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Government Drops One Claim in Mortgage False Claims Act Case
On April 29, the U.S. Attorney for the Southern District of New York dropped its reverse false claims count in a pending False Claims Act case against a mortgage lender. U.S. v. Wells Fargo Bank, N.A., No. 12-7527. Although the government’s letter does not provide the reasoning behind its decision, during the recent oral argument on the lender’s motion to dismiss, the judge questioned the claim, noting that the obligation to pay at issue is conditional because it depends on an exercise of discretion by the government. The lender’s motion to dismiss remains pending.
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)
Federal District Court Holds Financial Institution's Fraud On Itself Triggers Potential FIRREA Liability
On April 24, the U.S. District Court for the Southern District of New York held that a federally insured financial institution may be prosecuted under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) for allegedly engaging in fraud that “affects” the same institution. U.S. v. Bank of N.Y. Mellon, No. 11-6969, 2013 WL 1749418 (S.D.N.Y. Apr. 24, 2013). In this case, the government alleges that the bank and one of its employees provided clients with false, incomplete and/or misleading information about the way it determined currency exchange rates for its “standing instruction” foreign exchange transactions, from which the bank profited, and which ultimately exposed it to “billions of dollars in potential liability.” Based on a lengthy analysis of textual meaning and congressional intent, the court concluded that the “text and purpose of FIRREA amply encompass the alleged conduct,” and that the government’s complaint sufficiently alleged that the bank was negatively affected by the fraud. The decision represents the first time a court has interpreted the meaning of the phrase “affecting a federally insured financial institution” under FIRREA to allow the government to prosecute a financial institution for its own alleged misconduct.
Federal Government Civil Fraud Suit Targets Mortgage Lender and Its President
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.
Fourth Circuit Holds FCA Statute of Limitations Tolled by Wartime Suspension of Limitations Act
The U.S. Court of Appeals for the Fourth Circuit recently held that the False Claims Act’s (FCA) statute of limitations can be tolled by the Wartime Suspension of Limitations Act (WSLA) in civil qui tam actions in which the government does not intervene. United States v. Halliburton ex rel. Carter, No. 12-1011, 2013 WL 1092732 (4th Cir. Mar. 18, 2013). A former employee of a defense contractor alleged that his employer fraudulently billed the United States for water purification services in Iraq that were never actually performed, and that the practice was consistent with a scheme to routinely bill the government set hours, regardless of actual hours worked. The government declined to intervene in the case, and the district court subsequently dismissed the complaint with prejudice, finding in part that the relator’s complaint was untimely filed after the FCA’s statute of limitations had expired. On appeal, the Fourth Circuit held that the WSLA applies to both civil and criminal fraud claims against the United States, regardless of whether the United States has intervened, and even without a formal declaration of war. Based on those factors, the Fourth Circuit held that the relator’s FCA claims were not time-barred. The court reversed the district court’s decision, and remanded the case for further consideration.
Seventh Circuit Adopts "Net Trebling" Damage Calculation in False Claims Act Case
On March 21, the U.S. Court of Appeals for the Seventh Circuit held that damages awarded in a False Claims Act case should have been calculated using a “net trebling” method. United States v. Anchor Mortgage Corp., No. 10-3122, 2013 WL 1150213 (7th Cir. Mar. 21, 2013). The court affirmed a district court holding that a defendant mortgage company violated the False Claims Act when it made false statements in applying for federal mortgage loan guarantees on eleven loans. The court also affirmed the district court’s holding that the government should be awarded treble damages, finding that the statutory provision that limits damages to double damages for a person who meets certain self-reporting requirements applies only with regard to the specific false claims on which the person self-reports. In this case, although the company had self-reported information on some false claims, it had not self-reported any information about the false claims on the eleven loans on which the government sought damages. The Seventh Circuit disagreed with the district court’s “gross trebling” calculation of damages. Under that method, the district court added together the amounts that the government had paid out on the guarantees on the eleven loans after they defaulted and then trebled that sum, before subtracting any amounts that the government had realized by selling the properties that secured the loans. The Seventh Circuit held that the district court should have employed a “net trebling” method, starting with the amount paid out by the government on a guarantee on a given loan, subtracting from that amount any money the government recovered by selling the property that secured the loan (or if unsold, the fair market value of the property held by the government), and then trebling the difference. In requiring the “net trebling” method, the court noted that most federal appellate decision have adopted that method, and that a Ninth Circuit decision to the contrary was unpersuasive and based on a misreading of the Supreme Court’s holding in United States v. Bornstein, 423 U.S. 303 (1976).
California Federal Court First to Outline Factors Governing FIRREA Civil Penalty Awards
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.
D.C. Federal Court Holds Government False Claims Case Not Precluded by National Servicing Settlement
On February 12, the U.S. District Court for the District of Columbia declined to enjoin the government from pursuing alleged False Claims Act violations against a bank that argued such claims were precluded by the terms of the national servicing settlement. United States v. Bank of Am. Corp., No 12-361, 2013 WL 504156 (D.D.C. Feb. 12, 2013). The bank petitioned the court to halt a suit filed by the government in the Southern District of New York, in which the government alleges that the bank's certification of loans under the FHA's Direct Endorsement Lender Program violated the False Claims Act. The bank argued that the national mortgage servicing settlement contains a comprehensive release for certain liability with respect to its alleged FHA mortgage lending conduct. Finding the consent judgment effectuating the settlement to be clear and unambiguous, the court rejected the bank's interpretation of the settlement. The court left it to the Southern District of New York to determine the nature of the claims at issue, but held that the release does not cover the claims as described by the bank. The court therefore denied the bank's motion to enforce the consent judgment and enjoin the New York action.
DOJ, State AGs File Civil Fraud Suits against Ratings Agency over RMBS Ratings; Buckley Offers Complimentary FIRREA Webinar
On February 5, the DOJ filed a lawsuit in the Central District of California against a major credit rating agency, alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. According to the complaint, the agency publicly represented that its ratings of RMBS and CDOs were objective and independent, notwithstanding the potential conflict of interest posed by the agency being selected to rate securities by the investment banks that sold those securities. The complaint alleges that, in fact, fear of losing market share and profits led the company to (i) weaken the ratings criteria and analytical models it used to assess credit risks posed by RMBS and CDOs, and (ii) issue inflated ratings on hundreds of billions of dollars’ worth of CDOs. When CDO’s rated by the agency failed, investors lost billions of dollars. The DOJ brings claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), alleging that the company engaged in (i) mail fraud affecting federally insured financial institutions, (ii) wire fraud affecting federally insured financial institution, and (iii) financial institution fraud, and seeks civil penalties up to the amount of the losses suffered as a result of the alleged violations. The DOJ believes such losses total $5 billion to date.
Also on February 5, the attorneys general for at least 12 states and the District of Columbia announced state court actions against a ratings agency in coordination with a parallel federal suit filed on the same day, as described above. The actions announced by the AGs for Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Iowa, Maine, Missouri, North Carolina, Pennsylvania, Tennessee, and Washington, allege violations of various state laws related to the same general conduct outlined in the federal complaint, i.e. that the ratings agency defrauded investors, including state pension funds, by inflating ratings of certain RMBS and CDOs for private gain, while publicly maintaining that the ratings were objective assessments of the risks posed by the securities. At least three states, Connecticut, Illinois, and Mississippi, are continuing to pursue similar, previously filed, suits against the same agency.
California District Court Unseals FCA Complaint Filed Against Numerous Banks
Last week, after the government declined to intervene in the case, the U.S. District Court for the Central District of California unsealed a qui tam False Claims Act (FCA) complaint filed by a whistleblower in April 2012 against numerous banks. U.S. ex rel Hastings v. Wells Fargo Bank, N.A., No. 12-3624, Complaint (C.D. Cal. Apr. 26, 2012). The relator claims that the banks knowingly endorsed for FHA-insurance mortgage loans originated in transactions where down payment gift programs were used fraudulently. According to allegations in the complaint, the banks’ programs generated gift funds by manipulating the sales price to pass FHA down payment assistance fees onto the buyer. Further, the alleged system forced the borrower to repay the down payment gift, a violation of FHA policy. The relator alleges that the banks then submitted to HUD false certifications for the non-compliant endorsed loans, upon which HUD relied to issue FHA mortgage insurance. The relator claims that the government was required to pay, and will continue to have to pay, FHA benefits on defaulted loans that contained material violations, and seeks treble damages and penalties under the FCA, a cease and desist order against the lenders, and a civil penalty of $5,500 to $11,000 for each alleged violation of the FCA.