May 21, 2009
Financial Fraud Enforcement Alert
Author(s): Carolyn G. Nussbaum
Yesterday, President Barack Obama signed the Fraud Enforcement and Recovery Act (FERA) into law, introducing sweeping changes to the False Claims Act and providing hundreds of millions of dollars for enforcement. The new law also amends the criminal code explicitly to bring mortgage lending businesses into the definition of “financial institutions.” This Financial Fraud Enforcement Alert provides details on the enacted legislation.
Yesterday, President Barack Obama signed into law the Fraud Enforcement and Recovery Act (FERA). FERA, which passed with overwhelming support in both chambers of Congress, is aimed at reducing fraud, especially—but not exclusively—fraud involving federal money and property. Supporters of the legislation contend that it is necessary based on reports indicating that mortgage and corporate fraud are at all-time highs and on projections by enforcement officials that the vast amounts of government dollars directed to economic recovery efforts bring an unavoidable increase in risks of further increases in fraud.
FERA strengthens and expands the ability to prosecute and punish fraud in three main areas. First, FERA amends and augments various statutes relating to financial fraud. Second, FERA significantly increases funding to the agencies charged with enforcing those statutes. Third, FERA establishes a commission to examine the causes and ramifications of the current financial crisis.
FERA makes major changes to several fraud laws and explicitly expands certain civil and criminal fraud statutes to include mortgage businesses and fraud aimed at the government’s economic recovery efforts. FERA also effectively overturns several recent judicial decisions that had limited the scope of certain antifraud laws.
FERA expands the grounds for liability under the False Claims Act (FCA), 31 USC §§ 3729–3733. It does so by “clarifying” that the FCA covers false claims for government money or property: (1) whether or not the claim was presented to a government employee or official; (2) whether or not the government has custody of the money or property; and (3) whether or not the person or entity specifically intended to defraud the government.
FERA accomplishes the above by amending the grounds for liability and altering (and adding) key definitions to the statute. After the amendments, the FCA may be enforced against any person or entity that “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” The statute’s definition of “claim” makes clear that this includes false records or claims made to the government or to contractors or other recipients of federal funds. Further, the new definition of “material” includes statements or records “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”
These changes effectively overturn Allison Engine v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008). There, the Supreme Court explained that a subcontractor violates the FCA if it submits a false statement to the prime contractor, intending for the statement to be used by the prime contractor to get the government to pay its claim. Liability would not exist when a subcontractor makes a false statement to the prime contractor and does not intend that the government rely on that false statement as a condition of payment. Under the new provisions, liability would exist if the subcontractor’s statement has a natural tendency to influence, or is capable of influencing, payment or receipt of money—a much lower standard.
FERA also repudiates United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004) and United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2005), rev’d, 562 F.3d 295 (4th Cir. 2009). The D.C. Circuit held in Totten that a claim must be “‘presented to an officer or employee of the government before liability can attach.’” Custer Battles established that liability under the FCA does not reach claims for payment of funds over which the United States has neither title nor control.
FERA revises “claim” to include “any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property.” This definition of “claim” includes any request or demand presented to the United States or “made to a contractor, grantee, or other recipient” if “the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest” and the United States provides or reimburses any portion of the money or property.
FERA also expands the concept of a reverse false claim. It makes explicit that it is a violation of the FCA to “improperly avoid or decrease an obligation to pay or transmit money or property to the Government.” Further, FERA defines “obligation” to include “an established duty…arising from…the retention of any overpayment.” These changes are aimed at prohibiting the improper retention of discovered overpayment.
FERA also restricts statute of limitations defenses in cases where the government intervenes. FERA includes direction that any government intervention “shall relate back to the filing date of the [relator’s] complaint…to the extent that the claim of the Government arises out of the conduct, transactions, or occurrences set forth, or attempted to be set forth, in the [relator’s] complaint….” This effectively overturns certain Circuit Court decisions that held that a defendant may have a statute-of-limitations defense when the delay between the original qui tam complaint and the government’s intervention becomes drawn out.
FERA reduces obstacles to issuing Civil Investigative Demands pursuant to the FCA. FERA amends the provisions relating to these demands to allow designees of the Attorney General to issue them. It further amends the FCA to allow greater sharing of information retrieved in FCA investigations.
FERA potentially expands grounds for retaliation claims. FERA amends the retaliation clause in the FCA. Although the wording of the new language is not entirely clear, it appears that the language may prohibit a broader range of actions against so-called “whistleblowers.” Retaliation may also exist for actions taken against an employee as a result of “associat[ing] with others in furtherance of other efforts to stop 1 or more violations” of the FCA.
FERA amends the Major Fraud Act, with its enhanced penalties, to include fraud committed in connection with the Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief Program (TARP).
FERA expands the definition of “financial institution” in Title 18 of the United States Code to include “mortgage lending business.” It also extends the prohibition against making false statements in a mortgage application to employees and agents of a mortgage lending business. FERA defines a “mortgage lending business” as “an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affect interstate or foreign commerce.” FERA adds this definition —as well as “any person or entity that makes in whole or in part a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974—to the definition of “financial institution” in 18 USC § 20.
FERA also proscribes false statements in mortgage applications made by employees and agents of mortgage lending businesses.
Section 1348 of Title 18 previously proscribed fraud only in the context of certain securities. FERA adds prohibitions against fraud involving options and futures in commodities.
FERA addressed the recent Supreme Court decisions in United States v. Santos, 553 U.S. __ (2008), by expanding the reach of the money laundering statute. FERA clarifies that the “proceeds” of money laundering include all gross proceeds, and are not limited to net proceeds.
FERA provides significant funding for antifraud enforcement. In total, the bill authorizes hundreds of millions of dollars per year over the next two years to hire hundreds of federal agents, prosecutors, and forensic analysts and support staff.
The Attorney General alone is awarded $330 million in funding for 2010–2011 “investigations and prosecutions and civil and administrative proceedings involving Federal assistance programs and financial institutions.” Of this amount, the Federal Bureau of Investigation is allocated $130 million for 2010–2011, “an appropriate percentage of which shall be used to investigate mortgage fraud.” The offices of the United States Attorneys ($50 million for each of the next two fiscal years) and the criminal, civil, and tax divisions of the Department of Justice ($40 million total for each of the next two fiscal years) are allocated significant funding, and the Securities and Exchange Commission was extended $20 million in 2010–2011 for “investigations and enforcement proceedings involving financial institutions.”
FERA also establishes a Financial Market Inquiry Commission to examine the causes, both domestic and global, of the financial crisis. The commission will be empowered to hold hearings and to issue subpoenas either for witness testimony or for documents, and will report its findings and conclusions to Congress and the public by December 15, 2010.
Among the commission’s functions will be to examine the roles of the following in the current financial and economic crisis:
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