Wells Fargo Must Face False Claims Act Questions on Discount Window

By Chris Bruce

The U.S. Supreme Court Feb. 21 said Wells Fargo must face another round of questions on whether it violated the False Claims Act when it borrowed from the Federal Reserve ( Bishop v. Wells Fargo & Co. , U.S., 16-cv-00578, remanded 2/21/17 ).

In a brief order, the justices granted a petition to review a May 2016 ruling by the U.S. Court of Appeals for the Second Circuit that dismissed claims brought by former officials of two banks acquired by Wells Fargo.

But instead of keeping the case on its own docket, the Supreme Court sent it back to the Second Circuit, with instructions to consider the case in light of a June 2016 Supreme Court ruling, Universal Health Servs., Inc. v. United States ex rel. Escobar.

Although the Supreme Court’s Feb. 21 order effectively revives the case in the Second Circuit, it could make the officials’ claims harder to sustain. In Escobar, the justices said False Claims Act allegations involving a failure to disclose certain information are subject to a materiality requirement.

Wells Fargo spokesperson Elise Wilkinson Feb. 21 declined to comment on the order.

Discount Window Loans

The case involves allegations by Robert Kraus and Paul Bishop, former officials of Wachovia Bank and World Savings Bank. World Savings merged into Wachovia in 2006, and Wells Fargo acquired the combined company in 2008.

Kraus and Bishop said Wachovia and, after the merger, Wells Fargo, falsely certified compliance with various laws and regulations while taking low-rate loans from the Federal Reserve’s discount window. The Fed makes such loans available to banks at favorable rates to ensure stability in the financial system.

According to the Second Circuit, the FBI and the Securities and Exchange Commission declined to pursue the allegations brought by Kraus and Bishop.

On remand, the Second Circuit will take up the case again with guidance from the Escobar case. That case focused on a theory of False Claims Act liability known as “implied false certification,” i.e., whether a defendant may be liable for submitting payment claims to the government while knowingly failing to disclose its own failure to comply with statutory, regulatory, or contract requirements.

In Escobar, the Supreme Court held the False Claims Act allows such claims, but said materiality must be considered.

“What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision,” Justice Clarence Thomas said for a unanimous Escobar court.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.comTo contact the editor responsible for this story: Michael Ferullo at mferullo@bna.com

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