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Pre-recession whistleblower suit revived against Wells Fargo

On Behalf of | Sep 11, 2017 | False Claims Act

In light of a 2016 Supreme Court ruling, the Second Circuit Court of Appeals has ordered a federal court to reconsider the case of two men who tried to blow the whistle on actions by Wells Fargo and two mortgage lenders before the 2008 financial crisis.

The case involved adjustable-rate mortgage specialist World Savings Bank. Wachovia bought World Savings’ parent company, Golden West Financial Corp., in 2006 for $24.2 billion. In 2008, Wells Fargo bought both Wachovia and Golden West for $12.7 billion.

The whistleblowers were employees of Wachovia and World Savings Bank. In 2011, they filed a federal False Claims Act lawsuit alleging that their employers, along with Wells Fargo, were concealing billions of dollars in losses and also hiding mortgage improprieties. The purpose of that concealment was to allow the lenders to falsely certify that they were in compliance with key banking laws so that they could obtain Federal Reserve aid at favorable rates, according to the suit.

Unfortunately, the suit was dismissed in 2015, and that dismissal was upheld by the Second Circuit in 2016. The False Claims Act was thought not to apply to claims like those made by the two whistleblowers — allegations that an entity falsely certified items, but that those items were not expressly laid out as conditions of receiving federal money.

Shortly afterward, however, the U.S. Supreme Court issued a ruling in another False Claims Act case, Universal Health Services v. United States ex rel. Escobar. In that case, the high court specifically found that the FCA does apply when an entity falsely certifies material contractual, statutory or regulatory compliance, even if that compliance wasn’t a condition of the federal grant or program.

Essentially, the Supreme Court ruled that people could blow the whistle under the False Claims Act on any misrepresentation “material to the government’s payment decision.” The Second Circuit and trial court had apparently been wrong to turn away the Wells Fargo whistleblowers’ suit.

And indeed, the Second Circuit recently ordered the trial court to reconsider the case in light of the Supreme Court ruling. Assuming the case goes forward, it still must be tried or settled.

“Going forward, companies will likely feel far less safe taking undue advantage of government programs,” said a lawyer for the whistleblowers, “and when they do transgress it will be easier for whistleblowers and the government itself to obtain redress.”

If successful, this False Claims Act lawsuit against Wells Fargo has the potential to save the federal government a substantial amount of money. Whistleblowers like these stand to receive a portion of any money returned to the government.