Wells Fargo Can't Dodge DOJ Mortgage Fraud Lawsuit
In a ruling Tuesday, U.S. District Judge Jesse Furman in Manhattan trimmed a U.S. Justice Department's lawsuit alleging that Wells Fargo & Co. duped the government into insuring mortgages. But Furman also became the third judge this year to side with the DOJ's interpretation of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), a statute dusted off by prosecutors in the wake of the financial crisis.
Federal prosecutors in Manhattan sued Wells Fargo in October 2012, alleging the bank and mortgage lender misled the U.S. Department of Housing and Urban Development into believing that certain mortgages qualified for government insurance. The government brought some of its claims under FIRREA, a statute from the 1980s that creates a civil cause of action for federal crimes such as mail fraud and wire fraud.
FIRREA has emerged as a favorite tool for prosecutors in the wake of the mortgage meltdown because it comes with a lower burden of proof and longer statute of limitations than criminal statutes. FIRREA only applies to alleged fraud that "affects" a federally insured financial institution. To meet that requirement, the DOJ argued that Wells Fargo is itself the affected institution. The DOJ has adopted this same theory, known as the "self-affecting" theory of FIRREA liability, in pending civil cases against Bank of New York Mellon Corp. and Bank of America Corp.'s Countrywide Financial unit.
Wells Fargo's defense lawyers at Fried, Frank, Harris, Shriver & Jacobson and K&L Gates moved to dismiss the case in January. With regard to the FIRREA claims, they accused the DOJ of enlarging the scope of the law in a way Congress never intended. "Wells Fargo has identified no FIRREA legislative history to support a claim that a bank can be both the violator and the affected financial institution," they wrote.
Furman rejected that argument Tuesday. "Wells Fargo's proffered interpretation is unsupported by the text of the statute, which does not exempt from the relevant affected financial institutions those that perpetrate fraud affecting themselves," he wrote. Furman follows in the footsteps of two colleagues in the Southern District of New York, judges Jed Rakoff and Lewis Kaplan, who both have adopted the self-affecting theory of liability in the BNY Mellon and BofA cases (see our coverage here and here).
Furman's ruling wasn't a total loss for Wells Fargo. While he refused to dismiss the FIRREA claim and a False Claims Act claim against the bank, he tossed common law tort claims such as breach of fiduciary duty, gross negligence and negligence. Furman ruled that those claims are time-barred, and that a 2004 audit report produced by the HUD inspector general "is plainly sufficient to demonstrate that the relevant facts underlying this action were known to him by 2004."
William Johnson of Fried Frank, who represents Wells Fargo, didn't immediately respond to a request for comment.