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.

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. Read more…

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.

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.

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).

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.

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.

The Evolution of False Claims Act and FIRREA Enforcement

BuckleySandler LLP will host a webinar on Friday, November 16, 2012, from 1:00 – 2:15 PM ET, focused on the Government’s most recent financial fraud enforcement actions, an overview of recent False Claims Act (FCA) cases and the Government’s increasing use of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), and what this means for financial institutions that do business with the Government, Government-Sponsored Enterprises (GSEs), and other recipients of federal funds.

BuckleySandler attorneys Andrew Sandler, Andrew Schilling, Matthew Previn, and Michelle Rogers will cover:

• A summary of recent enforcement actions by the DOJ, including the U.S. Attorney’s Office for the Southern District of New York’s (SDNY) use and expansion of      FCA and FIRREA.
• Understanding what the SDNY’s most recent lawsuits mean for the industry.
• Challenges facing financial services companies who do business with the Government and the GSEs.
• Predictions about where the Government may go from here.

This webinar will be of particular interest to in-house legal, compliance, and risk management personnel at banks and other financial services providers that do business with the Government, GSEs and other recipients of federal funds. Please no outside law firms, government agency personnel, consulting firms, or media. After registering and being approved, you will receive a confirmation email containing instructions for joining the webinar. Click here to register.

The CFPB: Investigations and Enforcement Actions in Focus

On Thursday, December 6, 2012 from 2:00-3:15 PM E, BuckleySandler LLP will host a webinar to discuss the CFPB’s rules governing investigations, enforcement actions, and adjudications. BuckleySandler attorneys Jeff Naimon, Jonice Gray Tucker, and Lori Sommerfield,  also will discuss themes prevalent in the first three public enforcement actions undertaken by the CFPB, all of which were predicated, in part, on allegations of unfair and deceptive practices.

This webinar will be of particular interest to in-house legal, compliance, and risk management personnel at banks and other financial services providers subject to CFPB oversight. Please no outside law firms, government agency personnel, consulting firms, or media. After registering and being approved, you will receive a confirmation email containing instructions for joining the webinar. Click here to register.

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.

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. Read more…

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.

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.

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.