Financial Crisis Programs

In 2009, Congress obligated and expended $1 trillion in the form of a stimulus package to stabilize the U.S. banking system and prevent economic collapse. These funds were primarily dispensed through contracts with non-governmental entities, including general contractors and subcontractors working for the government. The risk of fraud to this enormous taxpayer fund was substantial, and so Congress enacted the Fraud Enforcement and Recovery Act (“FERA”) to reduce anticipated fraud resulting from federal bailout programs such as the Troubled Asset Relief Program (“TARP”), Capital Purchase Programs (“CPP”), or Term Asset-Backed Securities Loan Facility (“TALF”). To achieve this, FERA amended the FCA to expand the types of government funds subject to whistleblower lawsuits. Part of the changes to the FCA included closing a subcontractor loophole and applying new subcontractor liability retroactively. Any false statement made to the government to obtain or use federal bailout money constitutes a false claim and may render a company liable under the FCA.

Example

In 2013, the government filed suit against Countrywide Financial Corp., Bank of America, and others under the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”), as well as under the FCA. The case was primarily about mortgage fraud, which was by far the most common form of fraud during the financial crisis. Much of it centered around Fannie Mae and Freddie Mac. These government-sponsored entities (“GSEs”) purchase single-family mortgages from lenders based on the lenders’ representations of those loans; namely that they are not fraudulent, noncompliant with guidelines, or otherwise materially defective. The defendants sold loans to Fannie Mae and Freddie Mac that it represented as acceptable investments. The government alleged that the defendants knew they were selling defective loans and that they sought to quickly boost their revenues by fraudulently modifying their loan origination process despite the collapsing subprime mortgage market. This new process, dubbed the “High Speed Swim Lane” or “HSSL,” reduced the number of days spend processing loans and greatly reduced oversight to ensure loan quality. The government asserted that this tactic effectively guaranteed that loans sold to Fannie Mae and Freddie Mac would be of lower quality than represented.

Fannie Mae and Freddie Mac purchased a greater percentage of loans from Countrywide and Bank of America than from any other lender; resulting in more than $1 billion in losses and causing both GSEs to become insolvent. Prior to 2009, the FCA did not encompass fraudulent claims made to entities such as Fannie Mae and Freddie Mac. However, the Fraud Enforcement and Recovery Act of 2009 applied the FCA to such claims. Unfortunately for the government, however, the fact did not have retroactive effect, and therefore only applied to claims filed on or after May 20, 2009. As a result, the district court dismissed the FCA claims against the defendants.

Example

In January 2013, a federal grand jury indicted Jesse Litvak for TARP fraud, among other crimes. Litvak was a licensed securities broker and former senior trader who defrauded six Public-Private Investment Funds (“PPIFs”) and fourteen privately funded entities. He lied to both sellers and buyers during negotiations for the purchase and sale of residential mortgage-backed securities (“RMBS”). He also invented nonexistent sellers with whom he pretended to negotiate on victims’ behalf in inventory trades, when he already held the security at issue. Since the government had invested TARP funds in these PPIFs, he faced a TARP fraud charge under the 2009 FERA.