Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Spotlight on the False Claims Act: Wartime Suspension of Limitations Act Suspends Statute of Limitations in False Claims Act Cases
The False Claims Act (FCA), which allows both the government and whistleblowers to seek treble damages for claims of civil fraud on the United States, is a powerful tool. In the past two years, the government has aggressively used the FCA to target financial institutions for claims of reckless lending and improper servicing. (e.g. FCA, FHA Lending, and US v. Deutsche Bank). As events leading to the financial crisis have approached - and in some cases exceeded - the FCA’s statute of limitations, financial institutions have increasingly responded to such claims by arguing that the government did not assert them in a timely manner.
A recent Fourth Circuit decision interpreting the Wartime Suspension of Limitations Act (WSLA), an obscure act first enacted during World War II, however, threatens to make it significantly more difficult for financial institutions to assert a statute of limitations defense to FCA claims. The case, United States ex rel. Carter v. Halliburton, came before the Fourth Circuit after a lower court dismissed an FCA lawsuit brought against Halliburton and related entities (collectively “KBR”) as barred by the FCA’s six-year statute of limitations. In a critical decision, the Fourth Circuit reversed the dismissal on the grounds that the FCA’s statute of limitations was tolled by the WSLA.
The holding is significant as the Fourth Circuit held that the WSLA applies regardless of whether the government or a private plaintiff prosecutes the case or the case involves the defense industry. The case, therefore, has the potential to reach any FCA defendant in any civil case — from financial institutions to healthcare providers.
The WSLA, enacted in 1942, extended the time to bring charges related to “indictable” fraud against the U.S. when “at war.” An amendment in 1944 deleted the term “indictable.” In 2008, the Wartime Enforcement of Fraud Act further amended the WSLA to allow it to apply whenever “Congress has enacted specific authorization for the use of the Armed Forces,” and extend the tolling period until “five years after the termination of hostilities.”
In a novel interpretation, the Fourth Circuit held that the WSLA applies to both civil and criminal fraud claims against the U.S., regardless of whether the U.S. has intervened, and even without a formal declaration of war. The Fourth Circuit first held that a formal declaration of war is not required under the WSLA, and that the U.S. was “at war” in Iraq from the date that Congress authorized the use of military force in 2002.
The court also held that the U.S. was still “at war” for the purposes of the WSLA when the alleged fraud occurred because neither Congress nor the President had met the formal requirements of the act for ending the tolling period. The Fourth Circuit then held that the WSLA applies to both criminal and civil cases because the 1944 amendments removed the word “indictable.”
Finally, the Fourth Circuit held that whether the U.S. – or a plaintiff – brings an FCA claim under the qui tam provisions is “irrelevant” because the WSLA’s tolling provision hinges not on who brings the claim, but when the claim is brought. Accordingly, the Fourth Circuit held that the relator’s FCA claims against KBR were not time-barred.
As Dietrich Knauth, a reporter with Law 360, recently noted, “The Fourth Circuit's decision in Carter v. Halliburton caused consternation among many FCA defense attorneys, who said that the decision effectively eviscerates the FCA's time limits.” Indeed, while the Fourth Circuit’s decision is remarkable, the theory advanced by the relator is gaining traction, including in cases outside of the defense industry. In mid-2012, the Department of Justice successfully made the same arguments in United States v. BNP Paribas SA, when it brought civil claims against under the FCA, alleging that the defendants had defrauded the U.S. in connection with commodity payment guarantees provided by the Department of Agriculture.
Collectively – and with broad interpretation - the Halliburton and BNP Paribas decisions could be invoked to suspend the limitations period for a wide-range of FCA claims and are certain to spur increased litigation as the government, relators and defendants alike join the fast-growing debate about the WSLA’s proper application.
For more information, see:
- Little Known Statute May Breathe New Life Into Stale False Claims Act Cases Against Financial Institutions (April 18, 2013; Thomson Reuters Accelus/Compliance)
- FCA Allows Treble Damages - 'But Treble What?' (March 26, 2013; Law360)
- False Claims Act & FIRREA (BuckleySandler Practice Overview)
Special Alert: DOJ Increasingly Pursuing Monetary and Non-Monetary Relief in Civil Enforcement Actions
Last month, in a potentially significant but largely overlooked development, the Department of Justice ("DOJ") signaled that it would "increasingly" pursue "innovative, non-monetary measures" when it settles civil fraud cases. In remarks to the American Bar Association on June 7, 2012, Stuart F. Delery, Acting Assistant Attorney General, said it was DOJ's "view that there will be cases in the future in which obtaining only a monetary recovery will not adequately redress the wrong." Responding specifically to the charge that qui tam lawsuits represent merely a "cost of doing business" and that qui tam settlements could be viewed as just another "regulatory burden," Delery said that DOJ's civil fraud settlements will increasingly include "non-monetary remedies and other measures to help prospectively reduce fraud." By way of example, he cited the Department's recent health care fraud settlement with Abbott Laboratories, in which the $1.5 billion criminal-civil settlement included such terms as a period of probation; an "agreed statement of facts"; a corporate integrity agreement; and a requirement that the company institute additional compliance measures. Although Delery acknowledged in his remarks that seeking non-monetary relief could "prolong" or even "prevent" settlement discussions, he described it as "increasingly" DOJ's view "that we owe it to taxpayers to do our best to implement measures to fully explain the conduct that led to the resolution, and to deter future bad acts." In fact, the Abbott Laboratories settlement cited by Delery did not break much new ground in this area. That settlement resolved not only civil but criminal charges against the company, and it is not uncommon for corporate criminal resolutions to include recitations of fact and to require that additional compliance measures be implemented. But Delery's emphasis on the importance of pursuing non-monetary relief in civil fraud settlements, including admissions of fact that help "explain the conduct that led to the resolution," is new, and notably echoes remarks made earlier this year by Preet Bharara, the United States Attorney in Manhattan. Speaking in March at the ABA's 26th Annual National Institute on White Collar Crime in Miami, Bharara said that his office did not view civil fraud settlements in monetary terms alone, and would insist also on non-monetary relief that furthers the public interest, including the public interest in deterrence, reforming behavior, and "improv[ing] public understanding of the truth." He emphasized that his office will usually require admissions of misconduct in a civil fraud settlement, and said that his office was fully prepared to litigate if the settlement terms are not satisfactory. A review of recently settled civil fraud cases by U.S. Attorney's offices reveals a trend toward requiring admissions in civil fraud settlements, a trend that was apparently well underway even before Delery's remarks in June. For example, Bharara's office has obtained admissions in civil fraud cases brought against importers, health care providers, mortgage lenders, and other financial institutions. Similarly, in March of this year, Colorado U.S. Attorney John Walsh (who currently serves as Co-Chair of DOJ's newly established Residential Mortgage-Backed Securities Task Force) secured admissions of fraudulent conduct in the settlement of a civil fraud lawsuit alleging the existence of a fraudulent foreclosure rescue scheme. It has long been commonplace for parties to settle a civil case - including a civil enforcement action - by agreeing to pay money while simultaneously maintaining innocence and denying fault or liability. Indeed, the SEC has vigorously - and, so far, successfully - defended its longstanding practice of settling with defendants while allowing them, in appropriate cases, to "neither admit nor deny" the allegations in the complaint. If DOJ increasingly pursues admissions of misconduct and other non-monetary relief in civil fraud settlements, therefore, it will represent not a minor policy shift, but a potential game-changer for defendants. To cite just a few examples, individuals who admit wrongdoing in a civil settlement could conceivably face exposure to criminal charges, health care providers that admit wrongdoing run the risk of administrative sanction, and public companies that admit misconduct face increased exposure to class action lawsuits. A recent ruling in a class action lawsuit against a major financial institution - in which the court cited an admission made by the company in an earlier civil settlement to support denial of the company's motion to dismiss - proves the point. Deciding whether to litigate or settle a civil enforcement action is always a difficult exercise. With DOJ increasingly requiring admissions of fact to settle civil enforcement actions, that exercise will become even more challenging. The collateral consequences of a settlement that includes an admission of misconduct may be further down the road, but they may also be substantial. It is therefore short sighted to weigh merely the risks of litigating against the benefits of settling; the risks of settling are also a significant factor in the mix. If DOJ continues to insist upon admissions of misconduct to settle civil fraud cases, more and more defendants may end up deciding that the cost of litigating - so often cited as the most compelling reason to settle a case - could in fact be lower than the costs of settling.
Andrew W. Schilling, a partner at BuckleySandler LLP, leads the New York office's government enforcement practice. Mr. Schilling represents entities and individuals facing government enforcement actions and complex civil litigation, and his practice includes the defense of False Claims Act matters, white-collar criminal matters, and internal investigations. Prior to joining BuckleySandler, Mr. Schilling served as Chief of the Civil Division at the U.S. Attorney's Office for the Southern District of New York. In that role, he established that office's Civil Frauds Unit, which investigates and prosecutes complex financial fraud cases, including health care fraud and mortgage fraud cases, and directly supervised several nationally significant financial fraud lawsuits against major financial institutions.
- APPROVED Webcast: CFL license transition to NMLS
- Jonice Gray Tucker to discuss “Justice for all: Achieving racial equity through fair lending” at CBA Live
- Warren W. Traiger to discuss “On the horizon for CRA modernization” at CBA Live
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting