BY ERYCA SCHIFFMAN — In one of the most ironic twists of the mortgage crisis, a former financial executive stands to make hundreds of millions of dollars in a whistleblower suit against Bank of America.
In February 2012, former Countrywide Home Loans Executive Vice President Edward O’Donnell filed a qui tam action under the False Claims Act (“FCA”) against Bank of America, which purchased Countrywide in July 2008. O’Donnell filed the action on behalf of the United States because of the substantial losses that Fannie Mae and Freddie Mac suffered in conjunction with the toxic B of A/ Countrywide mortgage portfolio.
O’Donell’s complaint alleges that Countrywide instituted an automated loan processing and underwriting strategy, internally referred to as the “Hustle,” in an effort to speed up loan processing and loan underwriting. The Hustle allegedly removed certain quality control devices, resulting in a catastrophic number of high-risk loans, many of which defaulted. The complaint states that Bank of America inherited the Hustle program from Countrywide and continued using the program to quicken the processing of loans.
Enter the False Claims Act (FCA). Wall Street Journal blogger Joe Palazzolo describes the FCA, 31 U.S.C. §§ 3729–33, as a law that “prohibits companies and individuals from submitting false records to receive payment from the government.” According to the United States Department of Justice, Congress enacted the FCA in 1863 in response to suppliers of goods who were defrauding the Union Army during the Civil War.
When first enacted a century and a half ago, the FCA made any individual who knowingly submitted false claims to the government liable for twice the damages suffered by the government in addition to $2,000 for each specific false claim. The FCA has been amended several times and currently provides for treble damages in addition to $5,000 to $10,000 for each false claim. 31 U.S.C. § 3729.
The FCA was further broadened by the Fraud Enforcement and Recovery Act of 2009 (“FERA”). According to Palazzolo, FERA eliminated case law that stated that individuals could be liable “only if they intended for a false statement to sway the government to pay a claim.” Section four of FERA broadened the grounds for liability under the FCA, as a false claim now includes anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” Most likely relying on the broader language of the FCA, federal prosecutors in Manhattan intervened in October 2012 and filed a complaint against Bank of America demanding over $1 billion dollars in penalties for defrauding the government.
In response to both complaints, Bank of America is likely to assert that FERA’s amendments of the FCA cannot be applied retroactively to the allegedly fraudulent actions. This would raise a difficult legal point–FERA has an obscure provision allowing for some retroactivity, but its scope has yet to be determined. If the court rules that the FERA amendments to the FCA do not apply to these cases, it seems unlikely that O’Donnell or the government will be able to prevail under the prior language of the FCA.
O’Donnell’s initial qui tam complaint rests on the statutory power of a private citizen, referred to in the FCA as a “Relator,” to sue on behalf of the federal government. In a qui tam action like this one, if the government wins its billion-dollar suit, the Relator is entitled to 15% to 25% of the amount recovered by the government. 31 U.S.C. § 3730. That could amount to more than $250 million.
Now that is a “Hustle.”
