Earlier this month, we reported that the U.S. Attorney in the Southern District of New York filed a billion dollar False Claims Act lawsuit against Deutsche Bank and its subsidiary MortgageIT for alleged mortgage fraud during last decade’s housing bubble. (Click here for the prior post.) It appears that a number of state attorneys general may begin to file lawsuits as well. Yesterday, the California Attorney General announced the creation of mortgage fraud strike force, and the Illinois Attorney General expanded her investigation into alleged practices used by banks and other mortgage institutions, including “robosigning.” (Click here for the California AG press release and here for the Illinois AG press release). Last week, the New York Attorney General opened an investigation into mortgage securitization practices. (Click here for the story reported on the WSJ blog.) Illinois, California, and New York all have state false claims acts and the increased attention given by the attorneys general may encourage private litigants to bring qui tam cases.
Private "whistleblowers" and the Government continue to stretch the reach of the False Claims Act. Businesses that never made a false statement to the Government, never received a dime in Government funds, and never presented a claim to the Government now can face liability under the FCA. Businesses are at risk for millions of dollars because they may have made an incorrect statement "having a natural tendency to influence or be capable of influencing" the Government's decision to make a payment.
Recently insurers have faced liability under the increasingly elastic FCA for false claims submitted by policy holders to the federal government even though the insurers neither submitted the claim nor were paid for it. Click here for an article published in Risk & Insurance, which examines how the FCA has been used to reach private insurance companies that are indirectly involved in government programs.
On May 9, 2011, a federal district court in the Northern District Court of Indiana in the case of United States ex rel. McCoy v. Madison Center, No. 3:10-CV-259-RM (N.D. Ind. May 9, 2011) , dismissed as untimely the State of Indiana’s complaint-in-intervention in its entirety and the relators’ state law claim brought under the Indiana False Claims and Whistleblower Protection Act (“IFCWA”). In 2005, the relators filed a qui tam complaint in federal court in Indiana on behalf of the federal government and the State of Indiana, alleging violations of both the federal False Claims Act and IFCWA by the defendant, Madison Center, and sought recovery for injuries suffered by both the federal government and the State. Defendant is a non-profit psychiatric hospital serving Medicaid-eligible patients, including children.
The relators alleged that, from May 2002 to the time of the complaint in 2005, the defendant routinely submitted Medicaid reimbursement claims for psychiatric treatment of children without maintaining adequate documentation of medical necessity or treatment plans, fabricated medical records to justify reimbursement claims for the children, and improperly billed for non-reimbursable services or for services not provided. In June 2003, the relators warned the State that the defendant was trying to fabricate or “doctor” medical records in anticipation of an upcoming Medicaid audit, which prompted Indiana Medicaid auditors to raid the defendant’s office and initiate an immediate audit. The audit eventually estimated Medicaid overpayments to defendant between 2001 to 2002 of about $11 million.Continue Reading...
U.S. Supreme Court Holds FCA's Public Disclosure Bar Prohibits Relators From Basing FCA Lawsuits On Information Obtained In Response To FOIA Requests
On May 16, 2011, in a 5-3 split, the United States Supreme Court issued an opinion in Schindler Elevator Corp. v. United States ex rel. Kirk, No. 10-188 concerning the public disclosure bar of the False Claims Act. The Supreme Court agreed with FCA defendant Schindler Elevator and held that a federal agency’s response to a request for records under the Freedom of Information Act (“FOIA”) constitutes a “report” within the meaning of the False Claims Act’s pre-PPACA public disclosure bar. The Supreme Court observed that because the FCA's public disclosure bar does not define "report," the Court looked first at the term's ordinary meaning. Relying on several dictionary definitions, the Supreme Court held that a "report" is "something that gives information" or a "notification" or "an official or formal statement of facts or proceedings." The Court observed that the broad ordinary meaning of “report” is consistent with the generally broad scope of the FCA’s public disclosure bar.
The Court next held that there was no textual basis for adopting a narrower definition of “report” because applying the ordinary meaning of the term does not render superfluous the other sources of public disclosure in 3730(e)(4)(A). The Supreme Court further held that any records the agency produces along with its written FOIA response are part of that response just as if they had been reproduced as an appendix to a printed report. Nothing in the public disclosure bar suggests that a document and its attachments must be disaggregated and evaluated individually. If an allegation or transaction is disclosed in a record attached to a FOIA response, it is disclosed “in” that FOIA response, and therefore, disclosed “in” a report for the purposes of the public disclosure bar.
Applying this framework to the FOIA responses at issue, the Supreme Court held that the Department of Labor's three written FOIA responses in the case, along with the accompanying records produced to the relator's wife, are reports within the meaning of the public disclosure bar. In so holding, the Supreme Court observed that "the sort of case that Kirk has brought seems to us a classic example of the 'opportunistic' litigation that the public disclosure bar is designed to discourage. Although Kirk alleges that he became suspicious from his own experiences as a veteran working for Schindler, anyone could have filed the same FOIA requests and then filed the same suit." The Supreme Court expressly rejected the argument posed in the amicus brief submitted by Taxpayers Against Fraud Education Fund that “the public disclosure bar is intended only to exclude qui tam suits that 'ride the investigatory coattails of the government’s own processes.'”
The Supreme Court left open the issue of whether the relator's suit is "based upon . . . allegations or transactions" disclosed in those reports, and remanded the issue to the Second Circuit to resolve.
Justices Ginsburg, Breyer, and Sotomayor dissented, noting their concern that whistleblowers, attentive to the heightened pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure, will be barred from court if they seek corroboration for their allegations through a FOIA request simply for copies of a contractor's filings. The dissent concluded by stating that "[a]fter today's decision, which severely limits whistleblowers' ability to substantiate their allegations before commencing suit, that question is worthy of Congress' attention."
Justice Kagan did not participate in the decision because she worked on the case while serving as Solicitor General. See our prior posts here and here discussing the factual background, lower court proceedings, and Supreme Court oral argument in the Schindler Elevator case.
On May 5, 2011, the Eight Circuit Court of Appeals in United States ex rel. Vigil v. Nelnet, Inc., et al., 2011 WL 1675418 (8th Cir. 2011), affirmed the dismissal of federal False Claims Act claims by a relator against private institutional lenders participating in the Federal Family Education Loan Program (FFELP) for failing to state a claim and to plead fraud with particularity. The relator was a former loan advisor for Nelnet, a loan service company specializing in student loans, and the primary defendant was Nelnet, with two major banks joined as alleged participants in a conspiracy to submit false claims. The government did not intervene.Continue Reading...
Earlier today, Honorable Roger W. Titus, who is the judge presiding over the Lauren Stevens trial, granted the defendant's motion for a judgment of acquittal, bringing the case to an end. Stevens had been accused of obstruction and making false statements in connection with GSK's responses to a voluntary request from the FDA for information concerning GSK's marketing practices for the drug Wellbutrin. In dismissing the case, Judge Titus found that "the evidence in this case can only support one conclusion, and that is that the defendant sought and obtained the advice and counsel of numerous lawyers. She made full disclosure to them. Every decision that she made and every letter she wrote was done by a consensus. Now, even if some of these statements were not literally true, it is clear that they were made in good faith which would negate the requisite element required for all six of the crimes charged in this case."
Judge Titus further stated that he "believe[d] it would be a miscarriage of justice to permit this case to go to the jury" and recognized that "[t]here is an enormous potential for abuse in allowing prosecution of any attorney for the giving of legal advice. I conclude that the defendant in this case should never have been prosecuted and she should be permitted to resume her career." Attached is a copy of Judge Titus's decision.
The Government's False Claims Act Complaint Against Deutsche Bank: FCA Claims And Program Certifications
On May 3, 2011, Manhattan U.S. Attorney Preet Bharara filed a billion dollar False Claims Act lawsuit against Deutsche Bank and its subsidiary MortgageIT for alleged mortgage fraud during last decade’s housing bubble. The action, captioned United States v. Deutsche Bank AG and MortgageIT, Inc., 11 Civ. 2978, was filed in the Southern District of New York and is being prosecuted by a special Civil Frauds Unit set up a year ago by the Manhattan U.S. Attorney’s Office to investigate large-scale economic crimes, including mortgage fraud.
The Deutsche Bank lawsuit is significant because it is the first public False Claims Act case for mortgage fraud against a major financial firm. On the issue of whether we can expect to see similar lawsuits against other financial firms in the future, U.S. Attorney Bharara stated that “it would not be a fantastical stretch to think we are looking at other lending institutions as well.” This week, we will publish a series of posts that analyze some of the issues arising out of the Government’s complaint. Today, we take a look at the Government’s FCA claims based on the annual certifications allegedly provided by Deutsche Bank and MortgageIT to maintain MortgageIT’s status as a Direct Endorsement Lender in a residential mortgage program insured by the federal Government. The complaint alleges the annual certifications were false because they represented to HUD that MortgageIT was in compliance with HUD’s mandatory quality control requirements, when this was allegedly not the case.
The Government has chosen to proceed on a “false certification” theory of liability, which is challenging for a plaintiff. Courts, including the Second and Tenth Circuits, have held that the certification must be a condition to Governmental payment, and cannot be simply a certificate of compliance as a condition of participation in the Government program. See Mikes v. Strauss, 274 F.3d 687, 701-702 (2d Cir. 2001); United States ex rel. Blundell v. Dialysis Clinic, Inc., 2011 WL 167246 (N.D.N.Y. Jan. 19, 2011), at *15-16; United States ex rel. Conner v. Salina Regional Health Center, Inc., 543 F.3d 1211, 1220-1221 (10th Cir. 2008).
HUD/FHA has a comprehensive regulatory scheme for managing participation in the Direct Endorsement Lender program. The FHA’s Mortgagee Review Board (“MRB”) is responsible for monitoring and enforcing compliance with the Direct Endorsement Lender program. The MRB can, and has, sanctioned FHA-approved lenders for violations of program requirements up to withdrawal of a lender’s FHA approval so that the lender cannot participate in FHA programs. The challenge here will be to show that the Direct Endorsement Lender’s certification was a condition of payment of an FHA-insured defaulted mortgage claim and not a condition of participation in the Direct Endorsement program. This blog will be following this point as the case emerges.
The Government also alleges that Deutsche Bank and MortgageIT violated the False Claims Act by making individual loan-by-loan certifications contained in the mortgage applications endorsed by MortgageIT. Our next post will take a look at FCA claims based on loan-by-loan certifications.
United States Files False Claims Act Lawsuit Alleging Mortgage Fraud Against Direct Endorsement Lenders
Earlier today, the United States filed a False Claims Act lawsuit for alleged mortgage fraud against Deutshe Bank AG and MortgageIT, Inc. in the federal court in the Southern District of New York. The complaint alleges violations of the False Claims Act pursuant to the FCA's false claims, false statements, and reverse false claims provisions. The complaint also includes common law claims for breach of fiduciary duty, gross negligence, negligence, and indemnification. We will report back once we've had a chance to review and analyze the theories of FCA liability, including false certification, pleaded in the complaint.