EDNY Dismisses False Claims Act Case Against Large National Bank

A U.S. District Court for the Eastern District of New York recently dismissed a False Claims Act (FCA) case against a large national bank.  The court ruled that the Federal Reserve Banks (FRBs), to which the national bank allegedly submitted false claims, do not act as the United States government or its agents under the FCA nor does the government provide funds to or reimburse the FRBs for the conduct at issue in this case.

In the qui tam lawsuit, United States ex rel. Kraus v. Wells Fargo & Co., 11 Civ. 5457 (BMC), two whistleblowers alleged that the national bank made false claims by: (1) engaging in extensive accounting and control fraud to distort its supervisory ratings and capital ratios to qualify for preferential interest rates from the FRBs; and (2) borrowing money at the lower rates.  The FCA imposes liability on any person who knowingly presents a false or fraudulent claim for payment or approval to an officer or employee of the United States.

The EDNY granted the defendant’s motion to dismiss the whistleblowers’ fourth amended complaint because FRBs do not act as the United States or its agents under the FCA.  The court considered numerous factors in determining whether an FRB should be characterized as the United States government.  For instance, the court held that (1) the Federal Reserve Act does not designate FRBs as part of any executive department or agency; (2) FRBs are financially independent from the government and owned by by their constituent private member banks; (3) FRB employees are not government employees; and (4) FRBs do not have the authority to promulgate regulations having the force and effect of law.  The court also noted that the government does not provide funds to or reimburse FRBs for the conduct at issue here.

The district court’s opinion and order follows the Second Circuit’s order remanding the case to be reviewed under the standard set forth in the Supreme Court’s landmark FCA decision in Universal Health Services, Inc. v. United States ex rel. Escobar.