The Second Circuit vacated a lower court’s dismissal of a qui tam case alleging fraud on the Federal Reserve, finding the district court erroneously concluded that falsified loan requests did not fall within the scope of the False Claims Act. The relators alleged that two banks lied about their financial solvency in order to obtain multi-billion dollar loans from the Federal Reserve at low interest rates for which they were not eligible. The district court found the claims were not covered by the FCA, but the appeals court held that the Federal Reserve Banks acted as agents of the United States when administering the loans in question and that the United States did provide the funds underlying the loans.
Relators Paul Bishop and Robert Kraus appealed from a district court ruling that concluded that fraudulent loan requests to Federal Reserve Banks were not claims within the meaning of the False Claims Act. The court thereafter granted defendant Wells Fargo’s motion to dismiss the relators’ qui tam case alleging the bank engaged in fraud to obtain the loans via the Federal Reserve Systems’ emergency lending authority.
The relators alleged Wells Fargo fraudulently misrepresented their financial condition to one or more of the twelve regional Federal Reserve Banks in order to obtain emergency loans at favorable interest rates for which they were not qualified.
The case arose out of the 2008 financial crisis. Prior to the crisis, many banks, allegedly including Wells Fargo and Wachovia, which was later acquired by Wells Fargo, acquired toxic assets which subsequently placed them into a precarious financial situation. The banks then turned to the FRBs for loans to stabilize their operations.
Wachovia requested billions of dollars in loans from two of the emergency lending facilities operated by the Fed: the Discount Window and the Term Auction Facility. The Discount Window is a standing facility through which the Fed makes short‐term loans to depository institutions. The terms of these loans depend on a borrower’s financial condition. In short, the better an institution’s financial outlook, the lower the interest rate they can obtain. Further, FRBs are not permitted to extend credit through the Discount Window to an institution that is insolvent or intends to loan money to an entity who is insolvent. Through the Term Auction Facility, only firms in a generally sound condition are eligible to participate.
The relators argued that Wachovia misrepresented its financial solvency in order to obtain loans at the lower interest rates available to institutions in sound financial shape. Despite receiving $66 billion in low interest loans, Wachovia was unable to survive as a standalone entity and merged with Wells Fargo. Thereafter, Wells Fargo borrowed an additional $45 billion at even lower rates.
The relators alleged the firms were inadequately capitalized and in poor financial condition, but falsely certified their compliance with the requirements of the loan programs to obtain the lower interest rates.
The district court initially dismissed the case for failing to allege false claims under the FCA and the Second Circuit affirmed. However, the Supreme Court vacated that decision and remanded the case for further consideration in light of its opinion in Escobar. The Second Circuit directed the district court to determine whether the relators adequately alleged the materiality of the relators’ complaints.
On remand, the district court dismissed the case after concluding that a knowing presentation of false or fraudulent loan applications to FRBs does not violate the FCA because (1) FRB personnel are not officers, employees, or agents of the United States within the meaning of the FCA and (2) that the United States does not provide the money requested or demanded by Fed borrowers within the meaning the law. The relators appealed.
The Second Circuit sided with the relators. While FRB personnel are not officers or employees of the United States, the court held that they are agents of the government and therefore the loan requests qualified as claims under the “capacious” text of the FCA. The board found no basis to conclude that the board’s funding, which is provided via non-appropriated funds, had any bearing on the application of the FCA to claims made to the banks. The board noted that the Federal Reserve Board is an agency of the United States and found no legal significance in its independence from the Treasury Department.
Further, the court concluded that money requested by Fed borrowers is provided by the United States to advance a government program or interest, within the meaning of the FCA. The appeals court reasoned that requests for loans made to FRBs are requests for loans from the United States. Further, as the FRBs are required to remit all their excess earnings to the United States Treasury, a borrower’s failure to pay the appropriate amount of interest on a loan from an FRB injures the public fisc, not merely the FRBs’ nominal shareholders.
While the FCA does not reach every type of fraud practiced on the government, the court noted the language of the act reflects a broad legislative purpose that extends, in some cases, to functional instrumentalities of the government and to agents pursuing its ends. Further, the Supreme Court itself noted that Congress’ broad intention was to protect the funds and property of the government from fraud, regardless of the particular form or the government instrumentality upon which the claims are made. The appeals court found it implausible that Congress did not intend to cover claims made to governmental instrumentalities operating under direct supervision of a government agency where the disbursement itself is part of a government program and where the money is created ex nihilo pursuant to congressional authority.
