The Department of Housing and Urban Development (HUD) and the Justice Department appear to be working together under a new strategy to use the False Claims Act (FCA) as an additional enforcement tool to supplement HUD’s limited arsenal. What began with United States v. Deutsche Bank AG, No. 1:11-cv-02976 (S.D.N.Y.), the first public mortgage fraud suit the Justice Department (DOJ) brought against a major financial institution in the wake of the recent mortgage-spurred financial crisis, appears now to be a growing trend and a clear strategy by HUD and DOJ to import the stiff penalties associated with the FCA into HUD’s enforcement arsenal.
The number of FCA cases the DOJ files each year has steadily increased—in 2011, the number increased 47% from 2009. Within the DOJ’s overarching FCA strategy, which has largely focused on the pharmaceutical industry ($7.4 billion in penalties and damages of a total $11.1 billion since 2009), it is clear that mortgage lenders, and large financial institutions generally, increasingly are coming under fire.
DOJ filed its initial mortgage-related FCA complaint against Deutsche Bank on May 3, 2011, seeking over a billion dollars in damages and penalties. At the time this appeared to be a troubling development and perhaps suggested there was more to come. For instance, after DOJ’s initial complaint was filed, U.S. Attorney for the S.D.N.Y. Preet Bharara commented that it “would not be a fantastical stretch to think we are looking at other lending institutions, as well.” Additionally, several leading financial companies disclosed in SEC filings made within the last two years that they received subpoenas from the federal government concerning mortgage-related conduct. See, e.g., Lauren Tara LaCapra, U.S. Probes Banks’ Mortgage Practices, The Street, Jan. 14, 2011.
On January 27, 2012, Attorney General Eric Holder announced the creation of a Residential Mortgage-Backed Securities Working Group, comprised of representatives from the DOJ, SEC, and HUD to “identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities,” but gave no indication that the group’s arsenal would be FCA-centric. Then, DOJ brought FCA-related suits against another 5 lenders; ultimately, settling with four of those lenders for more than $1 billion. This development was followed on March 12, 2012, with DOJ and HUD’s announcement of a $25 billion settlement agreement “with the nation’s five largest mortgage servicers,” for alleged frauds, including several FCA-related allegations. Finally, DOJ settled the first mortgage-related FCA case it had filed with Deutsche Bank and its subsidiary, MortgageIT, in May 2012 for more than $200 million.
There is every indication this strategy will continue. For instance, in the DOJ’s March announcement of a $25 billion settlement, DOJ indicated the settlement did not foreclose future FCA claims against those same institutions. And one major DOJ mortgage-related FCA case remains outstanding. In November 2011, DOJ filed an FCA-related suit against Allied Home Mortgage and two of its executives. This case remains unresolved.