15-2449
Paul Bishop v. Wells Fargo
15‐2449
Paul Bishop v. Wells Fargo
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_______________
August Term, 2015
(Argued: March 1, 2016 Decided: May 5, 2016)
Docket No. 15‐2449
_______________
PAUL BISHOP, ROBERT KRAUS, UNITED STATES OF AMERICA, EX REL PAUL BISHOP, EX
REL ROBERT KRAUS,
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
1
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.*
_______________
B e f o r e: KATZMANN, Chief Judge, SACK and LOHIER, Circuit Judges.
_______________
Appeal from the dismissal of a qui tam action under the False Claims Act
(“FCA”) by the United States District Court for the Eastern District of New York
(Brian M. Cogan, Judge). The relators allege that defendants Wells Fargo &
Company and Wells Fargo Bank, N.A., defrauded the government within the
meaning of the FCA by falsely certifying that they were in compliance with
various banking laws and regulations when they borrowed money at favorable
rates from the Federal Reserve’s discount window. The district court granted the
defendants’ motion to dismiss, holding that the banks’ certifications of
compliance were too general to constitute legally false claims under the FCA and
that the relators had otherwise failed to allege their fraud claims with
particularity. We agree with the district court that the relators have not
sufficiently pleaded their claims under the FCA, and therefore affirm.
_______________
The Clerk of the Court is respectfully directed to amend the caption to conform to the
*
above.
2
JOEL M. ANDROPHY, ZENOBIA HARRIS BIVENS (Rachel L. Grier, on the
brief), Berg & Androphy, Houston, Texas (George C. Pratt,
Uniondale, New York, on the brief), for Plaintiffs‐Appellants.
GERALD A. NOVACK, K&L Gates LLP, New York, New York (Amy P.
Williams, K&L Gates LLP, Charlotte, North Carolina; Noam A.
Kutler, K&L Gates LLP, Washington, District of Columbia, on
the brief), for Defendants‐Appellees.
_______________
KATZMANN, Chief Judge:
At the heart of the case before us is the False Claims Act (“FCA”), which
forbids “knowingly present[ing], or caus[ing] to be presented, a false or
fraudulent claim for payment or approval” to the United States government. 31
U.S.C. § 3729(a)(1)(A). In 2011, Robert Kraus and Paul Bishop (together, the
“relators”) brought a qui tam action under the FCA on behalf of the United States
against Wells Fargo & Company and Wells Fargo Bank, N.A. (together, “Wells
Fargo”). The relators’ claims hinge on what they allege to be massive control
fraud perpetrated by Wachovia Bank and World Savings Bank from at least 2001
through 2008. World Savings Bank merged into Wachovia in 2006, and the
combined entity merged into Wells Fargo in 2008. The relators contend that
Wachovia and, after the merger, Wells Fargo defrauded the government within
the meaning of the FCA by falsely certifying that they were in compliance with
3
various banking laws and regulations when they borrowed money at favorable
rates from the discount window operated by the Federal Reserve (the “Fed”). The
relators contend that the Fed would not have permitted the banks to borrow at
those favorable rates had it known that they were undercapitalized as a result of
the fraud. The government declined to intervene in the relators’ suit. Wells Fargo
filed a motion to dismiss, which the district court granted, holding that the banks’
certifications of compliance were too general to constitute legally false claims
under the FCA and that the relators had otherwise failed to allege their fraud
claims with particularity. The relators appealed.
We agree with the district court. As this Court has long recognized, the
FCA was “not designed to reach every kind of fraud practiced on the
Government.” Mikes v. Straus, 274 F.3d 687, 697 (2d Cir. 2001) (quoting United
States v. McNinch, 356 U.S. 595, 599 (1958)). Even assuming the relators’
accusations of widespread fraud are true, they have not plausibly connected those
accusations to express or implied false claims submitted to the government for
payment, as required to collect the treble damages and other statutory penalties
4
available under the FCA. Accordingly, we affirm the district court’s judgment
dismissing the suit.
BACKGROUND
A. Relevant Banking Regulations
We begin with some context about the banking regulatory scheme at work
here. As the relators point out in their briefing, financial institutions in the United
States are subject to many different laws and regulations, and are overseen by a
number of different regulators, including the Fed. The Fed is responsible for
maintaining the stability of the U.S. financial system. See Bd. of Governors of the
Fed. Reserve Sys., The Federal Reserve System: Purposes and Functions 1 (9th ed. June
2005). As part of this mandate, the Fed, acting through its regional Federal
Reserve Banks, acts as a backup lender of last resort for banks through its
“discount window.” Id. at 45–46. One of the purposes of the discount window is
to enable banks to borrow to meet their reserve requirements. Under federal
regulations, banks must hold certain balances, either in cash or in certain accounts
with the Fed. Id. at 31. A low level of reserves does not by itself indicate that the
bank is suffering from financial weakness; for example, a bank could have
5
anticipated receiving cash from another source that did not come through at the
expected time. Id. at 45.
Nonetheless, banks were historically reluctant to borrow through the Fed’s
discount window out of fear of being stigmatized as financially weak. The Fed
had previously lent money to banks at below‐market rates, but it did not want
banks to borrow at the discount window only to relend at higher rates to other
banks. Accordingly, it imposed a requirement that borrowers first prove they had
exhausted other avenues for credit. See Extensions of Credit by Fed. Reserve
Banks; Reserve Requirements of Depository Insts., 67 Fed. Reg. 67,777, 67,778
(Nov. 7, 2002). The result was that borrowing from the discount window
indicated to the public that the bank had no other options. According to the Fed,
this stigma “in turn . . . hampered the ability of the discount window to buffer
shocks to the money markets,” especially in times of financial crisis, when the Fed
most needed to strengthen the financial system. Id. To address this concern, the
Fed adopted a new two‐tiered structure in 2003.
Under that structure, banks in “generally sound financial condition” are
eligible to borrow at the primary credit rate, which is set above the target Federal
6
Funds Rate. 12 C.F.R. § 201.4(a); Bd. of Governors of the Fed. Reserve Sys.,
Lending to Depository Institutions, available at http://www.federalreserve.gov/
monetarypolicy/bst_lendingdepository.htm. Banks that are not eligible for the
primary credit rate can instead borrow at the secondary credit rate, set above the
primary credit rate. 12 C.F.R. § 201.4(b). Although the discount window is still
intended to be only a “backup source of liquidity,” banks eligible for the primary
credit rate no longer need to show that they have first exhausted other sources of
credit. 67 Fed. Reg. at 67,780. Indeed, purposefully little is required of the
borrower at the time of the loan; the Fed describes the primary credit program as
a “‘no questions asked’ program with minimum administration,” meaning that
“qualified depository institutions seeking overnight primary credit ordinarily are
asked to provide only the minimum amount of information necessary to process
the loan. In nearly all cases, this would be limited to the amount and term of the
loan.” J.A. 437. The Fed clarified that these changes were necessary to induce
banks to borrow from it, in turn increasing the Fed’s ability to protect the financial
system. See 67 Fed. Reg. at 67,778.
7
To enhance its ability to influence liquidity during the recent financial
crisis, the Fed instituted the Term Auction Facility (“TAF”) from December 2007
through 2010. Term Auction Facility, Bd. of Governors of the Fed. Reserve Sys.,
https://www.federalreserve.gov/monetarypolicy/taf.htm (last updated Nov. 24,
2015). TAF operated as an auction; banks would bid on the amount of money they
wanted to borrow at specific interest rates, and the Fed would match the amount
it wanted to lend with the amounts requested, starting with the highest offered
rates. The Fed would then set the rate for all borrowers at the lowest rate which
would satisfy the total amount of money allotted to be loaned out. See Extensions
of Credit by Fed. Reserve Banks, 72 Fed. Reg. 71,202, 71,203 (Dec. 17, 2007). Only
banks in “generally sound financial condition” (i.e., those eligible for the primary
credit rate) were permitted to participate. 12 C.F.R. § 201.4(e). There is no dispute
that Wachovia and Wells Fargo borrowed money through the discount window
at the primary credit rate and through TAF after the Fed deemed them eligible.
The Fed’s authority to lend to banks is governed by Regulation A, 12 C.F.R.
pt. 201, which was promulgated under the Federal Reserve Act and the
International Banking Act of 1978, see 12 C.F.R. § 201.1. Regulation A provides
8
that a “Federal Reserve Bank may extend primary credit on a very short‐term
basis, usually overnight, as a backup source of funding to a depository institution
that is in generally sound financial condition in the judgment of the Reserve Bank.
Such primary credit ordinarily is extended with minimal administrative burden
on the borrower.” 12 C.F.R. § 201.4(a). Similarly, Regulation A gives a Federal
Reserve Bank the discretion to lend “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.” 12 C.F.R. § 201.4(b). Regulation A is explicit that any loan is made at the
sole discretion of the Fed: “This section does not entitle any person or entity to
obtain any credit or any increase, renewal or extension of maturity of any credit
from a Federal Reserve Bank.” 12 C.F.R. § 201.3(b).
Regulation A also mandates the information that a Federal Reserve Bank
must collect to determine whether a given bank is eligible to receive a loan
through either the primary or the secondary credit program. See 12 C.F.R. § 201.4.
Although Regulation A tasks each Federal Reserve Bank with obtaining adequate
information about the banks under its supervision, it does not require the
9
borrowing banks themselves to provide any specific information. See id. In
practice, the Federal Reserve Banks rely on information that the banks are
otherwise required to report to regulators, including quarterly Call Reports filed
with banks’ designated federal supervisory agencies. See 12 U.S.C. § 1817(a)(3);
The Fed. Reserve System: Purposes and Functions supra, at 62–64. The Fed also relies
on information gathered during bank examinations, which are conducted at
regular intervals by banks’ primary regulators. For example, Wells Fargo is
primarily regulated by the Office of the Comptroller of the Currency, which
conducts a “[f]ull‐scope, on‐site review” of each bank in its purview every 12–18
months and also frequently reviews each bank’s compliance with specific federal
laws or regulations. See Examinations: Overview, Office of the Comptroller of the
Currency, http://www.occ.treas.gov/topics/examinations/examinations‐
overview/index‐examinations‐overview.html (last visited May 4, 2016).
B. Wells Fargo’s Alleged Fraud
Notwithstanding this regulatory oversight, the relators allege that
Wachovia and World Savings Bank engaged in massive fraud in the early‐to‐mid‐
2000s, before Wachovia merged into Wells Fargo. According to the relators,
10
Wachovia’s executives relied on improper accounting practices to hide toxic
assets off its balance sheet, making the bank look more profitable and in better
financial health than it was. In reality, the relators allege, Wachovia was severely
undercapitalized. Similarly, the relators assert that World Savings Bank violated
applicable laws and regulations by failing to put in place required internal
controls and by making inappropriate loans.
Both relators claim to have witnessed these misdeeds firsthand. Robert
Kraus was a controller for two Wachovia groups from June 2005 to September
2006; Paul Bishop was a residential mortgage salesperson for World Savings Bank
from November 2002 to May 2006. Each was fired after he complained internally
about the bank’s improprieties. Kraus also reported his allegations of fraud to the
Federal Bureau of Investigation in 2007 and to the Securities and Exchange
Commission (“SEC”) in 2009. Bishop likewise reported his allegations of fraud to
the SEC. It does not appear that either agency took action as a result.
The bulk of the relators’ complaint is spent detailing those fraud
allegations, but they are not the subject of this suit. Rather, the relators’ FCA
claims rest on their assertion that every time Wachovia and, eventually, Wells
11
Fargo attempted to borrow money from the Fed’s discount window, including
through TAF, the banks had to make certain representations and warranties
contained in the Fed’s Operating Circular No. 10 (the “Lending Agreement”). The
relators argue that Wachovia and Wells Fargo could not have truthfully made
three of those representations as a consequence of the underlying fraud:
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; . . .
(g): no statement or information contained in the Lending Agreement
or any other document, certificate, or statement furnished by the
Borrower to the Bank or any other Reserve Bank for use in connection with
the transactions contemplated by the Lending Agreement, on and as of the
date when furnished, is untrue as to any material fact or omits any
material fact necessary to make the same not misleading, and the
representations and warranties in the Lending Agreement are true
and correct in all material respects; . . .
(i): no Event of Default has occurred or is continuing.
J.A. 204–05 (emphasis added). The Agreement stipulates that an “Event of
Default” occurs when the bank fails to repay obligations as they become due,
becomes insolvent, fails “to perform or observe any of its obligations or
12
agreements under the Lending Agreement,” or submits a “representation or
warranty . . . under or in connection with the Lending Agreement . . . [that] is
inaccurate in any material respect on or as of the date made or deemed made.”
J.A. 196. Section 9.2 of the Lending Agreement provides that “[e]ach time the
Borrower requests an Advance, incurs any Indebtedness, or grants a security
interest in any Collateral to a Reserve Bank, the Borrower is deemed to make all
of the foregoing representations and warranties.” J.A. 205.
The relators contend that when Wachovia and, post‐merger, Wells Fargo
borrowed money from the discount window from 2007 through 2011, knowing
they were “in violation of” banking “laws or regulations,” per Section 9.1(b), they
were making false statements for the purpose of obtaining government funds.
Similarly, the relators argue that because the financial documents the Fed relied
on in making its determination that the banks were eligible for the primary rate
were “untrue” or “misleading,” the banks’ Section 9.1(g) representations were
fraudulent. As a result, the relators also allege that the banks lied in certifying
compliance with Section 9.1(i) because their other representations were materially
“inaccurate.” Although all of the underlying fraud alleged in the complaint took
13
place in or before 2006, the relators claim that the fraud was of such a magnitude
that Wells Fargo could not have been in compliance with applicable laws and
regulations when the complaint was filed in 2011.
C. Procedural Background
The relators filed this action against Wells Fargo and its subsidiaries and
affiliates under seal in November 2011, and eventually filed two amended
complaints. After the government declined to intervene, the relators filed a third
amended complaint. They sought to recover the treble damages and civil
penalties provided by the FCA—nearly $900 billion—for false claims filed by
Wachovia and Wells Fargo from 2007 through the date they filed the initial
complaint. The relators listed some of the payments in an appendix to their
complaint, but did not detail each fraudulent loan request.
The defendants filed a motion to dismiss for failure to state a claim under
Rule 12(b)(6) and for failure to plead fraud with particularity under Rule 9. The
district court granted the motion, dismissing all of the relators’ claims with
prejudice and denying leave to amend. The relators have appealed some of those
claims to this Court.
14
STANDARD OF REVIEW
We review a district court’s grant of a motion to dismiss under Rule
12(b)(6) de novo, “accepting as true the factual allegations in the complaint and
drawing all inferences in the plaintiff’s favor.” Biro v. Condé Nast, 807 F.3d 541, 544
(2d Cir. 2015). We review a district court’s decision to deny a motion to amend for
abuse of discretion. See Spiegel v. Schulmann, 604 F.3d 72, 78 (2d Cir. 2010).
This Court has held that FCA claims fall within the scope of Rule 9(b),
which requires that plaintiffs “state with particularity the specific statements or
conduct giving rise to the fraud claim.” Gold v. Morrison‐Knudsen Co., 68 F.3d
1475, 1477 (2d Cir. 1995). Pleadings subject to Rule 9(b) must “(1) specify the
statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3)
state where and when the statements were made, and (4) explain why the
statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004)
(quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
15
DISCUSSION
A. The False Claims Act
As noted at the outset of this opinion, the FCA prohibits “knowingly
present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment
or approval” to the United States government. 31 U.S.C. § 3729(a)(1)(A).
Accordingly, to prove their claims under the FCA, the relators “must show that
defendants (1) made a claim, (2) to the United States government, (3) that is false
or fraudulent, (4) knowing of its falsity, and (5) seeking payment from the federal
treasury.” Mikes, 274 F.3d at 695.1 The parties do not dispute that the banks’
requests for loans through the discount window constitute claims to the United
States government seeking payment from the federal treasury. But the defendants
contend, and the district court found, that those claims were not “false or
fraudulent” within the meaning of the FCA. The Act does not define either term.
The FCA was enacted in 1863 to combat fraud by defense contractors
during the Civil War. See, e.g., Paul E. McGreal & DeeDee Baba, Applying Coase to
Qui Tam Actions Against the States, 77 Notre Dame L. Rev. 87, 121 (2001) (“Army
1 Congress amended the FCA in 2009, but the changes to the statute do not materially
alter our analysis of the issues involved in this case.
16
officers had reported numerous incidents where the federal government had paid
for certain supplies only to receive defective goods or nothing at all.”). Consistent
with its origin, the archetypal FCA claim involves a factually false request for
payment from the government, as when a contractor delivers a box of sawdust to
the military but bills for a shipment of guns. See Michael Holt & Gregory Klass,
Implied Certification Under the False Claims Act, 41 Pub. Cont. L.J. 1, 16 (2011). Over
time, courts have extended the FCA’s reach to “legally false” claims, those in
which “a party certifies compliance with a statute or regulation as a condition to
governmental payment,” but is not actually compliant. Mikes, 274 F.3d at 697. In
1994, the Federal Court of Claims broadened the definition of a false claim even
further to include “impliedly false” claims, where the submission of the claim
itself is fraudulent because it impliedly constitutes a certification of compliance.
See Ab–Tech Constr., Inc. v. United States, 31 Fed. Cl. 429, 434 (1994), aff’d without
written opinion, 57 F.3d 1084 (Fed. Cir. 1995). Other courts adopting this theory of
liability, including this one, have warned about its potentially “expansive” reach.
See, e.g., Mikes, 274 F.3d at 699 (“[C]aution should be exercised not to read this
theory expansively and out of context.”).
17
From its enactment, the FCA has encouraged private citizens to report
fraud by promising a percentage of any eventual recovery. See McGreal & Baba
supra, at 121. Under the current version of the statute, each false claim exposes the
perpetrator to “a civil penalty of not less than $5,000 and not more than $10,000
. . . plus 3 times the amount of damages which the Government sustains because
of the act of that person.” 31 U.S.C. § 3729(a)(1). Qui tam relators are eligible to
receive up to 30% of the government’s total recovery, in addition to any expenses,
fees, or costs incurred in bringing the suit. 31 U.S.C. § 3730(d)(2).
B. Relators’ Express Certification Claims
In this case, the relators allege that Wells Fargo violated the FCA in several
ways: by making express false certifications under Sections 9.1(b), (g), and (i) of
the Lending Agreement; by making an implied false certification under Section
9.1(b); by fraudulently inducing the government to lend to it; and by conspiring
to submit false claims. The district court determined that the relators did not meet
their burden to show that the defendants violated the FCA. We agree and address
each claim in turn below.
18
a. Section 9.1(b) of the Lending Agreement
The district court first dismissed the relators’ claim that the defendants
made an express false certification under Section 9.1(b) of the Lending
Agreement. The relators allege that the defendants’ underlying fraud made it
impossible for the banks to certify that they were “not in violation of any laws or
regulations” when they borrowed from the discount window. The district court
determined that Section 9.1(b) is too broad to give rise to a claim under the FCA,
based on this Court’s holding in Mikes.
In Mikes, this Court affirmed the dismissal of a qui tam suit alleging that a
medical practice had violated the FCA by submitting Medicare reimbursement
requests for procedures that did not meet the requisite standard of care. This
Court clarified that the FCA was not intended to police general regulatory
noncompliance; “it does not encompass those instances of regulatory
noncompliance that are irrelevant to the government’s disbursement decisions.”
Mikes, 274 F.3d at 697. Thus, we held that “not all instances of regulatory
noncompliance will cause a claim to become false.” Id. This Court then rejected
the relator’s claims of express and implied false certification.
19
For an express false certification, the Mikes Court held that the plaintiff
must allege that the defendant submitted “a claim that falsely certifies compliance
with a particular statute, regulation or contractual term, where compliance is a
prerequisite to payment.” Id. at 698 (emphasis added). Following Mikes, this Court
has not addressed how narrow a certification of compliance must be to constitute
an express false claim, nor to our knowledge has any court considered whether a
provision of the Fed’s Lending Agreement can serve as the basis for an FCA
claim. But, as the district court noted, other district courts in this circuit have
frequently rejected FCA claims that are too broad or vague. See, e.g., United States
ex rel. Feldman v. City of New York, 808 F. Supp. 2d 641, 652 (S.D.N.Y. 2011) (“[A]
claim that there has been an express false certification cannot be premised on
anything as broad and vague as a certification that there has been compliance
with all ‘federal, state and local statutes, regulations, [and] policies.’”); United
States ex rel. Colucci v. Beth Israel Med. Ctr., 785 F. Supp. 2d 303, 315 (S.D.N.Y. 2011)
(“General certifications of compliance with the law are insufficient.”), aff’d sub
nom. Colucci v. Beth Israel Med. Ctr., 531 F. App’x 118 (2d Cir. 2013). Other circuit
courts have held similarly. See, e.g., United States ex rel. Steury v. Cardinal Health,
20
Inc., 625 F.3d 262, 268 (5th Cir. 2010) (citations omitted) (“We have thus
repeatedly upheld the dismissal of false‐certification claims (implied or express)
when a contractor’s compliance with federal statutes, regulations, or contract
provisions was not a ‘condition’ or ‘prerequisite’ for payment under a contract.
This prerequisite requirement seeks to maintain a ‘crucial distinction’ between
punitive FCA liability and ordinary breaches of contract.”); United States ex rel.
Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1219 (10th Cir. 2008) (rejecting
an FCA claim where the certification “contains only general sweeping language
and does not contain language stating that payment is conditioned on perfect
compliance with any particular law or regulation”).
On appeal, the relators attempt to distinguish between statutory and
contract‐based certification claims. They argue that we should analyze the
relevant provision here under principles of contract interpretation, rather than
look to a specific statute or regulation. They point to the Tenth Circuit’s analysis
in United States ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1171 (10th
Cir. 2010), in which that court concluded that a certification of compliance with
“all contractual requirements” was not too broad to support an FCA claim. We do
21
not find this reasoning persuasive. Even though the Lending Agreement is a
contract, Section 9.1(b) does not require banks to certify compliance with all
contractual requirements, as was the case in Lemmon. Rather, the Lending
Agreement requires banks to certify compliance with “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
universe of potentially applicable laws or regulations is vast, compared to the
finite number of potential requirements in a contract, as the district court
observed. See United States ex rel. Kraus v. Wells Fargo & Co., 117 F. Supp. 3d 215,
222 (E.D.N.Y. 2015) (“Without considering whether [Lemmon’s] ruling is correct in
the context of a contract, where it makes at least some sense (because there is
obviously a limit to how many terms that would refer to), it is not the same as a
certification of compliance with any statute or regulation—a certification that is
potentially limitless in scope.”).
Second, the relators assert that Section 9.1(b) is not “overbroad” because the
“law or regulation” alleged must “have an adverse effect on the validity,
performance, or enforceability of the terms of the Lending Agreement.” See
22
Relators’ Br. at 41 (emphasis omitted). We are not persuaded that the latter phrase
sufficiently cabins the sweep of the provision. As noted, banks are subject to
thousands of laws and regulations that could plausibly affect the “validity,
performance, or enforceability of the terms of the Lending Agreement,” from
banking‐specific laws and regulations like the Bank Secrecy Act or the Volcker
Rule to more general ones applicable to any corporation, including employment
or tax laws. Reading this provision as the relators urge would give rise to “exactly
the kind of overbroad certification requirement” that we have previously rejected.
Kraus, 117 F. Supp. 3d at 222.
The relators next assert that any other interpretation of Section 9.1(b) would
be at odds with “banking industry customs and practices,” which typically
require “individual borrowers [to] provide representations and warranties in
their lending agreements with banks, similar to the representations and
warranties in the Lending Agreement.” Relators’ Br. at 43. But the Fed is not a
typical commercial lender, and borrowing banks are not typical loan customers:
For one, the Fed’s purpose in lending to banks is different from a commercial
lender’s purpose in lending to individuals. The Fed’s mission is to ensure the
23
stability of the nation’s monetary and financial system. The Fed. Reserve System:
Purposes and Functions supra, at 1. Nowhere in the Fed’s mission statement does it
mention earning a profit from its lending activity, and its actual income from
loans is negligible. See Bd. of Governors of the Fed. Reserve Sys., 101st Annual
Report at 307 (2014). Moreover, the Fed already has a wealth of information about
each bank before any request for a loan is made, given the Fed’s access to
information obtained by the bank’s other supervisors. That contrasts with the
typical lending transaction, where a bank has only the information provided by
the borrower at the time of the loan request. In addition, loans through the
discount window are usually very short‐term, typically overnight. “Banking
industry customs and practices” governing longer‐term loans between banks and
individual borrowers thus do not govern our analysis here.
The relators also argue that the district court’s interpretation would lead to
the “absurd result” of banks getting a “free pass to make false certifications
without repercussions under the FCA.” Relators’ Br. at 45. This argument is also
unavailing. The federal government has many tools other than the FCA at its
disposal to discipline banks and to ensure compliance with banking laws and
24
regulations, ranging from informal reprimands to fines to involuntary
termination of a bank’s status as an insured depository institution. See, e.g., 12
U.S.C. § 1818(2); The Fed. Reserve System: Purposes and Functions, supra, at 66–67.
Finding no FCA liability here does not give banks a “free pass” to defraud the
government.
Moreover, there is a risk to expanding the FCA to cover these claims: It
could incentivize individuals to bring suit without regard for the larger
implications on the financial system. Permitting qui tam plaintiffs like the relators
here to proceed on the facts of this case could discourage banks from accessing
the discount window out of concern that they might face FCA liability if they are
not in compliance with “any law or regulation.” The result would be precisely the
opposite of the Fed’s intentions in changing discount window operations in 2003.
See Extensions of Credit by Federal Reserve Banks, 67 Fed. Reg. at 67,778; see also
Conner, 543 F.3d at 1221–22 (under a broad reading of the FCA, “[a]n individual
private litigant, ostensibly acting on behalf of the United States, could prevent the
government from proceeding deliberately through the carefully crafted remedial
process . . . . It would . . . be curious to read the FCA, a statute intended to protect
25
the government’s fiscal interests, to undermine the government’s own regulatory
procedures.”); Holt & Klass, supra, at 43–44 (“When the federal government
brings a suit under the FCA, it has presumably balanced any costs of interference
with other regulatory mechanisms against the benefits of recovery under the Act.
The qui tam plaintiff has little or no reason to take such regulatory interference
into account.”).
b. Sections 9.1(g) and (i) of the Lending Agreement
The relators next allege that the defendants violated the FCA by falsely
certifying compliance with Sections 9.1(g) and (i) of the Lending Agreement. They
acknowledge that to support a claim of express false certification under Section
9.1(g), they must “allege that Defendants provided the Federal Reserve falsified
documents or made false statements to the Federal Reserve in connection with
borrowing funds.” Relators’ Br. at 49–50. They have not done so. The documents
that the relators submitted to the district court show that Wachovia and Wells
Fargo did not need to submit any financial information “in connection with”
borrowing through the discount window; thus, the relators cannot show that the
defendants violated Section 9.1(g). Further, we agree with the district court that
26
the relators’ allegations are “far too speculative to constitute a well‐plead[ed]
claim” of fraud. Kraus, 117 F. Supp. 3d at 225.
Appendix 3 to the Lending Agreement describes the documents that a bank
must submit when it applies for a loan through the discount window: (1) a letter
of agreement stipulating that the borrower agrees to the provisions of the
Lending Agreement; (2) a certificate attaching copies of documents specifying the
official name of the borrower and providing contact information so the Fed can
make an effective UCC‐1 financing statement; (3) authorizing resolutions,
typically from a board of directors, giving the bank the legal authority to borrow
from the Fed; and (4) an official OC‐10 Authorization List, which lists individuals
who are authorized to borrow money on the bank’s behalf. J.A. 217–22; 698. The
list of required documents does not include or reference the bank’s balance sheet
or any other detailed financial information. This omission is likely intentional; as
noted, one of the Fed’s stated purposes in amending the process to access the
discount window in 2003 was to reduce the administrative burden on borrowing
banks. Banks are required to report financial information to their designated
regulators, but that information is used for many purposes, not necessarily “in
27
connection with” the Fed’s lending programs. Under the relators’ view, a
falsehood in any document submitted by a bank to its regulator could lead to
FCA liability because that document might be used by the Fed in its later
determination of eligibility for lending. To endorse that view would risk
substantially broadening the scope of FCA liability and potentially undermining
the Fed’s ability to maintain the stability of the financial system.
The relators’ argument that the defendants falsely certified compliance with
Section 9.1(i) depends on the same allegations as their argument that the
defendants falsely certified compliance with 9.1(b) and (g), and therefore fails for
the same reasons. See Relators’ Br. at 57 (acknowledging that non‐compliance
with Section 9.1(i) hinges on a violation of another provision of the Lending
Agreement). Put another way, because the relators cannot show that the
defendants submitted a “representation or warranty . . . under or in connection
with the Lending Agreement . . . [that] is inaccurate in any material respect,” they
cannot show that the defendants committed an “Event of Default” as defined by
the Lending Agreement. J.A. 196.
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C. Relators’ Implied Certification Claim
Separate from their express certification claims, the relators also argue that
the defendants are liable under the FCA for making implied false certifications
under Section 9.1(b). In Mikes, this Court warned that “the False Claims Act was
not designed for use as a blunt instrument to enforce compliance with all medical
regulations—but rather only those regulations that are a precondition to
payment—and to construe the impliedly false certification theory in an expansive
fashion would improperly broaden the Act’s reach.” 274 F.3d at 699. Accordingly,
this Court held that “implied false certification is appropriately applied only
when the underlying statute or regulation upon which the plaintiff relies expressly
states the provider must comply in order to be paid.” Id. at 700.
In this case, the district court rejected the relators’ implied certification
claim, observing that “Relators have not briefed an ‘implied false certification’
theory in any great depth, nor have they alleged it with any detail.” Kraus, 117 F.
Supp. 3d at 222. The court concluded that the claim was “misplaced,” as the
relators did not argue that “any of the many alleged violations of laws and
29
regulations that took place at the defendant banks was ever a violation of a statute
that governed eligibility for the primary credit program.” Id. at 223.
On appeal, the relators argue first that the district court erred in dismissing
this claim because the defendants’ certifications of compliance with Section 9.1(b)
constituted a “material condition to payment,” and thus their “bad acts went to
the heart of the bargain that they negotiated with the Government.” Relators’ Br.
at 23–24. But this Court has never adopted the relators’ “heart of the bargain” test
for implied false certification claims under the FCA; rather, the relators appear to
be referencing the district court’s decision in Mikes. See United States ex rel. Mikes v.
Straus, 84 F. Supp. 2d 427, 436 (S.D.N.Y. 1999) (“I cannot conclude that compliance
with 1320c–5 lay ‘at the heart of’ Defendants’ agreement with Medicare. Mikes
therefore cannot rely upon the implied certification theory to satisfy the second
element of her FCA claim.”). This Court did not adopt that test in affirming the
district court’s judgment, and we decline to do so now.2
2 The relators cite this Court’s decision in Mikes for the proposition that “certain
representations are so key to an agreement that they are clearly conditions for payment
and that failing to comply with these representations ‘may be actionable under § 3729 [of
the False Claims Act], regardless of any false certification conduct.’” Relators’ Reply Br.
at 9 (quoting Mikes, 274 F.3d at 703). But they fail to acknowledge that the quoted text in
Mikes referred to a worthless services claim, where a plaintiff alleges that a defendant
30
In the alternative, the relators contend that they have complied with Mikes’
express statement requirement. They point to the Federal Reserve Act and its
accompanying regulations, particularly Regulation A, as expressly incorporated
in the Lending Agreement. But Regulation A governs the Fed’s authority to lend
to banks. See 12 C.F.R. pt. 201. By its plain terms, it does not apply to the banks
themselves, and nowhere do the relators allege that banks were required to
submit any financial information in connection with borrowing from the discount
window. It is true, as the relators point out, that the Fed could not have made
decisions about the banks’ eligibility to borrow without examining their financial
statements, but the tangential relationship between banks’ submission of
documents to regulators and the Fed using that information to determine
eligibility at some later point is not sufficient to support liability under an implied
certification claim. See Mikes, 274 F.3d at 702.
Recognizing that our holding in Mikes likely precludes their implied
certification claim, the relators attempt to distinguish that precedent as only
applicable to fraud by a healthcare provider. Although the Mikes court examined
sought “reimbursement for a service not provided.” Mikes, 274 F.3d at 703. The Mikes’
court expressly characterized these types of claims as “distinct” from false certification
claims. Id. There is no analogous allegation in this case.
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the meaning of the FCA within the context of alleged Medicare fraud, we do not
read the text of the opinion to limit its holding to the healthcare industry. See
United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94, 113‐14 (2d Cir.
2010) (applying the holding in Mikes to a case involving an elevator
manufacturer), rev’d on other grounds, 563 U.S. 401 (2011). But see United States ex
rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1177 (9th Cir. 2006) (distinguishing
Mikes as limited to Medicare claims); United States ex rel. Feldman v. City of New
York, 808 F. Supp. 2d 641, 653‐54 (S.D.N.Y. 2011) (same).
Another reason for not limiting the holding in Mikes to healthcare fraud is
that some of the same concerns raised by the Court in that case are also relevant
to the banking industry. In Mikes, this Court observed that “a limited application
of implied certification in the health care field reconciles, on the one hand, the
need to enforce the Medicare statute with, on the other hand, the active role actors
outside the federal government play in assuring that appropriate standards of
medical care are met.” Mikes, 274 F.3d at 699–700. As the relators argue,
federalism issues may not be as relevant to the already federally‐regulated banks
as they were in the healthcare context, but the same concern about the “active
32
role” of other actors is just as pertinent here. 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. The Fed, which has the discretion to
lend to banks if it determines that doing so helps to maintain a functioning
economy, is more likely the best party to enforce its own requirements. Cf. United
States v. Sanford‐Brown, Ltd., 788 F.3d 696, 712 (7th Cir. 2015) (citations omitted)
(“The FCA is simply not the proper mechanism for government to enforce
violations of conditions of participation. Rather, under the FCA, evidence that an
entity has violated conditions of participation after good‐faith entry into its
agreement with the agency is for the agency—not a court—to evaluate and
adjudicate.”(citation omitted)); Raichle v. Fed. Reserve Bank of N.Y., 34 F.2d 910, 915
(2d Cir. 1929) (“It would be an unthinkable burden upon any banking system if its
open market sales and discount rates were to be subject to judicial review. Indeed,
the correction of discount rates by judicial decree seems almost grotesque, when
we remember that conditions in the money market often change from hour to
33
hour, and the disease would ordinarily be over long before a judicial diagnosis
could be made.”).
Lastly, the relators contend that applying Mikes’ express statement rule to
this case would be contrary to the FCA’s goal of punishing any fraud against the
government. But this argument ignores the explicit statements from the Supreme
Court and other courts clarifying that the FCA does not sweep so broadly. See,
e.g., McNinch, 356 U.S. at 599 (“[I]t is . . . clear that the False Claims Act was not
designed to reach every kind of fraud practiced on the Government.”); Steury, 625
F.3d at 268 (“The FCA is not a general ‘enforcement device’ for federal statutes,
regulations, and contracts.”(quoting United States ex rel. Thompson v.
Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997))).
D. Relators’ Fraudulent Inducement and Conspiracy Claims
The relators next contend that the district court’s failure to address their
fraudulent inducement and conspiracy claims warrants reversal. We conclude
that the court’s decision not to address either of these claims does not constitute
reversible error. These claims are merely derivative of the relators’ other claims.
Especially under these circumstances, the district court was not required to
34
respond in detail to each argument made by the relators. See, e.g., Malbon v. Penn.
Millers Mut. Ins. Co., 636 F.2d 936, 939 n.8 (4th Cir. 1980) (“It is, of course, not
absolutely necessary, that a judge, in disposing of a motion, specifically recite or
otherwise discuss each contention advanced by the parties.”); cf. Fed. R. Civ. P.
52(a)(3) (“The court is not required to state findings or conclusions when ruling
on a motion under Rule 12 . . . .”).
Although it would perhaps have been preferable for the district court to
discuss its reasoning in dismissing these claims, the relators present no reason on
appeal why their fraudulent inducement claim is distinct from their other claims
and would not fail for the same reasons. Likewise, under the facts of this case, the
relators cannot show a conspiracy to commit fraud given that they have not
sufficiently pleaded fraud under the FCA. Their appellate briefing simply states
that the district court failed to address their claims without providing any
argument in support of the merits. “Issues not sufficiently argued in the briefs are
considered waived and normally will not be addressed on appeal. . . . [M]erely
incorporating by reference an argument presented to the district court, stating an
issue without advancing an argument, or raising an issue for the first time in a
35
reply brief likewise did not suffice.” Norton v. Sam’s Club, 145 F.3d 114, 117 (2d
Cir. 1998).
E. Leave to Amend the Third Amended Complaint
Finally, the relators argue that the district court abused its discretion in
denying their request for permission to file a fourth amended complaint, although
they did not file a formal motion for leave to amend. The district court
determined that any amendments would be “futile” because “their expansive
theory of FCA liability simply is not viable. The facts plead[ed] do not suggest
that any further information available to relators will change that.” Kraus, 117
F.Supp. 3d at 228. As the district court determined, it is apparent from the
Lending Agreement which documents needed to be included with the application
for borrowing, so there is no need for the relators to “discover” which precise
documents the defendants submitted. The relators have not indicated how
permitting them to file a fourth amended complaint now will change the outcome
of the case.
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CONCLUSION
For the foregoing reasons, we conclude that the relators have not
sufficiently pleaded their claims under the False Claims Act, and we accordingly
AFFIRM the district court’s dismissal of their complaint.
37