The $89 million settlement in May between Financial Freedom and the United States regarding claims under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 resulted in a $1.6 million bounty for a FIRREA whistleblower.
It has been quite a few months since we have heard anything big about the continuing pursuit of mortgage fraud lawsuits. However, that silence changed last week with the announcement on Friday of a $1.2 billion settlement by Wells Fargo. It was followed today by a $5 billion settlement agreement with Goldman Sachs. The Justice Department settlements concluded enforcement actions under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and other legal theories. It also puts the U.S. Government and financial industry one step closer to putting the financial crisis created by bad mortgages behind it.
Last week, Representative Elijah E. Cummings and Senator Tammy Baldwin proposed a bill to modify several financial industry laws including the Dodd-Frank Act and Sarbanes Oxley Act to enhance and extend whistleblower rewards and anti-retaliation protections for bank and Wall Street whistleblowers. For those looking to follow the legislation in the House of Representatives, the Whistleblower Augmented Reward and Non-Retaliation Act of 2016 (WARN Act) is H.R. 4619.
Nine banks are nearing agreements to resolve the U.S. Government’s investigation into their sales of mortgage bonds prior to or during the financial crisis. Morgan Stanley has previously said that it agreed to pay $2.6 billion to resolve the matter. Goldman Sachs is now discussing a similarly sized payment of $2 to $3 billion to end the probe.
Other banks that are expected to settle in the near future are Barclays, Credit Suisse, Deutsche Bank, HSBC Holdings, Royal Bank of Scotland (RBS), UBS and Wells Fargo. Bloomberg says they are “set to settle.”
The investigations relate to suspected violations of federal law related to the sale of mortgage-backed securities. JPMorgan Chase, Bank of America and Citigroup resolved the allegations against them for more than $35 billion in cash and consumer relief. The upcoming settlements involving mortgage fraud are not expected to reach as high, with a range in amounts from a few hundred million to a few billion dollars.
The past settlements have charged the banks with a variety of violations, including penalties for violating the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and the False Claims Act. Both FIRREA and the FCA authorize payments for whistleblowers.
The U.S. Federal Housing Finance Agency (FHFA) also has an outstanding lawsuit against RBS on behalf of Fannie Mae and Freddie Mac. The estimates are that it could pay a settlement of up to $4.5 billion if it loses its challenge concerning the statute of limitations. RBS has contended that the 2011 lawsuit was filed too late. In total, FHFA has collected more than $19 billion from 16 banks.
In other news, the New York Post announced that there is a new investigation into the fraudulent manipulation of the $12.5 trillion Treasuries market. According to the New York Post, the investigation into the setting of interest rates at Treasury auctions is in the early stages and the government has requested information for three of the twenty two financial institutions acting as primary government debt dealers. We haven’t seen confirmation of the investigation by any other paper yet.
It’s time to examine the False Claims Act recoveries for the first half of the U.S. Government’s fiscal year 2015 since the calendar reads April. So far, the U.S. has recovered more than $1.2 billion under the federal False Claims Act, according to Taxpayers Against Fraud. That is down by more than 50% over last year but not a particularly big disappointment given the way last year started for the Department of Justice. It would have been hard to keep up the pace set by the Johnson & Johnson, JPMorgan and Suntrust settlements last year.
This year’s leading settlements under the anti-fraud law so far are DaVita ($389 million) in October and Supreme Foodservice GmbH ($146 million in civil lawsuits and $288.36 million in the criminal case) in December, and Metlife ($123.5 million) in February.
DaVita agreed to pay $350 million to resolve the allegations it paid kickbacks to induce referrals of dialysis patients. DaVita reportedly offered lucrative partnerships to physicians with patient populations suffering renal disease to induce referrals to their dialysis clinics. It also agreed to a civil forfeiture of $39 million for two joint ventures in Denver, Colorado. The whistleblower in the case reportedly received $65 million plus interest.
After DaVita, there’s been a handful of settlements for amounts in the $25 to $75 million range. Violations of the Stark Law and the Anti-Kickback Statute still seem to be key areas where health care companies are at risk of violating the law.
In descending order, settlements under the False Claims Act by health care companies include Community Health Systems ($75 million), OtisMed/Stryker ($41 million), Daiichi Sankyo ($39 million), Extendicare ($38 million), Dignity Health ($37 million), Organon ($34 million) and CareAll ($25 million).
There’s been a massive drop in the recoveries coming from housing and mortgage fraud. Through this point last year, the U.S. had already reached settlements under the False Claims Act totaling more than $1 billion between Suntrust and JPMorgan. So far this year, the only significant settlement we have seen announced by the DOJ in this area under the False Claims Act was the $123.5 million settlement with MetLife.
There’s also an agreement in principle between Morgan Stanley and the DOJ to settle an investigation into the Wall Street Bank’s mortgage practices for $2.6 billion. It’s too soon to allocate any portion of this settlement to the False Claims Act, but it could be a nice bump in the total when it is announced by the DOJ.
The U.S. has had another victory in this area – it just can’t be counted as a win for the False Claims Act. The federal government’s complaint that led to the $1.375 billion settlement with Standard & Poor’s, half of which went to the Federal Government, was brought under FIRREA. FIRREA was easily the big winner last year in the fight against fraud, eclipsing the False Claims Act for the first time ever.
The other big FIRREA case right now is the appeal between Bank of America and the Department of Justice over the $1.27 billion verdict in a whistleblower-initiated lawsuit. The False Claims Act allegations were dismissed two years ago but the case against the company under FIRREA remained. This case was specifically excluded from the massive $16 billion settlement last year and the Judge Rakoff denied a new trial in February.
The drop-off in the False Claims Act and FIRREA in this area could have been easily predicted. It was unlikely that the U.S. could repeat the $3.1 billion in federal funds it recovered under the False Claims Act or the staggering $11 billion under FIRREA. It was the first time that the DOJ used the FCA to recover more from mortgage fraud than it did from health care fraud.
The Supreme Foodservice settlement involved a payment of $288.36 million to resolve the criminal case in the Eastern District of Pennsylvania and $101 million to resolve the civil lawsuit under the False Claims Act. The company was accused of using a United Arab Emirates company it controlled to inflate the price of food and bottled water sold under the contract. The whistleblower in the case was to receive $16.16 million from the government’s settlement. A subsidiary of Supreme Group, Supreme Logistics FZE, agreed to pay $25 million to resolve allegations of false billings in food shipping contracts during Operation Enduring Freedom.
There have been a few other mid-sized settlements in government contracts. Office Depot ($68.5 million), Iron Mountain ($44.5 million) and Lockheed Martin Integrated Systems ($27.5 million) jumped off the list. Office Depot and Iron Mountain were both best price violations. LMIS involved over-billing for under qualified workers.
Adding up the rewards from some of the bigger cases to settle this year, relators have earned more than $160 million this year from bringing qui tam lawsuits. In FY2014, whistleblowers were paid $435 million by the Department of Justice. The FY 2015 awards so far include announced payments for:
DaVita: $65 million.
Office Depot: $23 million.
Community Health: 18.67 million.
Supreme Foodservice: $16.16 million.
Iron Mountain: $8.1 million.
OtisMed/Stryker: $7 million.
Dignity Health: $6.25 million.
Daiichi Sankyo: $6.1 million.
CareAll: $3.9 million
For additional information, please contact one of our Philadelphia False Claims Act attorneys.
As the calendar year wraps up, we thought it would be interesting to take a look back at the companies paying more than $1 billion in 2014 to resolve investigations into corporate misconduct. Twelve companies agreed to these large fines (if we include Suntrust which fell just shy of $1 billion) for a total of more than $45 billion in penalties to the US (and a handful to the UK from the forex settlement). A few things worthy of note:
- Only 2 companies were not financial institutions.
- Only 5 cases involved mortgage fraud.
- Not one pharmaceutical company is on the list.
- We only used the calendar year. J&J and JPMorgan Chase both had large settlements that would have qualified if we used Fiscal Year 2014.
Bank of America – $16.65 Billion in August
The largest civil settlement with a single entity in American history was agreed to by the financial institution to resolve misconduct by Countrywide, Merrill Lynch and BofA stemming from . The $5 billion penalty imposed under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) is the largest under the law, eclipsing the $4 billion paid by Citigroup only a month before. Four whistleblowers in this case were paid approximately $170 million in total under the False Claims Act and FIRREA.
BNP Paribas – $8.9 Billion in June
The French bank agreed to a guilty plea to charges it violated US economic sanctions by providing dollar clearing services to individuals and entities dealing with Sudan, Cuba and Iran between 2004 and 2012. Three individuals helped the government make their case agains BNP.
Citigroup – $7 Billion in July
The settlement covered misrepresentations made to investors regarding the quality of mortgage securities. It paid a short-lived record $4 billion as a civil penalty to settle the Justice Department claims under FIRREA. It also paid $208.25 million to the Federal Deposit Insurance Corporation (FDIC) and nearly $300 million to five states participating in the agreement. The remaining $2.5 billion was earmarked for consumer relief.
Anadarko – $5.15 Billion in April
Anadarko agreed to pay the largest recovery for the cleanup of environmental contamination. It resolves the liability of Kerr-McGee, an Anadarko subsidiary acquired in 2006, for legacy liabilities spun off in an inadequately funded company which filed for bankruptcy in 2009.
Goldman Sachs – $3.15 Billion in August
Goldman agreed to pay the Federal Housing Finance Agency (FHFA) for securities law violations in the sale of private-label mortgage-backed securities to Freddie Mac and Fannie Mae between 2005 and 2007.
Credit Suisse – $2.6 Billion in May
The Swiss bank pleaded guilty to conspiracy to aid U.S. taxpayers in filing false income tax returns with the Internal Revenue Service. It paid $1.8 billion to the Department of Justice for the U.S. Treasury, $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Services. It also paid $196 million to the SEC earlier in the year for providing cross-border brokerage services without registering.
MF Global Holdings Ltd. – $1.3 Billion in December
A consent order in December 2014 requires the parent company of brokerage unit MF Global Inc. to pay $1.2 billion in restitution and $100 million in fines to the CFTC. MF Global had liquidity problems in 2011 due to trading losses that caused its bankruptcy.
Morgan Stanley – $1.25 Billion in February
The FHFA settled its claims over private-label mortgage-backed securities sold to Freddie Mac and Fannie Mae between 2005 and 2007 for $625 million to each.
Toyota Motors – $1.2 Billion in March
Toyota agreed to the largest penalty for an automobile manufacturer to resolve allegations of misconduct related to its recall of vehicles for unintended acceleration. The charges involved misleading statements made to consumers and regulators in 2009 and 2010 concerning the safety of its vehicles.
FOREX Manipulation – $4.3 Billion by six banks in November to three agencies in the US and UK.
Citigroup and JPMorgan each paid a total of about $1 billion in fines between the US Commodity Futures Trading Commission, Office of the Comptroller of the Currency and UK Financial Conduct Authority to resolve allegations its traders manipulated the FOREX market. Four other banks paid amounts under $1 billion to resolve the investigations by these government agencies. UBS, RBS, HSBC and Bank of America each paid between $250 million and $800 million.
Suntrust Mortgage – $968 Million in June
The mortgage company settled claims involving problems with improper mortgage origination, servicing and foreclosure arising between 2006 and 2012. The settlement involved the Justice Dept., Housing and Urban Development (HUD), Consumer Financial Protection Bureau (CFPB) and 49 states plus the District of Columbia. The deal was agreed to in principal in late 2013 but announced in 2014.
Other Settlements of Interest
While we were doing our research, we found a few other record settlements that we thought you would find interesting.
Alstom – The French engineering company agreed to the largest criminal tax penalty for an FCPA violation imposed by the Department of Justice, $772 million, in December 2014. Alstom used consultants to pay $75 million in bribes to secure $4 billion in projects with state-owned companies in five countries.
Hyundai Motor and Kia Motors – The two related auto manufacturers agreed to a $100 million penalty, the largest ever for violation of the Clean Air Act, in November 2014. They overstated the fuel economy and understated the greenhouse gas emissions of their cars and SUVs in 2012 and 2013.
AT&T Mobility – The $105 million settlement with the Federal Communications Commission over cramming unauthorized third party subscriptions and premium text messaging onto customer bills was the largest enforcement action in the FCC’s history.
We are aware of ten whistleblowers involved in four of these cases. At this point, only payments to the individuals in the Bank of America case have become public knowledge.
There may have been additional cases involving insiders where the details have not yet been made publicly available. For example, the CFTC has not yet issued a notice of covered action for the fines issued to the banks in the forex case.
Edward O’Donnell, the Countrywide whistleblower who tipped the government to the ‘Hustle’ program at the mortgage company, will receive a $58.6 million payout as a result of the historic $16.65 billion settlement between the U.S. Government and Bank of America in August.
The majority of the award, $57 million, is to be paid out under a False Claims Act lawsuit filed by O’Donnell in June. The June lawsuit was the second he filed against Bank of America, the successor to Countrywide. O’Donnell’s first lawsuit, filed in 2010, resulted in a $1.27 billion award now under appeal. However, his potential reward from the case is limited because the judge dismissed the False Claims Act allegations back in 2013. The jury trial proceeded on the allegations that Countrywide violated the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
There is still the potential for at least two more awards since the Justice Department announced in August that the settlement resolved three qui tam lawsuits.
Overshadowed by the large reward paid under the False Claims Act may be the first FIRREA whistleblower award. Although I haven’t seen a news report connect the dots yet, the additional $1.6 million to be paid to O’Donnell is the exact amount of the maximum reward under the law that has become the U.S. Government’s leading law against mortgage fraud. The BofA settlement included a $5 billion penalty under FIRREA, the largest of its kind so far.
There have been a few other large settlements under FIRREA this year but this is the first announcement of an award that I have seen. Earlier this year, I was unable to find a prior award announcement. The law has been on the books for more than 20 years, so it seems likely that there have been prior payments. But the law’s long history of disuse and recent revival suggest that even if there have been awards in the past, the number of people who have received them is still small.
In September, U.S. Attorney General Eric Holder proposed a modification of the payout calculation under the popular financial fraud law. He suggested that the amount should instead be modeled after the False Claims Act and not limited to a maximum of $1.6 million.
Record penalties under FIRREA helped make financial fraud the largest source of money collected by the Department of Justice through enforcement efforts in Fiscal Year 2014. The DOJ statistics released today revealed that agency led enforcement actions and negotiated civil settlements resulted in collections of more than $24 billion during the fiscal year ending in September.
FIRREA had fallen into disuse until prosecutors began bringing enforcement actions against banks for conduct surrounding the financial crisis of 2008. Now, it has become the nation’s leading tool against mortgage fraud. It resulted in settlement amounts of $2 billion (JPMorgan), $4 billion (Citigroup) and $5 billion (Bank of America) over the past year as banks sought to put their misconduct involving residential mortgage backed securities behind them. JPMorgan and Citigroup were cited by the DOJ as paying significant sums in 2014, with Bank of America unnamed. Because the BofA settlement happened toward the end of the fiscal year, it may not have paid the money to the U.S. Government yet.
FIRREA’s increasing importance also led Attorney General Eric Holder to call for an increase in the law’s incentives for whistleblowers just days before he announced he was stepping down. Rewards are currently capped at a maximum of $1.6 million. The False Claims Act, SEC and IRS programs are all uncapped, with payments potentially reaching over $100 million on large cases.
In the press release, the Justice Department credited whistleblowers under the False Claims Act for bringing many of the cases leading to large civil collections. Whistleblowers were involved in a number of large cases reaching a resolution in 2014, including investigations into Bank of America and JPMorgan Chase in the financial arena and Johnson & Johnson in health care.
The DOJ press release added another financial crime to the list of penalties paid by financial institutions: LIBOR manipulation. UBS Securities Japan and RBS Securities Japan paid large amounts to end investigations into their manipulation of the London Interbank Offered Rate.
The $24 billion number includes money paid during FY2014 even if the settlement or enforcement action happened in a preceding year. It excludes settlements agreed to in 2014 but not paid during the government’s fiscal year. The DOJ received $13.7 billion while its civil and criminal enforcement efforts helped other federal agencies, states and additional parties receive another $11 billion. It’s unclear to us how much, if any, overlaps with the $7 billion collected by the CFTC and SEC.
The amount was more than three times the $8.1 billion collected in 2013. The ongoing antitrust investigation into the auto parts industry, environmental cleanups of pollution and criminal penalties for violations of the FCPA also led to significant collections. Significant antitrust and environmental cases also led to more than $1 billion in 2013.
Last year, health care fraud topped the list of collections with large fines paid by Abbott and Amgen. It’s absence from the list this year is noticeable because of the large amounts settlements gathered from this area in the past ten years for violations of the False Claims Act.
For additional information about today’s DOJ announcement, here is the press release.