Spectre at the feast: Post-Crash False Claims Act Enforcement Looms Over Large Banks and the Paycheck Protection Program

Recently, I was reading the Washington Post’s Finance 202 Newsletter about the Small Business Administration’s Paycheck Protection Program (PPP). Right next to the article was an ad from a plaintiff’s law firm soliciting whistleblowers to report fraud. Such advertisements are just a small reminder that whistleblower firms are looking for opportunities to bring False Claims Act cases in connection with the more than $2 trillion in government aid being dispersed in the Coronavirus Aid, Relief, and Economic Security Act.

While banks are making most of the PPP loans, some large banks are especially sensitive to the down-the-road threat from False Claims Act (FCA) and Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) suits. The Washington Post reports that several large banks were concerned that they may later face lawsuits for their loans from whistleblowers or the U.S. Department of Justice (DOJ). As a result, these banks were either not participating in the program or were being “extra diligent,” which delayed the dispersal of the loans. Sen. Marco Rubio, one of the chief sponsors of the program, complained on Twitter that “some banks were putting crazy restrictions on who could apply for a loan through the program.”

The reluctance of some large banks to participate in the PPP or to quickly process these loans stems from the numerous FCA and FIRREA suits brought against them after the 2008 financial crash. According to the Washington Post, large banks remember all too well how the DOJ sued numerous large banks for allegedly failing to strictly enforce standards for mortgage loans either insured by the Federal Housing Administration (FHA) or which were later bought by Fannie Mae or Freddie Mac. Those suits led to settlements in the billions of dollars. Bank of America, for example, settled for $9.65 billion and provided an additional $7 billion in consumer relief. Citibank and JP Morgan Chase settled for $7 billion and $13 billion, respectively, in combined payments and consumer relief. Many of these suits turned on a “false certification” theory of liability, whereby the banks were accused of falsely certifying their compliance with mortgage loan underwriting standards.

The present-day reluctance of lenders to issue federally backed loans or to participate in federal loan programs due to FCA and FIRREA exposure should not be a surprise. Secretary of U.S. Department of Housing and Urban Development (HUD), Ben Carson, noted last year that depository banks previously issued almost 50 percent of all FHA loans, but “that number is down to less than 15 percent.” The DOJ, Carson explained, was “so vigorous” in its pursuit of banks who issued FHA loans for alleged fraud that “they basically drove them away because, in many cases, the banks had been involved in some version minor, non-material defect in the process and were slammed with enormous fines and suspension.” To entice these lenders to return to the FHA lending program, HUD recently entered into a “memorandum of understanding” with the DOJ that provides for “prudential guidance on the appropriate use” of the FCA for violations by lenders. Along with the agreement, HUD recently unveiled a new certification that “limits the banks’ liabilities for some loan errors.”

Like the broad certifications of compliance formerly required by banks for FHA loans, lenders issuing PPP loans also make broad certifications and representations, including:

·     For purpose of making covered loans, the lender is responsible, to the extent set forth in the PPP loan requirements, for all decisions concerning the eligibility (including size) of a borrower for a covered loan.

·    By making any demand that SBA purchase the guaranteed portion of a loan, the lender will be deemed thereby to certify that the covered loan has been made, closed, serviced and liquidated in compliance with the PPP.

·     The lender consents to all rights and remedies available to the SBA under the Small Business Act, the PPP and its Loan Program Requirements, as each of those are amended from time to time, and any other applicable law.

·     To the best of its knowledge, the lender certifies that it is in compliance and will maintain compliance with all applicable requirements of the PPP and its Loan Program Requirements.

·     Certification that “all representations made are true and correct” that “any false statements made to the U.S. Small Business Administration and the Department of Treasury can result in . . . imposition of civil monetary penalties under 31 USC 3729 [of the FCA].

The Washington Post quoted a senior SBA official who was frustrated with how slow the banks had been to help small businesses as saying, “There really is no risk to the banks.” Also, the SBA and U.S. Department of the Treasury issued an Interim Final Rule as well as a set of answers to Frequently Asked Questions, in which they state that the “U.S. government will not challenge lender PPP actions that conform to this guidance.” But as a recent Wall Street Journal editorial pointed out, “This [statement]was followed with a footnote: ‘This document does not carry the force and effect of law independent of the statute and regulations on which it is based.’ In other words, trust Treasury guidance at your own risk.” Such skepticism is well taken. The DOJ’s own Brand Memo prohibits converting “agency guidance documents into binding rules.” Perhaps in the short term as the country wrestles with the COVID-19 crisis, the DOJ will follow Treasury’s guidance, which claims to apply to all U.S. departments and agencies. But does that apply to regulators who may seek to bring FCA suits against banks for alleged fraudulent certifications of PPP loans? What about for DOJ down the road a year or two?

The FCA and FIRREA are both akin to legal thermonuclear weapons. Their widespread use by DOJ against banks and other commercial lenders after the 2008 crash has caused some of these institutions to be understandably cautious about dispersing large amounts of government loans and funding. If Congress wants to encourage participation in its relief programs and the rapid dispersal of funds, it may wish to consider other means to enforce compliance with these desperately needed funding programs. 

A. Brian Albritton

April 22, 2020

An Insider's View of Florida ex rel FX Analytics v. Mellon Bank Qui Tam: Florida Attorney General Releases Hundreds of Confidential Documents Provided by Relator

As reported by the The Wall Street Journal and other news sources last week, documents released by the Florida Attorney General's Office provide an insider's glimpse into the Florida state qui tam action against Bank of New York Mellon Corporation (Mellon Bank).  That suit, State of Florida ex rel FX Analytics v. Bank of New York  Mellon Corporation, was initially filed by a foreign currency trader and whistleblower at the bank, Mr. Grant Wilson, in 2009 and the Florida Attorney General intervened in 2011.  In this qui tam case, the Florida Attorney General alleged that Mellon Bank conducted foreign currency trades on behalf of the Florida Retirement System Trust Fund, and in so doing, fraudulently "added hidden spreads . . . to these foreign exchange trades rather than pricing the trades at the exchange rates at which it actually executed the transactions, causing the [Trust Fund] to pay far more than it should have for buys and receive much less than it should have for sells."

The Florida Attorney General released "hundreds of pages of confidential documents" that Mr. Wilson had obtained while working at Mellon Bank.  According to the Wall Street Journal, the documents reportedly show "how the bank allegedly scrambled to contain the fallout from a fast-growing government investigation," and included "company materials, emails and observations."  As described in a Huffington Post article, the documents reflected the important role played by the relator's counsel.  For example, Wilson's lawyers provided "a question-and-answer tutorial so the Florida Attorney General's office knows the right questions to ask BNY Mellon employees;" and in another memo, the lawyers discredit Mellon's claims that "difficulty in production" delayed its document productions because, according to Wilson, documents are "centrally stored" and can be "easily obtained."  In another released memo, Wilson's "legal team provided detailed biographies of fellow traders and employees at BNY Mellon to help determine whether they might be helpful in the whistleblower legal effort."

Beyond the insight into the qui tam against Mellon Bank, these articles prompt several observations:  First, the Florida Attorney General's release of these documents show that there is far less confidentiality surrounding relators and the documents they provide in state qui tams than in federal qui tams.  This difference is especially stark when dealing with states like Florida, which have public records laws that permit the public broad access to government records.  The case is ongoing, with the State having intervened only months ago, and yet hundreds of pages of internal confidential documents, both from Mellon and the relator's lawyers have been released.  It is not clear that Wilson, his lawyers, or Mellon wanted these documents released.

Second, the experience of Mr. Wilson as a whistleblower shows just how lucrative the role of a relator can be.  The Wall Street Journal reports that Wilson, a foreign trader with Mellon for more than a decade, "walked away from deferred bonuses totaling roughly $5 million."  Clearly, he anticipates making much more than that from the qui tam.

Third, from these articles, you can see the important role that whistleblower counsel can play in ensuring a successful qui tam suit and in pressing for a vigorous prosecution against the defendant.  In Wilson's case, counsel apparently went so far as to "provide intimate snapshots of [Wilson's] colleagues, including details about their families, personal problems and financial standing."

Finally, where was the bank's compliance officer?  Wilson reportedly worked for two years as an informant, allegedly detailing the bank's scheme to overcharge its clients for whom it made foreign exchange trades.  He was, documents appear to show, not the only one who knew about these suspect practices. If that is true, how could such conduct be kept from the bank's compliance officers?

Fearing FCA Claims, Banks Delay Filing Claims with FHA to Cover Bad Loans

In contrast to the recent Allied Home Mortgage case reported on last week, banks are apparently getting smart about potential False Claims Act (FCA) liability when it comes to collecting on Federal Housing Administration (FHA) insurance for their failed FHA insured loans. In More on FHA:  Robo-Signing Effect , The Wall Street Journal Developments Blog observed this week that the FHA has millions more cash on hand than it probably should given the high failure rates of FHA insured loans.  The extra cash on hand results from the fact that although they are foreclosing on FHA insured loans, the banks are not submitting insurance claims for the bad loans to the FHA " because of the 'robo-signing' and other dubious back-office practices that surfaced last year."  Banks fear the  FCA and its treble damages if they submit to the FHA what could amount to a false claim for payment.  Accordingly, the WSJ Blog reports that banks will not submit an FHA insurance claim until they have "double- and triple-checked their processes to ensure that their reimbursement requests to Uncle Sam are iron proof. "