Why it matters: The government is involved in many disparate types of activity, and if “government dollars” are involved, we are seeing more and more how possible it is to run afoul of the False Claims Act (FCA). This month, we review the Supreme Court’s grant of certiorari in an FCA case involving allegations of insurance fraud on the government, where the Court agreed to review the question of what standard governs the dismissal of a qui tam case when a violation of the FCA’s 60-day “seal” provision is alleged. In addition, we review the Second Circuit’s reversal of a Southern District of New York court’s $1.27 billion judgment in an FCA-related government-sponsored mortgage lending context, in which the Court tackled the question of when an alleged breach of contract can also constitute fraud. We also review recently-announced FCA resolutions and filings by the DOJ in three very different business sectors where fraud on the government was alleged: mortgage lending, healthcare supply referrals, and customs duties. Read on for a recap.

Detailed discussion: What do Hurricane Katrina, mortgage lending, continence care products, and bedroom furniture have in common? All figured prominently in recent FCA-related cases and government resolutions.

We begin by looking at two recent FCA matters in the courts:

  • On May 31, 2016, the Supreme Court granted certiorari in State Farm Fire and Casualty Company v. U.S ex rel. Cori Rigsby; Kerri Rigsby, a case involving a qui tam suit filed by two independent claims adjustors against State Farm Fire and Casualty Company (State Farm) alleging that, following Hurricane Katrina, State Farm misadjusted federal flood claims in Mississippi by attributing wind damage (covered under State Farm’s homeowners insurance) to flood damage (covered by flood policies under the federal government’s National Flood Insurance Program). The issue that the Court agreed to address involves the actions of the relators in the period following the filing of their qui tamsuit. The FCA requires that qui tams be filed under seal for a period of 60 days before service on the defendant to give the government the opportunity to investigate and decide whether to intervene. Instead of honoring the 60-day “seal,” State Farm alleged that the relators went on a “media binge” to “demonize” State Farm by disclosing the existence of their qui tam to news outlets on at least three occasions within the seal period, thereby justifying dismissal of the case. The circuits are split on the issue of when dismissal would be warranted in such a circumstance, and the Court thus granted certiorari to consider the question of “[w]hat standard governs the decision whether to dismiss a relator’s claim for violation of the FCA’s seal requirement, 31 U.S.C. § 3730(b)(2)?” The Court declined to review State Farm’s second question presented involving the standard under which a corporation can be found to have “knowingly” presented a false claim in violation of the FCA, leaving that particular issue for another day. The Court will hear oral argument when it reconvenes in October.
  • On May 23, 2016, the Second Circuit in U.S. ex rel Edward O’Donnell v. Countrywide Home Loans, Inc. et al.overturned a $1.2 billion penalty that had been imposed by Southern District of New York Judge Jedd S. Rakoff against Countrywide Home Loans, Inc. and related entities (Countrywide) and its successor-in-interest Bank of America, NA and other BA entities (BA) in connection with the sale of mortgages to government-sponsored entities (GSEs). To briefly summarize the facts, commencing in 2007 in an internal restructuring after the collapse of the subprime market, the Full Spectrum Lending Division (FSL) of Countrywide began selling what the government alleged were poor-quality prime mortgages. In 2012, Countrywide employee Edward O’Donnell filed a qui tam suit under the FCA with respect to the FSL lending, in which the government intervened and added claims under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The FCA claims and certain of the Countrywide and BA entities were subsequently dismissed, and only the FIRREA claims were presented at trial against the remaining defendants. At the trial, the government alleged that, when made, the mortgage loans were not in compliance with the lending requirements even though Countrywide represented and warranted in investment purchase contracts that they were “Acceptable Investments” and of “investment quality” (as those terms were defined). Key to the Second Circuit’s analysis, the government failed to present evidence at trial to show that Countrywide had fraudulent intent during the negotiation and execution of the investment contracts. Instead, the government presented evidence to show that Countrywide executives knew that the mortgages were of poor investment quality when subsequently made in breach of the representations and warranties contained in the contracts and thus Countrywide intended to defraud the GSEs. The defendants countered at trial that, at most, they were guilty of intentional breach of contract, but the evidence was insufficient as a matter of law to support a finding of fraud. The federal jury returned a verdict in favor of the government, and Judge Rakoff imposed a fine against Countrywide and BA of $1.27 billion.

    The Second Circuit reversed and ordered that judgment be entered in favor of Countrywide and BA. The Second Circuit began its analysis by posing the question “[w]hen can a breach of contract also support a claim for fraud?” The Court looked at the common law of fraud, as incorporated in criminal statutes such as FIRREA, and found that “where allegedly fraudulent misrepresentations are promises made in a contract, a party claiming fraud must prove fraudulent intent at the time of contract execution; evidence of a subsequent, willful breach cannot sustain the claim.” Thus, the Court concluded that “the trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises.”

Next, we review some recent DOJ FCA resolutions and filings that caught our eye in the disparate areas of FHA mortgage lending, healthcare supply referrals and customs duties:

FHA mortgage lending: The DOJ recently announced that it had resolved an action with one financial institution and filed a complaint against another in connection with the participation by those institutions in the Federal Housing Administration’s (FHA) Direct Endorsement Lender (DEL) program, through which private financial institutions directly originate, underwrite and certify mortgages for FHA insurance.

  • M&T Bank Corp: On May 13, 2016, the DOJ announced that New York-based M&T Bank Corp. (M&T) agreed to pay $64 million to resolve allegations that it violated the FCA while participating in the FHA’s DEL program by “knowingly” originating and underwriting mortgage loans that did not meet applicable FHA origination, underwriting and quality control requirements. As part of the settlement, M&T admitted to violations of the DEL rules during the period from 2006 to 2011, including (1) filing false certifications for FHA insurance mortgage loans that did not meet the U.S. Department of Housing and Urban Development’s (HUD) underwriting requirements and did not adhere to FHA’s quality control requirements; (2) failing to conduct reviews of all “Early Payment Default” loans (i.e., loans that become 60 days past due within the first six months of repayment) and adequate samples of closed FHA loans as required by HUD; and (3) failing to adhere to HUD’s self-reporting requirements regarding defective loans. The DOJ’s press release stated that “[a]s a result of M&T’s conduct and omissions, HUD insured hundreds of loans approved by M&T that were not eligible for FHA mortgage insurance under the Direct Endorsement Lender program and that HUD would not otherwise have insured. HUD subsequently incurred substantial losses when it paid insurance claims on those loans.” The DOJ said that the settlement resolved allegations in a whistleblower lawsuit filed under the qui tam provisions of the FCA by a former employee of M&T, whose award had not yet been determined.
  • Guild Mortgage Company: On May 19, 2016, the DOJ announced that it had filed a complaint in D.C. district court against San Diego–based Guild Mortgage Company (Guild) under the FCA for improperly originating and underwriting mortgages insured by the FHA while participating in the DEL program. In the complaint (through which it was intervening in an FCA qui tam lawsuit), the DOJ alleged among other things that, from 2006 to 2012, Guild (a) “knowingly submitted … claims for hundreds of improperly underwritten FHA-insured loans, (b) “grew its FHA lending business by ignoring FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages,” and (c) allowed its underwriters to “waive compliance with FHA requirements when underwriting a loan” and “used unqualified junior-underwriters who did not have a [DEL] certification to waive mandatory conditions on higher risk loans where HUD required underwriting only by highly trained [DEL] underwriters.” To support its claims, the DOJ alleged that Guild management “focused on growth and profits and ignored quality,” citing to facts regarding the discovery through branch audits of high percentage rates of defective loans being issued by untrained underwriters (“significant defects included fraud, misrepresentation and other serious findings while moderate defects included not following guidelines”) and the failure of Guild’s internal quality control group to flag and report the defective loans to management or attempt to remediate them. The DOJ alleged that “as a result of Guild’s knowingly deficient mortgage underwriting practices, HUD has already paid tens of millions of dollars of insurance claims on loans improperly underwritten by Guild, and that there are many additional loans improperly underwritten by Guild that are currently in default and could result in further insurance claims on HUD.”

Healthcare supply referrals: On April 29, 2016, the DOJ announced that Byram Healthcare Centers Inc., a medical products supplier (Byram), and Hollister, Inc., a manufacturer of disposable health care products (Hollister) agreed to pay approximately $9.4 million and $11.44 million, respectively, to resolve allegations that the companies “engaged in a kickback scheme designed to increase sales and profits.” The DOJ said that the settlement with Hollister resolved allegations (which were neither admitted or denied by Hollister) that, from 2007 to 2014, it paid kickbacks to Byram in return for “marketing promotions, conversion campaigns, and other referrals of patients to Hollister’s ostomy and continence care products.” The DOJ said that the settlement with Byram resolved allegations (that were neither admitted or denied by Byram) that, in 2012 and 2013, Byram received numerous kickbacks from Hollister and three other manufacturers of ostomy and continence care products (including Coloplast Corp. (Coloplast)) in return for Byram’s agreement to “conduct promotional campaigns and to refer patients to the manufacturers’ products.” The Byram settlement also resolved state and federal FCA allegations that Byram submitted inflated claims to the California Medi-Cal program in violation of the state’s regulation which limits the amount a provider can bill for certain products. In connection with the FCA settlement, Byram agreed to pay $127,117 to the state of California and to enter into a corporate integrity agreement with the U.S. Department of Health and Human Services, Office of Inspector General. The DOJ said that the settlements resolved allegations in a whistleblower lawsuit filed by two former employees and one current employee of Coloplast under the qui tam provisions of the FCA, and that the whistleblowers’ award had not yet been determined. Finally, the DOJ said that claims against Coloplast and another defendant were resolved in December 2015 for approximately $3.6 million, bringing the total recovery in the case to approximately $24.6 million.

Evasion of customs duties: On April 27, 2016, the DOJ announced that Los Angeles-based Z Gallerie LLC (Z Gallerie), a seller of upscale furniture and accessories, agreed to pay $15 million to resolve allegations that it engaged in a scheme to evade customs duties on imports of wooden bedroom furniture from the People’s Republic of China (PRC) in violation of the FCA. The DOJ explained in its press release that the Department of Commerce assesses various duties to protect U.S. manufacturers from unfair competition abroad by “leveling the playing field for domestic products.” This case involved “antidumping” duties that protect domestic manufacturers from foreign companies “dumping” products on U.S. markets at prices below cost. Relevant to this case, imports of wooden bedroom furniture manufactured in the PRC have been subject to antidumping duties since 2004. According to the DOJ’s allegations (which were neither admitted or denied by Z Gallerie), Z Gallerie evaded antidumping duties on wooden bedroom furniture imported from the PRC between 2007 and 2014 by misclassifying the imported furniture as pieces intended for non-bedroom use on documents presented to customs officials. Qui tam whistleblower to receive $2.4 million.

See here to read State Farm’s Petition for Writ of Certiorari in State Farm Fire and Casualty Company v. U.S ex rel. Cori Rigsby; Kerri Rigsby.

See here to read the Second Circuit’s 5/23/16 opinion in U.S. ex rel Edward O’Donnell v. Countrywide Home Loans, Inc. et al.

See here to read the DOJ’s 5/13/16 press release entitled “M&T Bank Agrees to Pay $64 Million to Resolve Alleged False Claims Act Liability Arising from FHA-Insured Mortgage Lending.”

See here to read the DOJ’s 5/19/16 press release entitled “United States Files Lawsuit Alleging That Guild Mortgage Improperly Originated and Underwrote FHA-Insured Mortgage Loans.”

See here to read the DOJ’s 4/29/16 press release entitled “Byram Healthcare and Hollister, Inc. to Pay $20 Million to Resolve Kickback Allegations.”

See here to read the DOJ’s 4/27/16 press release entitled “California-Based Z Gallerie LLC Agrees to Pay $15 Million to Settle False Claims Act Suit Alleging Evaded Customs Duties.”