On January 30, the U.S. District Court for the Southern District of New York denied the SEC’s motion for an order authorizing alternative means of service for two Chinese nationals residing in the People’s Republic of China. SEC v. China Intelligent Lighting & Electronics, Inc., No. 13 CIV. 5079, 2014 WL 338817 (S.D.N.Y. Jan. 30, 2014). The SEC moved for the order after it was unable to serve two individual defendants in a securities fraud case by means of the Hague Convention on the Service Abroad of Judicial and Extra-Judicial Documents in Civil and Commercial Matters. The court agreed that alternative service would be appropriate, but rejected the SEC’s proposed method of alternative service: publication in the International New York Times and via email. The court held that alternative service is acceptable if it (i) is not prohibited by international agreement, and (ii) if it comports with constitutional notions of due process. Although no international agreement would prevent the SEC’s proposed methods of service, the court held the SEC failed to demonstrate such service was “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” The court held that the SEC failed to provide evidence that either method of service would actually reach the defendants—it did not provide any information about the distribution of the newspaper and failed to provide evidence the email addresses were accurate and in use by the defendants. The court denied the SEC’s motion without prejudice.
On February 4, the DOJ announced the filing and simultaneous settlement of a complaint by the U.S. Attorney for the Southern District of New York (SDNY) against a mortgage lender alleged to have violated the False Claims Act (FCA) by submitting false loan-level certifications to HUD that fraudulently induced HUD to insure ineligible mortgage loans. The complaint makes similar claims with respect to loans insured by the Department of Veterans Affairs (VA). This is the first FCA case brought by the SDNY to assert claims based on VA loans. Although the complaint was filed in a whistleblower qui tam case under seal in January 2013, it indicates the U.S. Attorney’s investigation of fraudulent lending practices has been on-going since 2011. In addition to allegations concerning reckless origination practices, the complaint also alleges that the lender’s underwriters manipulated the data entered into the AUS/TOTAL Scorecard system, repeatedly entering hypothetical data that lacked a factual basis with the goal of determining the lowest values that would generate an “accept/approve” recommendation. The U.S. Attorney claims this practice violated HUD guidance and encouraged fraud by both loan officers and borrowers, and also that the lender made false statements in its loan-level certifications when it falsely certified to the “integrity” of the data entered by underwriters into AUS/TOTAL. To resolve the matter, the lender agreed to pay a total of $614 million; $564.6 million to resolve the HUD claims and $49.4 million to resolve the VA claims. Consistent with the SDNY’s recent practice of requiring admissions in civil fraud cases, the settlement stipulation recites that the lender admits responsibility for certain specified allegations. The settlement also requires the lender to implement “an enhanced quality control program,” the terms of which are to be memorialized in a separate agreement still to be negotiated.
On October 23, a jury found a bank liable on one civil mortgage fraud charge arising out of a program operated by a lender the bank had acquired. The jury also found against a former executive of the acquired lender. The verdict followed a four week trial in the first DOJ case alleging violations of the FCA and FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. Judge Jed Rakoff of the Southern District of New York will consider briefing on the penalty—the DOJ originally had sought damages close to $1 billion. The bank stated that it will evaluate its options for an appeal. For more information about the government’s expanding FCA/FIRREA civil fraud initiative, please visit our resource center.
On August 16, the U.S. District Court for the Southern District of New York issued a written opinion in support of its May 8, 2013 dismissal of claims for damages and civil penalties under the False Claims Act (FCA) brought by the federal government against a mortgage lender alleged to have sold defective loans to Freddie Mac and Fannie Mae while representing that the loans complied with the enterprises’ requirements. U.S. v. Countrywide Fin. Corp., No. 12-1422, 2013 WL 4437232 (S.D.N.Y. Aug. 16, 2013). Although it dismissed the FCA claims, the court did not dismiss the government’s claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) that the lender’s conduct “affected” a federally insured financial institution – the lender itself. In its opinion, the court rejected the lender’s arguments that FIRREA’s legislative history and policy considerations contradict the government’s position, and instead applied a plain meaning analysis and held that the lender allegedly has paid billions of dollars to settle repurchase claims by Fannie Mae and Freddie Mac as a result of the alleged fraud, which “affected” the lender itself and as such is sufficient to sustain the FIRREA counts. The court also rejected the lender’s argument that the government failed to adequately allege the FIRREA predicate offenses of mail fraud and wire fraud because the alleged misrepresentations were “mere breaches of contract that cannot separately support an action for fraud,” holding that the argument is premised on the “fundamental error” that “mail fraud and wire fraud are subject to the same arcane limitations as common law fraud.” Notably, the court dismissed the government’s FCA claims “with prejudice” because the government failed to plead fraud with particularity with respect to loans sold after the enactment of the Fraud Enforcement and Recovery Act of 2009, which extended the FCA to cover indirect recipients of federal funds.
On August 6, the DOJ and the SEC announced parallel civil fraud actions filed in the U.S. District Court for the Western District of North Carolina. The DOJ alleged that a national bank and related entities misled investors about the residential jumbo prime mortgage loans backing an $850 million RMBS the bank offered for sale, made false statements after failing to perform proper due diligence, and filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers. The DOJ action represents the enforcement agency’s latest effort to employ the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to seek civil penalties. The SEC is seeking an order requiring disgorgement and civil penalties under the Securities Act. The complaints were announced as part of the Financial Fraud Enforcement Task Force’s RMBS Working Group, and Task Force participants Attorney General Eric Holder, Associate Attorney General Tony West, and New York Attorney General Eric Schneiderman all promised additional investigations and actions, using every tool and resource available to the group.
On July 25, the U.S. Senate confirmed Anthony West to serve as the DOJ’s Associate Attorney General, a position he has held in an “acting” capacity since March 2012. In that role Mr. West advises and assists the Attorney General and the Deputy Attorney General in formulating and implementing departmental policies and programs related to a broad range of issues, including civil litigation, federal and local law enforcement, and public safety. Prior to March 2012, Mr. West served as the Assistant Attorney General for the Civil Division – the largest litigating division at the DOJ – where he emphasized the Civil Division’s authority to bring civil and criminal actions to enforce the nation’s consumer protection laws, and served in various positions on the Financial Fraud Enforcement Task Force. In addition, the DOJ’s Civil Rights Division’s home page indicates that Jocelyn Samuels is serving as Acting Assistant Attorney for the Civil Rights Division. Ms. Samuels previously served as Principal Deputy Assistant Attorney General for that division and as Senior Counselor to the Assistant Attorney General for Civil Rights. She replaces Thomas Perez who recently was confirmed to serve as Secretary of Labor.
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.
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.
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Special Alert: DOJ Increasingly Pursuing Monetary and Non-Monetary Relief in Civil Enforcement Actions
Last month, in a potentially significant but largely overlooked development, the Department of Justice (“DOJ”) signaled that it would “increasingly” pursue “innovative, non-monetary measures” when it settles civil fraud cases. In remarks to the American Bar Association on June 7, 2012, Stuart F. Delery, Acting Assistant Attorney General, said it was DOJ’s “view that there will be cases in the future in which obtaining only a monetary recovery will not adequately redress the wrong.” Responding specifically to the charge that qui tam lawsuits represent merely a “cost of doing business” and that qui tam settlements could be viewed as just another “regulatory burden,” Delery said that DOJ’s civil fraud settlements will increasingly include “non-monetary remedies and other measures to help prospectively reduce fraud.” By way of example, he cited the Department’s recent health care fraud settlement with Abbott Laboratories, in which the $1.5 billion criminal-civil settlement included such terms as a period of probation; an “agreed statement of facts”; a corporate integrity agreement; and a requirement that the company institute additional compliance measures. Although Delery acknowledged in his remarks that seeking non-monetary relief could “prolong” or even “prevent” settlement discussions, he described it as “increasingly” DOJ’s view “that we owe it to taxpayers to do our best to implement measures to fully explain the conduct that led to the resolution, and to deter future bad acts.”