BOA -Memo in Re Motion to Dismiss

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK UNITED STATES OF AMERICA ex rel. EDWARD O’DONNELL, Plaintiff, – v. – BANK OF AMERICA CORPORATION, successor to COUNTRYWIDE FINANCIAL CORPORATION, COUNTRYWIDE HOME LOANS, INC., and FULL SPECTRUM LENDING, Defendants.

UNITED STATES OF AMERICA, Plaintiff-Intervenor, – v. – COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE FINANCIAL CORPORATION, BANK OF AMERICA CORPORATION, and BANK OF AMERICA, N.A., Defendants.

Case No. 12-cv-1422 (JSR)

ECF Case

MEMORANDUM IN SUPPORT OF MOTION TO DISMISS

Brendan V. Sullivan, Jr. Enu A. Mainigi Williams & Connolly LLP 725 Twelfth Street, NW Washington, DC 20005 (202) 434-5000 Counsel for Defendants Bank of America Corporation and Bank of America, N.A.

Richard M. Strassberg William J. Harrington Goodwin Procter LLP The New York Times Building 620 Eighth Avenue New York, NY 10018 (212) 813-8800 Counsel for Defendants Countrywide Financial Corporation, Countrywide Home Loans, Inc., and Full Spectrum Lending

Case 1:12-cv-01422-JSR Document 34 Filed 12/21/12 Page 1 of 45

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TABLE OF CONTENTS

INTRODUCTION...........................................................................................................................1

THE COMPLAINT’S ALLEGATIONS ........................................................................................3

ARGUMENT ..................................................................................................................................6

I. THE FIRREA CLAIM SHOULD BE DISMISSED. ..........................................................6

A. The Complaint Does Not Allege Fraud “Affecting a Federally Insured Financial Institution.” ..............................................................................................7

1. The Complaint’s Limitless “Effects” Theory Is Contrary to Case Law in Analogous FIRREA Contexts Requiring a Direct Impact on a Financial Institution. .................................................................................9

2. The Complaint’s Limitless “Effects” Theory Contradicts the Statutory Language, Purpose, and History. ...............................................13

B. The Complaint Does Not Adequately Allege a Scheme To Defraud. ...................17

1. Defendants’ “Representations” Are Contractual Promises That Do Not Support a Fraud Claim. .......................................................................19

2. Defendants’ Alleged Failure To Investigate Is Not Fraud. ........................25

3. Countrywide’s Alleged Failure To Adhere To Underwriting Guidelines Is Not Fraud. ............................................................................26

4. Countrywide’s Alleged Nondisclosures Are Not Fraudulent in the Absence of Any Duty to Disclose. .............................................................26

5. The Complaint Does Not Sufficiently Plead That Countrywide Deceived the GSEs Through Allegedly Falsified Data or the Seven Loans Described in the Complaint. ............................................................27

II. THE FALSE CLAIMS ACT COUNTS SHOULD BE DISMISSED. ..............................29

A. The Complaint Does Not Identify an Actionable “Claim.” ...................................30

1. The Complaint Does Not Identify Any Demand for Payment within the Relevant Time Period. ..............................................................32

2. The Complaint Does Not Sufficiently Allege Any Demand for Government Money or Property. ...............................................................34

CONCLUSION..............................................................................................................................36


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TABLE OF AUTHORITIES

FEDERAL CASES

A. Terzi Prods. Inc. v. Theatrical Prot. Union Local No. One, 2 F. Supp. 2d 485, 500–01 (S.D.N.Y. 1998) .......................................................................................................................19

Anschutz Corp. v. Merrill Lynch & Co, 690 F.3d 98, 108 (2d Cir. 2012) .....................................26

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ..................................................................................13

ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) ..................................20

Bibeault v. Advanced Health Corp., No. 97 Civ. 6026 (WHP), 2002 WL 24305, at *6 (S.D.N.Y. Jan. 8, 2002) ............................................................................................................24

Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 19–20 & n.2 (2d Cir. 1996) ...........................................................................................................................20, 21

Cafasso v. Gen. Dynamics C4 Sys., 637 F.3d 1047, 1055 (9th Cir. 2011) ....................................31

Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771, 772 n.18 (1984) .................11

Corley v. United States, 556 U.S. 303, 314 (2009) ........................................................................17

Cougar Audio, Inc. v. Reich, No. 99 Civ. 4498 LBS, 2000 WL 420546, at *6 (S.D.N.Y. Apr. 18, 2000) ..........................................................................................................................21

Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 70 (2d Cir. 1990) ..............................................10

Dolan v. U.S. Postal Serv., 546 U.S. 481, 486, 487 (2006) ...........................................................14

DynCorp v. GTE Corp., 215 F. Supp. 2d 308, 310, 324, 325 (S.D.N.Y. 2002) ......................22, 23

Ellington Mgmt. Grp., LLC v. Ameriquest Mortg. Co., No. 09 Civ. 0416 (JSR), 2009 WL 3170102, at *3 (S.D.N.Y. Sept. 29, 2009) ...............................................................................25

FCC v. Am. Broad. Co., 347 U.S. 284, 296 (1954) .......................................................................10

First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 178 (2d Cir. 2004) .................18

Garg v. Covanta Holding Co., 478 F. App’x 736, 741 (3d Cir. 2012) ....................................35, 36

Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 589 (2004) ..............................................15

Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 1476–77 (2d Cir. 1995) (per curiam) ..................30

Goldfine v. Sichenzia, 118 F. Supp. 2d 392, 404 (S.D.N.Y. 2000) ...............................................21


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Great Earth Int’l Franchising Corp. v. Milks Dev., 311 F. Supp. 2d 419, 430 (S.D.N.Y. 2004) ........................................................................................................................................24

Haas v. Gutierrez, No. 07 Civ. 3623, 2008 U.S. Dist. LEXIS 48762, at *22 (S.D.N.Y. June 26, 2008) ..........................................................................................................................31

Halebian v. Berv, 590 F.3d 195, 205 (2d Cir. 2009) .....................................................................12

Hopper v. Solvay Pharm., Inc., 588 F.3d 1318, 1326, 1328–30 (11th Cir. 2009) .........................33

IKEA N. Am. Servs., Inc. v. Ne. Graphics, Inc., 56 F. Supp. 2d 340, 342–43 (S.D.N.Y. 1999) ........................................................................................................................................21

In re Enron Corp., No. 04 Civ. 1367 (NRB), 2005 WL 356985, at *8–11 (S.D.N.Y. Feb. 15, 2005) ..................................................................................................................................20

In re Parmalat Sec. Litig., 479 F. Supp. 2d 332, 341 (S.D.N.Y. 2007) .........................................27

In re Refco Sec. Litig., 759 F. Supp. 2d 301, 316 (S.D.N.Y. 2010) ...............................................27

John Paul Mitchell Sys. v. Quality King Distribs., Inc., No. 99 Civ. 9905 (SHS), 2001 WL 910405, at *4–5 (S.D.N.Y. Aug. 13, 2001) ......................................................................21

Knoll v. Schectman, 275 F. App’x 50, 51 (2d Cir. 2008) ..............................................................18

Koch Indus., Inc. v. Aktiengesellschaft, 727 F. Supp. 2d 199, 214 (S.D.N.Y. 2010) ..............23, 24

Leocal v. Ashcroft, 543 U.S. 1, 12 n.8 (2004)................................................................................10

Lewin v. Lipper Convertibles, L.P., 756 F. Supp. 2d 432, 439, 441 (S.D.N.Y. 2010) ..................12

McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 791 (1st Cir. 1990) ............19

McGee v. State Farm Mut. Auto. Ins. Co., No. 08–CV–392, 2009 WL 2132439, at *5, *6 (E.D.N.Y. July 10, 2009) .........................................................................................................19

McLaughlin v. Anderson, 962 F.2d 187, 191, 192 (2d Cir. 1992) .....................................18, 19, 28

McNeill v. United States, 131 S. Ct. 2218, 2223 (2011) ................................................................16

Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 184 (2d Cir. 2007) ......................23

Mills v. Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir. 1993).......................................18, 27

Odyssey Re (London) Ltd. v. Stirling Cooke Brown Holdings Ltd., 85 F. Supp. 2d 282, 296 (S.D.N.Y. 2000) ................................................................................................................27

Reynolds v. Sci. Applications Int’l Corp., No. 07 Civ. 4612, 2008 U.S. Dist. LEXIS 48760, at *24–25 (S.D.N.Y. June 26, 2008) ............................................................................33


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Ritchie Capital Mgmt., L.L.C. v. Coventry First LLC, No. 07 Civ. 3494 (DLC), 2007 WL 2044656, at *7 (S.D.N.Y. July 17, 2007) ................................................................................22

S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 113, 115 (2d Cir. 2009).......................25

Sampson v. Medisys Health Network Inc., No. 10–CV–1342, 2011 WL 579155, at *6 (E.D.N.Y. Feb. 8, 2011) ...........................................................................................................21

Spang Indus., Inc. v. Aetna Cas. & Sur. Co., 512 F.2d 365, 368 (2d Cir. 1975) ...........................24

Thompson v. N. Am. Stainless, LP, 131 S. Ct. 863, 869 (2011).....................................................16

TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) ...............................................................................16

U.S. ex rel. Dugan v. ADT Sec. Servs., Inc., No. DKC–03–3485, 2009 WL 3232080, at *14 (D. Md. Sept. 29, 2009) ....................................................................................................34

United States ex rel. Assocs. Against Outlier Fraud v. Huron Consulting Grp., Inc., No. 09 Civ. 1800, 2011 U.S. Dist. LEXIS 7335, at *4–5 (S.D.N.Y. Jan. 24, 2011) ...............30

United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 504 (6th Cir. 2007) ........30

United States ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 232–33 (1st Cir. 2004) .................................................................................................................................34

United States ex. rel. Mikes v. Straus, 274 F.3d 687, 697 (2d Cir. 2001) ......................................30

United States ex rel. Pervez v. Beth Israel Med. Ctr., 736 F. Supp. 2d 804, 811, 812 (S.D.N.Y. 2010) .................................................................................................................29, 31

United States ex rel. Sterling v. Health Ins. Plan of Greater N.Y., Inc., No. 06 Civ. 1141, 2008 U.S. Dist. LEXIS 76874, at *17 (S.D.N.Y. Sept. 30, 2008) ...........................................35

United States v. Agne, 214 F.3d 47, 51, 52 (1st Cir. 2000) .................................................2, 10, 12

United States v. Aleynikov, 676 F.3d 71, 79, 81 (2d Cir. 2012) .....................................................17

United States v. Bouyea, 152 F.3d 192, 195 (2d Cir. 1998) (per curiam) ...........................2, 10, 11

United States v. Carollo, No. 10 CR 654, 2011 WL 3875322, at *2 (S.D.N.Y. Aug. 25, 2011) ........................................................................................................................................13

United States v. D’Amato, 39 F.3d 1249, 1261 n.8 (2d Cir. 1994) ................................................20

United States v. Ghavami, No. 10 CR 1217, 2012 WL 2878126, at *5 (S.D.N.Y. July 13, 2012) ........................................................................................................................................13

United States v. Kernan Hosp., No. RDB-11-2961, 2012 U.S. Dist. LEXIS 105765, at *18 (D. Md. July 30, 2012) ................................................................................................31, 34


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United States v. Kitsap Physicians Serv., 314 F.3d 995, 1002 (9th Cir. 2002) .............................33

United States v. McNinch, 356 U.S. 595, 599 (1958) ....................................................................30

United States v. Mullins, 613 F.3d 1273, 1278 (10th Cir. 2010) .............................................10, 13

United States v. Ohle, 678 F. Supp. 2d 215, 229 (S.D.N.Y. 2010) ................................................10

United States v. Pelullo, 964 F.2d 193, 216 (3d Cir. 1992) .....................................................10, 11

United States v. Pierce, 224 F.3d 158, 165 (2d Cir. 2000) ............................................................19

United States v. Rubin/Chambers, Dunhill Ins. Servs., 831 F. Supp. 2d 779, 783 (S.D.N.Y. 2011) .......................................................................................................................10

United States v. Serpico, 320 F.3d 691, 694–95 (7th Cir. 2003) .............................................12, 16

United States v. Shellef, 507 F.3d 82, 107 (2d Cir. 2007) .............................................................18

United States v. Trapilo, 130 F.3d 547, 550 n.3 (2d Cir. 1997) ....................................................19

United States v. Ubakanma, 215 F.3d 421, 426 (4th Cir. 2000) ....................................................10

United States v. Vanoosterhout, 898 F. Supp. 25, 30 (D.D.C. 1995) ............................................10

United States v. Winstar Corp., 518 U.S. 839, 856 (1996) ............................................................15

Vincel v. White Motor Corp., 521 F.2d 1113, 1118 (2d Cir. 1975) ...............................................12

STATUTES, RULES, AND LEGISLATIVE MATERIALS

12 U.S.C. § 1811 ..............................................................................................................................8

12 U.S.C. § 1813 ..............................................................................................................................8

12 U.S.C. § 1833a .................................................................................................................. passim

18 U.S.C. § 982(a) ...........................................................................................................................9

18 U.S.C. § 1341 ..............................................................................................................................7

18 U.S.C. § 1343 ..............................................................................................................................7

18 U.S.C. § 1961(1) .......................................................................................................................18

18 U.S.C. § 1962 ............................................................................................................................18

18 U.S.C.§ 1964 .............................................................................................................................18

31 U.S.C. § 3729 .................................................................................................................... passim


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135 Cong. Rec. H2562 (daily ed. June 14, 1989) ..........................................................................15




135 Cong. Rec. S10200 (daily ed. Aug. 4, 1989) ..........................................................................15

Federal Rule of Civil Procedure 9(b) ...................................................................................1, 18, 26

Federal Rule of Civil Procedure 12(b)(6) ........................................................................................1

H.R. Conf. Rep. 101-222, at 445 (Aug. 4, 1989) ...........................................................................16

H.R. Rep. No. 101-54(I), at 96, 107, 118, 196 (1989) .............................................................15, 16

Pub. L. No. 101-73, 103 Stat. 183, 187, 500, 501, 504, 505 (1989) ..........................................9, 15

Pub. L. No. 111-21, 123 Stat. 1617, 1630 (2009) ..........................................................................32

OTHER AUTHORITIES

1 John T. Boese, Civil False Claims and Qui Tam Actions (4th ed. 2012) § 2.01[B] ...................32

Black’s Law Dictionary 1725 (9th ed. 2009) .................................................................................23

FDIC Insurance Coverage Basics, http://www.fdic.gov/deposit/deposits/insured/basics.html (last visited Dec. 19, 2012) ............8


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Defendants Countrywide Financial Corporation and Countrywide Home Loans, Inc.

(collectively, “Countrywide”), and Bank of America Corporation and Bank of America, N.A.

(collectively, “Bank of America,” and collectively with Countrywide, “Defendants”1) move,

pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the Complaint in its entirety.

INTRODUCTION

The Complaint asserts claims against Defendants under the False Claims Act, 31 U.S.C.

§ 3729, and under the Financial Institutions Reform, Recovery, and Enforcement Act

(“FIRREA”), 12 U.S.C. § 1833a, which authorizes civil penalties against those who commit

certain criminal offenses, including mail and wire fraud “affecting a federally insured financial

institution.” The government alleges that Countrywide fraudulently sold loans to “government-

sponsored enterprises” Federal National Mortgage Association (“Fannie Mae”) and Federal

Home Loan Mortgage Corporation (“Freddie Mac”) (collectively, the “GSEs”) that did not

conform to promised underwriting standards or to the representations and warranties in

Countrywide’s contracts with the GSEs. All of the government’s claims are fraud-based and

must be pleaded with particularity under Federal Rule of Civil Procedure 9(b). None of them

states a claim.

I. The Complaint’s FIRREA claim (Count III) alleges that Defendants’ conduct

amounts to mail and wire fraud “affecting a federally insured financial institution” under 12

U.S.C. § 1833a(c)(2). But the alleged “fraud” was directed at the GSEs, which are not alleged to

be “federally insured financial institutions.” The alleged “effect” is on financial institutions

other than the GSEs who happened to have invested in the GSEs and allegedly suffered

1 The definition of “Defendants” is without prejudice to any defenses that any entity named as a defendant in the Complaint may assert, including any defense that such entity is not a proper defendant as to one or more allegations in the Complaint.


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investment loss. This interpretation of the “affecting” clause is limitless and absurd. And, while

we are aware of no court that has opined on the meaning of this clause in § 1833a itself, the

government’s interpretation is contrary to cases in the Second Circuit and elsewhere that have

construed similar “affecting” language in other FIRREA provisions to require a sufficiently

direct effect on a financial institution. See, e.g., United States v. Bouyea, 152 F.3d 192, 195 (2d

Cir. 1998) (per curiam) (finding “sufficiently direct” effect on financial institution); United

States v. Agne, 214 F.3d 47, 52 (1st Cir. 2000) (reversing wire fraud conviction because

defendant’s actions did not “affect” a financial institution when the consequence to the bank was

“too remote”).

The FIRREA claim also fails because the Complaint’s allegations do not set forth a

“scheme to defraud,” as the predicate mail and wire fraud statutes require. Rather, the Complaint

alleges that Countrywide repeatedly violated contractual provisions requiring that Countrywide

satisfy certain underwriting standards and requiring that the loans presented for sale to the GSEs

conform to specified criteria. Such contract breaches do not amount to mail or wire fraud.

Rather, under settled law, a breach of contract can be fraud only if it violates duties independent

of the contract, or identifies misrepresentations extraneous to the contract terms, or causes

damages that are not recoverable under the contract. None of these exceptions is alleged in this

case.

II. The Complaint’s allegations under the False Claims Act (Counts I and II) also fail

to state a claim. In those counts, the government seeks to recover only for false claims made on

or after May 20, 2009. On that date, the False Claims Act was expanded to authorize penalties

for claims presented, not only to the government itself, but to a non-government intermediary if

the government pays for the claim. The Complaint alleges that Defendants presented false


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claims—i.e., sold defective loans—to the GSEs, which were paid for with government funds.

But the Complaint identifies no loan or other “claim” submitted to the GSEs for payment on or

after May 20, 2009, much less identifies such a loan with Rule 9(b) particularity. The only loans

described with any degree of detail are seven loans dating from 2007—well before the time

period for which the government seeks to recover.

Not only does the Complaint fail to identify a “claim,” it fails to allege that the

government paid for any claim. It is not enough that the government provided general funding to

the GSEs, which is all the Complaint contends. Rather, the Act applies only when the specific

claim is paid or reimbursed by the government.

For all of these reasons, as explained below, the Complaint should be dismissed.

THE COMPLAINT’S ALLEGATIONS

Fannie Mae and Freddie Mac are government-chartered companies that operate in the

secondary mortgage market. As part of their business, the GSEs purchase single-family

residential mortgages from financial institutions and either hold the loans in their investment

portfolios or bundle them into mortgage-backed securities that they sell to investors. Compl.

¶ 27. Countrywide, a large mortgage lender, sold such loans to the GSEs. Compl. ¶ 3.

According to the Complaint, Bank of America merged with Countrywide on July 1, 2008 and is

alleged to be the successor-in-interest to Countrywide. Compl. ¶¶ 16–17.

The allegations of the Complaint, assumed to be true solely for purposes of this motion,

charge that beginning in 2007, Countrywide systematically sold loans to the GSEs that did not

conform to the representations and warranties in Countrywide’s contracts with the GSEs. See

Compl. ¶¶ 30–35. To sell to the GSEs, Countrywide was required by contract to make certain

representations with regard to the quality of the loans. Compl. ¶ 32. The GSEs had a


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corresponding contractual remedy if they later suspected material breaches of those

representations: they could “demand that the lender repurchase the loan and/or reimburse the

GSE for any loss already incurred.” Compl. ¶ 36. The Complaint alleges that “Countrywide and

later Bank of America defrauded the GSEs of more than one billion dollars” by selling the GSEs

defective mortgage loans and then refusing to honor their contractual obligation to repurchase

those loans. Compl. ¶¶ 8, 129.

According to the Complaint, with the collapse of the secondary market for subprime

loans in the spring of 2007, Countrywide sought to generate loan sales by transitioning from the

subprime into the prime, conventional lending market. Compl. ¶¶ 47, 52. As this shift occurred,

the Complaint alleges, Countrywide’s Full Spectrum lending division implemented a streamlined

loan origination process called “High Speed Swim Lane,” abbreviated as “HSSL” or “Hustle.”

Compl. ¶ 54.

The HSSL process allegedly eliminated human underwriting review for all but the

riskiest loans. Compl. ¶ 56. It allowed loans approved by Countrywide’s automated

underwriting system, “CLUES,” to be processed by only a loan specialist and funder, without

any manual underwriting. Compl. ¶ 64. Pure loan volume, rather than a combination of loan

volume and loan quality, allegedly became the relevant criterion. Compl. ¶ 65. According to the

Complaint, Countrywide did not disclose the HSSL process to the GSEs, and the GSEs allegedly

would have expected a different underwriting process, particularly for stated income loans.

Compl. ¶¶ 53, 59.

Loans originated through this new process allegedly were of poor quality. Compl. ¶ 67.

According to the Complaint, the Relator instituted additional pre-funding quality checks of these

loans to be conducted in a parallel track with their origination. Compl. ¶ 69. These additional


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reviews allegedly confirmed issues with the quality of loans processed through HSSL and were

circulated only within the division that had instituted the process. Compl. ¶ 71; see Compl. ¶ 54.

The Complaint alleges that these defect rates were not reported to the GSEs. Compl. ¶ 83.

The Complaint further alleges that Countrywide’s loan processors manipulated data input

into CLUES to achieve an “Accept” from the program. Compl. ¶ 73. According to the

Complaint, this manipulation is evidenced by an increase in the number of times, on average,

each loan was run through the CLUES system. Compl. ¶ 74.

During this period, the GSEs purchased from Countrywide many loans that allegedly did

not conform to underwriting standards or to the contractual representations and warranties. The

Complaint identifies seven specific allegedly defective loans, all dating from 2007, that were

sold to Fannie Mae. Compl. ¶¶ 93–125. Although the Complaint admits that the GSEs had a

contractual right to require Defendants to repurchase non-conforming loans, it claims that

Defendants refused to repurchase unspecified HSSL loans, allegedly resulting in financial loss

for the GSEs. Compl. ¶¶ 126–129.

The Complaint alleges that loans originated from this single Countrywide division from

August 2007 through 2009 caused approximately one billion dollars in losses to the GSEs.

Compl. ¶¶ 2, 6. On September 6, 2008, about half-way through that period, the GSEs were

placed into conservatorship and the U.S. Department of Treasury chose to provide a capital

infusion to the GSEs by purchasing their preferred stock. Compl. ¶¶ 19-20. The alleged one

billion dollars in HSSL loan losses amounts to approximately one-half of one percent of the $183

billion in support from Treasury that allegedly was required to keep the GSEs afloat. Compl.

¶ 20. The conservatorship and Treasury stock purchase “wiped out virtually all of the value of

the outstanding preferred stock in the [GSEs].” Compl. ¶ 133. As a consequence, certain


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federally insured financial institutions who owned preferred stock in the GSEs suffered losses.

Compl. ¶¶ 130–135.

Based on these allegations, the Complaint sues Defendants for violating the False Claims

Act, 31 U.S.C. § 3729 (Counts I and II), and FIRREA, 12 U.S.C. § 1833a (Count III). Compl.

¶¶ 166–186. Bank of America is sued both directly and as an alleged successor-in-interest to

Countrywide. Compl. ¶¶ 137–165. The government seeks treble damages under the False

Claims Act, Compl. ¶¶ 173, 181, and “civil penalties to the maximum amount authorized” under

FIRREA, Compl. ¶ 186.

ARGUMENT

I. THE FIRREA CLAIM SHOULD BE DISMISSED.

Count III of the Complaint alleges that Defendants are liable for civil penalties under

FIRREA, 12 U.S.C. § 1833a.2 That section permits the government to sue civilly for certain

criminal offenses including, as relevant here, crimes of mail fraud or wire fraud that “affect[] a

federally insured financial institution.” § 1833a(c)(2).

Though Congress enacted § 1833a over two decades ago following the savings and loan

crisis, the government for many years only rarely invoked the statute, and virtually no judicial

decisions have interpreted it. In the past few years, however, the government has unearthed

§ 1833a as a convenient, and blunt, instrument to seek civil penalties in the current environment.

This Complaint seeks to extend FIRREA to unprecedented lengths. It employs a law

designed to protect federally insured financial institutions to assert a claim against such

institutions. It contends that Defendants are guilty of criminal mail and wire fraud based on

allegations that, even assuming they were true, show at most and in hindsight that Defendants

2 The Complaint incorrectly cites “18 U.S.C. § 1833a,” Compl. p. 44, which does not exist.


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made poor underwriting decisions and breached contracts with the GSEs. And, because the

allegedly “defrauded” GSEs are not federally insured financial institutions protected by § 1833a,

the Complaint advances a tortured theory of injury to other institutions that invested with the

GSEs.

The Complaint is, quite simply, extraordinary and insupportable. For at least two

separate and independent reasons, it does not state a claim under § 1833a. First, the alleged

scheme to defraud the GSEs does not “affect[] a federally insured financial institution.” On the

contrary, the alleged impact on such institutions is solely in their capacity as investors in the

GSEs, a remote and attenuated theory that, if sufficient, would destroy this critical statutory

limitation. Second, the Complaint does not allege a “scheme to defraud” as required for the

predicate mail and wire fraud offenses. The Complaint alleges no actual misrepresentations or

deceptive acts—certainly not with the requisite particularity under Rule 9(b). Rather, it alleges

breaches of contract, which are not actionable under the mail and wire fraud statutes. For all of

these reasons, Count III should be dismissed.

A. The Complaint Does Not Allege Fraud “Affecting a Federally Insured Financial Institution.”

FIRREA § 1833a authorizes the government to seek civil penalties for violation of

specified criminal statutes. The Complaint in this case alleges a FIRREA claim predicated solely

on the federal mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343. Compl. ¶ 183. The

mail and wire fraud statutes are predicates for civil liability under FIRREA only if the violation

“affect[s] a federally insured financial institution.” 12 U.S.C. § 1833a(c)(2).

While the Complaint alleges that Defendants “schemed” to defraud the GSEs, Compl.

¶ 1, it does not allege that Fannie Mae or Freddie Mac is a “federally insured financial


8

institution” within the meaning of § 1833a(c)(2).3 Nor does it allege that Defendants defrauded

any financial institutions other than the GSEs. Rather, the Complaint alleges that eleven

federally insured financial institutions held preferred stock in the GSEs, Compl. ¶¶ 135,185, and

that the alleged fraud “contributed to the financial distress (and conservatorship) of the GSEs,

and in turn, caused losses to the preferred stockholders in the GSEs,” Compl. ¶ 135; see Compl.

¶ 132 (“As the GSEs began to suffer increasingly large losses resulting from non-performing

loans (purchased from Countrywide as well as other lenders) . . . the GSEs’ stock price declined

precipitously, negatively impacting the . . . investors in the GSEs.”). In other words, the

Complaint alleges that federally insured financial institutions were “affected” by mail and wire

fraud violations for purposes of FIRREA liability solely by virtue of their investment in other

entities that were the object of the alleged fraud.

This is a wildly expansive reading of FIRREA’s limiting clause which, to our knowledge,

no court has ever adopted. This Court should not be the first. If a financial institution’s

investment in a defrauded entity were sufficient to establish an “[e]ffect[] [on] a federally insured

financial institution,” then the potential for liability would be limitless. FIRREA punishes fraud

that directly impacts financial institutions as such. It was not intended to increase civil penalties

for all fraud that, through intermediaries, might remotely touch a financial institution, or all fraud

against public companies. Yet that would be the consequence of the government’s theory.

Every company of any size has one or more financial institutions as an investor, creditor, or

business partner who could claim to be “affected” by a fraud on that company.

3 They are not, and the government conspicuously does not allege that they are. While “federally insured,” is not defined, it is apparent from the statute that this means insured by the Federal Deposit Insurance Corporation. See 12 U.S.C. §§ 1811, 1813(c)(2), (h). Investments in Fannie Mae and Freddie Mac are not FDIC-insured. See FDIC Insurance Coverage Basics, http://www.fdic.gov/deposit/deposits/insured/basics.html (last visited Dec. 19, 2012).


9

In short, the Complaint’s absurd and overbroad “effects” theory is inconsistent with the

text and purposes of FIRREA, as well as with the settled interpretation of other FIRREA

provisions with similar language. A fraud affects a federally insured financial institution when it

is directed against such an institution, not when alleged fraud directed against a different entity

has incidental consequences for a financial institution by the happenstance of its investment in

that entity. Count III should be dismissed.

1. The Complaint’s Limitless “Effects” Theory Is Contrary to Case Law in Analogous FIRREA Contexts Requiring a Direct Impact on a Financial Institution.

Because § 1833a itself is so rarely invoked, we are aware of no judicial decision

interpreting the “affecting” language under that specific provision. FIRREA’s enactment in

1989, however, also amended several criminal statutes to provide higher penalties and a longer

limitations period for offenses “affecting a financial institution.”4 In the two decades since,

numerous cases have interpreted and applied the “affecting” language in the context of these

other statutes, and not one has held that a defendant could be penalized on the basis that its fraud

against a third party “affected” a financial institution by virtue of its investment in that third

party. On the contrary, the case law interpreting those provisions confirms that the phrase

“affecting a financial institution,” while broad, is not unlimited but rather requires a sufficiently

4 See Pub. L. No. 101-73, § 961(i), (j), 103 Stat. 183, 500 (1989) (amending mail and wire fraud statutes to increase available penalty if the fraud “affects a financial institution”); id. § 961(l), 103 Stat. at 501 (extending statute of limitations for, inter alia, mail or wire fraud that “affects a financial institution”); id. § 963(c), 103 Stat. at 504–05 (amending 18 U.S.C. § 982(a) to require forfeiture when court finds a violation of certain statutes, including mail and wire fraud, “affecting a financial institution”); see also id. § 961(m), 103 Stat. at 501 (directing the Sentencing Commission to establish guidelines “to provide for a substantial period of incarceration” for violation of certain criminal statutes, including mail and wire fraud, “that substantially jeopardizes the safety and soundness of a federally insured financial institution”). Unlike the other “affect” provisions of FIRREA, 12 U.S.C. § 1833a uses the more restrictive term “federally insured financial institution.”


10

direct connection between the fraud and the financial institution. This interpretation is in

keeping with the usual rule that punitive statutes must be “narrowly construed.” United States v.

Vanoosterhout, 898 F. Supp. 25, 30 (D.D.C. 1995) (dismissing § 1833a claims because

investment company was not a federally insured financial institution).5

The Second Circuit in United States v. Bouyea, 152 F.3d 192 (2d Cir. 1998), construed

the “affects a financial institution” requirement in FIRREA’s statute of limitations provision to

mean effects that are “sufficiently direct.” Id. at 195 (emphasis added); see also United States v.

Rubin/Chambers, Dunhill Ins. Servs., 831 F. Supp. 2d 779, 783 (S.D.N.Y. 2011) (applying

“sufficiently direct” effect standard); United States v. Ohle, 678 F. Supp. 2d 215, 229 (S.D.N.Y.

2010) (same). An “‘unreasonably remote’” effect on a financial institution, such as when fraud

is “‘directed against a customer of the depository institution which was then prejudiced in its

dealings with the institution,’” does not satisfy the “affects” standard. Bouyea, 152 F.3d at 195

(quoting United States v. Pelullo, 964 F.2d 193, 216 (3d Cir. 1992)). Other Circuits agree that

“affecting” must have meaningful limits and indeed have reversed criminal convictions or

sentences on that ground. See Agne, 214 F.3d at 52 (reversing wire fraud conviction because

defendant’s actions did not “affect” a financial institution when the consequence to the bank was

“too remote”); United States v. Ubakanma, 215 F.3d 421, 426 (4th Cir. 2000) (concluding that

increased penalty provision could not apply and remanding for resentencing because a wire fraud

offense “affects” a financial institution “only if the institution itself [is] victimized by the fraud,

as opposed to the scheme’s mere utilization of the financial institution in the transfer of funds”);

see also United States v. Mullins, 613 F.3d 1273, 1278 (10th Cir. 2010) (“As some of our sister 5 “[P]enal statutes are to be construed strictly,” even when applied in noncriminal contexts. FCC v. Am. Broad. Co., 347 U.S. 284, 296 (1954); see also Leocal v. Ashcroft, 543 U.S. 1, 12 n.8 (2004) (same regarding rule of lenity); Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 70 (2d Cir. 1990) (“[A] statute with a punitive thrust . . . is to be strictly construed.”).


11

circuits have recognized, there may be some point where the ‘influence’ a defendant’s wire fraud

has on a financial institution becomes so attenuated, so remote, so indirect that it . . . does not in

any meaningful sense ‘affect’ the institution.”).

In Bouyea, a fraud against the wholly-owned subsidiary of a financial institution caused a

“sufficiently direct” effect on the institution because the subsidiary borrowed money for the

fraudulent transaction from its parent and when the subsidiary suffered loss as a result of the

fraudulent scheme, the parent “was affected by this loss.” 152 F.3d at 195. The Bouyea court

relied on United States v. Pelullo, in which the Third Circuit rejected the argument that fraud

against a wholly-owned subsidiary could never “affect” its parent financial institution as a matter

of law. 964 F.2d at 216. Both courts recognized that, although fraud on a wholly-owned

subsidiary may not always “affect” the parent, the close relationship between such entities could

potentially give rise to a “sufficiently direct” effect.

In contrast, the government’s theory here—that federally insured financial institutions

were “affected” by an alleged scheme to defraud public companies in which the institutions have

invested—is far too remote and attenuated to state a claim. Certainly it does not approach the

“effect” found sufficient in Bouyea, where the financial institution’s wholly-owned subsidiary

was defrauded. A wholly-owned subsidiary is “a subunit” of its parent, and because “the

ultimate interests of the subsidiary and the parent are identical,” they “must be viewed as a single

economic unit.” Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 772 n.18 (1984);

see id. at 771 (“A parent and its wholly owned subsidiary have a complete unity of interest.”).

That relationship is worlds apart from shareholders, creditors, and other entities tangentially

impacted by the parent’s affairs. Thus, the First Circuit in Agne, in reversing a criminal wire

fraud conviction for lack of an “effect” on a financial institution, distinguished Bouyea and


12

Pellulo as “situations in which the financial institution was a parent to the defrauded entity and

thus was closely financially linked to it.” 214 F.3d at 51.

Courts have long distinguished between direct and derivative harm to investors in the

analogous context of shareholder lawsuits. When a corporation suffers an injury and the

shareholders suffer solely through depreciation in the value of their stock, the injury to individual

shareholders is considered too indirect to give them standing to sue on such a claim—only the

corporation itself or a stockholder suing derivatively in the name of the corporation may

maintain such an action. See Lewin v. Lipper Convertibles, L.P., 756 F. Supp. 2d 432, 441

(S.D.N.Y. 2010) (quoting Vincel v. White Motor Corp., 521 F.2d 1113, 1118 (2d Cir. 1975)).

Although “[h]arm to a corporation may manifest itself as harm to its shareholders in the form of

a lower stock price,” the “wrong underlying a derivative action is indirect, at least as to the

shareholders. . . . [O]nly the corporation itself suffers the direct wrong.” Halebian v. Berv, 590

F.3d 195, 205 (2d Cir. 2009) (internal quotation marks omitted); see Lewin, 756 F. Supp. 2d at

439 (“Where plaintiffs complain of injuries that are wholly derivative of harm to a third party,

plaintiffs’ injuries are generally deemed indirect and as a consequence too remote to support

recovery.”). Based on these settled principles of law, the financial institutions that invested in

the GSEs would have no standing to sue for the derivative injuries alleged here because their

harm is only indirect. That same indirectness supports a conclusion that a fraud on the GSEs

does not “affect” the institutions “sufficiently directly” for purposes of FIRREA’s civil penalty.

The sweeping consequences of this theory are multiplied by the prospect that courts may

interpret the “affecting” language to require only an increased risk of loss, not actual loss, as

some courts have interpreted that language in other FIRREA-related statutes. See, e.g., United


13

States v. Serpico, 320 F.3d 691, 694–95 (7th Cir. 2003); Mullins, 613 F.3d at 1278.6 Under the

government’s interpretation, one would be hard-pressed to find any mail or wire fraud that does

not somehow increase the risk of loss for a financial institution and thereby trigger FIRREA’s

civil penalties. Such an interpretation stretches § 1833a far beyond its intended scope.7

2. The Complaint’s Limitless “Affecting” Theory Contradicts the Statutory Language, Purpose, and History.

FIRREA’s text, purpose, and history also demonstrate that § 1833a’s “affecting” clause is

intended to be a meaningful limitation on civil claims and that the offense must directly impact

the financial institution. Thus, the Complaint’s thesis, that a financial institution is “affected” for

purposes of § 1833a whenever it suffers investment loss as a shareholder of a defrauded entity, is

an insupportable interpretation of the statute.

The statutory language. Subsection 1833a(c) limits civil penalties under FIRREA to

violations of the following criminal statutes: “(1) section 215, 656, 657, 1005, 1006, 1007, 1014,

or 1344 of Title 18; (2) section 287, 1001, 1032, 1341 or 1343 of Title 18 affecting a federally

insured financial institution; or (3) section 645(a) of Title 15.” Each of the Code sections listed

in paragraph (1) expressly proscribes bribery of a bank officer or employee, or fraud against a

bank, a financial institution, or a federal regulator of such institution. Similarly, the Code section

cited in paragraph (3) proscribes fraud against the Small Business Administration. Neither of

6 Whether an increased risk of loss is sufficient “effect” for FIRREA purposes is an open question in the Second Circuit. See United States v. Ghavami, No. 10 CR 1217, 2012 WL 2878126, at *5 (S.D.N.Y. July 13, 2012); United States v. Carollo, No. 10 CR 654, 2011 WL 3875322, at *2 (S.D.N.Y. Aug. 25, 2011).

7 The importance of the “affecting” requirement is especially acute here, where the government has not plausibly alleged any meaningful impact from the HSSL loans causing the GSEs to be placed into conservatorship, much less any meaningful impact on the investor banks. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The alleged duration and scope of the HSSL origination process belies any suggestion that these loans caused the GSEs to collapse.


14

those paragraphs includes a requirement that the offense “affect” a financial institution; by the

nature of these offenses, such language would be superfluous.

By contrast, the statutes listed in paragraph (2) are not, by their terms, limited to offenses

committed against financial institutions. Congress thus included the limiting language “affecting

a federally insured financial institution” in paragraph (2) to ensure that that paragraph, like

paragraphs (1) and (3), would be limited to crimes against or directly concerning federally

insured financial institutions. Read in context, paragraph (2) applies only where the fraud

directly impacts a federally insured financial institution, not when fraud directed against a

different entity has incidental consequences for a financial institution, along with all other

shareholders, by virtue of its investment in that entity.

The Supreme Court has instructed that the interpretive principle, “a word is known by the

company it keeps,” “is often wisely applied where a word is capable of many meanings in order

to avoid the giving of unintended breadth to the Acts of Congress.” Dolan v. U.S. Postal Serv.,

546 U.S. 481, 486 (2006) (internal quotation marks omitted). In Dolan, the Supreme Court

interpreted the phrase “negligent transmission of letters or postal matter” not to include

delivering a package in such a manner as to create a slip-and fall hazard, even though the

ordinary meaning and usage of the word “transmission” could embrace such a broad

interpretation. Id. The Court determined that the surrounding terms “loss [and] miscarriage . . .

of letters or postal matter” limited the otherwise expansive reach of “negligent transmission.” It

rejected as “odd” an interpretation that would cause one term in the statutory list to sweep far

more broadly than its neighbors. Id. at 487. That admonition applies here: The phrase

“affecting a federally insured financial institution” should not be read to cause paragraph (2) to

sweep much more broadly than its neighbors, as the government’s interpretation would require.


15

The statutory purpose and history. The stated purpose of the statute confirms its limited

scope. See Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 589 (2004) (relying on

statutory purpose to reject expansive construction of statute). Congress enacted FIRREA, in

reaction to the savings and loan crisis of the 1980s, with “the objects of preventing the collapse

of the [thrift] industry, attacking the root causes of the crisis, and restoring public confidence” in

financial institutions. United States v. Winstar Corp., 518 U.S. 839, 856 (1996). Section 101 of

FIRREA states that the law was enacted to, among other things, “strengthen the civil sanctions

and criminal penalties for defrauding or otherwise damaging depository institutions and their

depositors.” Pub. L. No. 101-73, § 101(10), 103 Stat. 183, 187 (1989).

The legislative history of FIRREA further underscores that § 1833a was not intended to

punish all fraud that may indirectly touch a financial institution. Rather, the statute was designed

to protect financial institutions by penalizing conduct that defrauds the institution or otherwise

directly harms it, such as by insider abuse, which was a major concern underlying the legislation.

See H.R. Rep. No. 101-54(I), at 96 (1989) (“[I]t is clear that fraud and insider abuse has been a

major factor in a significant portion of thrift failures in the 1980s. . . . Regulators estimate that as

many as 40% of thrift failures are due to some form of fraud or insider abuse.).8 Congress

8 Debates in both chambers confirm that abuse and fraud by insiders was a primary focus of FIRREA’s enhanced criminal and civil penalties. See, e.g., 135 Cong. Rec. S10200 (daily ed. Aug. 4, 1989) (Sen. Chafee reporting that “[o]utright fraud and embezzlement led to one-third of all thrift failures” in the savings and loan crisis.); 135 Cong. Rec. H2786 (daily ed. June 15, 1989) (Rep. Parris urging that Congress “must strengthen enforcement and penalties to prevent future occurrences of fraud and mismanagement of institutions insured by the Federal Government”); 135 Cong. Rec. H2562 (daily ed. June 14, 1989) (Rep. Roukema describing the bill as “mandat[ing] tougher criminal and civil penalties for those former S&L owners and operators who are apprehended and convicted of fraud and abuse”); 135 Cong. Rec. H2576 (daily ed. June 14, 1989) (Rep. Hughes describing the civil penalties as aimed at “[u]nscrupulous persons in the savings and loan industry [who] have, through their fraudulent practices, brought an industry to its knees”); 135 Cong. Rec. H2781 (daily ed. June 15, 1989) (Rep. Richardson


16

intended to increase civil and criminal penalties—specifically including penalties for mail and

wire fraud—for “crimes of fraud against financial institutions” and “involving financial

institutions.” H.R. Rep. 101-54(I), at 107, 118, 196 (emphases added); see also H.R. Conf. Rep.

101-222, at 445 (Aug. 4, 1989) (describing proposed § 1833a as authorizing civil penalties “for

conduct that violates [certain] banking-related offenses in title 18 of the United States Code”).

Fraud against a third party that has tangential consequences for a financial institution therefore

does not come within the purposes of the statute. See Serpico, 320 F.3d at 694 (noting

FIRREA’s purpose “to protect financial institutions, a goal it tries to accomplish in large part by

deterring would-be criminals from including financial institutions in their schemes”).

Avoiding absurdity and superfluity. Finally, in construing any statute, a court should

avoid any interpretation that would lead to absurdity or render any statutory term superfluous.

McNeill v. United States, 131 S. Ct. 2218, 2223 (2011); TRW Inc. v. Andrews, 534 U.S. 19, 31

(2001). The Complaint’s “investment injury” theory violates both interpretive principles. See,

e.g., Thompson v. N. Am. Stainless, LP, 131 S. Ct. 863, 869 (2011) (rejecting broad interpretation

of statutory term because it would lead to the “absurd consequence[]” that persons tangentially

affected by the injurious conduct, such as shareholders, would be allowed to sue). If any

investment by a financial institution in a defrauded entity were sufficient for the fraud to “affect”

the institution, then the “affecting” clause of § 1833a would have virtually no limiting impact on

the statute. By virtue of their role as investor, creditor, or business partner, financial institutions

could claim to be “affected” by a fraud on almost any company or even fraud on individuals. It

is simply inconceivable that Congress added this express limitation to civil penalties for violation

urging that Congress must “establish severe penalties for the abuse, misuse or fraud against federally insured institutions” (emphasis added)).


17

of the mail and wire fraud statutes with the intent that it would have no consequence. Yet, for

the Complaint to state a claim, that is the interpretation that this Court would have to adopt.

The Second Circuit’s analysis in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012),

is instructive. There, the Second Circuit rejected the government’s broad interpretation of the

statutory phrase “produced for or placed in interstate or foreign commerce” in the Economic

Espionage Act. The court first observed that the phrase “must be read as a term of limitation”

because Congress did not include that phrase in an otherwise parallel statute (like the mail and

wire fraud statutes here). Id. at 79. The court then rejected the district court’s broad

interpretation of “produced for” because it would have rendered the additional phrase “placed in”

all but superfluous, contrary to the “basic interpretive canon[]” that a statute should be

interpreted “so that no part will be inoperative or superfluous, void or insignificant.” Id. at 81

(quoting Corley v. United States, 556 U.S. 303, 314 (2009)); see Aleynikov, 676 F.3d at 81

(“[E]ven if one could identify one such example, or two [where the phrase as interpreted by the

government would limit the statute], it would not be a category that would demand the attention

of Congress, or be expressed in categorical terms.”). The same analysis applies here.

* * * * *

Under any reasonable interpretation of the statutory language, a fraud does not “affect” a

financial institution and trigger FIRREA’s civil penalties merely because the institution owns

stock in the alleged fraud victim. Because that is the Complaint’s only allegation, it does not

state a claim under § 1833a, and Count III should be dismissed.

B. The Complaint Does Not Adequately Allege a Scheme To Defraud.

In addition to an effect on a federally insured financial institution, the government must

plead the elements of mail and wire fraud, which are “(1) a scheme to defraud, (2) money or

property as the object of the scheme, and (3) use of the mails or wires to further the scheme.”


18

United States v. Shellef, 507 F.3d 82, 107 (2d Cir. 2007) (internal quotation marks omitted). As

in any fraud case, a complaint predicated on mail and wire fraud is obliged to plead the

fraudulent scheme with particularity under Federal Rule of Civil Procedure 9(b).9 It must “state

the contents of the communications, who was involved, where and when they took place, and

explain why they were fraudulent.” Mills v. Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir.

1993). This Complaint does not come close to meeting the Rule 9(b) standard or, indeed, any

standard, because it does not set forth any misrepresentation or deceptive conduct that plausibly

could amount to a “scheme to defraud.”

The Complaint asserts that Defendants underwrote and sold loans that were inconsistent

with underwriting guidelines. It describes a process, the HSSL program, that removed

“underwriters and other ‘toll gates,’” Compl. ¶ 57, and incented volume at the expense of

quality. But nowhere does the Complaint particularize any allegation that anyone whose conduct

was attributable to Defendants made any misrepresentation of fact or concealed any fact that she

had a duty to disclose, or engaged in deceptive conduct toward the GSEs. The Complaint, in

short, does not allege any deception. Instead, it essentially alleges that Defendants breached the

contracts that governed the sale of loans. It therefore fails to plead a scheme to defraud under

§ 1341 and § 1343.

9 No court to our knowledge has had occasion to address the pleading standard in a FIRREA § 1833a case, as the government so rarely invokes that provision. Civil RICO is analogous insofar as it, like § 1833a, creates a civil cause of action for predicate criminal offenses, including mail and wire fraud. 18 U.S.C. §§ 1961(1), 1962, 1964. In a civil RICO case, a plaintiff must plead alleged predicate acts of fraud with particularity under Rule (9)(b). McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992); Knoll v. Schectman, 275 F. App’x 50, 51 (2d Cir. 2008); First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 178 (2d Cir. 2004). There is no reason for a different rule here. See Compl. ¶ 1 (“This is a civil fraud action . . . .”).


19

The Second Circuit has defined a “scheme to defraud” as a plan to deprive someone “of

something of value by trick, deceit, chicane or overreaching.” United States v. Pierce, 224 F.3d

158, 165 (2d Cir. 2000) (internal quotation marks omitted). This is “a nontechnical standard,” A.

Terzi Prods. Inc. v. Theatrical Prot. Union Local No. One, 2 F. Supp. 2d 485, 500–01 (S.D.N.Y.

1998) (internal quotation marks omitted), applicable to a wide range of conduct, see, e.g., United

States v. Trapilo, 130 F.3d 547, 550 n.3 (2d Cir. 1997) (holding that smuggling qualifies as

scheme to defraud). But it is not unbounded. A scheme to defraud requires a plan to deceive

someone. “Absent any element of deception, allegations of wrongful conduct simply do not

constitute a scheme to defraud.” McGee v. State Farm Mut. Auto. Ins. Co., No. 08–CV–392,

2009 WL 2132439, at *5 (E.D.N.Y. July 10, 2009) (quoting A. Terzi Prods., 2 F. Supp. 2d at

500); accord McLaughlin v. Anderson, 962 F.2d 187, 192 (2d Cir. 1992) (“The mail fraud statute

requires some element of deception.”). Thus, neither “a breach of contract in itself,” McEvoy

Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 791 (1st Cir. 1990), nor even a

scheme that violates federal law, but does not involve deception, McGee, 2009 WL 2132439, at

*6, is a “scheme to defraud” for purposes of the mail or wire fraud statutes.

Because the Complaint does not identify, much less plead with particularity, any

deception, it fails to state a claim for mail or wire fraud under FIRREA § 1833a.

1. Defendants’ “Representations” Are Contractual Promises That Do Not Support a Fraud Claim.

The Complaint alleges that Defendants sold loans to the GSEs that did not conform to

Defendants’ “representations” that they would adhere to particular underwriting standards. See,

e.g., Compl. ¶¶ 6, 91, 92, 93, 98, 103, 107, 112, 116, 121, 183. The “representations” identified

in the Complaint appear to be “representations and warranties” in the loan purchase contracts and

associated documents. See Compl. ¶¶ 30–33, 78, 175, 183. The Complaint nowhere identifies


20

with particularity which contract, let alone exactly what representation or warranty within a

contract, is the basis for its mail and wire fraud charges. This is sufficient reason alone to

dismiss the FIRREA count.

Although Defendants thus are left to guess which contracts may be at issue, attached as

Exhibit A to the Declaration supporting this motion is one of the “purchase contracts” to which

the Complaint evidently refers, the Mortgage Selling and Servicing Contract between Fannie

Mae and Countrywide Funding Corporation (“MSSC”).10 See ATSI Commc’ns, Inc. v. Shaar

Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (court may consider “statements or documents

incorporated into the complaint by reference” on a motion to dismiss). In that contract,

Countrywide warrants that each mortgage it sells to Fannie Mae “conforms to all the applicable

requirements in [Fannie Mae’s] Guides and in this Contract.” Ex. A at 5. Such warranties are

not deceptive misrepresentations; they are contractual promises. The alleged failure to fulfill

them does not support a claim for fraud.

As a rule, a breach of contract cannot be the basis for a fraud claim. See

Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 19–20 & n.2 (2d Cir.

1996) (reversing fraud finding because trial judge “equated a failure to carry out contractual

obligations with fraud”); see also United States v. D’Amato, 39 F.3d 1249, 1261 n.8 (2d Cir.

1994) (“A breach of contract does not amount to mail fraud.”); In re Enron Corp., No. 04 Civ.

1367 (NRB), 2005 WL 356985, at *8–11 (S.D.N.Y. Feb. 15, 2005). “The fundamental reason

for this doctrine, which traces back to the common law, lies in the recognition that virtually

every dispute over breach of contract involves an allegation that the breaching party has lied

about its performance. It would materially chill commerce if every time a contracting party 10 Countrywide Funding Corporation legally changed its name to Countrywide Home Loans, Inc. after the MSSC was executed.


21

suffered what it believed was a breach of performance the party could also bring a tort claim for

fraud.” IKEA N. Am. Servs., Inc. v. Ne. Graphics, Inc., 56 F. Supp. 2d 340, 342–43 (S.D.N.Y.

1999) (“[E]ven intentionally misleading statements by a defendant falsely indicating an intent to

perform under a contract and/or concealing a breach of the contract do not give rise to an action

for fraud.”); accord John Paul Mitchell Sys. v. Quality King Distribs., Inc., No. 99 Civ. 9905

(SHS), 2001 WL 910405, at *4–5 (S.D.N.Y. Aug. 13, 2001).

The Second Circuit recognizes narrow exceptions to this rule, none of which is met here.

A plaintiff may maintain a fraud claim in connection with contractual representations or

warranties if it: “(i) demonstrate[s] a legal duty separate from the duty to perform under the

contract; or (ii) demonstrate[s] a fraudulent misrepresentation collateral or extraneous to the

contract; or (iii) seek[s] special damages that are caused by the misrepresentation and

unrecoverable as contract damages.” Bridgestone/Firestone, Inc., 98 F.3d at 20 (citations

omitted). A complaint that does not adequately allege one of these exceptions does not state a

claim based on mail or wire fraud. Sampson v. Medisys Health Network Inc., No. 10–CV–1342,

2011 WL 579155, at *6 (E.D.N.Y. Feb. 8, 2011) (because “plaintiffs have not adequately alleged

the Bridgestone/Firestone elements, they cannot make out a claim for fraud or mail fraud”); see

Goldfine v. Sichenzia, 118 F. Supp. 2d 392, 404 (S.D.N.Y. 2000) (“plaintiffs’ RICO claims fail

to allege with particularity a scheme to defraud rather than a mere breach of contract, which

mandates dismissal”); Cougar Audio, Inc. v. Reich, No. 99 Civ. 4498 LBS, 2000 WL 420546, at

*6 (S.D.N.Y. Apr. 18, 2000) (dismissing RICO claim where “the Complaint fails to explain with

sufficient particularity why th[e alleged] misrepresentation constitutes a scheme to defraud rather

than a mere breach of contract”).


22

This Complaint does not plead facts supporting any of the Bridgestone/Firestone

exceptions. First, there is no indication in the Complaint that Defendants owed the GSEs any

special duty. To the contrary, the Complaint focuses on the contractual duties that Countrywide

owed but, allegedly, failed to fulfill. Where, as here, the defendant’s duty “was defined entirely

by the[] contractual relationship,” the plaintiff cannot maintain a fraud claim under the first

Bridgestone/Firestone criterion. DynCorp v. GTE Corp., 215 F. Supp. 2d 308, 324 (S.D.N.Y.

2002).

The contracts themselves make clear that the government’s claim is for breach of

contractual duties rather than fraud. The MSSC provides that “[b]reaches of this [c]ontract

include . . . any act or omission of the Lender in connection with the origination and sale to us of

any mortgage or participation interest [that] causes us harm, damage or loss.” Ex. A at 13

(emphasis added). It also provides that “[i]t is a breach if the Lender does not comply with this

Contract or our Guides through any act or omission.” Id. (emphasis added). Finally, it provides

that “[i]t is also a breach if the Lender sells us any mortgage or participation interest knowing

that any of the mortgage warranties are untrue.” Id. (emphasis added). Because the

government’s claim is, in reality, a breach-of-contract claim, its fraud predicates fail. See Ritchie

Capital Mgmt., L.L.C. v. Coventry First LLC, No. 07 Civ. 3494 (DLC), 2007 WL 2044656, at *7

(S.D.N.Y. July 17, 2007) (dismissing fraud claim that “appears to rest entirely on the subjects

covered in the representations and warranties contained in the agreements”; “[t]o the extent that

there was a misrepresentation or omission in connection with those contractual representations

and commitments, then that conduct must be pleaded as a breach of contract claim”).

Second, a “fraudulent misrepresentation collateral or extraneous to the contract,” means a

“‘misstatement[ or] omission[] of present facts,’ rather than [a] ‘contractual promise[] regarding


23

prospective performance.’” Koch Indus., Inc. v. Aktiengesellschaft, 727 F. Supp. 2d 199, 214

(S.D.N.Y. 2010) (quoting Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 184 (2d

Cir. 2007)). Here, the government has not pleaded with particularity any misstatement of present

fact. Rather, it has invoked, without particularity, contractual representations and warranties that

promise and describe future performance: that the loans Countrywide someday would sell to the

GSEs pursuant to the contract would meet the “applicable requirements.”11 When the contract

was signed, by its terms, the details of the actual loans that might be sold to the GSEs were

unknown, and nothing about them conceivably could be misrepresented. Thus, while a warranty

that is “a statement of present fact” might arguably support a fraud claim, see Merrill Lynch, 500

F.3d at 184 (internal quotation marks omitted), no such present-tense statement is pleaded here.

The Complaint, in other words, does not allege any misrepresentations that are “collateral and

extraneous” to the contracts between Defendants and the GSEs. To the contrary, the alleged

misrepresentations are the words of the contracts themselves, which are not grounds for a fraud

claim. See DynCorp, 215 F. Supp. 2d at 325 (“DynCorp’s claims of fraud [] are not ‘collateral or

extraneous to the terms of the parties’ agreement,’ since the false representations that they allege

are the representations and warranties that are provided in Section 2.3 of the Purchase

Agreement.”). 11 The MSSC (which was executed in 1982) provides that Countrywide’s warranties “are made as of the date transfer is made” to Fannie Mae. Ex. A at 5. That provision, however, does not transform a contractual promise into a statement of present fact under Bridgestone/Firestone. See DynCorp, 215 F. Supp. 2d at 310 (applying Bridgestone/Firestone doctrine to fraud claim based on warranties stated in executed Purchase Agreement and made as of subsequent Closing Date). Every warranty concerns the state of goods at the time of transfer. See Black’s Law Dictionary 1725 (9th ed. 2009) (defining “warranty” as “a seller’s promise that the thing being sold is as represented or promised”). If that were enough to nullify the Bridgestone/Firestone doctrine, a breached warranty could always be the subject of a fraud claim. That is not the law. See, e.g., Koch, 727 F. Supp. 2d at 214. Rather, under Bridgestone/Firestone, a fraud claim implicating a warranty is only cognizable if the claim is based on a misrepresentation other than the warranty itself. See id.


24

The second criterion also is not met if a fraud suit is inconsistent with the remedies

contemplated in the parties’ contract. See Koch Indus., 727 F. Supp. 2d at 214. Here, the

contracts between Defendants and the GSEs expressly prescribe the remedies for breach. For

example, the MSSC provides that the “Consequences of Untrue Warranties” are “Repurchase,”

“Indemnity,” or “Termination of Contract.” Ex. A at 9; see also id. (providing for repurchase

remedy whether or not Countrywide “had actual knowledge of the untruth”). Indeed, the

Complaint repeatedly refers to the well-established repurchase remedy contemplated by the

parties and prescribed by their contracts, whereby Countrywide was required to repurchase loans

that did not conform to the “representations and warranties” of the contract.12 Compl. ¶¶ 8, 36,

126–129. Thus, Plaintiff has not satisfied the second Bridgestone/Firestone criterion.

Third, to meet the final Bridgestone/Firestone criterion, “special damages must be

plead[ed] with particularity.” Bibeault v. Advanced Health Corp., No. 97 Civ. 6026 (WHP),

2002 WL 24305, at *6 (S.D.N.Y. Jan. 8, 2002). In addition, such damages “must have been

caused by the misrepresentation and unrecoverable as contract damages” and they “must flow

directly and proximately from the fraud, rather than from the breach of contract.” Great Earth

Int’l Franchising Corp. v. Milks Dev., 311 F. Supp. 2d 419, 430 (S.D.N.Y. 2004) (internal

quotation marks omitted). Special damages are limited to “injuries which the parties could

reasonably have anticipated at the time the contract was entered into.” Bibeault, 2002 WL

24305, at *6 (quoting Spang Indus., Inc. v. Aetna Cas. & Sur. Co., 512 F.2d 365, 368 (2d Cir.

1975)). The Complaint here satisfies none of these requirements. It pleads no damages with

particularity, praying instead for statutory penalties. See Compl. ¶ 186. No alleged damages

12 To be sure, the MSSC also provides that Fannie Mae “may also enforce any other available remedy.” Ex. A at 9. But that does not alter the fact that these representations and warranties and the potential remedies for their breach are quintessentially contractual.


25

flow “directly and proximately” from any fraud, as opposed to purported breaches of contract.

And any losses to the GSEs from the loans are not “unrecoverable as contract damages.” To the

contrary, the MSSC provides that Countrywide will indemnify the GSEs “against any [] losses

[or] damages” related to a breach. Ex. A at 9. Thus, the Complaint does not satisfy the third

Bridgestone/Firestone criterion.

In sum, the Complaint does not plead fraud because the alleged misrepresentations are

based entirely on alleged breaches of contractual “representations and warranties” and the

allegations do not satisfy any of the Bridgestone/Firestone exceptions to the rule that a breach of

contract is not fraud.

2. Defendants’ Alleged Failure To Investigate Is Not Fraud.

The Complaint’s central theme is that Defendants failed to conduct due diligence and

quality control processes as required under the controlling contracts. The Complaint alleges that

Countrywide’s HSSL process omitted employees who performed due-diligence functions—

verifying and evaluating information submitted by borrowers—during underwriting and before

closing. Compl. ¶¶ 4, 5, 56, 64. As a result, Countrywide allegedly delivered loans with

“obvious and easily detectable material defects,” Compl. ¶ 92, instead of “investment-quality

loans that complied with GSE requirements,” Compl. ¶ 6.

Inadequate diligence is not fraud. That is so even when the contracts allegedly required

diligence that the defendant failed to perform. See S. Cherry St., LLC v. Hennessee Grp. LLC,

573 F.3d 98, 113, 115 (2d Cir. 2009) (rejecting fraud claim because “[a]t bottom, this was a

contract case”; “[t]he obligation to conduct the five-step due diligence [wa]s one imposed by

contract on HG” (internal quotation marks omitted)); accord Ellington Mgmt. Grp., LLC v.

Ameriquest Mortg. Co., No. 09 Civ. 0416 (JSR), 2009 WL 3170102, at *3 (S.D.N.Y. Sept. 29,

2009).


26

3. Countrywide’s Alleged Failure To Adhere To Underwriting Guidelines Is Not Fraud.

The Complaint repeatedly references Countrywide’s internal underwriting guidelines and

alleges that Countrywide’s actual underwriting practices did not conform to those guidelines.

The Complaint pleads no facts about these guidelines or alleged deviations that make them

fraudulent as opposed to, perhaps, a breach of contract.

The Complaint alleges, with no pretense of particularity, that: (1) “Countrywide

represented to individuals at both Fannie Mae and Freddie Mac that it had implemented tighter

underwriting guidelines in the fourth quarter of 2007,” Compl. ¶ 51; see also Compl. ¶¶ 2, 6, 90

(substantially similar allegations); and (2) “[a]nother former Fannie Mae executive commented

that it was misleading for Countrywide to be representing . . . that it was tightening its

underwriting controls,” Compl. ¶ 90. The Complaint does not specify any particular statement

by any speaker, does not say when or where the statement was made, and does not explain why

the statement was fraudulent. Such vague allegations fail under Rule 9(b). See Anschutz Corp.

v. Merrill Lynch & Co, 690 F.3d 98, 108 (2d Cir. 2012) (“To satisfy [Rule 9(b)] the plaintiff

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.” (internal quotation marks omitted)).

4. Countrywide’s Alleged Nondisclosures Are Not Fraudulent in the Absence of Any Duty To Disclose.

The Complaint alleges that Countrywide concealed questionable underwriting practices,

high defect rates, and high fraud rates from the GSEs. Compl. ¶¶ 72–90. Nothing in the

Complaint, however, suggests active concealment, only at most nondisclosure. See, e.g., Compl.

¶ 53 (“Countrywide did not disclose its new origination model to the GSEs.”). The Complaint

alleges no duty on Countrywide’s part to disclose any of these things.


27

“Omissions constitute fraud only where there is a duty to disclose.” In re Parmalat Sec.

Litig., 479 F. Supp. 2d 332, 341 (S.D.N.Y. 2007). A duty to disclose is the exception, rather than

the rule, and “the plaintiff must show that the defendant had a duty to disclose.” In re Refco Sec.

Litig., 759 F. Supp. 2d 301, 316 (S.D.N.Y. 2010). In other words, to state a claim for fraud

based on an alleged omission, “plaintiff must allege facts giving rise to a duty to disclose.”

Odyssey Re (London) Ltd. v. Stirling Cooke Brown Holdings Ltd., 85 F. Supp. 2d 282, 296

(S.D.N.Y. 2000). The Complaint in this case makes no such allegation. It does not say what

Countrywide had a duty to disclose, when the duty to disclose arose, or even whether a duty to

disclose existed at all. Accordingly, the Complaint’s conclusory claims that Countrywide

concealed its underwriting practices, its defect rates, and its borrower fraud rates from the GSEs

do not allege deceptive conduct.

5. The Complaint Does Not Sufficiently Plead That Countrywide Deceived the GSEs Through Allegedly Falsified Data or the Seven Loans Described in the Complaint.

The Complaint’s bare allegations that loan processors falsified CLUES data, see, e.g.,

Compl. ¶ 73, fail under the Rule 9(b) particularity standard. The Complaint does not allege

which data was false, who falsified it, when or where it was falsified, or to whom the false data

was communicated. Instead, it makes such general statements as: “loan processors were

incentivized to, and repeatedly did manipulate borrower information (e.g., by entering a higher

income for the borrower) until they received an ‘Accept’ and the loan could enter the high speed

swim lane.” Compl. ¶ 73. Vague allegations like these simply do not allege deceptive conduct

under Rule 9(b)’s heightened pleading standard and thus do not qualify as part of a scheme to

defraud. See Mills, 12 F.3d at 1176 (holding that “fail[ure] to satisfy Rule 9(b) demands as a

corollary that these allegations cannot serve as predicate acts”).


28

Similarly, while the Complaint lists seven loans that allegedly did not conform to

contractual requirements for sale to the GSEs, the Complaint fails to explain what was deceptive

about these loans. See Compl. ¶¶ 93–125. These loans may have been of poor quality, or poorly

underwritten, but that does not make them fraudulent. The Complaint suggests that the seven

loans ran multiple times through Countrywide’s underwriting system and that later internal

reviews identified the loans as problematic. See, e.g., Compl. ¶¶ 97, 100, 102, 106, 109, 111,

113, 115, 118, 120, 123, 125. But nothing in the Complaint links any of these seven loans to any

deceptive conduct attributable to Defendants—as opposed to, perhaps, the borrowers who

misrepresented their financial condition to Countrywide. The Complaint’s allegations about the

seven loans do not comply with Rule 9(b) and therefore do not amount to predicate acts under

FIRREA.13

* * * * *

The Complaint, at most, alleges a breach of contract and non-disclosure of information

that Countrywide had no duty to disclose. It does not plead any misrepresentation or deception

within the meaning of the mail or wire fraud statutes. The Complaint therefore fails to plead a

scheme to defraud, and Count III should be dismissed. See, e.g., McLaughlin, 962 F.2d at 192

(dismissing civil RICO mail fraud claim because complaint did not plead deceptive conduct and

“[t]he mail fraud statute requires some element of deception”).

13 The government’s assertion that Defendants improperly have refused to repurchase loans is belied by the fact, to be borne out in discovery, that six of these seven loans were already remediated in accordance with Fannie Mae’s contractual remedy prior to the filing of the complaint, either through repurchase, make whole payment, or a settlement agreement payment.


29

II. THE FALSE CLAIMS ACT COUNTS SHOULD BE DISMISSED.

In Counts I and II of the Complaint, the government alleges that Defendants are liable for

damages and penalties under the False Claims Act (“FCA”). Count I charges violation of

subsection (a)(1)(A) of the FCA, which imposes liability on one who “knowingly presents, or

causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C.

§ 3729(a)(1)(A). Count II is asserted under FCA subsection (a)(1)(B), which applies against one

who “knowingly makes, uses, or causes to be made or used, a false record or statement material

to a false or fraudulent claim.” § 3729(a)(1)(B). The two FCA subsections share basic elements:

“[T]here must have been a ‘claim’”; the claim under subsection (a)(1)(A) or the statement

material to a claim under subsection (a)(1)(B) “must have been false or fraudulent”; and the

defendant “must have known that the claim or statement was false or fraudulent.” United States

ex rel. Pervez v. Beth Israel Med. Ctr., 736 F. Supp. 2d 804, 811 (S.D.N.Y. 2010).

Until 2009, the FCA covered only false claims presented to the government, which is not

alleged here. As of May 20, 2009, the Fraud Enforcement and Recovery Act of 2009 (“FERA”)

amended the FCA to prohibit false claims made to non-government entities under specified

circumstances when the government pays the claim. In this case, the government’s FCA claims

are expressly limited to claims made after this statutory amendment. The Complaint alleges that,

after the FERA amendments, Defendants sold defective loans to the GSEs, which in their

conservatorship received U.S. Treasury funds.

The Complaint does not state a claim under either of the two FCA provisions it invokes

because it identifies no actionable false “claim,” let alone with the particularity required by Rule

9(b). The Complaint specifies no loan that Defendants sold to the GSEs after the critical date of

May 20, 2009, when the statutory amendment took effect. Nor, if there were any such “claims,”

does the Complaint sufficiently allege that the U.S. government paid for them—an essential


30

element since the alleged false claims were presented, not directly to the government, but to the

GSEs.

The Complaint’s allegations must be judged against the backdrop of Rule 9(b)’s

particularity requirement. “It is self-evident that the FCA is an anti-fraud statute,” and therefore

“claims brought under the FCA fall within the express scope of Rule 9(b).” Gold v. Morrison-

Knudsen Co., 68 F.3d 1475, 1476–77 (2d Cir. 1995) (per curiam). The Rule’s requirements are

discussed above in connection with the government’s FIRREA claim. As applied to the FCA, a

complaint must identify the “‘who,’ ‘what,’ ‘where,’ ‘when,’ and ‘how’ of fraudulent

submissions to the government.” Id. at 1476; see also United States ex rel. Assocs. Against

Outlier Fraud v. Huron Consulting Grp., Inc., No. 09 Civ. 1800, 2011 U.S. Dist. LEXIS 7335, at

*4–5 (S.D.N.Y. Jan. 24, 2011). The Complaint in this case does not come close to meeting these

standards and should be dismissed.

A. The Complaint Does Not Identify an Actionable “Claim.”

The False Claims Act “only prohibits a narrow species of fraudulent activity:

‘present[ing], or caus[ing] to be presented, . . . a false or fraudulent claim for payment or

approval.’” United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 504 (6th Cir.

2007); see also United States ex. rel. Mikes v. Straus, 274 F.3d 687, 697 (2d Cir. 2001) (“[T]he

False Claims Act is ‘not designed to reach every kind of fraud practiced on the Government,’”

but is instead “intended to embrace at least some claims that suffer from legal falsehood.”

(quoting United States v. McNinch, 356 U.S. 595, 599 (1958))). A “claim” is “a request or


31

demand for money or property” presented to the U.S. government or a non-government

intermediary.14 31 U.S.C. § 3729(b)(2); Pervez, 736 F. Supp. 2d at 811–12.

“It seems to be a fairly obvious notion that a False Claims Act suit ought to require a

false claim.” Cafasso v. Gen. Dynamics C4 Sys., 637 F.3d 1047, 1055 (9th Cir. 2011) (internal

quotation marks omitted). Thus, a complaint should be dismissed if it does not identify a

specific false claim actionable under the FCA. United States v. Kernan Hosp., No. RDB-11-

2961, 2012 U.S. Dist. LEXIS 105765, at *18 (D. Md. July 30, 2012) (“For example, a complaint

is insufficient if it fails to allege specific claims submitted to the government and the dates on

which those claims were submitted.”); Haas v. Gutierrez, No. 07 Civ. 3623, 2008 U.S. Dist.

LEXIS 48762, at *22 (S.D.N.Y. June 26, 2008) (dismissing FCA complaint where plaintiffs

failed to cite “a single identifiable record or billing submission that they claim to be false, or give

a single example of when a purportedly false claim was presented for payment by a particular

defendant at a specific time”).

14 As amended by FERA, the term “claim”

(A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that—

(i) is presented to an officer, employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government—

(I) provides or has provided any portion of the money or property requested or demanded; or (II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; and

(B) does not include requests or demands for money or property that the Government has paid to an individual as compensation for Federal employment or as an income subsidy with no restrictions on that individual’s use of the money or property.

31 U.S.C. § 3729(b)(2).


32

The Complaint fails this most basic requirement of a False Claims Act suit because it

nowhere identifies an actionable claim. It does not specify with particularity—or at all—any

claim during the relevant time period, nor does it identify any federal funds that Defendants

allegedly claimed. For either or both of these reasons, as explained below, Counts I and II

should be dismissed.

1. The Complaint Does Not Identify Any Demand for Payment within the Relevant Time Period.

Prior to 2009, FCA liability could be premised only on the knowing presentation of a

false claim to “an officer or employee of the United States Government.” See 31 U.S.C.

§ 3729(a)(1) (1986). In the 2009 FERA amendments, Congress for the first time imposed FCA

liability for false claims submitted to certain non-government intermediaries, as well as those

submitted directly to the government. 31 U.S.C. § 3729(b)(2)(A) (2009); see 1 John T. Boese,

Civil False Claims and Qui Tam Actions (4th ed. 2012) § 2.01[B].

By its terms, the Complaint asserts FCA liability only for claims after the effective date

of the FERA Amendments, which is May 20, 2009.15 See Compl. ¶¶ 172 (alleging FCA

violations for “each of the loans sold to the GSEs in violation of GSE requirements after the

effective date of FERA”), 180 (same).16 As the government apparently recognizes, Defendants

cannot be liable for any pre-FERA “claims” because there is no suggestion that they made any

demand for payment directly to the U.S. government.

15 See Pub. L. No. 111-21 § 4, 123 Stat. 1617, 1630 (2009). 16 The government has also conceded this in its initial disclosures. Initial Disclosures of U.S. at 7 (“[T]he Government is entitled to recover all damages suffered by the GSEs from loans originated by FSL under the Hustle model that were sold to the GSEs and defaulted after the effective date of the Fraud Enforcement and Recovery Act of 2009 . . . .”).


33

The Complaint appears to posit that loans submitted to the GSEs were “request[s] or

demand[s] for money or property,” see Compl. ¶¶ 167, 175, but it nowhere alleges such a

“request or demand” made after the 2009 FERA amendments. The Complaint describes seven

allegedly defective loans sold to the GSEs, Compl. ¶¶ 93–125, but all of those loans allegedly

date from 2007, well before the FERA amendments. See Compl. ¶¶ 93, 97, 98, 102, 103, 106,

107, 111, 112, 115, 116, 120, 121, 125.

The only allegations that even touch on the post-FERA time period are in an introductory

paragraph of the Complaint, which alleges that the HSSL program “began in full force in

approximately August of 2007 . . . and continued through 2009, well after Bank of America’s

acquisition of Countrywide in July 2008.” Compl. ¶ 6. Like the remainder of the Complaint,

this paragraph focuses on an allegedly wrongful scheme rather than any “claim” for payment that

is the linchpin of an FCA cause of action. “Improper practices standing alone are insufficient to

state a claim under either § 3729(a)(1) or (a)(2) absent allegations that a specific fraudulent claim

was in fact submitted to the government.” Hopper v. Solvay Pharm., Inc., 588 F.3d 1318, 1326,

1328–30 (11th Cir. 2009) (rejecting “highly-compelling statistical analysis” that a false claim

was submitted as insufficient to plead a false claim for payment); see also Reynolds v. Sci.

Applications Int’l Corp., No. 07 Civ. 4612, 2008 U.S. Dist. LEXIS 48760, at *24–25 (S.D.N.Y.

June 26, 2008) (“‘The False Claims Act [ ] focuses on the submission of a claim, and does not

concern itself with whether or to what extent there exists a menacing underlying scheme.’”

(quoting United States v. Kitsap Physicians Serv., 314 F.3d 995, 1002 (9th Cir. 2002))).


34

Neither that introductory paragraph nor any other paragraph in the Complaint alleges that

Defendants presented any specific false claim after May 20, 2009.17 Far less does that paragraph

satisfy Rule 9(b)’s requirement to allege the who, what, when, where, and how of any such

loans. See United States ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 232–33 (1st

Cir. 2004) (FCA “relator must provide details that identify particular false claims for payment

that were submitted to the government,” such as “details concerning the dates of the claims, the

content of the forms or bills submitted, their identification numbers, the amount of money

charged to the government, the particular goods or services for which the government was billed,

the individuals involved in the billing, and the length of time between the alleged fraudulent

practices and the submission of claims based on those practices”); U.S. ex rel. Dugan v. ADT

Sec. Servs., Inc., No. DKC–03–3485, 2009 WL 3232080, at *14 (D. Md. Sept. 29, 2009) (noting

that Rule 9(b) requirements were not satisfied when plaintiff alleged “that FCA violations

occurred between 1995 and 1998, but did not allege any specific dates”).

In short, the Complaint fails to identify a single claim, let alone with the particularity

required by Rule 9(b), presented at any time after May 20, 2009—the only time period that

matters for the FCA counts. For that reason alone, Counts I and II should be dismissed.

2. The Complaint Does Not Sufficiently Allege Any Demand for Government Money or Property.

Even if the Complaint had identified a defective loan presented to the GSEs within the

relevant time period, it has not sufficiently alleged that the government paid or would pay for

that claim. After the FERA Amendments, an FCA claim may be predicated on a demand for

17 Cf. Kernan Hosp., 2012 U.S. Dist. LEXIS 105765, at *18 (recognizing, in a case where the government provided examples of false claims in 2007 and 2008 but not in 2009, that it was possible that some of the complained of conduct occurred after the FERA amendments but finding irrelevant the distinction between the two versions of the statute based on the allegations in that case).


35

payment to a non-government intermediary, but only if the government can show, first, that the

requested money or property was “to be spent or used on the Government’s behalf or to advance

a Government program or interest,” and second, that the government “provides or has provided”

or “will reimburse” any portion of the money or property claimed. 31 U.S.C. § 3729(b)(2)(A).

As the Third Circuit has explained:

The FCA does not apply to fraud against any federal grantee; it requires that the specific money or property claimed must be intended to “be spent or used on the Government’s behalf or to advance a Government program or interest.” Furthermore, the federal government must also provide at least a portion of the specific “money or property requested” or reimburse the grantee for that specific demand. These statutory requirements all drive at the same point—that “the False Claims Act only prohibits fraudulent claims that cause or would cause economic loss to the government.”

Garg v. Covanta Holding Co., 478 F. App’x 736, 741 (3d Cir. 2012) (citations omitted); see also

United States ex rel. Sterling v. Health Ins. Plan of Greater N.Y., Inc., No. 06 Civ. 1141, 2008

U.S. Dist. LEXIS 76874, at *17 (S.D.N.Y. Sept. 30, 2008) (dismissing claim where the

Complaint did not describe the organization to which the allegedly false claims were submitted

“as being funded by, in contract with, or related to the Government in any way”).

The only source of federal money or property mentioned in the Complaint is the U.S.

Treasury, which provided funds to the GSEs by purchasing the GSEs’ preferred stock after they

entered into conservatorship. See Compl. ¶ 20. The Complaint’s charging paragraphs allege that

Treasury funds “have been used to purchase Defendants’ loans and to reimburse the losses

incurred by the GSEs as a result of paying out guarantees to third parties after guaranteed loans

purchased from Defendants defaulted.” Compl. ¶ 170. The government’s evident theory is that

the GSEs suffered losses from purchasing bad loans, including from Countrywide, and Treasury


36

separately provided relief to the GSEs in the form of preferred stock purchases, which provided

the GSEs sufficient liquidity to purchase more loans from Defendants.

That theory does not state a claim. Treasury’s general infusion of funds into the GSEs

through the purchase of stock does not mean that the federal government provided “at least a

portion of the specific ‘money or property requested’” by Defendants when they sold loans to the

GSEs. Garg, 478 F. App’x at 741 (emphasis added). As the Third Circuit explained in Garg, if

general support through funding were enough, “every fraud against a government employee or

taxpayer [would] support[] a claim under the FCA.” Id.

For all of these reasons, Counts I and II of the Complaint should be dismissed.

CONCLUSION

For the foregoing reasons, Defendants respectfully request that the Court grant their

motion and dismiss the Complaint in its entirety.

Respectfully submitted,

Dated: Washington, DC s/Enu A. Mainigi

December 21, 2012 Brendan V. Sullivan, Jr. (pro hac vice) Enu A. Mainigi (pro hac vice) Williams & Connolly LLP 725 12th Street, NW Washington, DC 20005 (202) 434-5000 (202) 434-5029 (fax) [email protected] [email protected] Counsel for Defendants Bank of America Corporation and Bank of America, N.A.


37

Dated: New York, NY s/Richard M. Strassberg December 21, 2012 Richard M. Strassberg

William J. Harrington Goodwin Procter LLP The New York Times Building 620 Eighth Avenue New York, NY 10018 (212) 813-8800 [email protected] [email protected] Counsel for Defendants Countrywide Financial Corporation, Countrywide Home Loans, Inc., and Full Spectrum Lending


CERTIFICATE OF SERVICE

I hereby certify that, on this 21st day of December, 2012, the foregoing Memorandum In

Support of Motion To Dismiss was filed with the Court through the CM/ECF system and a

courtesy hard copy was sent to the Court. I also certify that the foregoing was served via

electronic mail on the following counsel: Pierre G. Armand Jaimie L. Nawady Assistant United States Attorneys 86 Chambers Street, Third Floor· New York, NY 10007 Tel: (212) 637-2724/2528 Fax: (212) 637-2730 Email: [email protected] [email protected] Attorneys for the United States David G. Wasinger The Wasinger Law Group, P.C. 1401 S. Brenwood Blvd., Ste. 875 St. Louis, MO 63144 Tel: 314-961-0400 Fax: 314-961-2726 [email protected] Attorney for Relator Edward O’Donnell

s/Enu A. Mainigi Enu A. Mainigi


BOA -Memo in Re Motion to Dismiss

Documents

countrywide home loans

defendants alleged failure

defendants representations

fraud claim

insured financial institution

spectrum lending case

case law

firrea claim