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On August 12, the U.S. Court of Appeals for the 3rd Circuit vacated the dismissal of a relator’s qui tam action, concluding that the federal action was not barred by New Jersey’s equitable entire controversy doctrine. In the case, an employer brought a defamation and disparagement suit against a former employee, and while the suit was pending, the employee brought a qui tam action under the False Claims Act (FCA) against the employer on behalf of the United States and the state of New Jersey. The qui tam action remained under seal for over seven years while the government investigated the action. During this time, the employer’s state court action against the employee was dismissed after the parties entered into a settlement agreement. After the government chose not to intervene in the FCA action, and the district court unsealed the complaint, the employee chose to proceed. The district court granted summary judgment in favor of the employer, finding that New Jersey’s “entire controversy” doctrine requires claims arising from related facts or transactions to be adjudicated in one action.
On appeal, the 3rd Circuit concluded that New Jersey’s entire controversy doctrine did not apply to the employee’s qui tam action because, in FCA cases, the U.S. is the real party in interest. The appellate court noted that concluding otherwise would essentially allow the employee to “unilaterally negotiate, settle, and dismiss the qui tam claims during the Government’s investigatory period.” Moreover, the appellate court found that application of the doctrine “would incentivize potential [FCA] defendants to ‘smoke out’ qui tam actions by suing potential relators and then quickly settling those private claims,” in order to bar a potential qui tam action.
On August 8, the U.S. Court of Appeals for the 5th Circuit affirmed a district court ruling that ordered two mortgage companies and their owner to pay nearly $300 million in a suit brought under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The suit accused the defendants of allegedly making false certifications, which reportedly led to mortgages ending in default. The jury agreed that the defendants defrauded the Federal Housing Agency’s mortgage insurance program when a state audit revealed unregistered company branches were used to originate loans in violation of agency guidelines, and the court determined that there was ample evidence to find that the false certifications were a proximate cause of losses from loan defaults. As a result, the government trebled the damages and civil penalties under the FCA from $93 million to roughly $298 million. The defendants appealed the decision, challenging, among other things, the sufficiency of evidence, methodologies presented by the government’s expert witnesses, and the judge’s decision to not order a new trial after dismissing a disruptive juror.
On appeal, the 5th Circuit opined that there was sufficient evidence to support the jury’s findings, and rejected the defendants’ expert witness challenges, holding first that the defendants had waived any argument about the loan default sampling methodology used by one of the witnesses, because their argument that the witness “failed to control for obvious causes of default” never came up “during the extensive negotiations over the sampling methodology that would be used.” The appellate court also concluded that nothing in the record supported the defendants’ argument that the second witness “did not apply the HUD underwriting standards” in his re-underwriting methodology. The appellate court further noted that it has declined to adopt a rule used by other circuit courts that prohibits jurors from being dismissed “unless there is no possibility” that the juror’s failure to deliberate stems from their view of the evidence. Rather, the 5th Circuit held that the district court had grounds to dismiss the juror who “failed to follow instructions, exhibited a lack of candor during questioning, and had engaged in threatening behavior towards other jurors.”
On July 10, the U.S. District Court for the Northern District of Illinois ordered the founder and president of a mortgage company to pay $500,000 in a suit brought under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The suit accused the defendant of allegedly submitting fraudulent certifications certifying he was not under criminal indictment in order to participate in HUD’s Federal Housing Administration mortgage insurance program. (Certification is necessary to participate in the FHA program.) In 2016, the defendant appealed to the 7th Circuit that the district court’s ruling—which originally ordered approximately $10 million in treble damages and $16,500 in penalties under the FCA—had been held to the wrong causation standard. In 2017, the appellate court issued an opinion referring to the U.S. Supreme Court’s ruling in Universal Health Services, Inc. v. U.S. ex rel. Escobar, holding that in this matter, the district court had improperly relied on a “but for” causation standard for FCA liability, and had failed to adequately develop whether the defendant’s “falsehood was the proximate cause of the government’s harm.”
On remand, the district court found that the government's losses were not proximately caused by the defendant’s form certifications, and thus failed to satisfy the proximate cause standard for damages in a FCA suit. The district court ordered the defendant to pay $500,000 for making false statements to HUD in violation of FIRREA. “Half a million dollars is a substantial sum of money, and it reflects the seriousness of [the defendant’s] wrongdoing over a series of years, as well as the fact that there is no good-faith explanation for his actions,” the court stated. The court further elaborated that “[a]t the same time, [the fine] also reflects that [the defendant’s] conduct, while serious, does not put him within the worst class of FIRREA violators.”
10th Circuit: Compliance employees must show they went beyond established protocols to obtain FCA whistleblower retaliation protection
On April 30, the U.S. Court of Appeals for the 10th Circuit affirmed the dismissal of a former employee’s False Claims Act (FCA) whistleblower retaliation claims, holding that employees with compliance responsibilities bear the burden of showing that their alleged protected activities are not simply part of their job responsibilities. The case concerned a qui tam relator who alleged her former employer systemically violated the FCA when it knowingly and fraudulently billed the government for inadequately or improperly completed work, and then fired her in retaliation for trying to end the alleged fraud. According to the plaintiff—who was previously employed as a senior quality control analyst responsible for reviewing investigators’ work and documenting incomplete investigations—the company violated the FCA by: (i) “falsely certifying that it performed complete and accurate investigations”; (ii) “falsely certifying that it did proper case reviews and quality-control checks”; and (iii) “falsifying corrective action reports.” The district court, however, entered summary judgment for the company on all counts, determining that the plaintiff’s qui tam claims were “‘substantially the same’ as those that had been publically disclosed” in previous investigations and news reports, and dismissing her claims under the public disclosure bar. Her retaliation claim was dismissed after the district court determined that she had failed to properly plead that the company was on notice that she was engaging in protected activity.
On appeal, the 10th Circuit concluded that the district court erred in its legal determinations on the qui tam claims, vacated the order for summary judgment, and remanded those claims for further proceedings. However, the 10th Circuit agreed with the district court’s decision to dismiss the plaintiff’s whistleblower retaliation claim, stating that in order to establish FCA whistleblower liability, an employer must know that the employee’s actions were connected to a claimed FCA violation, and an employee “must overcome the presumption that her internal reports of fraud were part of her job.” The appellate court held that because the plaintiff’s allegations did not show that she went outside of established protocols or broke her chain of command, she failed to allege adequately that the company was on notice of her claimed FCA-protected activity.
On May 13, the U.S. Supreme Court unanimously held that a relator has up to 10 years to bring a qui tam suit under the False Claims Act (FCA) whether or not the government intervenes in the suit. According to the opinion, in November 2013, a relator brought a suit against two defense contractors alleging they defrauded the U.S. Government by submitting false payment claims for security services in Iraq through early 2007. The relator claimed he told federal officials about the allegedly fraudulent conduct in November 2010, but the Government declined to intervene. The defendants moved to dismiss the action as barred by the six year statute of limitations under 31 U. S. C. §3730(b)(1), while the relator claimed the action was timely under §3730(b)(2)— which states that a FCA civil action may not be brought “more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed.” The district court dismissed the action, while the U.S. Court of Appeals for the 11th Circuit reversed the decision, concluding that §3730(b)(2) applies in “nonintervened actions, and the limitations period begins when the Government official responsible for acting knew or should have known the relevant facts.”
Upon review, the Supreme Court rejected the defendants’ argument that the six year statute of limitations in §3731(b)(1) applies to all relator-initiated actions (whether the Government intervenes or not), while § 3731(b)(2) applies only to qui tam actions when the Government intervenes, arguing the interpretation is “at odds with fundamental rules of statutory interpretation.” Moreover, the Court concluded that the relator in a nonintervened suit is not “the official of the United States” whose knowledge triggers §3731(b)(2)’s three-year limitations period, as it was not what Congress intended, and a private relator is neither “appointed as an officer of the United States nor employed by the United States.”
On May 7, the DOJ (or the “Department”) announced the release of formal guidance to the Department’s False Claims Act (FCA) litigators, which explains how the DOJ awards credit to defendants who cooperate with the Department during a FCA investigation. Under the formal policy, which is located in Section 4-4.112 of the Justice Manual, cooperation credit in FCA cases may be earned by (i) voluntarily disclosing misconduct unknown to the government, which can be done even if the DOJ has already begun an investigation of other misconduct; (ii) cooperating in an ongoing investigation, such as by preserving documents beyond standard business or legal practices, identifying individuals who are aware of the relevant information or conduct, and facilitating review and evaluation of relevant data or information that requires access to special or proprietary technologies; or (iii) undertaking remedial measures in response to a violation, such as by implementing or improving an effective compliance program or appropriately disciplining or replacing those responsible for the misconduct.
The Department has discretion in awarding credit, which will vary depending on the facts and circumstances of each case. With regard to voluntary disclosure or additional cooperation, the Department will consider (i) the timeliness and voluntariness of the assistance; (ii) the truthfulness, completeness, and reliability of any information or testimony provided; (iii) the nature and extent of the assistance; and (iv) the significance and usefulness of the cooperation to the government. Entities or individuals may quality for partial credit if they have “meaningfully assisted the government’s investigation by engaging in conduct qualifying for cooperation credit.” Most often, cooperation credit will take the form of a reduction in penalties or damages sought by the Department. However, the maximum credit that a defendant may earn may not exceed the amount that would result in the government receiving less than full compensation for the losses caused by the misconduct. In addition, the Department may consider in appropriate circumstances other forms of credit, including notifying a relevant agency about the defendant’s disclosure or other cooperation, publicly acknowledging such disclosure or cooperation, and assisting in resolving a qui tam litigation with a relator.
On March 12, the U.S. District Court for the Northern District of Illinois granted a national bank’s motion to dismiss a former associate vice president/lending manager’s whistleblower claims that it violated the False Claims Act (FCA) by submitting fraudulent claims and providing false information about loan applications to Fannie Mae and Freddie Mac. The whistleblower alleged that the bank (i) knowingly submitted fraudulent claims for payment to the U.S. government; (ii) told Fannie Mae and Freddie Mac that the applications met underwriting standards; and (iii) later terminated his employment as retaliation for notifying his superiors about the alleged false statements. However, according to the court, the whistleblower failed to sufficiently plead that the bank actually submitted the false claims, did not provide enough specificity as to whom the bank sent the alleged false claims to, and failed to “allege specific facts that link [the bank’s] fraudulent conduct to a claim submitted to the government.” Moreover, the court stated that under the FCA’s public disclosure bar, a whistleblower cannot base his case on allegations raised in prior litigation or publically disclosed information, and identified several similarities between the whistleblower’s allegations and previously disclosed claims. Because the whistleblower’s FCA claims failed, the retaliation claims were also dismissed.
On February 13, the U.S. Attorney for the Eastern District of California announced a $3.67 million joint settlement with HUD and the Fair Housing Administration (FHA) to resolve allegations that a mortgage lender violated the False Claims Act by falsely certifying compliance with FHA mortgage insurance requirements. According to the settlement agreement, between 2007 and 2009, the mortgage lender, a participant in HUD’s Direct Endorsement Lender program, allegedly knowingly submitted false claims to the FHA loan insurance program by failing to ensure the loans qualified for FHA insurance when they were originated. The announcement notes that the settlement relates solely to allegations, and that there has been no determination of actual liability by the mortgage lender, which did not admit to liability in the settlement.
On February 11, the DOJ announced a $2.5 million settlement with a South Carolina university to resolve allegations that the university violated the False Claims Act (FCA) by submitting false claims to the U.S. Department of Education. According to the announcement, between 2014 and 2016, the university hired a company, which was partially owned by the university, to recruit students to the university and paid the company based on the number of students who enrolled in university programs, in violation of the prohibition on paying incentive compensation in Title IV of the Higher Education Act. The co-owner of the company originally brought a qui tam lawsuit against the university and will receive $375,000 from the settlement.
On January 8, the U.S. Court of Appeals for the 4th Circuit affirmed a federal jury’s unanimous verdict clearing a Pennsylvania-based student loan servicing agency (defendant) accused of improper billing practices under the False Claims Act (FCA). As previously covered by InfoBytes, the plaintiff—a former Department of Education employee whistleblower—filed a qui tam suit in 2007, seeking treble damages and forfeitures under the FCA. The plaintiff alleged that multiple state-run student loan financing agencies overcharged the U.S. government through fraudulent claims to the Federal Family Education Loan Program in order to unlawfully obtain 9.5 percent special allowance interest payments. Over the course of several appeals, the case proceeded to trial against the student loan servicing agency after the 4th Circuit held that the entity was “an independent political subdivision, not an arm of the commonwealth,” and “therefore a ‘person’ subject to liability under the False Claims Act.” The plaintiff appealed the jury’s verdict, arguing the court erred by excluding evidence at trial and failed to give the jury several of his proposed instructions.
On appeal, the 4th Circuit disagreed with the plaintiff, finding that the court correctly excluded the state audit, which determined the student loan servicer “failed its mission” with lavish spending on unnecessary expenses. The appeal court noted the audit was irrelevant to the only issue in the case: “Did [the servicer] commit fraud and file a false claim?” The appeals court also rejected the plaintiff’s jury instruction arguments, concluding that the court’s instructions substantially covered the substance of the plaintiff’s proposal and “sufficiently explained that the jury had to consider whether [the servicer’s] claims were ‘false or fraudulent.’”
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
- Benjamin W. Hutten to discuss "BSA program reporting, management and board of directors responsibilities" at the Georgia Bankers Association BSA Experience Program
- Hank Asbill to discuss "Ethical guidance in conducting internal investigations – The intersection of Yates and Upjohn" at the American Bar Association Southeastern White Collar Crime Institute
- H Joshua Kotin to discuss "Recent developments in fair lending and avoiding the pitfalls" at the Arkansas Community Bankers/Bankers Assurance 2019 Compliance Conference
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at the American Bar Association Business Law Section Annual Meeting
- Valerie L. Hletko to discuss "Banking on guns ‘n drugs: Social policy meets financial services" at the American Bar Association Business Law Section Annual Meeting
- Daniel P. Stipano to discuss "Navigating the conflicting federal and state laws for doing business with cannabis companies" at the American Bar Association Business Law Section Annual Meeting
- Tim Lange to discuss "Services and value" at the North American Collection Agency Regulatory Association Annual Conference
- Katherine L. Halliday to discuss "UDAP, UDAAP & the Map rule compliance basics" at the Mortgage Bankers Association Regulatory Compliance Conference
- Brandy A. Hood to discuss "How to ace your TRID exam" at the Mortgage Bankers Association Regulatory Compliance Conference
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Melissa Klimkiewicz to discuss "Navigating FHA rules and regs" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss "Washington regulatory overview" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Kathryn L. Ryan to discuss "The state’s role in fintech: Providing an industry framework for innovation" at Lend360
- Jeffrey P. Naimon to discuss "Truth in lending" at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions" at the Institute of International Bankers Risk Management and Regulatory Examination/Compliance Seminar
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference