Second Circuit Rejects Broad Certification as Basis for False Claims Act Liability in Financial IndustryToday, the Second Circuit affirmed the dismissal of False Claims Act (FCA) claims against Wells Fargo, finding a general certification of compliance with “any laws or regulations” too broad to support an FCA action and cautioning against an expansive reading of the FCA. Read the opinion in Bishop v. Wells Fargo & Co., Case No. 15-2449 here.

The FCA action—brought by a pair of whistleblower former employees—alleged the bank falsely certified it was in compliance with various banking laws and regulations when it borrowed money at favorable rates from the discount window operated by the Federal Reserve (Fed). Each time the bank borrowed money from the Fed, the bank made representations and warranties on the Fed’s Operating Circular No. 10, including the following:

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; . . .

The plaintiffs alleged the certifications were false as they related to pre-merger conduct of Wachovia and World Savings Bank. They further alleged that Wachovia used improper accounting practices to hide “toxic” assets and was severely undercapitalized and that World Savings Bank made inappropriate loans and failed to put in place required controls.

The Court rejected these theories of liability, relying heavily on its 2001 health care FCA opinion Mikes v. Strauss, 274 F.3d 687 (2d Cir. 2001), which stated that the FCA was “not designed to reach every kind of fraud practiced on the Government.” The Wells Fargo Court agreed with the lower court opinion that the general certification of compliance with “any laws or regulations” is “too broad to give rise to a claim under the FCA,” and cited the statement in Mikes that the FCA “does not encompass those instances of regulatory noncompliance that are irrelevant to the government’s disbursement decisions.” Responding to plaintiffs’ argument that this holding would give banks a “free pass” to defraud the government, the Court noted: “The federal government has many tools other than the FCA at its disposal to discipline banks and to ensure compliance with banking laws and regulations, ranging from informal reprimands to fines to involuntary termination of a bank’s status as an insured depository institution.”

Although the Ninth Circuit and Southern District of New York have previously limited Mikes to instances of alleged fraud in the healthcare industry, in Wells Fargo the Second Circuit explicitly found Mikes applicable to the financial industry. The Court stated, “As with Medicare, there are other actors involved in regulating banks who are better suited to ‘assuring that’ banks comply with applicable laws and regulations while at the same time ensuring that the entire banking system remains stable.”

This opinion should be useful to financial institutions faced with potential FCA liability based on either broad certifications of compliance with the law or noncompliance with legal requirements that are not preconditions to the payment of the claim at issue.