Questions Linger: Is Fraud on Freddie and Fannie Fraud on the Government

 

This guest post was authored by our colleague Priya Roy, an associate in the firm’s Litigation Department and member of its Data Privacy and Cybersecurity practice group. Priya focuses her practice in the areas of higher education and white collar and government investigations. She also serves an editor of the firm’s Data Privacy Alert blog, which focuses on data privacy and cybersecurity issues.

In the wake of the mortgage crisis, there has been an uptick in False Claims Act (“FCA”) claims against banks, lenders, and mortgage servicers based on loans involving Government Sponsored Enterprises (“GSE”) such as Freddie Mac and Fannie Mae.  Yet on February 22, 2016, the Ninth Circuit rejected claims against certain financial institutions arising out of allegedly false representations and warranties made in seller / services contracts with Freddie Mac and Fannie Mae, holding that Fannie and Freddie were not governmental instrumentalities for purposes of the FCA.  United States ex rel. Adams v. Aurora Loan Servs., Inc., 2016 WL 697771 (9th Cir. Feb. 22, 2016).  The court, however, refused to take a bright line rule that GSEs could never be governmental instrumentalities.  The opinion nonetheless sheds light on the scope of the FCA in cases involving GSEs.

The FCA is the government’s primary tool to recover damages for fraud involving government funds. Importantly, the FCA has a qui tam mechanism that allows citizens who purport to have evidence of fraud against the government contracts and programs to sue on the government’s behalf. Such qui tam plaintiffs are called “Relators,” and stand to be awarded between fifteen to twenty-five percent of the ultimate recovery in the case.  The government has the right to intervene in the proceedings.  Even if the government declines intervention, the Relator may proceed with the action.

In Adams, the Relator asserted that servicer defendants violated the FCA when they falsely certified to the GSEs that they were in compliance with their seller/servicer agreements and representations when they were not.  Further, he alleges that servicers caused the GSEs to pay for certain homeowner association assessments and charges for which the GSEs are not liable.

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DOJ Hopes to Prosecute More Criminal Cases Arising Out of False Claims Acts

On Wednesday, Assistant Attorney General for the Criminal Division Leslie R. Caldwell spoke at the Taxpayers Against Fraud Education Fund annual conference in Washington D.C., and announced that the DOJ is closely examining civil False Claims Act lawsuits in order to find possible criminal cases. The DOJ published Caldwell’s remarks from the conference, run by a well-known nonprofit. If you represent government contractors, hospitals, other health care industry individuals and entities, or others involved in government programs, take note of this development and advise your clients accordingly.

Ms. Caldwell said that:

Today, I want to announce that we will be stepping up our use of one tool, and that is the fine work done by all of you in investigating and filing cases under the False Claims Act.

Through our Fraud Section, we will be committing more resources to this vital area, so that we can move swiftly and effectively to combat major fraud involving government programs.

(emphasis added).

She asked the audience, mostly members of the Plaintiff’s bar, to contact DOJ Criminal Division “[w]hen you are thinking of filing a qui tam case that alleges conduct that potentially could be criminal, I encourage you to consider reaching out to criminal authorities, just as you now do with our civil counterparts in the department and the U.S. Attorney’s Offices.” She noted that the DOJ Criminal Division has “unparalleled experience prosecuting health care fraud, procurement fraud, and financial fraud” and that they “will bring that expertise to bear by increasing our commitment to criminal investigations and prosecutions that stem from allegations in False Claims Act lawsuits.”

Ms. Caldwell emphasized all of the resources available to criminal prosecutors that might not be available to other enforcement agencies, including search warrants and wiretaps, consensual recordings, confidential informants.”

The announcement of the DOJ’s goal combined with attempts to streamline the referral process internally has many possible ramifications for white collar practitioners. First and foremost, if your client is facing exposure under the False Claims Act, be aware that the DOJ may be combing through the relators complaint to see if the alleged conduct raises criminal concerns or even working directly with the qui tam plaintiff’s lawyer who filed the civil suit. And if the DOJ Criminal Division does take notice and start investigating, the negotiations will inevitably shift from minimizing the financial penalties to avoiding criminal charges at all. The bottom line is that the DOJ has effectively upped its ability to collect much more in fines with the new threat of criminal prosecutions.