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  • Fifth Circuit affirms dismissal of reverse-false-claims action in benefits payment fraud matter

    Courts

    On October 7, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a whistleblower’s reverse-false-claims action because it was barred by the False Claims Act’s (FCA) public-disclosure provision and the alleged scheme was not plead with sufficient detail. The relator, a former fraud investigator for the Department of Veterans Affairs Office of the Inspector General, alleged that the 15 financial institution defendants “avoided their regulatory obligation to return government-benefit payments they received for beneficiaries they knew to be deceased.” According to the relator, the defendants must have known of the beneficiary deaths because the Social Security Administration sends death notification entries to all receiving depository financial institutions. However, the district court determined that defendants provided documents showing the information had already been publicly disclosed and the relator was not the original source of the information (which would have been required to maintain a claim with respect to information that has already been publicly disclosed) because he obtained the information through his employment as a fraud investigator. As such, the court permanently dismissed the complaint on the grounds that the relator relied on public disclosures, and that the complaint failed to plead the allegations with sufficient detail.

    On appeal, the 5th Circuit agreed that the complaint could not survive the FCA’s public disclosure bar, explaining that the public-disclosure bar is met if the following elements apply: (i) the disclosure is public; (ii) the disclosure contains “‘substantially the same allegations’” as in the complaint; and (ii) the relator is not the “‘original source’” of the information. In addition, the appellate court agreed that the complaint lacked sufficient factual matter to satisfy federal rules of civil procedure, and concluded that further amendments would be futile because there are no claims left to amend.

    Courts Whistleblower Appellate Fifth Circuit False Claims Act / FIRREA

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

    Courts

    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

  • FCA claims move forward against California mortgage company

    Courts

    On September 11, the U.S. District Court for the Southern District of California denied a mortgage company’s motion to dismiss an action by the U.S. government alleging the company violated the False Claims Act by falsely certifying compliance with FHA mortgage insurance requirements. According to the opinion, the government intervened in a former employee’s suit against the company and alleged that the company, a participant in HUD’s Direct Endorsement Lender program, had failed to report loans to HUD that presented “material risk and ‘[f]indings of fraud or other serious violations’ discovered during the ‘normal course of business and by quality control staff during reviews/audits of FHA loans.’” The company moved to dismiss the action, arguing that the government failed to allege a scheme that was designed to flout specific FHA requirements. In denying the motion, the court concluded that the government sufficiently alleged the “who, what, where, how, and why” of the company’s misconduct, noting that the company “knew, or should have known, that the certifications of compliance it made at the time of endorsement were false because the falsities were facially apparent from the loan files that it was required to underwrite in accordance with HUD’s requirements.” The court also concluded that the government sufficiently pleaded its breach of fiduciary duty and breach of contract claims.

    Courts HUD False Claims Act / FIRREA FHA Mortgages

  • 3rd Circuit: FCA claims not barred by state’s equitable “entire controversy” doctrine

    Courts

    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.

    Courts False Claims Act / FIRREA Appellate Third Circuit State Issues

  • 5th Circuit upholds $298 million fine in FCA/FIRREA mortgage fraud action

    Courts

    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.” 

    Courts Fifth Circuit Appellate Mortgages Fraud False Claims Act / FIRREA HUD

  • District Court orders mortgage company founder to pay $500,000 FIRREA fine in mortgage fraud suit

    Courts

    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.”

    Courts False Claims Act / FIRREA Mortgages HUD

  • 10th Circuit: Compliance employees must show they went beyond established protocols to obtain FCA whistleblower retaliation protection

    Courts

    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 [sic] 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.

    Courts Tenth Circuit Appellate Whistleblower False Claims Act / FIRREA

  • Supreme Court holds FCA relators have 10 years to bring nonintervened suit

    Courts

    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.”  

    Courts U.S. Supreme Court False Claims Act / FIRREA Whistleblower Financial Crimes

  • DOJ issues False Claims Act guidance

    Federal Issues

    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.  

    Federal Issues DOJ False Claims Act / FIRREA Agency Rule-Making & Guidance

  • District Court dismisses whistleblower’s mortgage fraud claims

    Courts

    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 publicly 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.

    Courts False Claims Act / FIRREA Whistleblower Mortgages Fraud Fannie Mae Freddie Mac

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