United States ex rel. Kraus v. Wells Fargo & Co.
| Decision Date | 21 November 2019 |
| Docket Number | August Term, 2018,Docket No. 18-1746 |
| Citation | 943 F.3d 588 |
| Parties | UNITED STATES of America ex rel. Robert Kraus and Paul Bishop, 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. |
| Court | U.S. Court of Appeals — Second Circuit |
Jay W. Eisenhofer (James J. Sabella, Grant & Eisenhofer P.A., New York, New York, Kyle J. McGee, Grant & Eisenhofer P.A., Wilmington, Delaware, Sharad A. Samy, Law Offices of Sharad A. Samy LLC, Darien, Connecticut, and Tejinder Singh, Goldstein & Russell, P.C., Bethesda, Maryland, on the brief), for Plaintiffs-Appellants.
Amy Pritchard Williams (Stephen G. Rinehart, on the brief), Troutman Sanders LLP, Charlotte, North Carolina, for Defendants-Appellees.
Joseph H. Hunt, Assistant Attorney General, Richard P. Donoghue, United States Attorney for the Eastern District of New York, Charles W. Scarborough, Joshua M. Salzman, for the United States, Amicus Curiae.
Richard M. Ashton, Joshua P. Chadwick, Yvonne F. Mizusawa, Katherine A. Pomeroy, for Amicus Curiae Board of Governors of the Federal Reserve System.
Meghann E. Donahue, Michele Kalstein, for Amicus Curiae Federal Reserve Bank of New York.
Keith Goodwin, Gregory J. Ewald, for Amicus Curiae Federal Reserve Bank of Richmond.
Before: Katzmann, Chief Judge, Cabranes and Carney, Circuit Judges.
This case arises out of the 2008 financial crisis. This appeal—appellants’ second—asks us to decide whether the False Claims Act (the "Act" or the "FCA"), 31 U.S.C. § 3729 et seq ., applies to persons who defraud the emergency lending facilities of the Federal Reserve System (the "Fed").
Paul Bishop and Robert Kraus ("relators") allege that Wells Fargo & Company and Wells Fargo Bank N.A. (jointly, "Wells Fargo") fraudulently misrepresented their financial condition to one or more of the Fed’s twelve regional Federal Reserve Banks ("FRBs") so that they could obtain emergency loans at favorable interest rates for which they were not qualified. The district court (Cogan, J. ) granted Wells Fargo’s motion to dismiss, holding that knowingly presenting false or fraudulent loan applications to FRBs does not violate the FCA because (1) FRB personnel are not "officer[s], employee[s], or agent[s] of the United States" within the meaning of § 3729(b)(2)(A)(i) ; and (2) the United States does not "provide[ ] ... the money ... requested or demanded" by Fed borrowers within the meaning of § 3729(b)(2)(A)(ii).1 See United States ex rel. Kraus v. Wells Fargo & Co. (" Bishop IV "), 11-cv-5457, 2018 WL 2172662, at *2 .2
Although we agree that FRB personnel are not "officer[s]" or "employee[s] ... of the United States" within the meaning of 31 U.S.C. § 3729(b)(2)(A)(i), we conclude that loan requests presented to the FRBs under the Discount Window and Term Auction Facility are nonetheless "claims" under the FCA because the FRBs are "agents of the United States" within the meaning of § 3729(b)(2)(A)(i), and also because the "money ... requested" by Fed borrowers is "provided" by the United States to advance a Government program or interest within the meaning of § 3729(b)(2)(A)(ii).
The FRBs are instrumentalities of the federal government and the operating arms of its central bank. See Starr Int’l Co. v. Fed. Reserve Bank of N.Y. , 742 F.3d 37, 40 (2d Cir. 2014). The Federal Reserve Act ("FRA") empowers the FRBs, in conjunction with the Board of Governors of the Federal Reserve System (the "Board"), to issue legal tender and to finance the Fed’s activities by purchasing public and private debts. The FRA also authorizes the FRBs to administer the Fed’s emergency lending facilities. Requests for loans made to these facilities are requests for loans from the United States. And as the FRBs are required to remit all their excess earnings to the United States Treasury, a borrower’s failure to pay the appropriate amount of interest on a loan from an FRB injures the public fisc, not merely the FRBs’ nominal shareholders.
The Fed, as it has evolved over the last century, involves a complex set of relationships that any court must be wary of unsettling. Thus, the opinion that follows is narrowly focused on the FCA and our analysis may not be relevant to questions involving the status of the FRBs in other contexts. Because we conclude that, in the context of the Fed’s emergency lending facilities, the FCA applies to fraud involving the FRBs, we VACATE the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.
On de novo review, as stated infra at 594–95, we accept the facts as alleged in the complaint as true. From approximately June 2005 to September 2006, Kraus was employed by Wachovia Capital Markets LLC ("WCM"), a subsidiary of Wachovia Corporation ("Wachovia"), as Vice President, Controller for the Real Estate Capital Markets group, and Controller for the Corporate and Investment Bank Finance group. From about November 2002 to May 2006, Bishop was employed by World Savings, Inc. ("WSI") as a retail salesperson.
According to Kraus and Bishop, during these periods, and in the years that followed, Wachovia and WSI (which was acquired by Wells Fargo in October 2006) engaged in a "pervasive pattern of financial, regulatory and accounting fraud." Joint App’x at 27 (Compl. ¶ 3). Among other things, Wachovia and WSI, by and through their subsidiaries and affiliates, originated and "securitized" low-quality real estate loans and, to avoid financing these loans with the required amount of equity capital, cooked their books, improperly hiding certain assets in off-balance-sheet entities and classifying them as "trading assets" or "assets held for sale." Id. at 28 (Compl. ¶ 3).
When "cracks started to show in Wachovia’s fragile financial façade," id. at 59, the bank turned to the Fed for help. As relevant herein, the Fed is comprised of twelve FRBs, which are separately incorporated banks dispersed geographically throughout the country, and a Board, which is based in Washington, D.C. and is an independent agency within the executive branch. See 12 U.S.C. §§ 241 - 252, 264, 341 - 362.3 Through its banking subsidiary—Wachovia Bank National Association ("WBNA")—Wachovia requested billions of dollars in loans from two of the emergency lending facilities operated by the Fed: the Discount Window and the Term Auction Facility ("TAF").
The Discount Window is a standing facility through which the Fed makes short-term loans to depository institutions. See Bloomberg, L.P. v. Bd. of Governors of the Fed. Reserve Sys. , 601 F.3d 143, 145 n.1 (2d Cir. 2010). The terms of these loans depend on a borrower’s financial condition: The FRA and related regulations promulgated by the Board authorize the FRBs to extend credit at a "primary credit rate" as a "backup source of funding to a depository institution ... that is in generally sound financial condition," 12 C.F.R. § 201.4(a), and at a higher, "secondary credit rate" as "a backup source of funding to a depository institution that is not eligible for primary credit if, in the judgment of the Reserve Bank, such a credit extension would be consistent with a timely return to a reliance on market funding sources," id. at § 201.4(b).
FRBs are also authorized to extend longer-term secondary credit to depository institutions if "such credit would facilitate the orderly resolution of serious financial difficulties." Id. And FRBs may extend emergency credit to other persons in "unusual and exigent circumstances" if certain further requirements are met. See id. at § 201.4(d). But the FRBs are not permitted to extend credit through the Discount Window to those institutions that are insolvent or to those that are borrowing for the purpose of lending to a person who is insolvent. See id. at § 201.4(d)(5)(i).
The TAF was a temporary facility created by the Board on December 12, 2007, to increase liquidity in financial markets at the outset of the financial crisis. The program’s goal was to address the reluctance of financial institutions to borrow from the Discount Window at that time. Unlike the Discount Window, the TAF provides financial institutions with loans of up to 84 days in amounts and at rates set by auction. Only firms in a generally sound condition are eligible to participate. See id. at § 201.4(e) ; see also Extensions of Credit by Fed. Reserve Banks, 72 Fed. Reg. 71,202, 71,202 –03 (Dec. 17, 2007).
During the second half of 2008, Wachovia borrowed substantial amounts from the TAF and the Discount Window. For example, on October 6, 2008, WBNA borrowed $29 billion from the Discount Window at the primary credit rate, then 2.25%. Two days later, on October 8,...
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