In the words of Supreme Court Justice Oliver Wendell Holmes: "Men must turn square corners when they deal with the government."
This phrase rings particularly true today as banks and financial institutions seek assistance from the government in order to survive the current economic crisis. As these entities increase their dealings with the government, so too do they increase their risk of running afoul of the False Claims Act.
The Emergency Economic Stabilization Act of 2008 was signed into law on Oct. 3. Under the act, the Treasury Department is charged with establishing and managing the Troubled Asset Relief Program. TARP authorizes the Treasury to purchase or insure up to $700 billion of "troubled assets" from banks and other financial institutions. This $700 billion has been split into two rounds of $350 billion. Of the first-round TARP assistance, approximately $293 billion has been spent and of that, approximately $200 billion has been invested in U.S. banks.
Since the day the program was rolled out, a major criticism has been the lack of oversight on how TARP money was being spent. In mid-January, TARP's Congressional Oversight Panel demanded that the Treasury hold the banks receiving TARP assistance accountable "in order to restore investor and taxpayer confidence in the markets." The panel also recommended that the Treasury establish formal procedures for banks and financial institutions to disclose the manner in which they are using the funds or to condition TARP assistance on the making of such disclosures. In this same vein, the Government Accountability Office released a report in late January also insisting TARP recipients be held accountable for their use of TARP money.
In early February, President Obama responded to some of these oversight-related criticisms by announcing new restrictions capping compensation for certain executives at certain financial institutions and requiring CEOs of all companies that have or will receive assistance under TARP to certify that they have complied with statutory, Treasury, and contractual executive compensation restrictions. The rules also mandate re-certification of compliance on an annual basis.
On Feb. 10, Treasury Secretary Timothy Geithner sought to address some portion of these criticisms. While explaining the government's plans for the second round of TARP spending, Geithner vowed to place more conditions and restrictions on those banks and financial institutions receiving assistance. According to these new conditions, TARP recipients will be required to submit detailed plans explaining how they will use TARP money to increase lending and must also detail the number of new business and consumer loans made on a monthly basis. TARP recipients that cannot meet these and other conditions and restrictions, but agree to them anyway in order to obtain assistance, may find themselves the target of a lawsuit brought under the False Claims Act.
Even before Obama and Geithner introduced these new accountability measures, however, Sen. Charles Grassley, R-Iowa, had already suggested that less than scrupulous TARP recipients should be held liable under the False Claims Act. In a Nov. 17 letter to then-Treasury Secretary Henry Paulson and then-Attorney General Michael Mukasey, Grassley pointed out that in the first round of TARP spending, many of the oversight provisions in the legislation had been either overlooked or ignored. Further, he noted that the Special Inspector General for TARP -- a position specifically provided for in the legislation -- had yet to be confirmed. Thus, Grassley asked Paulson and Mukasey to consider, among other things, using the False Claims Act to punish instances of waste, fraud and abuse. Given the new requirements imposed for receiving TARP money in the next round of the spending, the potential for False Claims Act litigation can only increase.
The False Claims Act provides that a person or entity may be held liable if they knowingly present or cause to be presented false claims for payment to the United States. This includes situations where a party makes false statements or causes false statements to be made in order to get a claim paid by the United States. Put another way, "any time a false statement is made in a transaction involving a call on the U.S. fisc, False Claims Act liability may attach." Among the examples of False Claims Act violations that Grassley highlighted were submitting fraudulent applications for a grant of government funds, submitting a false application for a government loan, and submitting a claim falsely certifying that an entity has complied with a law, contract term, or regulation.
The False Claims Act's treble damages provisions have made it a very powerful tool in the government's arsenal for fighting fraud. Under the act, a liable party may face a penalty of not less than $5,500 and not more than $11,000 per false claim, plus three times the amount of damages the government sustains. The False Claims Act also provides that private individuals, known as qui tam relators or "whistleblowers," may commence actions on behalf of the United States. If successful, a whistleblower generally stands to collect between 15% and 25% of the lawsuit's proceeds.
As TARP oversight increases and more conditions are placed on TARP money, the potential for conduct that may result in a claim under the False Claims Act also increases. First, banks and financial institutions that seek TARP assistance will have to undergo a "comprehensive stress test" to determine whether they have sufficient capital to survive a continually declining economy. Gauging the financial stability of these TARP recipients will require them to make certain certifications and representations to federal regulators to convince them of an entity's financial viability. Were an entity to make a certification or representation to a federal regulator that it knows to be false in order to obtain TARP assistance, it may subject itself to a claim or even liability under the False Claims Act.
As observed by the Ninth Circuit Court of Appeals, "[m]any different courts have held that a claim under the False Claims Act can be false where a party merely falsely certifies compliance with a statute or regulation as a condition to government payment." In one case for example, the defendant faced False Claims Act liability after making an allegedly false certification that there were no conflicts of interest in its hiring practices in order to get the Department of Energy to approve and fund a contract.
Finally, while the Treasury has thus far refused to force banks and financial institutions to use TARP money in particular ways, it is still possible that a TARP recipient may face False Claims Act liability if it obtained assistance after voluntarily pledging to use TARP money to make specific investments (e.g. residential mortgages or credit card loans) or to participate in government-mandated programs when it knew that it was unwilling or unable to do so.
While further details of the conditions and restrictions that will accompany the next $350 billion in TARP assistance remain to be seen, Obama and Geithner have made one thing clear: Financial institutions must pledge to do more to get more. And with these new conditions comes the potential for False Claims Act liability for the unwary corporation asking for TARP assistance.
Therefore, it is incumbent on general counsel for any TARP recipient to adhere to and, if necessary, refine their corporate governance program. As a first step in heading off lawsuits brought under the False Claims Act, counsel should ensure there is an internal oversight mechanism to review and vet submissions made to the government to make sure there is a good-faith basis for certifications made to obtain TARP funds. Further, efforts should be made to create a documented record containing information that underlies certifications or representations made to the government should questions later arise. Finally, counsel must ensure that if the bank or financial institution is promising to take certain action as a condition of receiving TARP money, it must fully intend to actually take that action.
Moreover, because many False Claims Act lawsuits are initiated, not by the government itself, but by employees turned qui tam relators, counsel and upper management should be attuned to any concerns raised within the company about its representations to the government. Any corporate compliance program should include, among other things, a formal and open reporting system where employees feel comfortable raising concerns without fear of retaliation. If a system like this is already in place, there is no time like the present to remind employees of its existence and to explain how the process works.
Similarly, banks and financial institutions dealing with the government should consider establishing a corporate oversight board. Not only do these boards provide recourse for employees who feel their complaints are not being properly considered within the company, but they also provide a means by which counsel can raise concerns if counsel perceives there to be a problem that cannot be properly handled within the company.
As TARP oversight increases, general counsel for any TARP recipient must be aware of the False Claims Act, ensure that an internal oversight framework exists for addressing complaints within the company, and must remind their companies of the "square corners" that they must turn on in dealing with the government.Konrad L. Cailteux is a partner and Stephen A. Gibbons is an associate with Weil, Gotshal & Manges LLP's products liability practice.