Financial Fraud

With the collapse of Enron, WorldCom, and other formerly well-respected companies, Americans experienced a crisis of confidence in our corporations. Massive accounting frauds were discovered with the advent of the Enron bankruptcy filing, and since then, financial industry fraud prosecutions under the FCA have continuously risen. Financial fraud typically involves banks, creditors, insurance companies, investors, and other financial service institutions. The financial industry receives billions of taxpayer dollars from the government both at the state and federal level in the form of government funded programs, government backed loans, and even government pension funds.

Some of the most common types of financial industry fraud are:

In response to failings in the credit and financial markets during the fall of 2008, the federal government authorized billions of dollars in federal funds to stabilize financial markets and help individuals affected by the declining market through enactment of the Troubled Asset Relief Program (TARP). TARP programs include the Making Home Affordable Program (HAMP), the Automotive Industry Financing program, the Capital Purchase Program, and the Targeted Investment program.

The 2009 amendments to the False Claims Act, passed within the Fraud Enforcement and Recovery Act (“FERA”), clarified that the False Claims Act applies to federal funds implicated through TARP and other bailout and recovery acts such as the American Recovery and Reinvestment Act (“the stimulus bill”). Those amendments also greatly expanded whistleblower protections to employees, contractors, and agents who report fraud violations in furtherance of a False Claims Act investigation. Finally, the FCA was amended to close a loophole that allowed subcontractors to skirt liability and to apply liability retroactively in certain cases.

The False Claims Act serves an important tool in augmenting government oversight of bailout and recovery programs to ensure the integrity of funds designated to assist those most affected by the financial crisis. Many of the financial frauds perpetrated during the financial crisis involved Fannie Mae and Freddie Mac. These government-sponsored entities (“GSEs”) were designed to help Americans obtain mortgages to propel them into the middle class. The GSEs accomplished this by purchasing mortgages from lenders. Unfortunately, many lenders misrepresented the risk associated with those loans, resulting in thousands of toxic assets and liability under the False Claims Act.

In 2009, President Obama formed the Financial Fraud Enforcement Task Force (“FFETF”). It represents the largest coalition ever assembled to investigate and prosecute financial fraud. Admittedly, the Task Force’s goals are ambitious, but at bottom it is designed to strengthen the investigation and prosecution of significant financial crimes, recover the proceeds, and ensure just punishment of the perpetrators.

Example

In 2013, a Pittsburgh-based bank agreed to pay $7.1 million to settle claims under the FCA that it failed to engage in prudent underwriting practices when issuing loans that were guaranteed by the Small Business Administration (“SBA”). Assistant Attorney General Stuart Delery remarked, “Banks that are SBA preferred lenders have a duty to prudently guard the public funds they commit to borrowers.”

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