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Financial Services Law Insights and Observations


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  • 2nd Circuit affirms leveraged loans are not securities


    On August 24, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s order dismissing plaintiff’s claim that a national bank’s nearly $1.8 billion syndicated loan for a drug testing company were securities. The drug testing company filed for bankruptcy subsequent to a $256 million global settlement with the DOJ in qui tam litigation involving the company’s billing practices.

    Plaintiff, a trustee of the drug testing company, brought claims to the New York Supreme Court in 2017 against defendant for violations of (i) state securities laws; (ii) negligent misrepresentation; (iii) breach of fiduciary duty; (iv) breach of contract; and (v) breach of the implied contractual duty of good faith and fair dealing. Defendant filed a notice of removal to the U.S. District Court for the Southern District of New York, where the district court denied plaintiff’s motion to remand after concluding it had jurisdiction under the Edge Act, and later granted defendant’s motion to dismiss because plaintiff failed to plead facts plausibly suggesting the notes are securities. 

    The 2nd Circuit held that the district court had subject matter jurisdiction pursuant to the Edge Act. The court then applied a “family resemblance” test to determine whether a note is a security and examined four separate factors to help uncover the context of a note. In comparing the loan note to “judicially crafted” list of instruments that are not securities, the court found that the defendant’s note “‘bears a strong resemblance’” to one, therefore concluding that the note is not a security and affirming the district court’s earlier decision.

    Courts Appellate Loans Securities Second Circuit New York DOJ Qui Tam Action Consumer Finance

  • 2nd Circuit affirms dismissal of FCA claims following government motion to dismiss


    On August 21, the U.S. Court of Appeals for the Second Circuit upheld the dismissal of a whistleblower False Claims Act (FCA) case, holding that FCA qui tam relator complaints may be dismissed upon the government’s motion without a hearing, provided the district court consider the parties’ arguments. The plaintiff qui tam here alleged that a bank (defendant) failed to pay penalties to the government for violating economic sanctions. Plaintiff’s complaint specifically alleged that defendant facilitated illegal transactions violating economic sanctions and defrauded the government by concealing the extent of its illegal activities during negotiation of a deferred prosecution agreement. In a summary order without precedential effect, the 2nd Circuit upheld the dismissal of plaintiff’s complaint.

    Plaintiff’s complaint was initially dismissed by the district court following a motion to dismiss by the government, which intervened in the action to argue that the complaint should be dismissed because it lacked merit and would waste government resources. Consideration of plaintiff’s appeal of the dismissal was delayed until after the Supreme Court issued a decision in Polansky v. Executive Health Resources, Inc., a different FCA case raising applicable issues regarding when the government has the authority to force the dismissal of an FCA case brought by a whistleblower.

    Following the Supreme Court’s ruling in Polansky, the 2nd Circuit upheld the dismissal of plaintiff’s complaint, reasoning that district court properly dismissed the qui tam relator claim after the government’s intervention seeking dismissal, since the defendant bank had not yet answered the complaint or moved for summary judgment. The 2nd Circuit held that “the district met the hearing requirement” established by Polansky for dismissing qui tam relator cases through its careful consideration of the briefs and materials submitted by the parties. In reaching this conclusion, the 2nd Circuit noted that Polansky does “not mandate universal requirements” for an FCA hearing in every case. The 2nd Circuit also rejected plaintiff’s due process arguments, plaintiff’s claim that the court failed to evaluate defendant’s settlement with the government resolving related criminal and administrative violations, and plaintiff’s claim that the district court erred in denying its motion for an indicative ruling, based on new evidence published while the appeal was pending.

    Courts Federal Issues Appellate Second Circuit Supreme Court FCA Qui Tam Action

  • California mortgage lender to pay $1 million to settle fraud allegations

    Federal Issues

    Recently, the United States Attorney for the Eastern District of Washington announced a settlement with a California-based mortgage lender to resolve allegations that it “improperly and fraudulently” originated government-backed mortgage loans insured by FHA, resulting in losses to the government when borrowers defaulted on their mortgages. The settlement concludes a joint investigation conducted by the U.S. Attorney’s Office and the Offices of Inspector General for the Department of Veterans Affairs and HUD, which commenced as required by the False Claims Act after a whistleblower (a former loan processor) filed a qui tam complaint against the lender in 2019. The whistleblower claimed that between December 2011 and March 2019, the lender knowingly underwrote certain FHA mortgages and approved some mortgages for insurance that failed to meet FHA requirements or qualify for insurance. The whistleblower further alleged that the lender “knowingly failed to perform quality control reviews that it was required to perform.”

    “By improperly originating ineligible mortgages, lenders take advantage of the limited resources of the FHA program and unfairly pass the risk of loss onto the public,” the U.S. Attorney said. According to the announcement, the lender agreed to pay more than $1.03 million under the terms of the settlement agreement. The whistleblower will receive $228,172 of the settlement proceeds, plus attorney’s fees, expenses, and costs.

    Federal Issues Courts DOJ FHA Mortgages HUD Department of Veterans Affairs False Claims Act / FIRREA Qui Tam Action

  • District Court: News reports cannot reverse dismissal of sanctions suit

    Financial Crimes

    On October 13, the U.S. District Court for the Southern District of New York denied a relator’s motion seeking indicative relief, ruling that post-ruling news reports were insufficient to reverse the dismissal of a qui tam suit accusing a UK-based bank and related entities (collectively, “defendants”) of violating U.S. sanctions against Iran. In 2020, the court dismissed the complaint after finding that the government “had articulated multiple valid purposes served by dismissal, and that relator had not carried its burden to show that a dismissal would be ‘fraudulent, arbitrary or capricious, or illegal.’” The relator’s appeal to the U.S. Court of Appeals for the Second Circuit is pending. At the district court, the relator moved for indicative relief based on the premise that if the court had jurisdiction, it would have vacated the dismissal based on disclosures in post-dismissal media reports.

    According to the opinion, the defendants entered into a deferred prosecution agreement (DPA) with the DOJ in 2012 following a multi-year, multi-agency investigation concerning allegations that defendants deceptively facilitated U.S. dollar transactions by Iranian clients between 2001 and 2007 in violation of U.S. sanctions and various New York and federal banking regulations. The defendants admitted to the violations and paid hundreds of millions of dollars in fines and penalties. The relator subsequently filed a qui tam action alleging the defendants misled the government in negotiating the DPA. A government investigation found no support for the allegations. In 2019, the DOJ entered a new DPA with defendants. The relator amended its complaint alleging improper conduct related to the 2019 DPA, which the court dismissed.

    The relator then filed the instant motion to reopen the case, arguing that news reports published in 2020 showed that the defendants engaged in transactions with sanctioned Iranian entities after 2007, which was contrary to the government’s representations when it moved to dismiss the case. The relator claimed that the government incorrectly asserted that it closely examined records before seeking dismissal and failed to honestly conclude that the allegations were meritless. In denying the relator’s motion, the court explained that the relator failed to show that the news reports would be admissible or were important enough to change the outcome of the earlier motion to dismiss. The court held that news reports are inadmissible and further concluded that none of the suspicious activity reports discussed in the news reports contradicted the government’s representations in its motion to dismiss.

    Financial Crimes Courts Of Interest to Non-US Persons OFAC OFAC Sanctions Iran Relator Qui Tam Action DOJ Appellate Second Circuit SARs

  • 3rd Circuit: FCA does not guarantee an in-person hearing before dismissal


    On September 12, the U.S. Court of Appeals for the Third Circuit held that the False Claims Act (FCA) does not guarantee relators an automatic in-person hearing before a case can be dismissed. According to the opinion, a relator filed a qui tam action against a Delaware non-profit organization, asserting claims on behalf of the United States and the State of Delaware under the FCA and the Delaware False Claims Act (DFCA), alleging the organization received funding from state and federal governments by misrepresenting material information. Delaware and the federal government declined to intervene and, three years later, both moved to dismiss the case. Both governments argued that the relator’s allegations were “factually incorrect and legally insufficient.” The district court granted the motions without conducting an in-person hearing. The relator appealed, arguing that the FCA guarantees an automatic in-person hearing before a case can be dismissed.

    On appeal, the 3rd Circuit disagreed with the relator. The appellate court noted that the government “has an interest in minimizing unnecessary or burdensome litigation costs,” and, once the government moved to dismiss, the burden shifted to the relator to prove that dismissal would be “fraudulent, arbitrary and capricious, or illegal.” The appellate court concluded that the relator failed to do so, and rejected his argument that he should have been allowed to introduce evidence during a hearing to satisfy his burden. While the FCA and the DFCA state that a relator has an “‘opportunity for a hearing’ when the government moves to dismiss,” it is the relator’s responsibility to avail himself or herself of this opportunity, according to the appellate court. The court concluded that the FCA and DFCA do not guarantee an automatic in-person hearing and, because the relator failed to request a hearing and his motions failed to prove the dismissal was fraudulent, arbitrary, capricious, or illegal, the district court did not err in dismissing the action.

    Courts Whistleblower Relator Qui Tam Action False Claims Act / FIRREA Appellate Third Circuit

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