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.
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.