The long-running saga of the case of U.S. ex rel. Bibby et. al. v. Wells Fargo Bank et al. 1:06-CV-0547-MHS (N.D. Ga.) provides a handy tutorial on two important issues in False Claims Act cases:
(1) The importance of the seal.
(2) The need for the defendant’s fraud to be material to the government’s decision to pay.
All potential whistleblowers should be aware of these issues. We will first explain what these legal concepts mean in plain English and then explain how these concepts were explored in the various decisions the courts issued in the Bibby case.
We will focus on the seal issues first and will tackle materiality in our next blog.
What is “the seal” and why is it important?
All whistleblowers must file their False Claims Act complaints “under seal.” That means that whistleblowers must file their complaints by following court procedures that prevent the public (including the news media) from knowing about the existence of the complaint or its contents.
By law, the seal lasts for a minimum of 60 days. However, the government usually moves to extend the seal period multiple times so that they can continue their investigation confidentially. During the seal period, the only people allowed to know that the False Claims Act complaint exists are the whistleblowers, their attorneys, the government, and court personnel.
During the seal period, whistleblowers are not allowed to discuss the case with anyone – not their friends, family members, or news media. They may only discuss it with their attorneys and the government.
As we will soon discover when examining the Bibby case, whistleblower violations of the seal carry serious consequences.
What is the point of sealing False Claims Act cases? The seal period helps the government investigate the allegations underlying the filed complaint with minimal interference. After each seal period expires, the government decides whether to ask for another seal extension, intervene in (i.e. join) the case, or decline to intervene in the case.
Once the government either intervenes or declines to intervene, the court unseals the case and it becomes part of the public record. The defendant is only formally served with the complaint if the case is litigated, either by the government on an “intervened” basis or by the whistleblower on a “non-intervened” basis.
What happened in Bibby?
Facts of the Case
Let’s review a summary of the whistleblower’s allegations. In 2006, two whistleblowers filed the lawsuit against eight defendants, including Wells Fargo Bank and their now-defunct employer Mortgage Investors Corporation (MIC). The whistleblowers alleged that defendants had added illegal fees to Veterans Affairs (VA)-backed Interest Rate Reduction Refinance Loans (IRRRL).
The IRRRL program is supposed to allow veterans to refinance existing VA-backed mortgages at more favorable terms so that they can keep their homes. The VA requires IRRRL lenders to follow a number of rules designed to protect veterans, including rules limiting the fees lenders can charge borrowers during the origination process.
In exchange, the VA guarantees the IRRRL if the borrower defaults on the loan. The whistleblowers alleged that the defendants regularly charged veterans illegal fees, “bundling” them with legal ones to hide the practice from the VA. When the borrowers then defaulted on the loan, defendants wanted to collect on the IRRRL loan guarantee. The whistleblowers alleged that since the defendants had violated the IRRRL program rules by charging veterans illegal fees, they had no right to the IRRRL loan guarantee.
The Court Sanctions the Whistleblowers for Violating the Seal Requirements
Although the Bibby whistleblowers filed the complaint under seal, they later violated the seal by discussing the case while the government was still conducting its sealed investigation. According to the findings of the district court who ultimately ruled on the seal violation, the whistleblowers were unhappy with how long the government was taking to investigate their case and, unbeknownst to the defendants and the government, told people about what was happening with the case.
Specifically, the whistleblowers:
(1) Corresponded with both a television reporter and a television producer that resulted in 175 pages of emails in which they gave details about the sealed lawsuit and the status of the investigation.
(2) Used an anonymous email account to try to give information about the case to other media outlets.
After the government declined to intervene in the case in October 2011, the court unsealed the complaint and the whistleblowers settled with six of the defendants, providing the government with a $161 million recovery.
Still unaware of the seal violation, the government ultimately agreed to give the whistleblowers approximately 27% of the total recovery, which totaled around $43 million.
The Court Addresses the Seal Violations and Sanctions the Whistleblowers
In March of 2014, Wells Fargo (one of the remaining defendants who had not settled out of the case) found out about the seal violation during the discovery phase of the ongoing litigation. The whistleblowers admitted they had disclosed the existence of the case to third parties beginning in 2009.
Wells Fargo then moved to dismiss the case, arguing that the severity and bad faith of the seal violations required dismissal. Although the government agreed that the whistleblowers violated the seal, it still argued that the court should not dismiss the case.
On this point, the government argued that there was no evidence that their investigation was harmed by the disclosures and a dismissal would only result in a windfall to Wells Fargo. A sanction of $2.7 million – which would reduce the relator’s share to 25%, the statutory minimum for non-intervened cases – was a more appropriate remedy.
To reach its decision, the Court reviewed previous False Claims Act cases dealing with seal violations to determine whether a dismissal was an appropriate remedy in this instance. The Court reviewed analyses of other circuit courts since the Eleventh Circuit (which governs the decisions of the court in question) had not yet ruled on this specific issue. In doing so, the Court analyzed the two main approaches to determining whether a court should dismiss a whistleblower’s case for a seal violation.
The first approach, which the Sixth Circuit employs, is a strict approach requiring that the court dismiss a whistleblower’s case in every case where the whistleblower has violated the seal. The Sixth Circuit explained that this reasoning comports with Congress’s intent in requiring the seal and that “the mere possibility that the Government might be harmed by disclosure is” the whole point of the seal.
The second approach, which the several other circuits follow (including the Second and Ninth Circuits) and which the court in Bibby followed as the “majority rule,” is a more balanced one. This approach analyzes: (1) whether the government was actually harmed by the seal violation; (2) the extent and severity of the seal violation; and (3) whether the whistleblower acted in bad faith.
In employing this balanced approach, the Court first considered what effect the seal violation had on the case. They ultimately found that there was no evidence that the whistleblower’s seal violation had resulted in the public being aware of the existence or status of the case. This is because the members of the media to whom the whistleblowers had disclosed information about the case had kept this information under wraps until the case was unsealed.
The Court also stated that Wells Fargo and the government admitted that the seal violations had resulted in no actual harm to the government’s investigation of the case while it was still under seal.
Further, the Court recognized the whistleblowers’ crucial role in returning hundreds of millions of dollars from banks that were defrauding veterans and their families. That said, there was an intentional seal violation and so the Court sanctioned the whistleblowers $1.6 million.
Wells Fargo ultimately settled the case for $108 million in August 2017 which left Mortgage Investors Corporation as the last remaining defendant in the case. We will address what happened with that defendant in our next blog on materiality so stay tuned!
So what did we learn from Bibby? The obvious lesson is do not violate the seal! Do not discuss the case with anyone or anywhere – not with friends or family, not on social media, and certainly not with the news media.
If you are in the Sixth Circuit (or in another Circuit that has not yet addressed seal violations and chooses to follow the Sixth Circuit), your seal violations may result in the court dismissing your case and all of your hard work will have been for nothing.
The more nuanced lesson is that, in Bibby, what saved these whistleblowers from dismissal is that the media outlets never publicized what the whistleblowers had told them. Had those media outlets run with the story while the government was still investigating the case, thus harming the investigation, the court would have likely dismissed the case.
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