Erhart v. Bofi Holding, Inc.

• Decision Date: 31 March 2020
• Docket Number: Case No. 15-cv-02287-BAS-NLS,c/w 15-cv-02353-BAS-NLS
• Parties: CHARLES MATTHEW ERHART, Plaintiff, v. BOFI HOLDING, INC., Defendant. And Consolidated Case
• Court: U.S. District Court — Southern District of California

CHARLES MATTHEW ERHART, Plaintiff, v. BOFI HOLDING, INC., Defendant.

And Consolidated Case

Case No. 15-cv-02287-BAS-NLS

c/w 15-cv-02353-BAS-NLS

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

March 31, 2020

ORDER:

(1) GRANTING IN PART AND DENYING IN PART BOFI FEDERAL BANK'S MOTION FOR SUMMARY JUDGMENT (ECF No. 127); AND

(2) GRANTING IN PART AND DENYING IN PART CHARLES ERHART'S MOTION FOR SUMMARY JUDGMENT (ECF No. 137)

INTRODUCTION

Charles Erhart was an internal auditor for BofI Federal Bank. After Erhart discovered conduct he believed to be wrongful, he reported it to BofI's principal regulator. BofI responded by allegedly defaming and terminating him. Erhart then filed this lawsuit for whistleblower retaliation under state and federal law. The next morning, The New York Times published an article summarizing the lawsuit's allegations—causing BofI's stock price to plummet. The Bank quickly commenced a countersuit against Erhart claiming he committed fraud, breached his duty of loyalty, and violated state and federal anti-hacking statutes. The Court consolidated BofI's countersuit with Erhart's whistleblower-retaliation action.

Now before the Court are the parties' cross-motions for summary judgment. BofI asks the Court to summarily adjudicate parts of Erhart's whistleblower retaliation claims. (ECF No. 127.) Erhart, in turn, seeks summary judgment on almost all the Bank's claims. (ECF No. 137.) The Court held oral argument on the motions. (ECF No. 175.) For the following reasons, the Court GRANTS IN PART and DENIES IN PART each party's motion.

BACKGROUND

Charles Erhart graduated from The University of Kansas in 2009 with a degree in finance. (Erhart Prelim. Inj. Decl. ¶ 2, ECF No. 158-4.) After briefly working as a financial support analyst, Erhart served as an examiner for the Financial Industry Regulatory Authority for nearly four years. (Id. ¶ 3.) Then, in September 2013, he started working for BofI at its headquarters in San Diego, California. (Erhart Summ. J. Opp'n Decl. ¶ 2, ECF No. 158-2; Joint Statement of Undisputed Facts ("JSUF") ¶ 6, ECF No. 167.)

BofI Federal Bank is a federally chartered savings and loan association. (JSUF ¶ 1.) Its holding company, BofI Holding, Inc., is publicly traded under the Securities Exchange Act of 1934.¹ BofI provides financing for residential properties and small-to-medium size businesses. (Id. ¶ 2.) The Bank also purchases "specialty finance receivables," such as payment streams from structured court settlements and lottery winnings. (Id. ¶¶ 2, 44; see also Erhart Prelim. Inj. Decl. ¶ 12.) The Bank hired Erhart to work as an internal auditor in its Internal Audit Department. (JSUF ¶ 6.)

I. The Internal Audit Department

BofI's Internal Audit Department tests, monitors, and reports on the Bank's internal controls. (JSUF ¶¶ 9, 11.) The Office of the Comptroller of the Currency ("OCC") is BofI's primary regulator. (Id. ¶ 4.) The OCC defines internal controls in the banking context as "the systems, policies, procedures, and processes" implemented to "safeguard bank assets, limit or control risks, and achieve a bank's objectives." OCC, Comptroller's Handbook: Internal Control 1 (2001). An audit of BofI's internal controls starts with an internal auditor obtaining "input and supporting documentation from the relevant business unit" and preparing "preliminary conclusions in the form of a draft audit report." (JSUF ¶ 14.) Then, during the "exit meeting" for the audit, "key individuals from Internal Audit and the business unit discuss potential issues raised in the draft report." (Id. ¶ 15.) Once the audit report is finalized, the Vice President ("VP") of Internal Audit distributes the final report to both the business unit and the Audit Committee of the Board of Directors—which oversees the Internal Audit Department. (Id. ¶¶ 12, 18.)

When Erhart joined BofI, Jonathan Ball served as the VP of Internal Audit and managed the Internal Audit Department. (JSUF ¶ 9.) Hence, Erhart reported directly to VP Ball. (Id.) One level above VP Ball on the corporate hierarchy was John Tolla, Senior Vice President ("SVP") of Audit and Compliance. (Erhart Prelim. Inj. Decl. ¶ 10.)

As an internal auditor, Erhart's job responsibilities included completing assigned audits. (JSUF ¶ 7.) He necessarily had to make inquiries and judgments based on the information available to him. (Id. ¶ 8.) Erhart had not previously done internal audit work. (Erhart Summ. J. Opp'n Decl. ¶ 2.) He thus "received on-the-job training, primarily from Mr. Ball, but also online at 'Reg U' and at various Banker Compliance Group seminars." (Id.) In addition, Erhart "was trained to do Sarbanes-Oxley Act ('SOX') testing," and he "knew that the Bank was required to certify its SOX compliance with the CEO and CFO signing off on such a certification on its financials, such as" Form 10-K filed with the SEC. (Id. ¶ 3.)

Erhart worked in BofI's Internal Audit Department for approximately eighteen months. (See Erhart Prelim. Inj. Decl. ¶¶ 9, 53, 72.) The parties tell two diverging stories of his tenure at the Bank.

II. Erhart's Believed Wrongdoing

Erhart's narrative portrays himself as an internal auditor in a turbulent corporate environment. (See Erhart Prelim. Inj. Decl. ¶¶ 9-75.) Time and time again, Erhart claims he repeatedly battled against pressure from senior management as he discovered conduct he believed to be wrongful. (Id.)

For instance, Erhart states he unearthed wrongdoing while conducting the "Structured Settlements and Lottery Audit." (Erhart Prelim. Inj. Decl. ¶¶ 10-16.) As mentioned, one of BofI's revenue sources involves purchasing structured settlements and payment streams to lottery winners. (Id. ¶ 12.) The Bank solicits prospects for this business unit through phone calls and a website. (Id.) While conducting an audit of this business unit in December 2013, Erhart states he discovered BofI's callers "were not notifying people they called that the calls were being recorded," which Erhart believed violated "California Penal Code § 632." (Id. ¶ 13.)

When senior management became aware of his finding, Erhart claims management instructed him and his supervisor VP Ball to remove the finding from the written audit report. (Erhart Prelim. Inj. Decl. ¶¶ 14-16.) And when he and Ball refused to do so, Erhart further claims that senior management told him to mark the entire report "Attorney Client Privileged" out of a concern that "the finding could be discoverable in class action litigation against the Bank, which would be expensive todefend." (Id. ¶ 16.) Erhart "acceded to this order," but still refused "to remove the finding from the audit." (Id.)

Erhart states he believed this conduct was wrongful because it is "improper to remove findings from audits before they [are] turned over to regulators like the OCC." (Erhart Summ. J. Opp'n Decl. ¶ 6.) He also states he believed the instructions "to remove the finding constituted a violation of SOX, including rules that require adequate internal controls and accurate books and records, as well as constituting fraud on shareholders and regulators." (Id.)

Several other examples of Erhart's believed wrongdoing involve the Bank's interactions with the OCC, including during an onsite regulatory examination. (See Erhart Prelim. Inj. Decl. ¶¶ 32-33, 37-43, 49, 52.) Erhart claims the Bank falsely responded to information requests, withheld information that the OCC had requested, and sought to defraud the regulator. (Id. ¶¶ 32, 33, 39; Erhart Summ J. Opp'n Decl. ¶¶ 13, 15, 17-18.) He also claims the Bank discouraged internal audit staff from communicating in writing during the examination because BofI "did not want a paper trail regarding [its] improprieties." (Erhart Summ J. Opp'n Decl. ¶ 17.)

Erhart describes various other conduct he discovered at BofI that he believed was wrongful. (See generally Erhart Prelim. Inj. Decl. ¶¶ 9-75; Erhart Summ. J. Opp'n Decl. ¶¶ 5-16.) Ultimately, Erhart claims he reported this conduct to the Government, and he contends BofI retaliated against him for raising these concerns—including by harassing, defaming, and firing him. (Erhart Summ. J. Opp'n Decl. ¶¶ 20-21.) As one example, Erhart claims BofI's CEO falsely declared that Erhart's "whistleblower activities were 'malicious'" and that any information Erhart provided to the government could not be credible because of his "psychiatric medical leave." (Erhart Prelim. Inj. Decl. ¶¶ 73-74.) The CEO also purportedly claimed "that he was going to 'bury the whistleblower.'" (Id. ¶ 74.)

III. The Bank's Counter-Narrative

In contrast, the Bank portrays Erhart as an internal auditor gone rogue—a loose cannon who recklessly handled confidential information and conducted unauthorized investigations. As one example, the Bank claims that Erhart, without authorization, requested that Bank staff run due diligence reports to dig up dirt on other employees, including a bank executive's son. (Tolla Rule 30(b)(6) Dep. 50:13-51:4, ECF No. 155-11; Ball Dep. 329:8-14, ECF No. 155-6.) Erhart's manager, VP Ball, testified that Erhart did not have authority to have these reports run and he did not request permission to do so. (See Ball Dep. 329:8-10, 15-17, ECF No. 155-6.)

As another example, BofI highlights that Erhart obtained its CEO's personal tax returns allegedly as part of a review of employee deposit accounts at the Bank. (Erhart Dep. 639:7-640:14, ECF No. 155-3.) VP Ball did not instruct Erhart to obtain these tax returns, was not aware that Erhart did, and testified it was improper for Erhart to pull the personal returns "at that part of the investigation." (Ball Dep. 318:7-18, ECF No. 155-6.)

The Bank also claims Erhart improperly inserted himself into a payroll audit. The Bank argues it is disputed "if, when, and how Erhart may have been assigned to conduct this audit." (BofI's Opp'n 12:10-11, ECF No. 155.) VP Ball does not recall if Erhart was assigned to this audit and believes Erhart was "corrupting the audit."...