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Court of Appeals Rules in Favor of Financial Industry Whistleblowers

12/19/2019

Wells Fargo can be Sued under the False Claims Act for Defrauding Federal Reserve Banks


By Mark A. Strauss

The Second Circuit Court of Appeals has ruled in favor of two financial industry whistleblowers, reviving their federal qui tam claims that Wells Fargo lied about its financial condition in order to obtain billions of dollars in low-interest emergency bailout funds from regional Federal Reserve Banks during the Financial Crisis.

The whistleblowers – former Wells Fargo employees – alleged that Wells Fargo falsely certified that it was sufficiently capitalized and in compliance with applicable banking and mortgage lending laws when it requested billions of dollars in emergency loans from the Fed’s Discount Window and Term Auction Facility.  As a result, it was able to obtain interest rates on the borrowed funds that were much lower than the rates it would otherwise have qualified for.  In May 2018, District Judge Brian M. Cogan dismissed the lawsuit, reasoning that Federal Reserve Bank personnel to whom Wells Fargo’s false certifications were presented were not “officers,” “employees” or “agents” of the United States within the meaning of the False Claims Act because such banks are nominally “independent” of the federal government.  Frauds against private parties are not actionable under the False Claims Act.
 

District Court reversed


However, in United States v. Wells Fargo & Co., No. 18-1746 (2d Cir. Nov. 21, 2019), the Second Circuit reversed, holding that Federal Reserve Bank personnel were, in fact, “agents” of the United States within the meaning of the False Claims Act because they acted on behalf of the Government in extending the emergency bailout credit to financial institutions such as Wells Fargo.  Such lending, the court pointed out, was not for the benefit of the Federal Reserve Banks’ nominal shareholders, i.e., private member banks.  Rather, the profits accrued to the United States Treasury to which the Federal Reserve Banks were required to remit their excess earnings.  “Fraud during a national emergency against entities established by the government to address that emergency by lending or spending billions of dollars is precisely the sort of fraud that Congress meant to deter when it enacted the FCA,” the court stated.

The court also held that Wells Fargo’s applications for bailout funds constituted “claims” under the 2009 amendments to the False Claims Act.  Prior to those amendments, false claims for payment had to be presented to the government itself for there to be liability.  The amendments, however, expanded the definition of “claim” to include requests for payment made to a “contractor, grantee, or other recipient” of federal funds if the money is “to be spent or used on the Government’s behalf or to advance a Government program or interest.”  The court found that Wells Fargo’s bailout applications fell squarely within this amended definition of an actionable “claim.”
 

Source of emergency loans was United States


Notably, Wells Fargo argued that its conduct did not violate the False Claims Act because the money it received did not come from the U.S. Treasury, but was instead “base money” created by the Federal Reserve Banks ex nihilo (out of nothing) under authority conferred on them by Congress pursuant to its Constitutional power to coin money.  The court rejected this and ruled that the False Claims Act was nevertheless implicated because “the United States is the source of the purchasing power conferred on the banks when they borrow from the Fed’s emergency lending facilities.”
 

Potentially large qui tam awards


The case is now back in the district court where the whistleblowers stand to win potentially large qui tam awards.  The False Claims Act imposes substantial liability – three times damages, plus penalties – on parties that knowingly overcharge (or underpay) the U.S. government.  Whistleblowers generally are entitled to receive awards of 15 percent to 30 percent of any recovery.

The claims against Wells Fargo show how, under certain circumstances, financial industry whistleblowers may be able to bring claims under the False Claims Act and are not relegated to simply reporting wrongdoing to the SEC under the Dodd-Frank whistleblower program.  The False Claims Act has certain advantages over the Dodd-Frank program – principally, that, under the False Claims Act, if the Government declines to intervene in the case, as it did in the Wells Fargo matter, the whistleblower can still go ahead and pursue the claims on behalf of the United States.  That option is not available under Dodd-Frank, where, if the SEC drops a matter, the case is over, and the whistleblower has no chance of receiving an award.  The legal territory in this field is complex, which is why potential whistleblowers should always engage experienced counsel to help determine how best to proceed with their claims.

Mark A. Strauss is a partner who represents whistleblowers in qui tam lawsuits under the False Claims Act.