A trio of recent multi-million dollar awards to whistleblowers — including a borrower, two mortgage brokers and a mortgage executive — combined with attorneys who have exhausted whistleblower cases in another industry could mean that an onslaught of such cases against mortgage firms is on the way. But there are steps that companies can take to minimize the fallout from potential false claims cases.
In April 2011, attorney Lynn Szymoniak appeared on 60 Minutes. Delinquent on a $780,000 loan she took out with Option One Mortgage Corp. in February 2006, her lender took her to court to start the foreclosure process. But the company had lost her loan documents only to find them a year later. Problem was, Szymoniak was a specialist in forgery and identified discrepancies in her assignment — a revelation that led to the discovery of thousands of documents fraudulently signed as “Linda Green” of DocX.
So Szymoniak filed a lawsuit under the whistleblower provision of the False Claims Act, 31 U.S.C. § 3729. Such actions are known as “Qui tam” and require that a false claim was made on the government.
The provision provides for plaintiffs, who are known as “relators,” in such lawsuits that are taken over by the government to collect between 15 percent and 30 percent of what the government collects.
On March 9, as part of the massive mortgage servicer settlement, the U.S. Attorney for the District of South Carolina announced that a $95 million settlement was reached with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.
Szymoniak will receive $18 million from that settlement.
Also emerging from the servicer settlement was a $45 million settlement with Chase over a 2006 lawsuit filed in U.S. District Court for the Northern District of Georgia by two mortgage brokers. The case alleged that illegal fees were charged on loans guaranteed by the Department of Veterans Affairs by more than a dozen lenders including Chase, BofA, SunTrust Mortgage and Wells Fargo.
The brokers, U.S. Financial Services President Victor Bibby and the Atlanta-based company’s vice president, Brian Donnelly, alleged that the lenders disguised attorneys fees ranging from $400 to $1,000 on “interest rate reduction refinancing loans” as title examination fees. By covering up the attorneys fees, the government was allegedly deceived into guaranteeing the mortgages.
While that case is still pending against seven other lenders, Bibby and Donnelly are set to receive $11.7 million so far.
Sherry Hunt, a quality control executive for CitiMortgage Inc., claimed in a whistleblower lawsuit that she was threatened by a senior executive at the organization for trying to expose mortgage fraud on loans insured by the Federal Housing Administration. She says she sued only after her pleas to management and human resources proved futile.
When Citi settled last month with the Department of Housing and Urban Development for $158.3 million, Hunt reaped $31 million.
The False Claims Act has been around since around the time of the Civil War and was amended in 1986.
Prosecutors and plaintiffs’ attorneys have been using the law against the pharmaceutical industry for years, according to Beth Moskow-Schnoll, a partner with Ballard Spahr LLP who represents financial institutions and mortgage companies. Moskow-Schnoll is a former federal prosecutor who focuses on white-collar litigation, regulatory enforcement and compliance in financial services litigation.
“They have been incredibly lucrative for the government,” Moskow-Schnoll said of actions brought under the False Claims Act.
She noted that in 2009, the Department of Justice recovered $2.4 billion under the act, including nearly $2 billion from actions brought in Qui tam cases filed by relators.
Moskow-Schnoll explained that the mortgage industry is starting to see more of these cases because plaintiffs’ attorneys who had been handling actions in the pharmaceutical industry are finding that fewer cases in the sector are available as firms in the industry have “pretty much gotten their act in gear.”
So the attorneys are now setting their sites on the next big opportunity: the mortgage industry.
“When people are getting $18 million as their share, I think it definitely give plaintiffs’ attorneys the incentive to keep looking for more people to bring actions on behalf of,” Moskow-Schnoll stated.
Given that the cases remain under seal for a period of time, many cases could currently be in the works.
She said that such actions are kept under seal while attorneys approach the government about taking on the case. If the government chooses to intervene, then the case can remain under seal for years as the government investigates. While the government takes a lead role in cases it accepts, it still works closely with the relators’ counsel.
“Generally, the success rate is a lot stronger when the government does intervene,” Moskow-Schnoll said.
Since relators and their attorneys in many of the pharmaceutical actions claimed that they tried to work within their organizations to rectify the issues before resorting to false claims actions, mortgage companies would be well advised to have a system in place for reporting activity, according to Moskow-Schnoll.
“The organization has to take it seriously and actually listen to the complaint and try to do something about it, conduct an investigation, see if there is any validity to the complaint,” she explained.
This would include effectively communicating the system to employees and creating an environment where they feel comfortable bringing up such issues. Employers also need to try to maintain confidentiality.
Moskow-Schnoll did note that it can be a very difficult process for relators, though it is against the law for them to be fired. Some relators want to stay on board with their employers to keep gathering information.
“It’s not a pleasant experience being a relator; it’s very tough,” she said. “Because … if you’ve been in a work environment for a long time, and then you’re potentially in a situation where you’re suing — and even if people don’t know — it’s just very, very difficult time.
“And it can take years and years before there’s a settlement.”