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.