A ranging attempt to confront mortgage lending issues, ramp up financial fraud enforcement, administer TARP funds and tighten the screws on false claims, the Fraud Enforcement and Recovery Act (FERA), enacted in May, is a bit of a Frankenstein’s monster. That makes it hard to get a clear read on the law’s overall significance and any new exposure it may present.
Expert opinions on the question are as divergent as the law itself. On the criminal side, FERA doesn’t change the status quo.
“I don’t see it as being all that big of a deal. I’m not sure it changes the playing field very much,” says Chris Clark, co-head of the white-collar defense and regulatory investigation group at Dewey & LeBoeuf. “These are minor tweaks.”
But when it comes to whistleblower liability, it’s not so cut-and-dried, says Dan Plunkett, a McGlinchey Stafford member who focuses on government contracts.
“On the mortgage fraud side, the horse is already out of the barn,” Plunkett says. “That fiasco is done, and I don’t think we will see it again. But on the false claims side, this is something to pay a little more attention to.”
Significant new civil and criminal liability lies in wait for high-risk sectors including health care, defense and finance (see “Perfect Storm,” July 2009).
FERA contains several amendments to fraud statutes. They include an expanded definition of the term ‘financial institution’ that now includes mortgage lenders, specific language to address the TARP program and a new definition for the term “proceeds” in the money laundering law.
The revisions address specifics of the ongoing financial crisis but are largely superfluous, according to white-collar crime experts.
“Federal prosecutors already had mail fraud, wire fraud, bank fraud, securities fraud, false claims and money laundering statutes. There’s not much in the world of sophisticated financial fraud that can’t be prosecuted already,” says Jud Aaron, a white-collar criminal defense partner at Conrad O’Brien. “I haven’t heard prosecutors claim that they lack the statutory framework to prosecute financial fraud.”
The change to the money laundering statute, which redefines “proceeds” as gross receipts instead of net profits, is merely a legislative fix to bad case law. In theory, it could impact a defendant at sentencing, since the amount of jail time is driven largely by the amount of the financial loss. But the practical impact will likely be negligible.
“If you’re involved in a gigantic financial swindle, trust me, you’re going to do a lot of time,” Clark says. “The judge is going to cut it down anyway, because it’s just silly to sentence someone to 300 years. In any high profile case, it’s going to be irrelevant.”
On the Money
Section Three of the act sends money to various federal agencies earmarked for fraud enforcement, including $165 million to the DOJ, $30 million to the Postal Inspection Service, $20 million to the Secret Service and $21 million to the SEC. It’s no pittance, but again, practical effect is debatable.
“I don’t think it’s significant in the sense that it has enabled the Justice Department to prosecute things that it couldn’t already prosecute,” Aaron says. “But it is significant in that it provides huge amounts of funding dedicated almost solely to investigating and prosecuting financial crimes.”
Clark, a New Yorker prone to hyperbole, says the money is essentially window dressing, and that the idea behind it–the notion that enforcement can eliminate fraud–is a fallacy.
“My favorite articles to pull out these days are from right after Enron, when Congress gave the SEC $80 billion to hire everyone in the United States to ferret out corporate fraud,” Clark says. “Did that work? Yeah, they’re giving money, but the size of the SEC doubled after Enron, and it didn’t help.”
The crux of the new law comes in the amendments to the False Claims Act, though the most perilous aspects for companies may not be immediately apparent.
These amendments are a reaction to the Supreme Court’s 2008 decision in Allison Engine v. U.S. ex rel. Sanders, which limited the scope of the FCA. FERA broadens the umbrella so that any claim can fall under the act if the money requested “is to be spent or used on the government’s behalf or to advance a government program or interest,” regardless of whether that claim is made directly to the government.
Many experts believe this was the original intent of the statute. “Statutes are funny things,” Plunkett says. “If they’re not written in a very precise way, lawyers being lawyers will find the cracks.”
This attempt to bring greater clarity, however, may actually open new fronts of liability, especially given the government’s unprecedented recent involvement in the financial sector.
“Let’s say Citibank has received $50 billion worth of TARP, and now the government owns 34 percent of Citibank,” posits Russ Hayman, a McDermott Will & Emery partner who practices both health care and white-collar defense. “Which expenditures by Citibank are on the government’s behalf? If Citibank signs a $500 million banking IT contract, are claims submitted under that contract subject to the FCA? I would assume so. If Citibank signs a contract for janitorial services in Milwaukee, is that covered? We don’t know.”
FERA makes no attempt to define the key terms “on the government’s behalf,” “government program” or “government interest.” Moreover, activity in this area is driven not by the Justice Department, but by the relators–or whistleblowers–bar.
“I don’t think there’s going to be great restraint in the cases that are brought under these new provisions because most of the cases will be brought by whistleblowers that are looking to get rich quick,” Hayman says.
Under FERA, a contractor no longer has to actually submit a claim to violate the law. If it knowingly avoids or decreases an obligation to pay money to the government, it’s afoul of the FCA.
Qui tam actions are damaging enough, but they are often accompanied by parallel administrative or criminal proceedings that can result in jail time for executives and suspension or debarment for the company, a de facto death penalty for government contractors.
“The new FERA amendments make it even more likely that we will have these types of parallel proceedings,” Hayman says.