February 23, 2017
Justices Revive FCA Suit Against Wells Fargo
Law360, New York (February 21, 2017, 12:50 PM EST)
The U.S. Supreme Court breathed new life into a False Claims Act case against Wells Fargo & Co. on Tuesday, telling the Second Circuit to take a look at former employees’ claims that the bank defrauded the federal government under the standard set in the so-called Escobar case last summer.
In their summary disposition, the justices gave Paul Bishop and Robert Kraus another chance to argue that their case wouldn’t have been dismissed if the top court’s ruling in Universal Health Services Inc. v. U.S. ex rel Escobar had been on the books. The pair had argued that the Second Circuit’s view of what counts as lying to the government was voided by the Escobar decision just a month after the appeals court affirmed the dismissal of their case against Wells Fargo.
A representative of Wells Fargo didn’t immediately respond to a request for comment on Tuesday. Joel Androphy, a partner at Berg & Androphy who represents Bishop and Kraus, hailed the decision.
“That’s great news for my clients today, one of whom is flipping burgers in a fast-food place because he can’t get a job,” he said. “We would have been in trial already under the Escobar standard.”
Krause and Bishop worked for Wachovia Bank and World Savings Bank before those institutions merged into Wells Fargo in 2008, and said those two banks engaged in massive fraud in the early- to mid-2000s. As relators, or whistleblowers, the men would share the winnings of any money judgment with the federal government.
As part of the alleged fraud, Wachovia’s executives used improper accounting practices to hide toxic assets off its balance sheet, making the bank look more profitable and in better financial health than it was. In reality, it was severely undercapitalized, the whistleblowers said.
The result of the alleged fraud was that the bank falsely claimed eligibility for preferential interest rates from the Federal Reserve and its Term Auction Facility by knowingly and intentionally violating the agency’s lending terms, the relators said.
Banks told the TAF how much they wanted to borrow and how much they would pay, and the Fed would loan its available capital to bidding banks starting with the highest interest rates and moving down until money ran out. Only banks in generally sound financial condition were eligible to bid, the whistleblowers said.
Under its old standard, set in the 2001 ruling Mikes v. Strauss, the Second Circuit defined an “expressly false claim” as one that falsely certifies compliance with a particular law, regulation or contractual term, where compliance is a prerequisite to payment, and said that implied false certification only applies when the underlying law or regulation upon which a plaintiff relies expressly says that compliance is necessary to be paid, the relators said.
In the instant case, the Second Circuit held that the banking laws didn’t expressly condition borrowing from the Fed on compliance, and that it didn’t matter if the violations actually caused the Fed to lend more money or charge less interest than it would have if it had known the truth, the petitioners said.
Then, in Escobar, the Supreme Court held that implied certification is a valid theory of FCA liability, doing away with the Mikes standard, the whistleblowers said.
When the district court originally dismissed the case, it did so with prejudice because it determined that any amendments would be futile because the relators’ “expansive theory of FCA liability simply is not viable” and the facts pleaded didn’t suggest that any further information would change that.
In their Supreme Court petition, the whistleblowers said that if the Second Circuit still has doubts about their claims, even given Escobar, they should be able to amend their complaint to state claims consistent with Escobar.
The petitioners are represented by Joel M. Androphy and Zenobia Harris Bivens of Berg & Androphy, Tejinder Singh of Goldstein & Russell PC, Sharad Samy of The Law Offices of Sharad A. Samy LLC and James Croke of the Law Offices of James Croke LLC.
Wells Fargo was represented at the Second Circuit by Gerald A. Novack, Amy P. Williams and Noam A. Kutler of K&L Gates LLP.
The case is Paul Bishop, et al., v. Wells Fargo & Co., et al., case number 16-578, in the Supreme Court of the United States.