PAUL BISHOP, ROBERT KRAUS, UNITED STATES OF AMERICA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, Plaintiffs-Appellants, STATE OF NEW YORK, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF DELAWARE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, DISTRICT OF COLUMBIA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF FLORIDA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF HAWAII, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF CALIFORNIA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF INDIANA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF ILLINOIS, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF MINNESOTA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEVADA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEW HAMPSHIRE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, COMMONWEALTH OF MASSACHUSETTS, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEW MEXICO, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF MONTANA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NORTH CAROLINA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEW JERSEY, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF OKLAHOMA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF RHODE ISLAND, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF TENNESSEE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, COMMONWEALTH OF VIRGINIA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, Plaintiffs, v. WELLS FARGO & COMPANY, WELLS FARGO BANK, N.A., Defendants-Appellees.
Docket No. 15-2449
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
August Term, 2015 (Argued: March 1, 2016 Decided: May 5, 2016)
KATZMANN, Chief Judge, SACK and LOHIER, Circuit Judges.
* The Clerk of the Court is respectfully directed to amend the caption to conform to the above.
GERALD A. NOVACK, K&L Gates LLP, New York, New York (Amy P. Williams, K&L Gates LLP, Charlotte, North Carolina; Noam A. Kutler, K&L Gates LLP, Washington, District of Columbia, on the brief), for Defendants-Appellees.
KATZMANN, Chief Judge:
At the heart of the case before us is the False Claims Act (“FCA“), which forbids “knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval” to the United States government.
We agree with the district court. As this Court has long recognized, the FCA was “not designed to reach every kind of fraud practiced on the Government.” Mikes v. Straus, 274 F.3d 687, 697 (2d Cir. 2001) (quoting United States v. McNinch, 356 U.S. 595, 599 (1958)). Even assuming the relators’ accusations of widespread fraud are true, they have not plausibly connected those accusations to express or implied false claims submitted to the government for payment, as required to collect the treble damages and other statutory penalties
BACKGROUND
A. Relevant Banking Regulations
We begin with some context about the banking regulatory scheme at work here. As the relators point out in their briefing, financial institutions in the United States are subject to many different laws and regulations, and are overseen by a number of different regulators, including the Fed. The Fed is responsible for maintaining the stability of the U.S. financial system. See Bd. of Governors of the Fed. Reserve Sys., The Federal Reserve System: Purposes and Functions 1 (9th ed. June 2005). As part of this mandate, the Fed, acting through its regional Federal Reserve Banks, acts as a backup lender of last resort for banks through its “discount window.” Id. at 45-46. One of the purposes of the discount window is to enable banks to borrow to meet their reserve requirements. Under federal regulations, banks must hold certain balances, either in cash or in certain accounts with the Fed. Id. at 31. A low level of reserves does not by itself indicate that the bank is suffering from financial weakness; for example, a bank could have
Nonetheless, banks were historically reluctant to borrow through the Fed‘s discount window out of fear of being stigmatized as financially weak. The Fed had previously lent money to banks at below-market rates, but it did not want banks to borrow at the discount window only to relend at higher rates to other banks. Accordingly, it imposed a requirement that borrowers first prove they had exhausted other avenues for credit. See Extensions of Credit by Fed. Reserve Banks; Reserve Requirements of Depository Insts., 67 Fed. Reg. 67,777, 67,778 (Nov. 7, 2002). The result was that borrowing from the discount window indicated to the public that the bank had no other options. According to the Fed, this stigma “in turn . . . hampered the ability of the discount window to buffer shocks to the money markets,” especially in times of financial crisis, when the Fed most needed to strengthen the financial system. Id. To address this concern, the Fed adopted a new two-tiered structure in 2003.
Under that structure, banks in “generally sound financial condition” are eligible to borrow at the primary credit rate, which is set above the target Federal
The Fed‘s authority to lend to banks is governed by Regulation A, 12 C.F.R. pt. 201, which was promulgated under the Federal Reserve Act and the International Banking Act of 1978, see
Regulation A also mandates the information that a Federal Reserve Bank must collect to determine whether a given bank is eligible to receive a loan through either the primary or the secondary credit program. See
B. Wells Fargo‘s Alleged Fraud
Notwithstanding this regulatory oversight, the relators allege that Wachovia and World Savings Bank engaged in massive fraud in the early-to-mid-2000s, before Wachovia merged into Wells Fargo. According to the relators,
Both relators claim to have witnessed these misdeeds firsthand. Robert Kraus was a controller for two Wachovia groups from June 2005 to September 2006; Paul Bishop was a residential mortgage salesperson for World Savings Bank from November 2002 to May 2006. Each was fired after he complained internally about the bank‘s improprieties. Kraus also reported his allegations of fraud to the Federal Bureau of Investigation in 2007 and to the Securities and Exchange Commission (“SEC“) in 2009. Bishop likewise reported his allegations of fraud to the SEC. It does not appear that either agency took action as a result.
The bulk of the relators’ complaint is spent detailing those fraud allegations, but they are not the subject of this suit. Rather, the relators’ FCA claims rest on their assertion that every time Wachovia and, eventually, Wells
Section 9.1: The Borrower represents and warrants that . . .
(b): the Borrower is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is not in violation of any laws or regulations in any respect which could have any adverse effect whatsoever upon the validity, performance or enforceability of any of the terms of the Lending Agreement; . . .
(g): no statement or information contained in the Lending Agreement or any other document, certificate, or statement furnished by the Borrower to the Bank or any other Reserve Bank for use in connection with the transactions contemplated by the Lending Agreement, on and as of the date when furnished, is untrue as to any material fact or omits any material fact necessary to make the same not misleading, and the representations and warranties in the Lending Agreement are true and correct in all material respects; . . .
(i): no Event of Default has occurred or is continuing.
J.A. 204-05 (emphasis added). The Agreement stipulates that an “Event of Default” occurs when the bank fails to repay obligations as they become due, becomes insolvent, fails “to perform or observe any of its obligations or
The relators contend that when Wachovia and, post-merger, Wells Fargo borrowed money from the discount window from 2007 through 2011, knowing they were “in violation of” banking “laws or regulations,” per Section 9.1(b), they were making false statements for the purpose of obtaining government funds. Similarly, the relators argue that because the financial documents the Fed relied on in making its determination that the banks were eligible for the primary rate were “untrue” or “misleading,” the banks’ Section 9.1(g) representations were fraudulent. As a result, the relators also allege that the banks lied in certifying compliance with Section 9.1(i) because their other representations were materially “inaccurate.” Although all of the underlying fraud alleged in the complaint took
C. Procedural Background
The relators filed this action against Wells Fargo and its subsidiaries and affiliates under seal in November 2011, and eventually filed two amended complaints. After the government declined to intervene, the relators filed a third amended complaint. They sought to recover the treble damages and civil penalties provided by the FCA—nearly $900 billion—for false claims filed by Wachovia and Wells Fargo from 2007 through the date they filed the initial complaint. The relators listed some of the payments in an appendix to their complaint, but did not detail each fraudulent loan request.
The defendants filed a motion to dismiss for failure to state a claim under Rule 12(b)(6) and for failure to plead fraud with particularity under Rule 9. The district court granted the motion, dismissing all of the relators’ claims with prejudice and denying leave to amend. The relators have appealed some of those claims to this Court.
We review a district court‘s grant of a motion to dismiss under
This Court has held that FCA claims fall within the scope of
A. The False Claims Act
As noted at the outset of this opinion, the FCA prohibits “knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval” to the United States government.
The FCA was enacted in 1863 to combat fraud by defense contractors during the Civil War. See, e.g., Paul E. McGreal & DeeDee Baba, Applying Coase to Qui Tam Actions Against the States, 77 Notre Dame L. Rev. 87, 121 (2001) (“Army
B. Relators’ Express Certification Claims
In this case, the relators allege that Wells Fargo violated the FCA in several ways: by making express false certifications under Sections 9.1(b), (g), and (i) of the Lending Agreement; by making an implied false certification under Section 9.1(b); by fraudulently inducing the government to lend to it; and by conspiring to submit false claims. The district court determined that the relators did not meet their burden to show that the defendants violated the FCA. We agree and address each claim in turn below.
The district court first dismissed the relators’ claim that the defendants made an express false certification under Section 9.1(b) of the Lending Agreement. The relators allege that the defendants’ underlying fraud made it impossible for the banks to certify that they were “not in violation of any laws or regulations” when they borrowed from the discount window. The district court determined that Section 9.1(b) is too broad to give rise to a claim under the FCA, based on this Court‘s holding in Mikes.
In Mikes, this Court affirmed the dismissal of a qui tam suit alleging that a medical practice had violated the FCA by submitting Medicare reimbursement requests for procedures that did not meet the requisite standard of care. This Court clarified that the FCA was not intended to police general regulatory noncompliance; “it does not encompass those instances of regulatory noncompliance that are irrelevant to the government‘s disbursement decisions.” Mikes, 274 F.3d at 697. Thus, we held that “not all instances of regulatory noncompliance will cause a claim to become false.” Id. This Court then rejected the relator‘s claims of express and implied false certification.
On appeal, the relators attempt to distinguish between statutory and contract-based certification claims. They argue that we should analyze the relevant provision here under principles of contract interpretation, rather than look to a specific statute or regulation. They point to the Tenth Circuit‘s analysis in United States ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1171 (10th Cir. 2010), in which that court concluded that a certification of compliance with “all contractual requirements” was not too broad to support an FCA claim. We do
Second, the relators assert that Section 9.1(b) is not “overbroad” because the “law or regulation” alleged must “have an adverse effect on the validity, performance, or enforceability of the terms of the Lending Agreement.” See
The relators next assert that any other interpretation of Section 9.1(b) would be at odds with “banking industry customs and practices,” which typically require “individual borrowers [to] provide representations and warranties in their lending agreements with banks, similar to the representations and warranties in the Lending Agreement.” Relators’ Br. at 43. But the Fed is not a typical commercial lender, and borrowing banks are not typical loan customers: For one, the Fed‘s purpose in lending to banks is different from a commercial lender‘s purpose in lending to individuals. The Fed‘s mission is to ensure the
The relators also argue that the district court‘s interpretation would lead to the “absurd result” of banks getting a “free pass to make false certifications without repercussions under the FCA.” Relators’ Br. at 45. This argument is also unavailing. The federal government has many tools other than the FCA at its disposal to discipline banks and to ensure compliance with banking laws and
Moreover, there is a risk to expanding the FCA to cover these claims: It could incentivize individuals to bring suit without regard for the larger implications on the financial system. Permitting qui tam plaintiffs like the relators here to proceed on the facts of this case could discourage banks from accessing the discount window out of concern that they might face FCA liability if they are not in compliance with “any law or regulation.” The result would be precisely the opposite of the Fed‘s intentions in changing discount window operations in 2003. See Extensions of Credit by Federal Reserve Banks, 67 Fed. Reg. at 67,778; see also Conner, 543 F.3d at 1221–22 (under a broad reading of the FCA, “[a]n individual private litigant, ostensibly acting on behalf of the United States, could prevent the government from proceeding deliberately through the carefully crafted remedial process . . . . It would . . . be curious to read the FCA, a statute intended to protect
b. Sections 9.1(g) and (i) of the Lending Agreement
The relators next allege that the defendants violated the FCA by falsely certifying compliance with Sections 9.1(g) and (i) of the Lending Agreement. They acknowledge that to support a claim of express false certification under Section 9.1(g), they must “allege that Defendants provided the Federal Reserve falsified documents or made false statements to the Federal Reserve in connection with borrowing funds.” Relators’ Br. at 49–50. They have not done so. The documents that the relators submitted to the district court show that Wachovia and Wells Fargo did not need to submit any financial information “in connection with” borrowing through the discount window; thus, the relators cannot show that the defendants violated Section 9.1(g). Further, we agree with the district court that
Appendix 3 to the Lending Agreement describes the documents that a bank must submit when it applies for a loan through the discount window: (1) a letter of agreement stipulating that the borrower agrees to the provisions of the Lending Agreement; (2) a certificate attaching copies of documents specifying the official name of the borrower and providing contact information so the Fed can make an effective UCC-1 financing statement; (3) authorizing resolutions, typically from a board of directors, giving the bank the legal authority to borrow from the Fed; and (4) an official OC-10 Authorization List, which lists individuals who are authorized to borrow money on the bank‘s behalf. J.A. 217–22; 698. The list of required documents does not include or reference the bank‘s balance sheet or any other detailed financial information. This omission is likely intentional; as noted, one of the Fed‘s stated purposes in amending the process to access the discount window in 2003 was to reduce the administrative burden on borrowing banks. Banks are required to report financial information to their designated regulators, but that information is used for many purposes, not necessarily “in
The relators’ argument that the defendants falsely certified compliance with Section 9.1(i) depends on the same allegations as their argument that the defendants falsely certified compliance with 9.1(b) and (g), and therefore fails for the same reasons. See Relators’ Br. at 57 (acknowledging that non-compliance with Section 9.1(i) hinges on a violation of another provision of the Lending Agreement). Put another way, because the relators cannot show that the defendants submitted a “representation or warranty . . . under or in connection with the Lending Agreement . . . [that] is inaccurate in any material respect,” they cannot show that the defendants committed an “Event of Default” as defined by the Lending Agreement. J.A. 196.
Separate from their express certification claims, the relators also argue that the defendants are liable under the FCA for making implied false certifications under Section 9.1(b). In Mikes, this Court warned that “the False Claims Act was not designed for use as a blunt instrument to enforce compliance with all medical regulations—but rather only those regulations that are a precondition to payment—and to construe the impliedly false certification theory in an expansive fashion would improperly broaden the Act‘s reach.” 274 F.3d at 699. Accordingly, this Court held that “implied false certification is appropriately applied only when the underlying statute or regulation upon which the plaintiff relies expressly states the provider must comply in order to be paid.” Id. at 700.
In this case, the district court rejected the relators’ implied certification claim, observing that “Relators have not briefed an ‘implied false certification’ theory in any great depth, nor have they alleged it with any detail.” Kraus, 117 F. Supp. 3d at 222. The court concluded that the claim was “misplaced,” as the relators did not argue that “any of the many alleged violations of laws and
On appeal, the relators argue first that the district court erred in dismissing this claim because the defendants’ certifications of compliance with Section 9.1(b) constituted a “material condition to payment,” and thus their “bad acts went to the heart of the bargain that they negotiated with the Government.” Relators’ Br. at 23–24. But this Court has never adopted the relators’ “heart of the bargain” test for implied false certification claims under the FCA; rather, the relators appear to be referencing the district court‘s decision in Mikes. See United States ex rel. Mikes v. Straus, 84 F. Supp. 2d 427, 436 (S.D.N.Y. 1999) (“I cannot conclude that compliance with 1320c–5 lay ‘at the heart of’ Defendants’ agreement with Medicare. Mikes therefore cannot rely upon the implied certification theory to satisfy the second element of her FCA claim.“). This Court did not adopt that test in affirming the district court‘s judgment, and we decline to do so now.2
Recognizing that our holding in Mikes likely precludes their implied certification claim, the relators attempt to distinguish that precedent as only applicable to fraud by a healthcare provider. Although the Mikes court examined
Another reason for not limiting the holding in Mikes to healthcare fraud is that some of the same concerns raised by the Court in that case are also relevant to the banking industry. In Mikes, this Court observed that “a limited application of implied certification in the health care field reconciles, on the one hand, the need to enforce the Medicare statute with, on the other hand, the active role actors outside the federal government play in assuring that appropriate standards of medical care are met.” Mikes, 274 F.3d at 699–700. As the relators argue, federalism issues may not be as relevant to the already federally-regulated banks as they were in the healthcare context, but the same concern about the “active
Lastly, the relators contend that applying Mikes’ express statement rule to this case would be contrary to the FCA‘s goal of punishing any fraud against the government. But this argument ignores the explicit statements from the Supreme Court and other courts clarifying that the FCA does not sweep so broadly. See, e.g., McNinch, 356 U.S. at 599 (“[I]t is . . . clear that the False Claims Act was not designed to reach every kind of fraud practiced on the Government.“); Steury, 625 F.3d at 268 (“The FCA is not a general ‘enforcement device’ for federal statutes, regulations, and contracts.“(quoting United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997))).
D. Relators’ Fraudulent Inducement and Conspiracy Claims
The relators next contend that the district court‘s failure to address their fraudulent inducement and conspiracy claims warrants reversal. We conclude that the court‘s decision not to address either of these claims does not constitute reversible error. These claims are merely derivative of the relators’ other claims. Especially under these circumstances, the district court was not required to
Although it would perhaps have been preferable for the district court to discuss its reasoning in dismissing these claims, the relators present no reason on appeal why their fraudulent inducement claim is distinct from their other claims and would not fail for the same reasons. Likewise, under the facts of this case, the relators cannot show a conspiracy to commit fraud given that they have not sufficiently pleaded fraud under the FCA. Their appellate briefing simply states that the district court failed to address their claims without providing any argument in support of the merits. “Issues not sufficiently argued in the briefs are considered waived and normally will not be addressed on appeal. . . . [M]erely incorporating by reference an argument presented to the district court, stating an issue without advancing an argument, or raising an issue for the first time in a
E. Leave to Amend the Third Amended Complaint
Finally, the relators argue that the district court abused its discretion in denying their request for permission to file a fourth amended complaint, although they did not file a formal motion for leave to amend. The district court determined that any amendments would be “futile” because “their expansive theory of FCA liability simply is not viable. The facts plead[ed] do not suggest that any further information available to relators will change that.” Kraus, 117 F.Supp. 3d at 228. As the district court determined, it is apparent from the Lending Agreement which documents needed to be included with the application for borrowing, so there is no need for the relators to “discover” which precise documents the defendants submitted. The relators have not indicated how permitting them to file a fourth amended complaint now will change the outcome of the case.
For the foregoing reasons, we conclude that the relators have not sufficiently pleaded their claims under the False Claims Act, and we accordingly AFFIRM the district court‘s dismissal of their complaint.