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.

Continue reading

Texas Attorney General Ken Paxton Indicted

Last Tuesday, a Texas grand jury indicted 52-year-old Texas Attorney General Ken Paxton on three counts of securities fraud. Paxton, sworn in on January 1, 2015, was previously a member of the Texas House of Representatives. The alleged illegal conduct arose while he was a member of the legislature and a private lawyer, and is connected to Paxton’s work soliciting clients and investors on behalf of two companies.

Yesterday morning, Paxton surrendered at the Collin County Jail to be booked. Bail was set at $35,000, and Paxton posted bond and was released. Paxton has been charged with two counts of securities fraud more than or equal to $100,000, a first-degree felony, and one count of failure to register with the state securities board as an investment advisor, a third-degree felony. In an ironic twist, as a state representative in 2003, Paxton voted in favor of changing Texas law to make it a felony for investment agents to fail to register. In Texas, a first-degree felony can result in 5 to 99 years in prison and a third-degree felony carries a possible range of punishment of 2 to 10 years.

The two counts of fraud Paxton committed according to the indictment occurred when Paxton sold more than $100,000 in stock to fellow Texas state representative Byron Cook and Florida businessman Joel Hochberg without revealing that he would make a profit from their investment. He also allegedly failed to disclose that he had already been compensated with 100,000 shares of the company and that he had not put any of his own money into the company. Commentators have already deemed these charges an “uphill battle” for the prosecution because fraudulent omission cases are more difficult to prove than fraudulent misrepresentation in securities cases: the facts will have to show that “information [Paxton] kept from clients during his time as an investment adviser was important enough to constitute a criminal omission.”

Last May, Paxton acknowledged the underlying conduct at issue for the third charge, failure to register, and admitted to the Texas State Securities Board that he had solicited clients for Mowery Capital Management (“MCM”) without abiding by the law requiring state registration. Paxton might have a harder time fighting this charge because of this admission. (As the New York Times has pointed out in yet another ironic twist, Paxton’s Attorney General website informs consumers that a “common theme of investment scammers” is that they are “not likely to be registered” with the Board.) The Texas State Securities Board disciplined him because he acted as an “investment advisor.” Paxton was reprimanded, paid a civil fine of $1,000, and called it an administrative error. The Texas State Securities Board order states that, “Respondent was compensated by MCM for each solicitation resulting in a client relationship with MCM. Specifically, MCM agreed to pay Respondent 30 percent of asset management fees collected by MCM from each client that Respondent solicited successfully.”

Despite the discipline action, the Texas State Securities Board did not refer Paxton for criminal charges. Texans for Public Justice, the same watchdog group that filed a complaint against former Texas Governor and current presidential candidate Rick Perry (who is currently still facing one felony count) deemed the Securities Board’s punishment insufficient and requested a criminal investigation. After the Travis County District Attorney referred the Paxton case to Collin County (where the alleged acts took place), Collin County District Attorney Greg Willis recused himself. Houston defense attorneys Brian Wice and Kent Schaffer were appointed as special prosecutors on the case, and a Texas Rangers investigation followed. Wice is well-known for representing former Republican House Majority Leader Tom DeLay, and securing a reversal of Delay’s conviction for violating Texas campaign-finance laws.

As the cases against now second-time Republican Presidential candidate Perry and former Majority Leader DeLay demonstrate, Texas politics can be hardball. In fact, Paxton has joined a long list of Texas politicians who have faced criminal charges. Our blog will keep you posted on the case.

Fourth Circuit’s “Official Act”: Former Virginia Governor McDonnell’s Appeal Rejected

This guest post was authored by Ernest Holtzheimer, a summer associate with Montgomery McCracken.

Earlier today, a three-judge panel of the 4th U.S. Circuit Court of Appeals unanimously upheld the conviction of former Virginia Governor Bob McDonnell on public corruption charges. We’ve previously blogged about how McDonnell’s public corruption conviction ended with a sentence of two years in prison for taking lavish gifts in return for helping a dietary supplement executive win business. On appeal, the former governor argued that the court’s jury instructions defined “official acts” too broadly such that “it would seem to encompass virtually any action a public official might take while in office.” McDonnell gained bipartisan support for this argument, with amici briefs signed by 44 former state attorneys general, two former U.S. attorneys general, attorneys for the past five presidents, the Republican Governors Association and prominent legal scholars. McDonnell also argued inter alia that the evidence against him was insufficient, that his trial should have been severed from his wife’s, and that the judge’s questioning of prospective jurors was insufficient given the pretrial publicity.The Court disagreed and found that the government evidence “demonstrated a close relationship between official acts and the money, loans, gifts and favors.” The court said that, “the jury could readily infer that there were multiple quid pro quo payments, and that (McDonnell) acted in the absence of good faith and with the necessary corrupt intent.” Judge Stephanie Thacker wrote the opinion for the court and stated that the former governor “failed to sustain his heavy burden of showing that the Government’s evidence was inadequate.” The Court concluded that McDonnell “received a fair trial and was duly convicted by a jury of his fellow Virginians.”

Given the prominence of former Governor McDonnell, the case has garnered significant media attention. The legal significance, however, may prove to be much more lasting, as the Court clarified – or, perhaps, expanded – the scope of what is an “official act” and the proper “quid pro quo” jury instruction.

 

General Petraeus Avoids Jail for Leaking Classified Information to Girlfriend

David PetraeusYesterday, former CIA head and retired General David H. Petraeus was sentenced for leaking classified information about the war in Afghanistan to his biographer/mistress, Paula Broadwell. Broadwell published a biography about him in 2012, “All In: The Education of David Petraeus,” before the affair was exposed. The Charlotte Observer wrote that “[w]ithout the weight and gravitas of his military uniform, the former military icon seemed every bit the white-collar criminal suspect as he passed through a media gauntlet on his way into the courthouse.” Judge David Kessler sentenced him to two years of probation and a $100,000 fine—more than double to the $40,000 he agreed to— as part of his plea deal for one federal misdemeanor count of unauthorized removal and retention of classified material. He faced up to one year in prison for this charge, and Judge Kessler said he increased the fine to “reflect seriousness of the offense.” Before sentencing, General Petraeus apologized for the pain his actions have caused and afterwards proclaimed that “[t]oday marks the end of a two-and-a-half-year ordeal” and that he looks “forward to moving on with the next phase of my life.” General Petreaus, who is now 62, resigned from the CIA after the affair became public.

According to the government, General Petreaus gave Broadwell eight binders of classified material he kept from his time as top military commander in Afghanistan. Some of the information contained in these binders included names of covert operatives, the coalition war strategy, and notes about General Petraeus’ discussions with President Barack Obama. Later, the FBI seized the binders from General Petraeus’ home in Arlington, Virginia, home. General Petraeus resigned from the CIA in November 2012, and signed a form that stated he had no classified material. This and the statements he told FBI agents denying that he gave Broadwell information were documented in court documents. Court documents also reference an email where General Petraeus promises to give the books to Broadwell.

Judge Kessler saw this as a just sentence for what appeared to be an aberration in an otherwise remarkable life. Judge Kessler noted that General Petreaus’ criminal conduct was “in stark contrast to 37 years of achievement.” The sentencing yesterday was the culmination of what the New York Times deemed “a spectacular fall” from grace for General Petreaus, a man once considered as a possible presidential candidate.

Former First Lady of Virginia Sentenced: Did Husband’s “Throw Momma Off the Train” Approach Work?

Photo: Associated Press

Readers of the White Collar Alert know that we have been closely following the downward spiral of former Virginia Governor Bob McDonnell and his wife Maureen McDonnell after their ill-fated relationship with Virginia businessman, Jonnie R. Williams Sr. Maureen McDonnell was convicted of eight counts of corruption and one count of obstruction of justice, but then acquitted on the obstruction charge after Judge Spencer found that there was insufficient evidence.  Judge Spencer sentenced her to 12 months and 1 day in prison.

Her husband was sentenced on January 6, 2015 to two years in prison, which we noted was a significant victory for the defense, considering the fact that it was a large reduction from the 10 to 12 year sentence recommended by the U.S. Probation Office and the 6 to 8 year sentence that the Court calculated using the Sentencing Guidelines. Mr. McDonnell was convicted of 11 counts of corruption as well as one count of making a false statement. In Mrs. McDonnell’s case, the prosecutors sought a total of 18 months in prison (despite a possible range of up to 6 1/2 years) while the defense requested a probationary sentence with community service.

So what could have prompted Judge Spencer to mostly follow the prosecutor’s request for a sentence of incarceration when the defense presented a strong case for probation? Especially in light of his substantial downward departure for her husband, it wasn’t out of the question that he could have decided that a very lenient sentence would be sufficient here: Mrs. McDonnell was being sentenced on 4 fewer counts, and Justice Spencer acknowledged at her husband’s sentencing that “while Mrs. McDonnell may have allowed the serpent into the mansion, the governor knowingly let him into his personal and business affairs.”

Today was the first time the public heard extensively from Mrs. McDonnell, who was tearful and at one point said “I am the one who opened the door and I blame no one but myself.” She also thanked Judge Spencer for “showing mercy to my husband.” Mr. McDonnell was present in the courtroom but remained quiet, a stark contrast to his earlier behavior. During the trial, he spent approximately 24 hours on the witness stand and explained in detail how his marriage was broken, how his wife sought attention from Jonnie R. Williams Sr., and he claimed to be clueless about many of his wife’s actions.

Judge Spencer acknowledged that Mr. McDonnell’s attorneys had presented a “let’s throw momma under the bus defense” at trial and that his sentencing had also focused on “throw[ing] momma off the train.” Despite recognizing Mr. McDonnell’s improper deflection of culpability, however, Judge Spencer said that he did not want to allow a wide disparity between Mr. and Mrs. McDonnells’ sentences because there was “joint criminal behavior.” It is impossible to ever know just how much her husband’s extensive and detailed testimony against her contributed to the Judge’s sentencing decision today. But I can’t help wondering what both of their respective sentences might have been had Mr. McDonnell not given such testimony that painted his wife in a very harsh light.

Britain’s Serious Fraud Office Secures First Convictions Under Bribery Act

Last Friday, news came from across the Atlantic that Britain’s Serious Fraud Office (“SFO”) had successfully obtained its first series of convictions under the UK’s Bribery Act of 2010 (the “Bribery Act”), which became effective in July 2011.

The SFO reported that a jury had found three men – Gary Lloyd West, former chief commercial officer at Sustainable AgroEnergy PLC, James Brunel Whale, former CEO of Sustainable Growth Group, and Stuart John Stone, a financial products sales director with SJ Stone Ltd. – guilty of numerous charges, including giving and receiving bribes in violation of the Bribery Act, stemming from their fraudulent promotion and sale of bio-fuel investment products to UK investors between April 2011 and February 2012. The scheme involved more than 250 investors, many of whom were duped into investing life savings and pension funds, and resulted in losses of over £23 million (approximately $36 million). Pete Brusch, “Britain Secures 1st Sentences Under 2010 Anti-Bribery Law,” Law 360 (Dec. 8, 2014); Carolyn Cohn and Kristin Ridley, “SFO Nails Its First Convictions Under New Bribery Laws,” Reuters (Dec. 8, 2014).

Though these first convictions are of individuals, not a corporation, and are related to a “good old fashioned boiler room fraud scheme,” not the “exotic” bribery of a foreign official by a “corporate fat cat[] … in the City of London,” Barry Vitou and Richard Kovalevsky Q.C., “Christmas Comes Early: SFO Scores 1st Bribery Act Convictions, at thebriberyact.com, they are seen as an important step forward in demonstrating the SFO’s ability to police the Bribery Act, which has been called “one of the world’s toughest anti-corruption laws.” Cohn and Ridley, supra.

Indeed, though US companies are rightly focused on ensuring compliance with the Foreign Corrupt Practices Act (“FCPA”), the Bribery Act has even wider application – and implications – of which companies must be aware if they conduct part of their business in the UK. For example:

  • Though Section 6 of the Bribery Act mirrors the FCPA in that it prohibits bribing a public official, unlike the FCPA:
    • there is no requirement for a “corrupt” or “improper” intent;
    • there is no exemption for facilitation payments (i.e., payments to a foreign official to expedite or secure the performance of a routine, on-discretionary government action); and
    • there is no defense for promotional expenses.
  • Further, unlike the FCPA, the Bribery Act reaches exchanges with private businesses and nongovernmental entities. Section 1 of the Act prohibits active bribery (i.e., the giving of a bribe) to any person (not just a foreign public official) to induce them to act “improperly,” and Section 2 prohibits passive bribery (i.e., the receipt of a bribe). (These were the sections under which West and Stone were convicted.)
  • Additionally, while a company may be vicariously liable for acts of its employees or agents under the FCPA, under Section 7 of the Bribery Act, a UK company or a company doing business in the UK may be held strictly liable for “failure to prevent bribery.” A “failure to prevent bribery” occurs when a company fails to institute “adequate procedures” to prevent “associated persons” from engaging in active bribery (i.e., Sections 1 and 6 of the Act) or passive bribery (Section 2).
    • It should also be noted that the head of the SFO, David Green, is seeking an amendment which would expand the breadth of Section 7, imposing strict liability on corporations for not only failing to prevent bribery, but also for failing to prevent “acts of financial crime by its employees.”
  • Under the FCPA an individual faces up to 5 years’ imprisonment and a $250,000 fine, and companies face fines of up to $2 million, per violation. In contrast, an individual convicted of a Bribery Act offense faces up to 10 years’ imprisonment, an unlimited fine and confiscation of assets. (West and Stone were sentenced to 4 years and 6 years, respectively, for their Bribery Act offenses.)

It remains to be seen whether the SFO will charge or successfully prosecute a company for violation of the Bribery Act. Despite this, it remains imperative for companies to have a proper understanding of bribery and corruption issues and laws, and how they can take steps to prevent themselves from being subject to such investigations.

Companies with questions regarding the FCPA, the Bribery Act, the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and/or other related legislation, or seeking guidance in drafting or instituting anti-bribery compliance programs should contact a member of MMWR’s White Collar and Government Investigations practice group.

Justice Department’s Integrity Section Scores a Win in McDonnell Case: Gov. McDonnell Should Have Accepted the Plea Deal Because the Broken Marriage Defense Didn’t Work

More than two years after the Justice Department Public Integrity Section’s embarrassing fumble in the campaign finance trial that didn’t result in a conviction against former U.S. Senator John Edwards, the section successfully prosecuted former Virginia Gov. Bob McDonnell (a onetime Republican rising star who was considered for the 2012 vice-presidential nomination) and wife Maureen McDonnell. The Edwards trial was one of many missteps that led to a wave of bad publicity for the DOJ Section. But yesterday, a jury found former governor Bob McDonnell guilty of 11 corruption-related counts, and his wife of 8 corruption-related counts and one count of an obstruction of justice in a case that arose from accepting gifts from a wealthy businessman. He was acquitted of lying on loan documents, and she was acquitted of falsifying a bank record.

We’ve previously blogged about the trial here. At trial, lawyers for the McDonnells argued that their marriage was too broken for them to conspire. This simply wasn’t enough for the jury. The prosecutors vigorously attacked this defense (at one point showing pictures of the McDonnells arriving at court holding hands earlier this year to the jury) and paraded the evidence of all the lavish presents received by the couple.

Now that we have all become familiar with the dysfunctional marital dynamics of the couple, and both face years in jail, I’m sure the former governor is ruing his decision to reject what now seems like an incredibly good deal: plead guilty to one felony fraud charge that had nothing to do with corruption in office and his wife would not be charged at all. However, the cliché that hindsight is 20/20 is usually appropriate with decisions to reject plea deals and go to trial. Because sometimes, even when it seems as though all evidence points to guilty, a jury will not convict. 

The Gov. Rick Perry Indictment: Another Weak Case that Shouldn’t Have Been Charged

The news outlets exploded this weekend with commentary on the Gov. Rick Perry indictment, and the criticism was fast and swift to deem it a very weak case. On Friday, Perry was indicted on two felony counts that arose from his decision to veto state funds for a district attorney who had been caught drunk driving but refused to resign. The felony charges include possible penalties of over 100 years in jail. Perry has called the indictment a farce and has promised to “explore every legal avenue” to fight the charges.

For those outside the realm of the legal sector, it probably seemed surprising that such paltry facts could result in serious charges with serious penalties. For those within the white collar field, it constitutes a shoulder shrug. How often do we see cases that should have been nipped in the early investigatory stages after the evidence didn’t fully support criminal activity but instead was referred to a grand jury for an even closer look? And, sadly, once a case is charged that shouldn’t have been charged, it is often a very long road to reveal the truth.

Public Officials: Don’t Drive the Ferrari and Don’t Take the Rolex

combinedWhether or not prosecutors will prove the 14 count indictment against former Governor Bob McDonnell of Virginia and his wife, Maureen, remains to be seen. The public corruption trial is currently into the second week, and the New York Times has described the evidence as “a parade of embarrassments.” Federal prosecutors need to prove that McDonnell and his wife, who received more than more than $150,000 in designer goods and large loans from wealthy businessman Jonnie R. Williams did so in exchange for currying favors from the governor’s office.

One crucial barrier to convict the McDonnells on this quid pro quo is the fact that under Virginia’s ethics laws at the time, there were no limits on gifts an official could accept. The Washington Post has slammed Virginia state legislators for failing to take decisive action to change the laws after the McDonnell indictment was released:

When the McDonnells’ tawdry scandal burst into the headlines last year, leaders of the General Assembly gave scant thought to convening a special session to address the state’s Swiss cheese ethics laws. And even after the stunning revelations contained in the federal indictment of the McDonnells emerged in January, the legislature took a minimalist approach, leaving Virginia’s rules on gifts and disclosures riddled with enormous loopholes.

Even if the McDonnells prevail at trial, and dodge conviction, the dirty laundry aired in this case will float around them for the rest of their lives. And even if these alleged acts aren’t proven to be criminal, they still don’t pass the sniff test. So, if you are an elected official, please don’t drive the Ferrari and don’t take the Rolex. It could save you—and the taxpayers—a lot of trouble down the road.

Managing an Environmental Enforcement Investigation

Although environmental prosecution is not a new trend, criminal enforcement of environmental laws is on the rise.  The recent expansion of tools and referral mechanisms to support a heightened level of criminal enforcement have led to prosecutorial success as the detection of wrongdoing is becoming much easier. And while not all criminal investigations result in criminal charges, the cost of a mishandled investigation can be catastrophic.  Rather than waiting for the government to show up at your door, it is imperative for corporations to plan for environmental enforcement investigations.

Carrie and I recently teamed up with Tim Bergère, chair of Montgomery McCracken’s environmental practice, to write an article on how to plan for and effectively handle an environmental enforcement investigation.

Please read the full article here.