White Collar Alert

This guest post was authored by our colleague Priya Roy, an associate in the firm’s Litigation Department and member of its Data Privacy and Cybersecurity practice group. Priya focuses her practice in the areas of higher education and white collar and government investigations. She also serves an editor of the firm’s Data Privacy Alert blog, which focuses on data privacy and cybersecurity issues.

In the wake of the mortgage crisis, there has been an uptick in False Claims Act (“FCA”) claims against banks, lenders, and mortgage servicers based on loans involving Government Sponsored Enterprises (“GSE”) such as Freddie Mac and Fannie Mae.  Yet on February 22, 2016, the Ninth Circuit rejected claims against certain financial institutions arising out of allegedly false representations and warranties made in seller / services contracts with Freddie Mac and Fannie Mae, holding that Fannie and Freddie were not governmental instrumentalities for purposes of the FCA.  United States ex rel. Adams v. Aurora Loan Servs., Inc., 2016 WL 697771 (9th Cir. Feb. 22, 2016).  The court, however, refused to take a bright line rule that GSEs could never be governmental instrumentalities.  The opinion nonetheless sheds light on the scope of the FCA in cases involving GSEs.

The FCA is the government’s primary tool to recover damages for fraud involving government funds. Importantly, the FCA has a qui tam mechanism that allows citizens who purport to have evidence of fraud against the government contracts and programs to sue on the government’s behalf. Such qui tam plaintiffs are called “Relators,” and stand to be awarded between fifteen to twenty-five percent of the ultimate recovery in the case.  The government has the right to intervene in the proceedings.  Even if the government declines intervention, the Relator may proceed with the action.

In Adams, the Relator asserted that servicer defendants violated the FCA when they falsely certified to the GSEs that they were in compliance with their seller/servicer agreements and representations when they were not.  Further, he alleges that servicers caused the GSEs to pay for certain homeowner association assessments and charges for which the GSEs are not liable.

In order to fall under the FCA, which requires a false claim to the government, the Relator argued that Freddie and Fannie’s 2008 conservatorship made them a part of the government.  The District Court of Nevada dismissed the Relator’s complaint for failure to state a claim.  It held that claims submitted to GSEs did not violate the FCA, because the GSEs were not instrumentalities of the United States but rather “private corporations created by the government.”  In so doing, the district court specifically rejected arguments that Freddie and Fannie’s 2008 conservatorship made them a part of the government, reasoning that “[i]f the GSE were agencies of the United States, there would be no need for Congress to have created the [Federal Housing Finance Agency] to take conservatorship of them.”

The Department of Justice declined to intervene but argued in an amicus curiae submission that under the expanded definition of “claim,” the money reimbursed to Fannie and Freddie by the government was done so “to advance a government program or interest.” The DOJ argued that the 2009 FERA (“Fraud Enforcement and Recovery Act”) amendments to the FCA expanded the scope of a “claim,” by removing the requirement that a claim to be “presented” to the government.  FERA expanded government’s ability to investigate and prosecute financial fraud, focusing on the misuse of stimulus and Troubled Asset Relief Program monies. Under the FERA amendments, “claim” was redefined to include a request for money made to a “recipient” of government money provided “to advance a Government program or interest.” 31 U.S.C. §3729(b)(2)(A).  Using these amendments, the DOJ argued that the FCA reaches payments made from private companies who are reimbursed by the Federal government; and the GSEs became “recipients” of federal funds when the U.S. government purchased preferred stock in the GSEs beginning in 2008.  The DOJ also argued that this “enormous investment” authorized by Congress to rescue the GSEs advanced a government interest within the meaning of the FCA.  The district court rejected this argument that GSEs were transformed into “recipients” of government funds when the United States purchased securities of the GSEs as part of their bailout.

On appeal, the Ninth Circuit affirmed the lower court’s decision, holding that Fannie and Freddie are not officers, employees, or agents of the federal government for purposes of the FCA.  Nor did the 2008 conservatorship transform Freddie and Fannie into government instrumentalities.  Indeed, the purpose of the conservatorship was to give Federal Housing Finance Agency the powers of Fannie and Freddie, “not the other way around.”

The Ninth Circuit declined to express an opinion on whether the Relator could have stated a claim under the government’s theory of the expanded scope of the claim, but found that the trial court “was mistaken” in ruling that claims made to Freddie and Fannie could never constitute claims under the FCA and that “[a] properly pled claim under § 3729(b)(2)(A)(ii) could give rise to FCA liability.”  In so ruling, the Court left open the ability of Relators and the government to plead that claims made to Freddie and Fannie were reimbursed by the government to advance a government interest.  A successful argument along these lines could substantially expand the FCA reach to hundreds of servicers, lenders, and banks by virtue of their contracts with and payments from Fannie and Freddie.