A New Era: The Government's False Claims Act Lawsuit Against Deutsche Bank
Kelley Drye Client Advisory
May 10, 2011

On May 3, 2011, U.S. Attorney Preet Bharara filed a billion dollar False Claims Act lawsuit against Deutsche Bank and its subsidiary MortgageIT for alleged mortgage fraud spanning from 1999 to 2009. The action, captioned United States v. Deutsche Bank AG and MortgageIT, Inc., 11 Civ. 2976, was filed in the Southern District of New York in Manhattan and is being prosecuted by a special Civil Frauds Unit within the U.S. Attorney's Office set up in March 2010 to investigate large-scale economic crimes, including mortgage fraud. The Deutsche Bank lawsuit is significant because it is the first public False Claims Act case for mortgage fraud against a major financial firm. With respect to whether we can expect to see other cases like this filed in the future, U.S. Attorney Bharara stated that "it would not be a fantastical stretch to think we are looking at other lending institutions as well." Thus, the Deutsche Bank case signals a new and serious litigation threat for lenders that issued loans guaranteed by the federal Government during the housing boom in the 2000s and also for large banking institutions which subsequently acquired firms that did so, even if such acquisition came after much of the questioned conduct.

The False Claims Act, 31 U.S.C. § 3729 et seq., provides the United States, or private citizens on behalf of the United States, with a civil cause of action to recover treble damages and penalties from those who knowingly present, or cause to be presented, false claims for money or property to the United States, or who submit false information in support of such claims. The Act has emerged in the past two decades as the Government's primary anti-fraud weapon. In recent years, the health care industry has been the Government's primary target, accounting for more than two-thirds of $28 billion in FCA settlements and judgments. Statistics show that the Government has obtained a settlement or prevailed at trial in 94% of the FCA actions it has brought. This latest case against Deutsche Bank signals that the Government is prepared to make FCA claims in the financial services sector.

The crux of the Government's complaint is that the defendants made two types of repeated false certifications which led to the Government having to pay mortgage insurance on defaulted mortgages. First, it is alleged that both MortgageIT and Deutsche Bank made annual certifications which falsely represented to HUD that MortgageIT was in compliance with HUD's mandatory quality control requirements. Defendants were allegedly required to make such annual certifications in order to maintain MortgageIT's status as a direct endorsement lender. MortgageIT allegedly made such certifications between 1999 and 2009 and Deutsche Bank allegedly made such certifications between 2007 and 2009. Second, it is alleged that MortgageIT falsely certified on each mortgage it endorsed that it had conducted due diligence in accordance with HUD rules.

The complaint takes an aggressive position in its claim that such certifications can be a basis for an FCA claim as opposed to a subject for regulatory review by FHA's Mortgagee Review Board. We expect the issue of liability will be hotly contested. Every financial services institution that participated in any kind of program where Government funds could be disbursed, such as this one, the Veterans Affairs Loan Program or the Rural Housing Service Loan Program, should understand that, in addition to the regulatory risk for such programs, the Government now is prepared to use the FCA in an effort to recover not only compensatory damages but also treble damages and penalties.

For more information about this Client Advisory, and about the defense of False Claims Act litigation, contact:

Sarah L. Reid
212-808-7720
sreid@kelleydrye.com

William A. Escobar
212-808-7771
wescobar@kelleydrye.com