Bank of America fraud trial spotlights whistleblower awards

By Nate Raymond, Reuters

New York

The former executive who blew the whistle on questionable mortgage lending at Countrywide Financial Inc could reap up to $1.6mn under a law dating from the 1980s savings-and-loan crisis.

Edward O’Donnell filed a whistleblower lawsuit last year, the basis for a US Justice Department case against Countrywide’s parent, Bank of America Corp, that went to trial this week.

The Justice Department accuses Countrywide of fraudulently selling thousands mortgages it knew were bad to Fannie Mae and Freddie Mac, which suffered losses when the loans defaulted.

The lawsuits say a Countrywide programme called the “High Speed Swim Lane,” also called “HSSL” or “Hustle”, starting in 2007 eliminated quality checkpoints and compensated employees based on loan volume.

O’Donnell filed his lawsuit under the False Claims Act, which allows whistleblowers to bring cases on behalf of the government against companies that defraud the US.

Before the trial, the judge dismissed the government’s claims under the False Claims Act, which eliminated O’Donnell’s ability to recoup 15% to 30% of the up to $848.2mn in penalties the Justice Department has said it would ask for.

But in court on Tuesday, a lawyer from the US Attorney’s Office confirmed that O’Donnell also filed a whistleblower claim directly with the Justice Department under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

FIRREA is a savings-and-loan-era law that has become a key tool in efforts to pursue institutions over the financial crisis. Among other provisions, the 1989 law has a 10-year statute of limitations, longer than the limit of other laws used in financial fraud cases.

Less publicised is the ability of whistleblowers to bring claims asserting violations of FIRREA. Under a process set up in a separate law in 1990, the Justice Department has a year to investigate claims under FIRREA submitted by whistleblowers.

O’Donnell filed a FIRREA declaration in February 2012, the same day as he filed his lawsuit in federal court in New York. The Justice Department intervened in the case in October 2012.

In testimony Friday, O’Donnell said he filed the lawsuit because he did not believe anyone in the government was aware of Countrywide’s “Hustle” program.

“Because they were not aware of it, no one was being held accountable,” O’Donnell said.

But in opening statements on Tuesday, a lawyer for Bank of America sought to cast O’Donnell in different light, saying he entered, “into a little bit of a get-rich-quick scheme.”

“He had read about the fact maybe as a whistleblower he might collect some money by going back five or six years and saying that, you know what, this is a fraud,” said Brendan Sullivan of the law firm Williams & Connolly.

With FIRREA complaints, whistleblowers such as O’Donnell are entitled to a range of awards. But they are capped at $1.6mn, much less than the multi-million-dollar prizes whistleblowers in False Claims Act cases have earned.

O’Donnell’s potential recovery, for example, pales in comparison to the $31mn earned by Sherry Hunt, a former employee who filed a complaint against Citigroup under the False Claims Act. The Justice Department intervened in her case and obtained a $158.3mn settlement in February 2012.

Plaintiffs lawyers say they have been giving more attention lately to whistleblower awards under FIRREA. But the small size of the potential award for FIRREA complaints makes it less attractive for potential whistleblowers to step forward and risk their careers and reputations on a case, some lawyers say.

“If it was a 15 to 30% bounty provision for whistleblowers bringing claims under FIRREA, you’d see more,” said Shayne Stevenson, a lawyer at Hagens Berman Sobol Shapiro, who has brought other False Claims Act cases against Bank of America.

O’Donnell’s strategy of filing both a False Claims Act case and a FIRREA declaration might be becoming more common. Mark Labaton, a lawyer at Motley Rice, said he was considering doing the same for at least one purported whistleblower soon.

“Often it makes sense to do both because often you do not know which is the more practical statute to use to get damages,” Labaton said.

A spokeswoman for the Justice Department could not immediately provide statistics on how many FIRREA whistleblower claims it had received. A lawyer for O’Donnell did not respond to request for comment.