The Resurgence of the False Claims Act and FIRREA

The False Claims Act(1) has been on the books since the United States Civil War, enacted to curtail defense contractors of the time in providing faulty equipment and unhealthy animals to Union and Confederate troops. Its past usage has focused on government contractors and health care providers who are paid under with federal funds. Approximately 23 years ago the Nation was embattled in a financial crisis not too different than what it is facing today. In response, the Government passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989(2) ("FIRREA"). The main purpose of FIRREA was to provide $50 billion to assist in the closing of several failed savings and loans through the creation of the Resolution Trust Corporation ("RTC"). The RTC was tasked with selling failed savings and loan’s assets to repay depositors who had entrusted their funds with the savings and loans.

In addition to creation of the RTC and other enhanced regulations, there were two other important pieces of the FIRREA legislation. The first was an increase in the statute of limitations on several existing bank fraud related statues(3) from five years to ten and secondly, an addition of the ability to seek civil penalties up to $1 million for each violation of these same bank fraud statutes and up to $5 million for continuing violations.

Today the RTC has dissolved, but the 10 year statute of limitations and the ability to bring civil actions under FIRREA and the False Claims Act are still visible in the arsenal of the Department of Justice as it addresses the current situation with financial institutions. Over the past year the Civil Fraud's Unit of the United States Attorney's Office for the Southern District of New York has filed four cases regarding the Housing and Urban Development's FHA Insurance Program and in the more recent CitiMortgage case has included a FIRREA count within the complaint. The main charging vehicle for these cases is the False Claims Act for providing false certifications to HUD to induce FHA insurance on loans that were allegedly not eligible for such insurance. As with FIRREA, the False Claims Act has severe penalties for persons who knowingly make false claims for federal funds and are therefore liable for three times the government’s loss plus a civil penalty of $5,500 to $11,000 for each false claim.

These recent cases filed in the Southern District paired with the settlement with Bank of America(4) for Countrywide’s alleged FHA related conduct and the $95 million settlement with five major banks to settle alleged false claims stemming from mortgage loan origination and servicing demonstrates that the Government is dusting off litigation of the past and applying them to financial institutions today.

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1 31 U.S.C. §§ 3729 et seq
2 To reform, recapitalize, and consolidate the Federal deposit insurance system, to enhance the regulatory and enforcement powers of Federal financial institutions regulatory agencies, and for other purposes.
3 18 U.S.C §§ 215, 656, 657, 1005, 1006, 1007, 1014, or 1344 of Title 18; or 18 U.S.C. 18 §§ 287, 1001, 1032, 1341 or 1343 affecting a federally insured financial institution.
4 http://amlawdaily.typepad.com/02152012citi_complaint.pdf
5 http://www.stopfraud.gov/iso/opa/stopfraud/NYE-120209.html