We are reaching the end of a decade since mortgage fraud hit its peak in 2007. However, the latest settlement by IberiaBank suggests that at least one lender continued aspects of mortgage fraud against the Federal Housing Administration (FHA) well after becoming informed of their wrongdoing.
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.
Goldman Sachs announced a tentative agreement yesterday with the Department of Justice, two state governments and a few other entities concerning federal and state investigations into the investment bank’s mortgage-backed securities practices prior to the financial crisis. Goldman is going to pay a $2.4 billion civil monetary penalty as well as provide consumer relieve including $875 million in cash and $1.8 billion in other consumer relief such as mortgage principal forgiveness, foreclosure prevention and support for debt restructuring.
There were a few interesting news items coming out of the Justice Department that we didn’t have more time to cover in more depth last week, so we thought that we would recap them briefly here as we start the short Thanksgiving week.
Fifth Third Bancorp has settled DOJ charges that it failed to report 1,400 defective mortgages for $85 million. It was discovered that these loans originated between 2003 and 2013 were not eligible for FHA insurance during post-closing quality reviews but the company did not report the problems to the government until 2012.
The lawsuit was initiated by a whistleblower complaint under the False Claims Act before the company voluntarily self-reported. The whistleblower was represented by a local Philadelphia whistleblower law firm – congratulations to them and their client on good work.
JPMorgan, Citi, Bank of America and U.S. Bancorp have all settled mortgage fraud lawsuits alleging they failed to follow the FHA’s underwriting standards in insured loans.
The most high profile lawsuit this year has been Quicken Loans, which filed a declaratory judgment action against the Federal Government in the Eastern District of Michigan a few days before the Department of Justice filed its complaint in the District of Columbia. The courts are now considering whether to dismiss or transfer the lawsuits.
A few banks have settled investigations into their conduct this year but non have reached the same lofty penalties as were announced last year, led by the $16.65 billion dollar Bank of America settlement.
We also saw the Department of Justice once again evaluate whether charges should be filed against any bank executives for their role in the financial crisis stemming from their mortgage lending and mortgage-backed securities trading. It is unclear whether they will take action in light of the criticism about their lack of prosecutions against executives but the recent Yates memo has indicated that the DOJ will be looking at bringing actions against the responsible individuals in current and future cases.
Whistleblowers have been a key ingredient in helping the government discover mortgage fraud. They are eligible for rewards under both the False Claims Act and FIRREA if they follow the appropriate procedures for the whistleblower laws.
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.
First Horizon National Corp will pay $212.5 million to resolve the DOJ and HUD investigation into mortgage loans made by First Tennessee Bank, according to media reports last week.
The settlement continues the U.S. Government’s pursuit of banks that made bad loans on real estate immediately prior to or during the financial crisis. The U.S. has also settled its investigation into MetLife and the S&P lawsuit over credit ratings this year. Morgan Stanley has also announced an agreement to settle the investigation into its mortgage practices for $2.6 billion. Last year, banks paid billions to settle government allegations of violations of the False Claims Act and FIRREA.
The investigation looked into underwriting and origination of FHA insured loans made by First Tennessee Bank between 2006 and 2008. Previous media coverage indicates that the government’s investigation involved the False Claims Act.
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.
The Wall Street Journal has reported that Standard & Poor’s, a unit of McGraw Hill Financial Inc., could settle SEC charges of securities fraud related to its rating of commercial real estate in 2011 this week. Previous estimates have put a settlement of these charges, unrelated to the subprime rating lawsuit by the DOJ, at around $60 million.
This report comes on the heels of Bloomberg and Reuters reports that Standard & Poor’s will settle for more than $1 billion the DOJ lawsuit brought under the False Claims Act for misleading the United States Government about its mortgage-backed securities ratings.
The S&P lawsuit is one of four largest that remains as a result of the financial crisis. The United States also has the FHFA lawsuit against the Royal Bank of Scotland settles the FHFA lawsuit and Morgan Stanley is under investigation for its mortgage-backed bond practices in 2015. All three could easily settle in 2015 to avoid a cloud over their heads while their competitors move on from the mortgage crisis. large settlements in this arena that have dominated the headlines could be over by the end of the year.
There’s also the $10 billion lawsuit Credit Suisse faces from New York. In an interview with Reuters, New York Attorney General Eric Schneiderman indicated that there will be more lawsuits filed against banks for selling mortgage-backed securities. So it still may be too early to call the end to cases of mortgage fraud, but not too early to start speculating about the future.
If the U.S. no longer spends significant resources targeting mortgage fraud, what will be the next area of corporate misconduct on the government’s radar?
If the government looks overseas, it should find plenty of potential cases.
Bribery is one area that is prime for additional prosecution. The record settlement with Alstom for violations of the Foreign Corrupt Practices Act (FCPA) in December could be the beginning of greater prosecutions in this area as the government frees resources from the mortgage prosecutions.
The FBI has already announced that it will triple the number of agents investigating foreign corruption, which includes both FCPA violations and kleptocracy. FBI agents play an important role in the investigation of bribery charges brought by the SEC and DOJ under the FCPA.
There should be no shortage of cases for them to investigate. China has been hunting down corruption within its country and whistleblowers are bringing cases to the SEC in record numbers. In FY2014, whistleblowers classified 159 tips as related to FCPA violations. Since starting the whistleblower program, the SEC has received more than 400 tips in this area.
Another area that took a big leap forward last year was the prosecution of anti-money laundering and economic sanctions violations. With the BNP Paribas settlement reaching nearly $9 billion last summer, this could become a hot area as government attorneys look for other financial institutions involved in similar banking deals.
If the government looks domestically, the auto industry is another potential target. Delayed recalls by car manufacturers have put millions of families at risk as unsafe vehicles have been driven unknowingly by families. There are several bills in Congress to strengthen regulation of motor vehicles and the passage of the Thune-Nelson bill would add whistleblower rewards to this area.
The high profile cases of GM and Takata last year might just be the tip of the iceberg. After a record 60 million cars were recalled last year, more than twice the previous record, the NHTSA is already predicting that we will see a new record set in 2015 as the government pushes manufacturers for more aggressive recalls. The Fiscal Times declared 2015 the year of the recall already.
Will mortgage cases stay on the government’s radar? Will the government focus elsewhere? Let us know your thoughts in the comments.
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.