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Financial Services Law Insights and Observations


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  • FinCEN, FDIC, and DOJ Announce Coordinated Anti-Money Laundering Enforcement Action and Settlement

    Financial Crimes

    On November 19, FinCEN and the FDIC announced that a state bank agreed to pay a $15 million civil money penalty to resolve the bank’s “history of noncompliance” with Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements, including recent allegations that the bank failed to implement an effective BSA/AML Compliance Program with reasonable internal controls. Specifically, the federal agencies alleged that the bank failed to adequately oversee third-party payment processor relationships and related products and services. The payment also resolves parallel civil claims by the DOJ that the bank violated the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) by originating withdrawal transactions on behalf of fraudulent merchants and causing money to be taken from the bank accounts of consumer victims. Concurrent with the federal action, the Delaware Office of State Bank Commissioner terminated the bank’s state charter.

    FDIC Anti-Money Laundering FinCEN Bank Secrecy Act DOJ False Claims Act / FIRREA

  • Bank Argues Government's False Claims Act Case Violates National Servicing Settlement


    On November 1, one of the five banks that entered into a comprehensive mortgage servicing settlement earlier this year with the federal government and 49 state attorneys general invoked that agreement in defense of claims recently filed against it by the federal government. Motion of Defendant Wells Fargo Bank, N.A. to Enforce Consent Judgment, United States v. Bank of America Corp., No. 1:12-cv-00361 (D.D.C. Nov. 1, 2012). Wells Fargo’s motion responds to a complaint filed in the Southern District of New York in which the DOJ and HUD allege that the bank falsely certified loans under the FHA’s Direct Endorsement Lender Program in violation of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). In response, the bank has asked the court overseeing the national servicer settlement to enforce the Consent Judgment the bank entered, which the bank notes includes a comprehensive release for certain liability with respect to its alleged FHA mortgage lending conduct. The bank argues that the release specifically releases liability arising under the FCA and FIRREA for its alleged FHA-certification conduct. The bank seeks declaratory relief with respect to its rights under the servicing settlement, as well as an order enjoining the federal government from pursuing its case in New York. Wells Fargo’s motion indicates that the government plans to oppose the motion.

    Mortgage Origination False Claims Act / FIRREA

  • DOJ Files First Civil Fraud Suit Alleging False Claims Act And FIRREA Violations In The Sale Of Loans To Fannie Mae And Freddie Mac


    On October 24, the United States Attorney’s Office for the Southern District of New York (SDNY) filed a $1 billion civil mortgage fraud lawsuit against a mortgage lender and a major financial institution in connection with loans sold to the government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Filed as a complaint-in-intervention in a pending qui tam, or whistleblower, lawsuit, the complaint alleges that the mortgage lender engaged in a scheme to defraud the GSEs in connection with the mortgage loans it sold to them, and that the financial institution that later acquired the lender was aware of and continued the misconduct. The suit seeks damages and penalties under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This is the first civil suit brought by the Department of Justice concerning mortgages sold to the GSEs, and indicates that the government might commence other suits based on the sale of conventional mortgages to those entities.

    The government’s allegations focus on a loan origination system initiated by the lender in 2006 that allegedly eliminated checkpoints on loan quality and led to fraud and other defects in the loans. The complaint alleges that the lender and the financial institution sold these loans to the GSEs but misrepresented that the loans complied with GSE requirements. The GSEs pooled the loans into mortgage backed securities and sold them to investors, subject to guarantees on principal and interest payments. As the allegedly defective loans defaulted, the GSEs suffered over $1 billion in losses through the payment of guarantees to investors.

    These allegations set forth a theory of liability that the government had not previously articulated.  Previous cases brought by the government primarily involved loans made by government program participants and alleged misrepresentations made directly to government agencies, whereas the complaint in this case is based on conventional loans and alleged misrepresentations to the GSEs.  Moreover, unlike previous cases, defendants did not receive federal funds directly from the government, but rather only may have received such funds indirectly based on the government’s funding of the GSEs.

    In addition, the complaint also represents another use by the government of FIRREA. Here, FIRREA is used to pursue the alleged profits made by defendants from the challenged loan origination system. See Understanding FIRREA’s Reach: When Does Fraud ‘Affect’ a Financial Institution.” The case also marks yet another financial fraud qui tam action filed in New York.  Both the FCA and FIRREA provide substantial rewards for whistleblowers and the government’s relatively quick decision to intervene, along with its fast response in other recent matters, may encourage other such suits in the SDNY.  See “Whistle-Blower Bounties May Encourage Residential Mortgage-Backed Securities Fraud Reporting.”

    In short, this action is another example of the government’s increasingly aggressive efforts to recoup losses stemming from the financial meltdown, as well as a reminder of the significance of the whistleblower provisions in both the FCA and FIRREA. Most importantly, it is a clear sign that government loan program participants are no longer the only targets for financial fraud recovery, and that the government may challenge the conduct of any lender who sold loans to the GSEs.

    Freddie Mac Fannie Mae DOJ Enforcement False Claims Act / FIRREA

  • DOJ Sues Mortgage Lender Over Alleged Fraudulent Certification of FHA Loans


    On October 9, the U.S. Attorney for the Southern District of New York and the U.S. Department of Housing and Urban Development (HUD) announced a civil fraud suit against a mortgage lender alleged to have falsely certified loans under the FHA’s Direct Endorsement Lender Program. The suit, filed in coordination with the Financial Fraud Enforcement Task Force (FFETF), claims that from May 2001 through October 2005, the lender regularly and knowingly engaged in reckless origination and underwriting of FHA loans, while certifying to HUD that those loans met the FHA Direct Endorsement Lender Program requirements and were therefore eligible for FHA insurance. Further, the suit alleges that the lender failed to conduct adequate quality control, failed to comply with HUD self-reporting requirements, and later attempted to cover up its reporting failures. The government claims that it 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 False Claims Act, as well as Financial Institutions Reform, Recovery, and Enforcement Act penalties. The government also seeks compensatory damages under the common law theories of breach of fiduciary duty, gross negligence, negligence, unjust enrichment, and payment under mistake of fact. This suit follows the settlements earlier this year of several other cases involving similar claims. One other similar suit is currently pending.

    Fraud HUD DOJ FHA False Claims Act / FIRREA

  • Medical Device Manufacturer Resolves FCPA Violations Related to Conduct in Mexico

    Financial Crimes

    On July 10, medical device manufacture Orthofix International N.V. became the latest in a string of companies in the medical device sector to resolve an FCPA matter with the U.S. government. The settlement adds Orthofix to the list of device manufacturers that have settled FCPA matters in 2012, along with Smith & Nephew and Biomet, who settled in February and March 2012, respectively. The Orthofix FCPA resolution calls for the company to pay a criminal fine to the DOJ of $2.22 million, and a civil monetary sanction (including disgorgement and interest) of $5.2 million to the SEC. The DOJ resolved the matter through a Deferred Prosecution Agreement, which was attached to the company’s 8-K of July 10, 2012, reporting the resolution. According to the allegations in the SEC’s Complaint, Promeca S.A. de C.V, a subsidiary based in Mexico, paid bribes to employees of the government-operated health care system, referring to the payments as “chocolates” and booking inaccurate reimbursement requests as meals, car tires or training expenses. The Mexico subsidiary made approximately $317,000 in improper payments over a 7-year period, according to the SEC. The FCPA resolution follows a June 7, 2012 guilty plea by the U.S. subsidiary, Orthofix Inc., on a False Claims Act-related matter, resulting in $7.8 million fine and payment of over $34 million to resolve a civil action.

    FCPA SEC False Claims Act / FIRREA

  • HUD Announces Another Mortgage False Claims Act Settlement


    On May 10, HUD and the U.S. Attorney for the Southern District of New York announced the settlement of a lawsuit alleging violation of the False Claims Act by a mortgage originator and affiliated entities. The government alleged that, for nearly a decade, MortgageIT, Inc. certified falsely that the mortgages it originated complied with HUD rules. MortgageIT and its affiliates agreed to pay $202.3 million to resolve the suit. After the Bank of America and Countrywide FCA claims settled in February, this marks the third mortgage-FCA lawsuit settled to date. A fourth case remains pending in the Southern District of New York.

    Mortgage Origination HUD False Claims Act / FIRREA

  • Federal Government Obtains Settlement of False Claims Act Claims Against CitiMortgage


    On February 15, HUD and the U.S. Attorney for the Southern District of New York announced that CitiMortgage, Inc. had agreed to settle the government’s claims that CitiMortgage violated the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act by failing to comply with certain requirements of the Fair Housing Administration’s Direct Endorsement Lender Program. According to the press release, the defendant submitted certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not, causing HUD to unnecessarily incur losses when those loans defaulted. As part of the settlement, which was approved by the United States District Court for the Southern District of New York, CitiMortgage agreed to pay $158.3 million in damages to the United States.

    Mortgage Origination HUD False Claims Act / FIRREA


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