 10b–5." (Id. ) These beliefs were based on the circumstances, including "guidance and instruction he received from" his manager, VP Ball. (Id. )

C. Turmoil in the Internal Audit Department

By early 2015, approximately sixteen months after he joined BofI, Erhart believed his job was in jeopardy. (See FAC ¶ 47.) On or about January 27, 2015, SVP Tolla walked by Erhart's desk and stated, in the presence of others, "If [Erhart] continues to turn over rocks, eventually he is going to find a snake and he's going to get bit." (Id. ) Erhart viewed this statement "as a direct and serious threat, and became concerned for his personal safety as well as for his job." (Id. )

Around this time, the United States Department of the Treasury's Office of the Comptroller of the Currency ("OCC"), BofI Federal Bank's principal regulator, was examining BofI on-site at its headquarters in San Diego. (FAC ¶ 49.) During this examination, SVP Tolla told all of the members of the internal audit department "that they would no longer be permitted to use Microsoft Outlook to communicate." (Id. ) Erhart alleges SVP Tolla gave this directive because he "did not want a paper trail regarding Bank improprieties." (Id. ) Erhart informed the OCC's examiner of this directive. (Id. )

Then, in late February 2015, VP Ball informed the internal audit department that a "meeting would be held to discuss major findings that needed to be presented to the Bank's Audit Committee." (FAC ¶ 50.) This action was significant because VP Ball "felt that the level of wrongdoing at the Bank had become so egregious that the staff had no choice but to bring it up to the Audit Committee." (Id. ) VP Ball allegedly...