The 20/20 hindsight from Capitol Hill regarding the federal bailout program for financial institutions has begun in earnest. So far, much of the criticism from the Hill has been focused on the Treasury Department’s implementation and oversight of the Troubled Assets Relief Program (TARP), and the Capital Purchase Program (CPP) whereby the Treasury is making at least $250 billion of direct capital investments in qualified financial institutions. However, a new front was opened in a November 17, 2008 letter to Treasury Secretary Henry Paulson and Attorney General Michael Mukasey from Senator Charles Grassley (R-IA). In his letter, Senator Grassley urged the Treasury and Justice Departments to utilize the government’s primary weapon against fraud on the federal government, the civil False Claim Act (FCA), to prosecute fraud in the TARP and CPP programs.1  

While Senator Grassley’s letter focused in part on the applicability of the FCA, of particular note are the qui tam or whistleblower provisions of the FCA. These provisions provide financial incentives to whistleblowers to file suit for claims on behalf of the United States if the government declines to take over. Senator Grassley’s letter stressed that whistleblowers be “treated seriously” and “that any legitimate claims of fraud, waste, or abuse are aggressively investigated and prosecuted to the fullest extent of the law…”  

The FCA has unique liability provisions, including treble damages and mandatory penalties of up to $11,000 per “false claim” knowingly submitted for federal funds. It imposes liability based on a “reckless disregard” standard that specifically does not require an intent to commit fraud. Private citizens (ex. bank employees) who use the statute to advise the government of fraud allegations file a lawsuit on behalf of the United States, but the FCA requires the Court to seal the complaint, prohibiting anyone from disclosing the lawsuit or the identity of the whistleblower (outside of the government). The Department of Justice then investigates the allegation and either prosecutes the case itself, including through criminal prosecution where appropriate, or declines the case, in which case the citizen, known as a “relator” can prosecute the civil claims. The incentives for whistleblowers and their attorneys are significant. Relators are entitled to be paid between 15 percent and 30 percent of any recovery, whether by settlement or verdict, as well as have attorneys fees paid.

Liability under the FCA applies to any person or entity that (1) submits a false claim to the federal government, (2) makes or causes a false record or statement to be used to get a false claim paid or approved by the government, (3) conspires to get a false claim allowed or paid, or (4) makes a false record or statement to conceal or avoid an obligation to pay money to the government (except for tax claims).2  

In his November 17 letter, Senator Grassley highlighted that FCA violations could include (1) seeking payment pursuant to a program for which it is not eligible, (2) fraudulently seeking to obtain a government contract, (3) submitting a fraudulent application for a grant of funds from the government, (4) submitting a false application for a loan from the government, or (5) falsely certifying that the entity has complied with a law, contract obligation, or regulation.  

The FCA was enacted in 1863 in response to allegations of fraud on the Union Army during the Civil War. It was significantly amended in 1986, and has since become the major statute used by the Justice Department to prosecute “fraud” against the federal government or in federal programs. According to statistics released last week, the federal government recovered $1.34 billion from settlements and judgments under the FCA during the last fiscal year. And since the 1986 amendments, the federal government’s total recovery is over $21 billion.  

But since its enactment, the FCA has rarely been used against entities in the financial services sector. The “lions share” of recoveries have been in the health care and defense sectors, as well as for the Department of Veterans Affairs. See Department of Justice press release. Senator Grassley, however, is urging application of the FCA to intentional or reckless false submissions for TARP or CPP funds, and he is urging private citizen whistleblowers to fully participate in this use of the FCA.  

Presently, a false certification can only be the basis for a FCA claim where the a false certification is considered “material” to the government’s decision to pay or approve the claim. Although many whistleblowers attorneys have argued there should not be a materiality requirement in a false certification claim, and even the Justice Department has sometimes advocated this position, to date no court has accepted that view. The Supreme Court’s recent decision in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2126 (2008) only underscores the importance of a materiality requirement. Otherwise, every violation of a statutory provision, contract term, or regulation, no matter how inconsequential, could result in an FCA violation.  

Institutions that seek TARP and CPP funding should be aware that such funds come with the potential for FCA litigation brought by the government, by disgruntled employees, or by whistleblowers seeking a large reward. With Senator Grassley’s urging, financial institutions that participate in the TARP and CPP programs are potential, if not likely, targets of FCA actions. Any institution seeking TARP or CPP funds must carefully scrutinize every application and assertion therein, and fully vent any potential problems, before submission of any request for TARP or CPP funds.