Fraud in connection with receipt of federal bailout funds held to be actionable under the False Claims Act
The Second Circuit Court of Appeals has ruled in favor of two financial sector qui tam whistleblowers, reviving their claims under the False Claims Act that Wells Fargo lied about its financial condition in order to get billions of dollars in low-interest emergency bailout funds from regional Federal Reserve Banks during the Financial Crisis.
The whistleblowers–who were former employees of Wells Fargo–alleged that the financial institution falsely certified that it was adequately capitalized and in compliance with applicable banking and mortgage lending laws when it requested billions of dollars in emergency loans from the Fed’s Discount Window and Term Auction Facility. As a result, it could get interest rates on the borrowed funds that were much lower than those for which it would otherwise have qualified.
In May 2018, District Judge Brian M. Cogan dismissed the lawsuit, reasoning that Federal Reserve Bank officials to whom Wells Fargo’s false certifications of eligibility for the bailouts were presented were not “officers,” “employees” or “agents” of the United States within the meaning of the False Claims Act because such banks are nominally “independent” of the federal government. Frauds against private parties are generally not actionable under the False Claims Act.
However, in United States v. Wells Fargo & Co., the Second Circuit reversed, holding that Federal Reserve Bank personnel were, in fact, “agents” of the United States within the meaning of the False Claims Act because they acted on behalf of the Government in extending the emergency bailout credit to financial institutions such as Wells Fargo. Such lending, the court pointed out, was not for the benefit of the Federal Reserve Banks’ nominal shareholders, i.e., private member banks. Rather, the profits accrued to the United States Treasury to which the Federal Reserve Banks remit their excess earnings. “Fraud during a national emergency against entities established by the government to address that emergency by lending or spending billions of dollars is precisely the sort of fraud that Congress meant to deter when it enacted the FCA,” the court stated.
The court also held that Wells Fargo’s applications for bailout funds comprised “claims” under the 2009 amendments to the False Claims Act. Prior to those amendments, false claims for payment had to be presented to the government itself for there to be liability. The amendments, however, expanded the definition of “claim” to include requests for payment made to a “contractor, grantee, or other recipient” of federal funds if the money is “to be spent or used on the Government’s behalf or to advance a Government program or interest.” The court found that Wells Fargo’s bailout applications fell squarely within this amended definition of an actionable “claim.”
Source of emergency loans was the United States
Notably, Wells Fargo argued that its conduct did not violate the False Claims Act because the money it received came not from the U.S. Treasury, but was instead “base money” created by the Federal Reserve Banks ex nihilo (out of nothing) under authority conferred on them by Congress under its Constitutional power to coin money. The court rejected this and ruled that the False Claims Act was implicated because “the United States is the source of the purchasing power conferred on the banks when they borrow from the Fed’s emergency lending facilities.”
Potentially large qui tam awards
The case is now back in the district court where the whistleblowers stand to win potentially large qui tam awards. The False Claims Act imposes substantial liability–three times damages, plus penalties–on parties that knowingly overcharge (or underpay) the U.S. government. By statute, qui tam whistleblowers are entitled to awards of 15-30% of any recovery resulting from their claims.
The claims against Wells Fargo show how, under certain circumstances, financial industry whistleblowers may bring claims under the False Claims Act and are not relegated to simply filing an SEC whistleblower claim. The False Claims Act has certain advantages over the SEC Whistleblower Program–principally, that, under the False Claims Act, if the Government declines to intervene in the case, as it did in the Wells Fargo matter, the whistleblower can still pursue the claims and, if successful, win a qui tam whistleblower award. That option is not available under the SEC Whistleblower Program, where, if the SEC decides against pursuing it, the matter is over.
On the other hand, whistleblowers who submit tips to the SEC Whistleblower Program have the advantage of being able to do so anonymously. In comparison, the identities of qui tam whistleblowers under the False Claims Act ultimately become public once the matter is unsealed.
The legal territory in this field is complex, which is why potential financial sector whistleblowers should always engage experienced whistleblower lawyer to help explore the pros and cons and determine how best to proceed with their claims.
Contact an experienced whistleblower lawyer
If you work in the financial sector and have evidence of fraud against the government–involving bailout or relief funds or otherwise–contact whistleblower lawyer Mark A. Strauss for a free and confidential consultation.