Wells Fargo Strikes Out: Court Denies Motion to Enforce Consent Judgment to Stop SDNY False Claims Act Case

In November 2012, I wrote about the False Clams Act suit brought by the U.S Attorney for the Southern District of New York (SDNY) against Wells Fargo Bank, N.A. The SDNY case alleged that while participating in the Federal Housing Administration (FHA) Direct Endorsement Lender Program, Wells Fargo falsely certified thousands of loans to be eligible for FHA insurance and that as a result of Wells Fargo’s false certifications, the FHA paid hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted.  U.S. v. Wells Fargo Bank N.A.,12-cv-7527, U.S. District Court, Southern District of New York

In April 2012 Wells Fargo previously settled with the U.S. Department of Justice (DOJ) and 49 states who together had sued Wells Fargo and other banks in D.C. District Court alleging that these banks engaged in abusive foreclosure practices. In settling that matter, Wells Fargo paid $5 billion and obtained a broad written release as part of a Consent judgement. When the SDNY filed suit against Wells Fargo in November 2012, the Company moved to enforce the Consent Judgment and release contained therein to "preclude" the SDNY from bringing its False Claims Act suit against Wells Fargo.

Yesterday, the D.C. District Court denied Wells Fargo's motion in an opinion found here:
United States et al., v. Wells Fargo et al., Civ. No. 12-361 (D.C. 2/12/13). While it brushed aside the DOJ's arguments that the Court lacked jurisdiction or that the abstention doctrine barred any injunction sought by Wells Fargo, the Court found that by its very terms the release did not stop the SDNY suit. Essentially, the Court found that the Consent Judgement released False Claims Act and FIRREA claims where the "sole basis" for such claims is that [Wells Fargo] submitted to HUD-FHA a false or fraudulent annual certification that the mortgagee had conformed to all HUD-FHA regulations necessary to maintain its HUD-FHA approval. Annual certifications, the Court observed, dealt with Wells Fargo's "company wide compliance." The Consent Judgment release also covered false individual loan certifications by Wells Fargo for HUD mortgage insurance but only if the individual loan did not contain a material violation of HUD-FHA requirements.  In short, the release precluded the DOJ from seeking to bring False Claims Act claims against Wells Fargo for claims based solely on false or fraudulent annual certifications --for individual loans, however, that was another matter and the release did not cover this retail type fraud.

Having interpreted the scope of the release, the Court refused to preclude or enjoin the SDNY case but it left open the question of whether the release could still be applied to portions of the SDNY case, observing that it "leaves the interpretation of the SDNY Amended Complaint to the court that has jurisdiction over it."

A. Brian Albritton
February 13, 2013

Wells Fargo Seeks to Enforce Forclosure Settlement and Stop Government False Claims Act Suit

In October of this year, the U.S. Attorney for the Southern District of New York (SDNY) sued Wells Fargo Bank, N.A. pursuant to the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). In the suit, the government alleged that for 10 years while participating in the Federal Housing Administration (“FHA”) Direct Endorsement Lender Program, Wells Fargo falsely certified thousands of loans to be eligible for FHA insurance and that as a result of Wells Fargo’s false certifications, “FHA has paid hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted.” Specifically, the suit alleges that “between May 2001 and October 2005 . . . . . although Wells Fargo certified to Housing and Urban Development (HUD) that its retail FHA loans met HUD’s requirements for proper origination and underwriting, and were therefore eligible for FHA insurance, the bank knew that a very substantial percentage of those loans – nearly half in certain months – had not been properly underwritten, contained unacceptable risk, did not meet HUD’s requirements, and were ineligible for FHA insurance.  . . . . . The extremely poor quality of Wells Fargo loans was a function of management’s nearly singular focus on increasing the volume of FHA originations – and the bank’s profits – rather than on the quality of the loans being originated." According to the Complaint, the bank further compounded its misconduct by failing to comply with HUD self reporting requirements and reporting only 300 of the 6,558 “seriously deficient loans that it was required to report.” The case is U.S. v. Wells Fargo Bank N.A.,12-cv-7527, U.S. District Court, Southern District of New York, and a copy of the complaint is found here.

In an interesting twist just last week, Wells Fargo sought to forestall the SDNY’s False Claims Act case by filing a Motion to Enforce Consent Judgment in a case previously brought by the Department of Justice and 49 attorneys general against Wells Fargo and other banks alleging abusive foreclosure practices. That case was settled in April of this year, and Wells Fargo reported that it “committed over $5 billion and, in exchange, obtained a broad written release which the court entered as part of its Consent Judgment. According to Wells Fargo, the release provided, among other things, that the government “cannot bring a claim against Wells Fargo based on conduct covered by Wells Fargo’s annual certifications to HUD regarding its FHA program participation, such as conduct related to Wells Fargo’s quality control (including self-reporting), underwriting, and due diligence programs,” which would include the conduct at issue in the New York case. The Motion argues that the government violated the terms of its settlement by filing the False Claims Act suit against it. Wells Fargo filed its Motion in U.S. v. Bank of America Corp., et al., 12- cv-00361 (U.S. District Court, District of Columbia). A copy of the motion and memorandum authored in part by Douglas Baruch of Fried, Frank are found here and here.

 

A. Brian Albritton

November 13, 2012