Bank Whistle Blowers May Get Their Day In Court After All
https://www.forbes.com/sites/walterpavlo/2017/03/06/bank-whistle-blowers-may-get-their-day-in-court-after-all/
To
summarize, the financial crisis was caused by; 1) individuals who
wanted to own a home, 2) banks who wanted to loan the money for fees 3)
the creation of mortgage-backed securities as a mechanism for allowing
banks to unload the mortgages they created, 4) rating agencies who
ignored the real value of the underlying mortgages that were bundled
into securities and 5) Wall Street who peddled those bundles of
over-rated securities unto investors. Then one day we all woke up and
realized that it was all a fraud.
Now a pair of whistleblowers may be about to get their day in court to prove how their banks (Wachovia purchased World Savings in 2006, then Wells Fargo bought Wachovia in 2008) hid billions of dollars in bad loans in off-balance sheet entities while, at the same time, stating that they were financially sound. According to claims made by Robert Kraus, Wachovia created a “Black Box” of off-balance-sheet entities to hide billions of dollars in worthless loans while borrowing, being forced to borrow through the Troubled Asset Relief Program, from the Federal Reserve Bank’s discount window during the 2007 / 2008 financial crisis. Wells Fargo, like other major banks, repaid $25 billion in December 2009.
Bishop's initial claim concerned allegations of improper lending practices at Golden West, a subsidiary of World Saving).
While unrelated, their cases have been joined in this whistleblower
lawsuit to portray a culture of fraud and deceit that was the overriding
contributing factor to the financial collapse.
Their claim was that the deception started before the Wells Fargo purchase of the banks but the coverup of the bad mortgages in the Black Box continued until at least 2011. The difference between what Wells Fargo paid at the low rate and the higher interest rate they should have paid would be due back to the tax payers. For their role as whistleblowers, Bishop and Kraus stand to get a percentage of that amount should they prevail.
This lawsuit, filed under the U.S. False Claims Act, was initially filed in 2011 in the Eastern District of New York, but that district court dismissed it because the claims did not reference any regulations or statutes that specifically conditioned payment by the government on compliance with bank lending laws. On appeal, the 2nd Circuit affirmed the dismissal in May 2016 on the same technical grounds. Wells Fargo’s argument was based on another 2nd Circuit case, Mikes v. Straus, which adopted a more narrow definition of a false claim, which differed from other federal courts in the country. It worked! Then a month after the 2nd Circuit decision, the Supreme Court ruled on another case that broadened the definition of a false claim eliminating the requirement of specific labels on laws requiring notice that payment, loan, was based on honesty. Imagine that. Last week SCOTUS ruled to send the whistleblower case back to the 2nd Circuit, which will most likely send it back to the district court for a trial.
Now a pair of whistleblowers may be about to get their day in court to prove how their banks (Wachovia purchased World Savings in 2006, then Wells Fargo bought Wachovia in 2008) hid billions of dollars in bad loans in off-balance sheet entities while, at the same time, stating that they were financially sound. According to claims made by Robert Kraus, Wachovia created a “Black Box” of off-balance-sheet entities to hide billions of dollars in worthless loans while borrowing, being forced to borrow through the Troubled Asset Relief Program, from the Federal Reserve Bank’s discount window during the 2007 / 2008 financial crisis. Wells Fargo, like other major banks, repaid $25 billion in December 2009.
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Their claim was that the deception started before the Wells Fargo purchase of the banks but the coverup of the bad mortgages in the Black Box continued until at least 2011. The difference between what Wells Fargo paid at the low rate and the higher interest rate they should have paid would be due back to the tax payers. For their role as whistleblowers, Bishop and Kraus stand to get a percentage of that amount should they prevail.
This lawsuit, filed under the U.S. False Claims Act, was initially filed in 2011 in the Eastern District of New York, but that district court dismissed it because the claims did not reference any regulations or statutes that specifically conditioned payment by the government on compliance with bank lending laws. On appeal, the 2nd Circuit affirmed the dismissal in May 2016 on the same technical grounds. Wells Fargo’s argument was based on another 2nd Circuit case, Mikes v. Straus, which adopted a more narrow definition of a false claim, which differed from other federal courts in the country. It worked! Then a month after the 2nd Circuit decision, the Supreme Court ruled on another case that broadened the definition of a false claim eliminating the requirement of specific labels on laws requiring notice that payment, loan, was based on honesty. Imagine that. Last week SCOTUS ruled to send the whistleblower case back to the 2nd Circuit, which will most likely send it back to the district court for a trial.
We have so few trials these days but if this were make it, it would provide some insights into not only the Black Box entities but also whether or not Wells Fargo purposely hid assets from the Fed when it borrowed money. What would also be interesting is how a jury would react to the case concerning the actions at the center of the financial crisis. As Joel Androphy and Zenobia Bivens, Berg & Androphy, lead attorneys representing the men, told me, “If the 12 jurors who will hear this case applied for a home loan, but omitted from their financial statements a delinquent $10,000 car loan, much smaller in scale than the billions of toxic loans withheld from regulatory review, they would face federal indictments and jail time.”
Their analogy seems reasonable. I covered a story of Jamila Davis, a low-level mortgage fraudster who made up mortgage documents that she presented to Lehman. Lehman, with their superior due diligence at the time, approved her loans. When she went to trial, bank executives testified against her, some of them in exchange for immunity. That was in 2008. Davis was found guilty and sentenced to 12 years in prison … she’s still there. This whistleblower case is not about people going to prison, but perhaps it should be.
It is also interesting what role the Fed had in doing their own due diligence on their customer. Wachovia and Wells Fargo, who portrayed themselves as sound banks at the time they asked for money. Did the government just take their word, or did they ask any questions.
If Bernie Madoff knew that the Fed was so easy about handing out money he might still be in business.
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You can contact Walt at walt.pavlo@500pearlstreet.com to tell him how much he was able to misunderstand the banking business or to propose him for the Nobel Surpize in Economics... Ha, ha ha. Morons.
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