DOJ Unveils New Policy on Individual Liability in White-Collar Prosecutions

On September 9, the Department of Justice (DOJ), issued a policy memorandum concerning DOJ’s goal of holding individuals accountable for corporate fraud or other misconduct.  While some of the guidelines set forth in the memorandum are statements of practices already being followed by DOJ, or by specific U.S. Attorney’s Offices, some of the measures are new and reflect an enhanced  focus on DOJ’s goal of holding individuals criminally or civilly liable for corporate wrongdoing. The memo sets forth “six key steps” to accomplish this goal and further DOJ’s underlying policies of deterring future illegal activity, incentivizing change in corporate behavior, holding proper parties responsible for their actions, and promoting public confidence in the justice system. Read more…


SDNY Orders Bank To Pay $1.3 Billion Following Verdict In GSE Civil Fraud Case

On July 30, the U.S. District Court for the Southern District of New York ordered a bank to pay a nearly $1.3 billion civil penalty after a jury found the bank liable in October 2013 on one civil mortgage fraud charge arising out of a program operated by a mortgage lender the bank had acquired. The case was the first in which the government alleged violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. The government originally sought damages of $1 billion based on alleged losses incurred by Fannie Mae and Freddie Mac. Subsequently the government argued the penalty should be calculated not based on loss to the GSEs, but rather based on gross gain to the lender, in order to accomplish “FIRREA’s central purpose of punishment and deterrence.” The government calculated a gross gain of $2.1 billion, and requested that the court impose a penalty in that amount.

In its order on civil penalties, the court noted that FIRREA provides no guidance on how to calculate a gain or loss or how to choose a penalty within the broad range permitted. To quantify the gain or loss on the 17,611 loans at issue, the court focused on the general principle that the “civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in favor of those purposes.” The court determined that both gain and loss should be viewed in terms of how much money the lender “fraudulently induced” the GSEs to pay. Even though many of the loans were in fact high quality, the Court included all of the loans in the gain and loss analysis because the jury found that the lender engaged in an intentional scheme to defraud the GSEs and that the lender intended to represent loans as being materially higher quality than they actually were. The court reasoned that the “happenstance that some of the loans may still have been of high quality should not relieve the defendants of bearing responsibility for the full payments they received from the scheme, at least not if the purposes of the penalty are punishment and deterrence.” As a result, the Court found the proper measure of both gain and loss to be the amount Fannie and Freddie paid for all loans at issue, and set $2,960,737,608 as the statutory maximum for the penalty. As a compensating factor, the court considered that 57.19 percent of the loans were not materially defective and reduced the penalty to 42.81 percent of the statutory maximum, or $1,267,491,770.


Federal, State Authorities Obtain Another Major RMBS Settlement

On July 14, the DOJ, the FDIC, and state authorities in California, Delaware, Illinois, Massachusetts, and New York, announced a $7 billion settlement of federal and state RMBS civil claims against a large financial institution, which was obtained by the RMBS Working Group, a division of the Obama Administration’s Financial Fraud Enforcement Task Force. Federal and state law enforcement authorities and financial regulators alleged that the institution misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. They claimed, among other things, that the institution received information indicating that, for certain loan pools, significant percentages of the loans reviewed as part of the institution’s due diligence did not conform to the representations provided to investors about the pools of loans to be securitized, yet the institution allowed the loans to be securitized and sold without disclosing the alleged failures to investors. The agreement includes a $4 billion civil penalty, described by the DOJ as the largest ever obtained under FIRREA. In addition, the institution will pay a combined $500 million to settle existing and potential claims by the FDIC and the five states. The institution also agreed to provide an additional $2.5 billion in borrower relief through a variety of means, including financing affordable rental housing developments for low-income families in high-cost areas. Finally, the institution was required to acknowledge certain facts related to the alleged activities.


Illinois AG Sues Student Debt Relief Firms

On July 14, Illinois Attorney General (AG) Lisa Madigan announced that her office filed separate civil lawsuits (here and here) in state court against two student debt relief firms and their principals.  The lawsuits allege that the defendants violated several state consumer protection statutes relating to their deceptive student debt relief practices and collection of improper fees.  The AG claims that the unlicensed companies and their sole principals improperly accepted upfront fees from student borrowers while claiming to have enrolled them in sham loan forgiveness programs or other legitimate loan relief programs that were available to borrowers free of charge.  The lawsuits also allege that the defendants engaged in extensive false and misleading advertisements that misrepresented their expertise, affiliation with the U.S. Department of Education, and the debt relief programs available to borrowers.

The AG maintains that these practices violate several state consumer protection statues, including:

  • The Illinois Consumer Fraud and Deceptive Business Practices Act, prohibiting unfair and deceptive business practices, including making false representations and failing to disclose material facts to consumers;
  • The Credit Services Organizations Act, prohibiting unlicensed parties from acting as “debt settlement providers” or accepting illegal fees; and
  • The Debt Settlement Consumer Protection Act, prohibiting parties from accepting upfront payment for debt relief services.

The lawsuits seek injunctive and non-monetary relief in the form of permanent injunctions against each defendant and a rescission of all contracts with Illinois residents.  The AG is also pursuing a variety of monetary damages and penalties, including restitution, costs of prosecution and investigation, and civil penalties of $50,000 for each statutory violation with additional penalties for those conducted with the intent to defraud or perpetrated against elderly victims.


DOJ Obtains Settlement In FHA False Claims Act Case

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.


SDNY Rejects SEC’s Proposed Alternative Service For Two Chinese Nationals

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.


DOJ Secures Jury Verdict In First GSE Civil Fraud Suit

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.


Southern District of New York Endorses Use of FIRREA in Mortgage Fraud Cases

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.


RMBS Task Force Announces New Suits Over Sale of Jumbo Prime RMBS

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.


Senate Confirms Anthony West as Associate Attorney General

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.


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.


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 Read more…


Special Alert: DOJ Increasingly Pursuing Monetary and Non-Monetary Relief in Civil Enforcement Actions

Government Enforcement Attorney Andrew Schilling

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.”

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