Just months after Wells Fargo Bank N.A. agreed to a $5 billion settlement over allegations of abusive practices in the home mortgage arena, federal prosecutors in New York brought a new civil fraud action against the bank, seeking hundreds of millions of dollars.
Lawyers for Wells Fargo, represented by a team that included Fried, Frank, Harris, Shriver & Jacobson, cried foul, saying the bank had resolved liability in the earlier deal, in April 2012, with the U.S. Justice Department and state attorneys general. The bank’s attorneys urged a federal trial judge in Washington to declare that the government violated its part of the deal.
Late on February 12, Wells Fargo lost that argument. U.S. District Judge Rosemary Collyer, ruling for DOJ, said the bank’s agreement with the government doesn’t preclude the civil action in New York. In her decision, Collyer noted the settlement did not bar all civil or administrative claims against Wells Fargo.
DOJ filed suit in March 2012 in Washington’s federal trial court against Wells Fargo and other major banks and financial institutions, including Bank of America Corp., Citigroup, Inc., J.P. Morgan Chase & Co. and Ally Financial.
The complaint alleged, among other things, unfair and deceptive trade practices regarding loan origination, servicing and foreclosure processing. The defendants agreed, in a series of consent judgments, to an overall settlement of $25 billion.
In her ruling, Collyer closely examines the scope of the deal, including language about annual certifications of Wells Fargo’s compliance with Housing and Urban Development/ Fair Housing Administration requirements.
The government, Collyer said, "reserved the right to bring claims against Wells Fargo based on illegal conduct including material violations of HUD-FHA requirements, but did not reserve the right to bring claims based only on false annual certifications."
Wells Fargo attorneys argued, as Collyer put it, that the action in New York is based on allegations that "relate to company-wide conduct covered by annual certifications." The lawyers for Wells Fargo argued that because the bank was released from liability based on claims rooted in annual certifications, then the company was released from conduct that was subject to those certifications. Collyer called the bank’s position "a leap of logic" that doesn’t comport with the consent judgment.
"Presumably, a false annual certification could jeopardize each application for FHA insurance during that year and potentially expose Wells Fargo to hundreds, if not thousands of claims under the [False Claims Act] and other statutes," Collyer wrote.
Fried Frank partner Douglas Baruch in Washington, who leads the firm’s False Claims Act practice, wasn’t immediately reached for comment during the morning of February 13. In a statement, Wells Fargo officials said they’re considering appellate options.
Collyer’s "decision did not determine whether the complaint pending in the United States District Court for the Southern District of New York has pled released claims," the bank’s statement said. "We look forward to the resolution of that issue in the Southern District of New York upon the completion of briefing in that matter."
In announcing the New York suit, U.S. Attorney Preet Bharara said Wells Fargo "engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance."
Last month, Wells Fargo’s attorneys, who also include a team from K&L Gates, urged a federal trial judge in New York to dismiss the government’s False Claims Act action. In their papers, the bank’s lawyers said the government’s claims are barred by the prior release of liability.
The government’s complaint "seeks to capitalize on an uninformed and often prevailing post-Financial Crisis era assumption that a financial industry culprit is to blame for every negative economic event," the bank’s attorneys said in papers.
"Faced with thousands of FHA-insured mortgage loan defaults resulting from the financial crisis and the recent housing market collapse," Wells Fargo’s lawyers said, the government "is trying to escape having to honor HUD’s insurance commitments by falsely asserting that Wells Fargo is to blame."
Prosecutors haven’t yet filed their response to Wells Fargo’s effort to dismiss the suit.