The problematic practice of robosigning – whereby banks and other lenders improperly foreclosed on properties through formulaically processing foreclosure documents – has been much in the news over the past couple of years. The feds have been investigating banks and individuals; state attorneys general have joined forces in pursuit of robosigners; and, unsurprisingly, there have been a number of class actions filed by consumers whose homes were foreclosed.
The fallout of these actions has been somewhat inconsistent. On the settlement side, banks and individuals are facing hefty penalties: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally entered into a massive $25 billion settlement with the Justice Department and state attorneys general (of 49 states) in early 2012. The mortgage servicing firm, Lender Processing Services (LPS), recently entered into a $120 million settlement with a coalition of state attorneys general (of 45 states). A founder of one of LPS’s subsidiaries, Lorraine Brown, pleaded guilty to federal conspiracy charges and Missouri state charges and faces not less than two years imprisonment.
Those defendants who have not settled may be faring better. In early March, a Nevada district judge threw out an entire case against two title officers of LPS who faced more than 100 felony counts. (The judge’s ruling was not merits-based but rather based upon prosecutorial misconduct.) A New Jersey federal judge recently dismissed a putative class action against Bank of America, noting the plaintiff’s failure to prove that robosigning constituted fraud.
Part of the challenge for cases that don’t settle out may be proving damages to homeowners who lost their homes: If a home was foreclosed on deadbeats, where are the damages in rapid-fire paper pushing? Some banking experts have found that, between 2009-2012, mortgage servicers created some 800,000 foreclosures that could have been avoided through loan modification programs. And foreclosure practices at BofA and Morgan Stanley subsidiaries were found to have violated the Servicemembers Civil Relief Act, which provides active servicemembers financial protection in matters such as civil proceedings, income tax disputes and foreclosures. But these two categories are only a small subset of foreclosures, which have amounted to between one million and four million each year for the last six years.
One lesson from these matters may be that settling is not always the best option. But another take-away that hasn’t come up is how banks and mortgage servicers got into the practice of robosigning in the first place. The issue faced by the banks and lenders was a glut of foreclosures and a related mountain of paperwork to process those foreclosures. How could they effectively address the problem and the dead weight on their ledgers? The answer was to institute an efficient, and automated, process. The problem with automation, though, is a lack of oversight or subjective inquiry – the very purpose behind much of the required foreclosure documents.
While the banks and processors are certainly to blame for false certifications and notarizations, their actions are not as nefarious as many make them out to be. How often are we all guilty of “robosigning” the terms and conditions for a new software program or credit card application? How often do we read all the new disclosures that financial institutions are required to send with each statement or loan request? Part of the problem is that we are faced with a mass of disclosures resulting from both regulation and excess litigation. The information overload is part of what has played out in the robosigning scandal.
The Government Accountability Office just released a report criticizing the Federal Reserve’s review of the robosigning matter, saying that the review itself has become cumbersome and inconsistent. The only problem is that there is no realistic resolution to the problem. Until we can devise a way to be both thorough and totally efficient in processing information, we will inevitably face new versions of the robosigning scandal.
A qui tam case that was recently dismissed on summary judgment may signal the next front in the legal enforcement war arising from off-label use of prescription medications.
In United States ex rel. Watson v. King-Vassel et al., filed in the U.S. District Court for the Eastern District of Wisconsin, the complaint alleged that defendant Dr. Jennifer King-Vassel violated the Federal False Claims Act and Wisconsin False Claims Law by prescribing medications to a minor patient receiving Medicaid assistance for off-label purposes – that is, for purposes other than the specific ones for which the Food and Drug Administration has authorized use. The complaint also alleged that the company that employed Dr. King-Vassel was liable under a theory of respondeat superior.
On October 23, 2012, the court granted summary judgment to the defendants on the ground that there was no specific allegation that Dr. King-Vassel had submitted a Medicaid claim (or made any other false claim) specifically arising from the prescription of the medication in question, and on the ground that Dr. King-Vassel was actually an independent contractor, and not an employee, of the corporate defendant.
The Watson case was clearly resolved in the way it was because of specific deficiencies in the pleadings and proof in that case, and the court’s order dismissing the case was also highly critical of ethically questionable behavior committed by the relator as a means of creating and supporting the qui tam case. Nevertheless, the case raises the specter of a whole new series of legal actions that appear likely to arise from off-label use of FDA-approved medications.
We have written before about the massive fines paid by pharmaceutical companies for promotion of off-label use of medications. The Watson case focuses on a whole other universe of potential deep-pocket defendants: medical professionals and institutions involved in the prescription of the medications in question. Notwithstanding the dismissal of the Watson case, its operative theory – that a Medicaid claim relating to off-label use of a medication may constitute a false claim – may still be viable, though it is largely untested. Going forward, in any case in which a medical professional or institution faces civil or criminal legal action based on such a theory, counsel will have to scrutinize carefully whether the claims on which liability purports to be based truly fall within the scope of the false claims statute.
On April 4, the $25 billion national mortgage servicing settlement, which was announced in February, was finalized by a judge in the U.S. District Court for the District of Columbia. The settlement with the nation’s five largest mortgage servicers — Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc. (formerly GMAC) — was negotiated by 49 state attorneys general and the federal government. The complaint alleged that the servicers’ misconduct “resulted in the issuance of improper mortgages, premature and unauthorized foreclosures, violation of service members’ and other homeowners’ rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds.”
The settlement of this major mortgage fraud case requires that servicers provide a minimum of $20 billion in benefits directly to borrowers through a series of national homeowner relief effort options, and pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government). Eligible borrowers who lost their homes to foreclosure from January 1, 2008 through December 31, 2011, and suffered servicing abuse may each qualify for an estimated $1,500 cash payment, and eligible homeowners whose homes are currently underwater may qualify for principal reduction.
While these payments will assist homeowners who have already fallen victim to servicers’ mortgage fraud, perhaps the most important development to emerge from this settlement is the creation of new servicing standards that will take effect over the next two to six months.
The standards seek to improve consumer access to help and information by requiring servicers to provide a single point of contact for borrowers seeking information about their loans and adequate staff to handle calls. These servicing standards set procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. Finally, they will stop many past foreclosure abuses by requiring servicers to evaluate homeowners for other loan mitigation options before resorting to foreclosure, forbidding banks from foreclosing while the homeowner is being considered for a loan modification, requiring strict oversight of foreclosure processing, and prohibiting abuses such as robo-signing and improper mortgage documentation.
To ensure that the servicers comply with the terms of the settlement and prevent future mortgage fraud, a monitor has been appointed to work with non-compliant institutions to establish corrective plans, or to recommend penalties or to seek injunctive relief to enforce the settlement. The U.S. Department of Justice and state attorneys general can enforce through the court process compliance with the servicing standards and the banks’ financial obligations. The settlement does not prohibit further relief for individuals, and borrowers and mortgage investors can pursue individual, institutional or class action cases without restriction.
We hope that this $25 billion settlement is enough to get the attention of servicers engaged in unscrupulous practices and to ensure that they change their operations moving forward. We also hope that now that this cloud over the industry is dissipating, it can proceed to provide and service mortgages in a way that is legal and ethical and that will aid in facilitating a housing recovery that is still only on the horizon.
Successful criminal prosecutions of mortgage fraud seem to have one thing in common: a fraud figure well below $10 million. One of the recent cases that generated a fair amount of press involved the convictions of co-conspirators in a mortgage scheme carried out by an ex-NFL player. That scheme, which took place during the housing boom in the early 2000’s, resulted in 10 convictions. Former Dallas Cowboy linebacker Eugene Lockhart is facing jail time of up to 10 years. The nine other individuals are looking at sentences of roughly two to five years.
The mortgage scheme – which led to convictions for wire fraud, conspiracy to commit wire fraud, and making false statements to a federal agency – seems pretty typical of the conduct that prosecutors have been going after: the use of “straw borrowers” to apply for loans on home purchases; falsification of data on loan applications to ensure that straw borrowers would qualify for home loans; and creation of artificially high appraisal values for the homes to be purchased by the straw borrowers. In the case of Lockhart and his cohorts, the Justice Department alleges that the scheme resulted in an actual loss to lenders of roughly $3 million.
While $3 million is not a trivial sum, it is a very tiny portion of the housing industry. Even the total amount in all similar prosecutions nationwide is quite small. Recent headline prosecutions involving similar schemes include a Florida case valued at $8 million in loan proceeds, an Alabama case valued at $2 million, and a New York case valued at $82 million in loan proceeds. At least the latter is a more aggressive number (as apparently was one of the defendants in the New York case, who moonlighted as a dominatrix in a Manhattan club).
The government has been touting these prosecutions as a part of a major crackdown on the mortgage business. The DOJ press statements note that “[m]ortgage fraud is a major focus of President Barack Obama’s Financial Fraud Enforcement Task Force.” But these are comparatively minor matters if one looks to the real causes of the housing crash that led to the 2008 financial crisis. Bank of America, Goldman Sachs, JPMorgan Chase, and Wells Fargo, who were all in the business of packaging and selling subprime mortgages, have been more or less covered with Teflon.
The lack of criminal prosecutions against the big banks in the subprime crisis has been written about many times. But that doesn’t mean it’s not worth repeating. Something seems just wrong about the DOJ’s focus on the smaller fraudsters and its soft approach to the bigger players.
Hopefully, the SEC’s recent decision to send Wellsnotices to Goldman Sachs, JPMorgan Chase, and Wells Fargo indicating possible enforcement proceedings, means that at least these banks could face some civil liability for their role in the housing crash. And Bank of America recently settled a False Claims Act case with the Feds for $1 billion. But approaching the banks with civil actions, and skirting individual culpability, sends the message that once you reach a certain level of success, you are above the law.
In November 2011, we at Ifrah Law expressed our views on a number of current issues in our blogs, Crime in the Suites and FTC Beat. This post summarizes and wraps up our thoughts from the month.
ACLU Wins FOIA Appeal on Prosecutors’ Use of Cell Phone Location Data
The Justice Department must turn over the names and docket numbers of numerous cases in which the government accessed cell phone location data without probable cause or a warrant.
Options for Suing the Federal Government Under Bivens Unlikely to Expand
U.S. Supreme Court argument indicates that the Justices are unlikely to extend Bivens to cover cases against private employees.
Judge Imposes 15-Year Sentence in FCPA Case; Appeal to Follow
This case will test the Justice Department’s expansive definition of “foreign official” under the statute.
High Court Hears Argument in GPS Fourth Amendment Case
The Justices grapple with issues of search and seizure in an online, wired world.
In Appeal of Construction Fraud Case, DOJ Seeks Tougher Sentences
This case, arising from Boston’s “Big Dig” project, will test the limits of a trial judge’s sentencing discretion.
Self-Regulation Reigns, for Now, on Consumer Data Privacy Issues
The online advertising industry is inching its way to more comprehensive policies regarding the collection of consumer data.
Google, Microsoft Assume Roles of Judge, Jury and Executioner on the Web
The Internet giants cancel the Web connections of companies that are accused by the government of mortgage fraud but have not been convicted.
New House Hearing Shows Strength of Hill Support for Legal Online Gaming
Many members of Congress remain serious that legal and technical obstacles can be overcome and that legislation can be passed in this area.
Convicted of Fraud but Changed Their Lives; Appeals Court Takes Note
A couple committed mortgage fraud back in the late ‘90s. The 7th Circuit gives them sentencing credit for self-rehabilitation.
More Big Pharma Companies Cough Up Big Dollars in DOJ Settlements
How high will these settlements go? The government has the power to strong-arm drug companies into settlements. How much will it demand?
Federal Criminal (Other), Federal Criminal Procedure, Federal Sentencing, Fraud, Internet Law, White-collar crime
Companies should make vigorous efforts to unseal civil False Claims Act complaints against them earlier in the process in an effort to achieve better results, argues Michael K. Loucks, a former acting U.S. attorney for the District of Massachusetts who is currently a Boston-based partner in a major law firm. Loucks also co-authored a post on his firm’s website, further explaining why companies should take on an aggressive strategy to unseal complaints.
The False Claims Act permits individual whistleblowers to file cases on behalf of the United States government against those who have allegedly defrauded the government. All complaints under the act must be filed under seal for 60 days and must be served on the government rather than on the defendant. The Department of Justice has the option of intervening in the suit or declining to do so. If it formally makes either a “yes” or a “no” decision, the case is unsealed. However, the government can extend the 60-day seal for “good cause” while it is making its decision. A whistleblower can recover a substantial portion of a settlement or verdict under the FCA – up to 30 percent of the final value.
DOJ recently reported to Congress that there are 885 pending False Claims Act cases involving health care fraud alone, with about 200 prosecutors to handle all health care fraud cases. On average, a case is sealed for more than a year, and at times, much longer.
Loucks contends that unsealing complaints earlier in the process would be advantageous to the companies. The extra time would allow the companies to learn the scope of the complaints earlier, allowing time to identify potential witnesses, develop a more comprehensive defense strategy, and engage in all the discovery that civil litigants are entitled to. Increased openness would also permit companies to correct any problems that the complaint may have highlighted.
There is nothing of course objectionable about Loucks’ suggestions. But someone as experienced as him also knows how difficult it is for a company to learn of the existence of a sealed complaint filed against it in the first place, and then to successfully unseal the complaint. Not surprisingly, the New York Times suggested that Loucks was able to be so successful as a prosecutor because he was able to operate in secret through the prolonged use of sealed complaints. (The case that the New York Times called his “crowning achievement” was a $2.3 billion settlement with Pfizer that was the result of a four-year secret investigation.)
Defendants have no tried and true solution of determining whether a sealed complaint has been filed against them. Indeed, many whistleblowers often continue to work for their employers long after they have filed a sealed complaint against that employer. Often there is nothing to suggest to a company that it is a target of an investigation. Accordingly, defendants will not know to ask the court to unseal a complaint that they do not know exists.
Even if a company were to learn of the existence of a sealed complaint, dozens of published cases – some of which Loucks himself participated in – confirm that when confronted with the objections of the government, courts rarely, if ever, unseal FCA complaints. (The National Law Journal is now reporting on a novel development: Some judges, notably including some in the U.S. District Court for Massachusetts, are now unsealing many FCA cases. It appears that the judges are doing this because they want to increase the visibility of the judicial system to the public.) In general, however, the “good cause” language in the FCA is often an easy standard for prosecutors to meet and allows them to keep cases under seal – even over defendant’s objections – for extended periods of time.
We are surprised by the lack of attention on Loucks’ part to the question of whether a defendant necessarily wants a complaint to be unsealed. Loucks built his reputation on obtaining huge settlements from publicly traded health care companies. Traditionally, those entities announce the existence of a complaint on the same day that the complaint is unsealed and the matter is settled. It is not surprising that organizations would seek to keep the complaint sealed from the public eye and only unseal the complaint when the announcement of a settlement is believed to mitigate the impact of that case on that company’s share value. (For more on the role of company disclosure, see our Web site here. )
While we certainly agree that companies confronted with complaints under the False Claims Act complaints may want to consider asking courts to unseal complaints against them, there are a host of issues that must be analyzed and considered, including the effect of disclosure on the market and the practical ability to successfully argue for disclosure under the FCA and existing case law interpreting that statute.
Business is booming at America’s for-profit colleges. With steady high unemployment rates, many of the job-hungry have opted to pursue higher or specialized degrees in an effort to make themselves more marketable. Pricy for-profit institutions, like the 400,000 strong University of Phoenix, are flourishing with this increased demand as students flock to their courses to invest in new career prospects.
But recent regulatory activity at both the state and federal levels may signify that the party is over … or, more likely, that it must settle down quite a bit. Questionable recruiting and student financing practices at some career colleges have brought these education companies to the attention of many state attorneys general, the Department of Education, and the Senate Committee on Health, Education, Labor and Pensions, with the latter holding hearings on student financing at for-profit colleges.
Federal-level issues largely center on less-than-desirable statistics regarding federal student loans. Apparently, nearly half of federal student loan defaults come through these for-profit colleges, while financing for students at the institutions grows rapidly. Significant to these statistics is how expensive for-profit colleges are as compared to state schools. A 2010 GAO Report noted that, while enrollment in career colleges jumped from 1 million to 1.8 million students from 2003-2008, federal student aid to those institutions tripled from $8 billion to $24 billion.
State-level issues revolve around alleged violations of consumer protection statutes through aggressive recruiting tactics. For instance, for-profit colleges are being investigated for potential false or deceptive claims to prospective students on accreditation for degree programs and post-graduation career prospects. Also at issue are colleges’ disclosures of student loan financing and loan default rates.
Some ten states’ attorneys general formed a task force in March to combine efforts and share investigative information as they pursue actions against these institutions. According to a recent op-ed by Kentucky Attorney General Jack Conway, who is leading the task force, the number of states investigating has jumped to 18. States, including New York and California, are and have been going after for-profit colleges on their own (including a recent action by New York AG Schneiderman against Trump University).
At the federal level, the Department of Education has been busy establishing new regulations for career colleges. The most notable of late, the “gainful employment” rule, will require colleges to demonstrate that at least 35 percent of students are repaying their loans, or that loan repayments do not exceed 30 percent of their discretionary income or 12 percent of their total earnings. Schools failing to meet the standard in three out of four years will no longer be able to accept student payment with federal loans.
These government efforts may make it seem that career colleges are nothing more than greedy institutions preying upon the unemployed during bad economic times, and that the white hat-donning government regulators are nobly reining them in.
However the economics of, or the basis of, for-profit colleges does not appear to have been considered: for-profit colleges are not as much in the business of educating and graduating stellar students as they are in the business of making money. These companies have an interest – and obligation to their shareholders/investors – to maximize profit and minimize cost. The more money they can charge students and the less money they must dole out for the service they provide (i.e. education), the better off they are. And again, that is their overarching duty to their investors.
In a perfect free market, career colleges could not charge exorbitant fees to attend their schools if their students could not get jobs after graduation – because students would not pay. But in our current structure where the cash cow of federal student loans exists, both for-profit colleges and prospective students have almost unlimited access to big funds. For-profit colleges would be irresponsible to their investors if they did not tap this resource. Students often are not responsible enough to understand the consequences of accruing significant student loan debt.
Bottom line, much of the issue of for-profit colleges in the social context is that they have both a financial and legal duty to act in their own interest. The problems federal and state regulators seek to address are largely problems created by the federal government’s presence in the first place. Without the federal cash cow, private lenders (who would be the sole source of student financing) would insist both for-profit colleges and students behave differently. Colleges would have to improve performance and students would have to be more judicious about how they spend their money.
On May 3, 2011, the U.S. Department of Justice filed a civil case against Deutsche Bank, Germany’s largest bank, asserting that Deutsche Bank was liable for more than $1 billion to the U.S. government for its statements and actions during the mortgage meltdown of the last few years.
This case is one of the few that has emerged from the mortgage crisis, and like many of the others, it’s a civil rather than a criminal case.
What’s particularly interesting is that the U.S. government is relying on the False Claims Act, a Civil War-era law that prohibits false claims against the government and that has been heavily relied on in contract disputes.
In this case, the government asserts that the Frankfurt-based bank wrote mortgages for borrowers with dubious histories, then falsely certified to the Federal Housing Administration, a unit of the Department of Housing and Development that the loans were sound.
The complaint grows out of the conduct of MortgageIT, a subsidiary that Deutsche Bank owned at the time.
“Contrary to the certifications appearing on each and every mortgage endorsed by MortgageIT, MortgageIT engaged in a nationwide pattern of failing to conduct due diligence in according with HUD rules and with sound and prudent underwriting principles,” the complaint says. “MortgageIT knew that its certifications of compliance with HUD rules were false.”
Under the False Claims Act, the U.S. government can seek triple damages and penalties of more than $1 billion.
Prosecutors say that while HUD rules required Deutsche Bank and MortgageIT to implement quality control programs to prevent defaults by their borrowers, they “ignored quality control” and gave mortgages to almost anyone who applied.
Is this an appropriate use of the False Claims Act? After all, MortgageIT, it seems, didn’t make knowingly false statements about its borrowers in seeking FHA insurance for the loans. It simply made assessments that the borrowers were in good financial shape. They turned out not to be, and the FHA had to pay insurance claims. Is that the material out of which a $1 billion civil case should be made?
Last month, the Federal Medicare Strike Force charged 111 defendants in nine states for their alleged participation in fraud schemes that reportedly cost Medicare almost a quarter billion dollars. Last month’s sweep resulted from the Justice Department’s and Health and Human Services’ work with the FBI, the HHS inspector general, and various state and local law enforcement officials. It represents the largest federal takedown of health-care fraud to date.
The schemes targeted by the Strike Force involved patient recruiters, who sought out Medicare beneficiaries who were willing to provide their Social Security Numbers and Medicare information. Recruiters allegedly induced beneficiaries to disclose their personal information with promises of free medical services or durable medical equipment. Recruiters were paid by health care professionals or health care facilities based on the amount of usable data they collected.
Healthcare professionals then used the data to bill for services or equipment that were not medically necessary or were never provided to the patient. The healthcare provider billed the bogus services to Medicare and pocketed the payments. In some cases, conspirators made tens of millions of dollars for unnecessary or undelivered medical care.
In 2007, the Justice Department, U.S. Attorney’s Offices, FBI, Centers for Medicare and Medicaid, and HHS joined forces to investigate Medicare fraud in Miami. In 2008, the agencies expanded their work to Los Angeles and later to four other fraud hot spots: Houston, Detroit, Baton Rouge and Tampa.
Based on the early success of the Strike Forces in these six cities, DOJ and HHS established the Health Care Fraud Prevention and Enforcement Action Team, otherwise known as HEAT. Since then, Medicare Strike Forces have been deployed in Brooklyn, Chicago, and Dallas. Amounts of money siphoned from Medicare in each city ranged from a high of $90 million in Brooklyn to a low of $2.8 million in Dallas.
According to HHS Secretary Kathleen Sebelius, from 2008-2010, the government recovered an average of $6.80 for every dollar spent under the Health Care Fraud and Abuse Controls. The impressive return portends an increasing allocation of resources for the investigation and prosecution of Medicare Fraud, which suggests that Medicare Strike Forces are likely to expand first to bigger cities with greater potential for recovery and then to smaller locales.
Whatever the case, last month’s arrests serve as a wake-up call. Healthcare providers can take a number of proactive steps to minimize their risk of criminal and civil liability under Medicare. First, Medicare providers should heed the results of Medicare overpayment audits andtake advantage of opportunities to work with the Medicare Safeguard Contractor to resolve disputed billing practices. Providers should also consider hiring a reputable independent consultant to audit and advise them on billing practices. Finally, if health care providers discover questionable or fraudulent billing practices within the organization, they should consider whether and how to disclose and correct the problems in order to minimize the organization’s exposure to criminal or civil liability in the future.
Health care fraud
This is the fourth of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s blogs.
1. Proposed Gaming Bill Could Make Nevada First to Legalize Online Poker
Nevada, long an innovator in the gambling arena, may soon take another major step by becoming the first state to legalize online poker. We discuss the state’s importance in the gaming world, the chances of passage of the bill, and the groups that stand to benefit.
2. Brady Violation Leads to Reversal of Conviction in D.C.
When it comes to Brady violations, sometimes late is no better than never, it seems, as the D.C. Court of Appeals reverses a conviction for assault with intent to commit murder. We explain what information the prosecutors withheld and why it was important.
3. ‘Taking the Fifth’ Before Congress: A New Ethics Twist
It’s unethical for a prosecutor to put a witness on the stand with knowledge that the witness will exercise the privilege against self-incrimination. We look into a new D.C. Bar ethics opinion that gives a novel answer to the question of doing the same thing before a congressional committee.
4. Is FTC Action Needed Against Pricey Apps?
It’s true that children shouldn’t be buying expensive Smurfberries and other online goodies for their apps with real money (on Mom or Dad’s credit card). The FTC has been asked to take action. We discuss whether the agency is the right place to turn, or perhaps Mom and Dad are.
5. Does Google Need to Police Its Ads for Fraud?
There are unscrupulous merchants out there on the Internet. Does Google need to look into every advertiser before accepting its money? A consumer group’s letter to the FTC has awakened interest in this issue.
6. Online Sellers Need to Beware of State Attorneys General
A Philadelphia online electronics store is the target of Pennsylvania’s attorney general for alleged bait-and-switch practices. But it’s not just the state of origin that can target an online seller.