False Claims Act

Federal Court Dismisses United States Action Against Countrywide In Part

On May 8, Judge Jed Rakoff of the United States District Court for the Southern District of New York dismissed claims by the United States for damages and civil penalties under the False Claims Act against Countrywide and Bank of America.  The court held that the government could proceed with its claims for violations of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989.  FIRREA permits the government to recover civil penalties for fraudulent activities that “affect” federally insured financial institutions.  The government alleged that Countrywide’s mortgage origination business had defrauded Fannie Mae and Freddie Mac.  The court noted it would explain its reasoning at a later date.  OrderAmended Complaint.

U.S. Sues Bank of America for Alleged Mortgage Fraud Against GSEs

On October 24, the U.S. Attorney for the Southern District of New York filed suit against Bank of America and Countrywide seeking damages for over $1 billion in alleged losses suffered by Fannie Mae and Freddie Mac.  The complaint alleges that Bank of America and Countrywide violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act by selling defective loans originated through a fraudulent origination program called the “High-Speed Swim Lane” (HSSL) or “the Hustle” that was implemented by Countrywide from 2007 to 2009.  The Government alleges that the program intentionally was designed to process loans quickly, ignoring or eliminating quality controls, including by replacing underwriters with “loan processors” who are alleged to have been “unqualified and inexperienced clerks.”  The suit further alleges that Countrywide, and later Bank of America, concealed the defects from Fannie Mae and Freddie Mac as they continued to sell these defective loans through 2009.  The Government seeks civil penalties under FIRREA as well as treble damages under the False Claims Act.  In a press release issued the day of the filing, the U.S. Attorney described the lawsuit as a “clear message that reckless lending practices [would] not be tolerated.”

U.S. Sues Wells Fargo Over Allegedly Defective FHA Mortgages

On October 9, the United States Attorney for the Southern District of New York filed suit against Wells Fargo Bank, N.A. in the United States District Court for the Southern District of New York.  The civil suit seeks damages, including treble damages where available, and civil penalties for alleged violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, breach of fiduciary duty, gross negligence, negligence, unjust enrichment, and payment under mistake in fact.  The Government’s complaint alleges that Wells Fargo, a participant in the Federal Housing Administration’s mortgage lending insurance program, failed to report over 6,000 mortgage loans that were in fact ineligible for FHA insurance.  As a result of Wells Fargo’s alleged misconduct, the Government allegedly paid hundreds of millions of dollars in connection with insurance claims made on these loans.  The alleged defects in connection with Wells Fargo’s origination process – that violations of stated mortgage lending guidelines resulted in poor quality loans – are similar to the allegations that underlie many RMBS investor actions.  Complaint.

Government Sues Allied Home Mortgage For Fraud Under the False Claims Act

On November 1, 2011, the United States filed suit in the Southern District of New York against Allied Home Mortgage, a mortgage lending company, for allegedly defrauding the government into insuring its now-defaulted loans. The complaint alleges that Allied and CEO Jim Hodge violated the False Claims Act (“FCA”) by making misrepresentations to the Department of Housing and Urban Development to ensure the company could continue originating mortgages insured by the Federal Housing Administration (“FHA”). The complaint alleges that Allied submitted loans to the FHA originated out of “shadow branches” it did not disclose to the government and then illegally routed those mortgages through HUD-certified mortgage branches to avoid detection by the government. The government also contends that Allied failed to implement sufficient quality control measures to ensure underwriting standards were being met. The government seeks a permanent injunction and treble damages. Complaint.

Investor Files Derivative Suit Against Bank of America

On September 26, 2011, a shareholder derivative complaint was filed against Bank of America (“BAC”) directors and officers (“Defendants”) alleging that they knew about supposedly inadequate review and authorization of foreclosure documents and other activities that exposed BAC to potential liability. Plaintiff alleges that, despite gaining detailed knowledge from extensive due diligence performed prior to BAC’s acquisition of Countrywide Financial Corp., Defendants recklessly mismanaged the risks posed by the acquisition and exposed BAC to substantial liability by refusing to cooperate with government regulators investigating BAC’s foreclosure practices, obtaining reimbursement on government guaranteed mortgages in violation of the False Claims Act, and other allegedly wrongful acts. Plaintiff alleges violations of Sections 10(b) and 10b-5 of the Exchange Act, breach of fiduciary duty, and breach of the duty of candor. Complaint.

DOJ Sues Deutsche Bank and MortgageIT for $1.1 Billion Related to Mortgage Lending Activities

On May 3, 2011, the U.S. Department of Justice filed suit in the Southern District of New York against Deutsche Bank AG and MortgageIT Inc. (which was a wholly owned by Deutsche Bank), asserting multiple claims under the False Claims Act as well as claims for breach of fiduciary duty, gross negligence, negligence and indemnity. The Complaint arises out of MortgageIT’s activities as a qualified Direct Endorsement Lender of the Federal Housing Administration (“FHA”) of the Department of Housing and Urban Development (“HUD”). From 1999 through 2009, the defendants originated mortgages that were insured by FHA. The Complaint alleges that during this time the defendants lied to FHA to maintain their Direct Endorsement Lender status which in turn allowed them to continue originating loans that were insured by FHA. The DOJ alleges that the defendants failed to abide by FHA’s standards to control the amount of risk the program would assume by funding mortgages that did not satisfy the underwriting guidelines and failing to implement quality control provisions to monitor the strength of the loans. The Complaint also alleges that HUD has paid more than $386 million in FHA insurance claims arising out of mortgages originated by the defendants. The DOJ seeks treble damages and penalties under the False Claims Act, as well as compensatory and punitive damages in connection with its other claims. Complaint.