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On July 25, the U.S. Senate confirmed Anthony West to serve as the DOJ’s Associate Attorney General, a position he has held in an “acting” capacity since March 2012. In that role Mr. West advises and assists the Attorney General and the Deputy Attorney General in formulating and implementing departmental policies and programs related to a broad range of issues, including civil litigation, federal and local law enforcement, and public safety. Prior to March 2012, Mr. West served as the Assistant Attorney General for the Civil Division – the largest litigating division at the DOJ – where he emphasized the Civil Division's authority to bring civil and criminal actions to enforce the nation's consumer protection laws, and served in various positions on the Financial Fraud Enforcement Task Force. In addition, the DOJ’s Civil Rights Division's home page indicates that Jocelyn Samuels is serving as Acting Assistant Attorney for the Civil Rights Division. Ms. Samuels previously served as Principal Deputy Assistant Attorney General for that division and as Senior Counselor to the Assistant Attorney General for Civil Rights. She replaces Thomas Perez who recently was confirmed to serve as Secretary of Labor.
On April 4, the U.S. Attorney for the Southern District of New York and HUD officials announced a civil fraud suit alleging FCA and FIRREA claims against a mortgage lender and its president for falsely certifying loans and other actions under the FHA’s Direct Endorsement Lender Program. Many of the allegations mirror those in prior mortgage fraud cases brought by the government, including claims that the lender failed to maintain adequate quality control processes, incentivized employees to expedite loan approval, failed to disclose to HUD all loans containing evidence of fraud or other serious underwriting problems, and made repeated false certifications to HUD. However, this is only the second time the government has brought claims based on the FHA’s annual certification process, as opposed claims based on certifications of individual loans. The complaint also alleges that the firm’s president and owner personally performed underwriting and provided false certifications to HUD in a number of instances. The government’s decision to name an individual also may evidence a new trend in its mortgage fraud enforcement practices. The government claims that to date HUD has paid more than $12 million in insurance claims on loans underwritten by the lender. The complaint does not specify total damages, but does seek more than $40 million in treble damages and penalties on the FCA claims.
On March 6, the U.S. District Court for the Central District of California identified for the first time factors for courts to consider when assessing a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). United States v. Menendez, No. CV 11-06313, 2013 WL 828926 (C.D. Cal. Mar. 6, 2013). The DOJ sued a real estate broker, alleging he committed bank fraud when he submitted a false certification on behalf of a homeowner to HUD in connection with the homeowner’s short sale. The DOJ claimed the certification was false because it represented that there were no hidden terms or special understandings with the buyer of the property, when in fact the broker himself, through a company he controlled, also was the buyer of the property and intended to immediately resell the property for a profit of nearly $40,000. Drawing upon principles applied by courts in other civil penalty contexts, the court considered eight factors to assess the civil penalty under FIRREA: (i) the good or bad faith of the defendant and the degree of scienter; (ii) the injury to the public and loss to other persons; (iii) the egregiousness of the violation; (iv) the isolated or repeated nature of the violation; (v) the defendant’s financial condition and ability to pay; (vi) the criminal fine that could be levied for the conduct; (vii) the amount of the defendant’s profit from the fraud; and (viii) the penalty range available under FIRREA.
In this case, the court found that the first three weighed in favor of a substantial civil penalty: (i) the broker acted with intent to defraud; (ii) HUD suffered a loss; and (iii) the broker’s bank fraud was egregious. The court found that the next two factors favored the broker: (iv) the admissible evidence reflected only a single instance of bank fraud, and (v) the broker recently received a discharge from bankruptcy court and had limited ability to pay. Finally, the court found that the civil penalty requested by the government — nearly $1.1 million — was excessive, considering that (vi) the amount of the criminal penalty for bank fraud was capped at $1 million, and the likely fine under the sentencing guidelines would have been “in the $20-30,000 range;” (vii) the broker’s profit was only approximately $40,000; and (viii) FIRREA precluded a penalty in excess of $1 million when the gain or loss was less than $1 million, as it was in this case. The court awarded a civil penalty of $40,000, an amount proportionate to the broker’s profit.
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.
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