United States ex rel. Kraus v. Wells Fargo & Co.
117 F. Supp. 3d 215
E.D.N.Y2015Background
- Relators (former bank employees) filed a qui tam False Claims Act (FCA) suit alleging that Wells Fargo, Wachovia (pre-merger), and affiliates made false certifications to obtain advances from the Federal Reserve (discount window / TAF) and to obtain advances from regional Federal Home Loan Banks (FHLBs).
- The United States declined to intervene; relators proceeded with a Third Amended Complaint alleging pervasive "control fraud," misstated financials, off‑balance‑sheet warehousing of toxic CRE loans, and related regulatory noncompliance dating from about 2001 through the relevant period.
- Relators base FCA liability primarily on borrowers’ adoption of representations in Federal Reserve Operating Circular No. 10: §9.2(b) (no violations of laws/regulations that could adversely affect performance), §9.2(g) (no material untrue/omitted facts in documents furnished), and §9.2(i) (no event of default). Relators also assert claims tied to FHLB lending agreements.
- Court framed the governing FCA standards (Mikes framework) and Rule 9(b) particularity requirements for fraud-based claims; relators assert express and implied legal-certification theories and factually false claims.
- The court dismissed the Third Amended Complaint in full, holding relators’ theories legally insufficient or insufficiently pleaded and denying leave to amend as futile.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §9.2(b) adoption is an express legally false certification under the FCA | §9.2(b) certified compliance with laws/regulations affecting performance; defendants’ undisclosed control fraud meant that certification was false when made | §9.2(b) is not a condition of payment or is narrowly read to concern authority to borrow; at minimum the certification is not a "particular statute" certification required by Mikes | Dismissed — §9.2(b) is too broad to constitute an express legally false certification under Mikes (must reference compliance with a particular statute/regulation) |
| Whether §9.2(b) supports an implied legally false certification claim | §9.2(b) impliedly certified eligibility by representing compliance with laws/regulations | Implied theory requires that the statute/regulation itself condition payment on compliance; no statute made regulatory compliance a prerequisite to Fed borrowing | Dismissed — no allegation that any specific statute or regulation conditioned eligibility for Reserve borrowing such that implied certification applies |
| Whether §§9.2(g) and 9.2(i) support factually false certification claims (financials/default) | Defendants furnished materially false financials/call reports and certifications that were used by Federal Reserve in assessing eligibility and in connection with draws | Defendants argue relators fail to plead that any specific documents were furnished to the Fed "in connection with" discount window/TAF draws as required; no plausible link pleaded | Dismissed — relators failed to plead with particularity that the allegedly false documents were furnished to the Fed in connection with borrowing; §9.2(i) default theory likewise fails |
| Whether advances from FHLBs give rise to FCA liability because FHLB obligations are "guaranteed by the United States" | FHLB obligations are effectively backed by the federal government; thus false claims to FHLBs fall within FCA | FHLBs are privately owned/privately funded; government has no financial stake such that FHLB payments are "provided by" the United States for FCA purposes | Dismissed — FHLBs are not the United States for FCA purposes; relators pleaded no plausible governmental funding/financial stake in FHLB advances |
Key Cases Cited
- Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001) (distinguishes factually false claims from express and implied legal certifications under the FCA)
- Colucci v. Beth Israel Med. Ctr., 785 F. Supp. 2d 303 (S.D.N.Y. 2011) (limitations on broad certifications; implied certification requires statute/regulation conditioning payment)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard and treatment of conclusory allegations)
- U.S. ex rel. Shupe v. Cisco Sys., Inc., 759 F.3d 379 (5th Cir. 2014) (entity without a financial stake of the government is not covered by the FCA)