Jeff Ifrah quoted in Law360 Article on Deutsche Bank FCA Suit

Law360, New York (May 5, 2011) — When the U.S. hit Deutsche Bank AG and one of its shuttered mortgage units with a more than $1.1 billion False Claims Act suit on Tuesday, it signaled the start of what could be a long chain of litigation brought by both the government and private whistleblowers, attorneys say.

“I think the government is going to come after financial institutions directly, and they have also sent a signal to the plaintiff-relator bar that these kinds of cases might be of more interest to the government than they have been before,” said Sarah L. Reid, a partner at Kelley Drye & Warren LLP who specializes in False Claims Act defense.

In a civil suit filed in Manhattan federal court, the lawsuit alleges the Federal Housing Administration paid out more than $386 million in insurance claims stemming from defaulted mortgages that Deutsche Bank unit MortgageIT Inc. approved for the U.S. Department of Housing and Urban Development Program between 1999 and October 2009.

The lender and its parent failed to maintain quality control standards such as ensuring that borrowers had jobs, and did not recognize red flags, U.S. Attorney for the Southern District of New York Preet Bharara said in a news conference Tuesday.

Deutsche Bank acquired the MortgageIT in 2007 and profited from the resale of its FHA-backed mortgages, the complaint says, though Deutsche Bank has denied the government’s claims.

The case originated from a HUD investigation which was referred to the U.S. Department of Justice. That fact alone makes it interesting because most FCA cases begin with a qui tam filing from a private whistleblower, Reid said.

While the government is looking for more whistleblowers, it’s unlikely that this is the last FCA case that it will bring against mortgage lenders stemming from government investigations.

“I would not underestimate the fact that the U.S. attorney has more of these cases to file,” Reid said.

The case against Deutsche Bank is a novel use of the False Claims Act, a Civil War-era law that is aimed at recovering money from fraudulent government contractors, according to A. Jeff Ifrah, founding partner of Ifrah Law and a former federal prosecutor.

But while the False Claims Act is broad enough to include the claims brought by the government in the Deutsche Bank case, the case itself seems “a little desperate,” Ifrah said. The key to success for the government will be to prove that the alleged false statements were made with the intent to defraud the government, which will not be easy, he added.

Still, it is easier than bringing a criminal case, since the government does not have to prove that Deutsche Bank or MortgageIT deliberately lied about the quality of the mortgages it issued, experts said. All they have to prove is that the company should have known there were issues, said Benjamin Vernia of the Vernia Law Firm, which specializes in FCA cases, they said.

“I think what they need in a case like this is a statute with the breadth of the False Claims Act where you can hold people liable for deliberate ignorance and reckless disregard for the truth,” Vernia said.

And just because a criminal case hasn’t yet been filed against Deutsche Bank does not mean that charges are out of the question, attorneys said.

In fact, there is a history of criminal complaints growing out of the discovery processes in FCA cases.

The FCA has tended to be used in recent years to go after fraud in the health care sector, and in the late 1980s and early 1990s it was employed against defense contractors that were overbilling the government. In several of those cases, the FCA complaint led directly to criminal charges — and convictions.

“I would not rule out the possibility that one or more of these cases could end up having a criminal law element to them,” said Andrew Sandler, chairman and executive partner at BuckleySandler LLP.

The case against Deutsche Bank is one that will be watched closely, and not just because of the use of the FCA.

There have been a number of smaller FCA cases springing from the mortgage crisis. The Deutsche Bank case is different because of its size, and because all the other cases have settled, Sandler said.

“The magnitude of this is much greater,” he said.

And while on the surface some observers have said the Deutsche Bank case is a way for the government to appear like it is doing something to go after the financial institutions that it believes brought the mortgage and financial crises, Reid noted that the FCA was an “extremely powerful tool” in its own right.

The government had $3 billion in FCA recoveries in civil settlements and judgments last year alone, she said.

Indeed, in some ways the FCA may be more damaging to financial institutions because of the ability for the government to pursue treble damages, according to Ifrah.

“The amount of money they can recover in a False Claims Act case any day is greater than the restitution they can get in a criminal case,” he said.

By letting the case go to litigation, Deutsche Bank is taking a huge risk. Had it settled, the bank could have paid a multiplier of 1 1/2 to 2 rather than the potential 3-to-1 payout it faces in an adverse ruling.

That potential payout makes it less likely that the government will want to settle FCA cases against big lenders, as the government is becoming much more aggressive in trying to recover money these days, according to Sandler.

That aggressiveness could make it impossible for settlements to come together in the future, said Sandler, who has represented some mortgage lenders in FCA cases.

“We are going to see a lot more litigation,” he said.