On May 20, 2009, President Obama signed into law The Fraud Enforcement and Recovery Act of 2009 (Pub. L. No. 111-21) or FERA. Before signing FERA, which Sens. Patrick Leahy, D-Vt., and Charles Grassley, R-Iowa, co-sponsored to address concerns about financial institutions, mortgage companies, and other recipients of Troubled Asset Relief Program (TARP) and other economic stimulus funds committing fraud, the President issued the statement below:

“Last year, the Treasury Department received 62,000 reports of mortgage fraud – more than 5,000 each month. The number of criminal mortgage fraud investigations opened by the FBI has more than doubled over the past three years. And yet, the federal government’s ability to investigate and prosecute these frauds is severely hindered by outdated laws and a lack of resources.

And that’s why this bill nearly doubles the FBI’s mortgage and financial fraud program, allowing it to better target fraud in hard-hit areas. That’s why it provides the resources necessary for other law enforcement and federal agencies, from the Department of Justice to the SEC to the Secret Service, to pursue these criminals, bring them to justice, and protect hardworking Americans affected most by these crimes. It’s also why it expands DOJ’s authority to prosecute fraud that takes place in many of the private institutions not covered under current federal bank fraud criminal statutes – institutions where more than half of all subprime mortgages came from as recently as four years ago.”

This legislation is designed to accomplish a number of goals, including:

• Updates federal fraud laws to include mortgage-lending businesses. FERA extends federal fraud laws (including financial institution fraud, false statements, and mail and wire fraud) to mortgage lending businesses which the federal government does not directly regulate or insure.
• Applies fraud statute to TARP and economic recovery package. FERA makes it a federal crime for government contractors to defraud the United States of funds under TARP and the economic stimulus package, including government purchases of preferred stock in financial institutions.
• Increases resources for investigation and prosecution of fraud cases. FERA authorizes $165 million for each of the fiscal years 2010 and 2011 to the US Attorney General for investigation and prosecution of fraud cases involving government assistance programs and financial institutions; $75 million for the FBI in fiscal year 2010, and $65 million in fiscal year 2011, to investigate mortgage fraud (which may include hiring additional special agents, professional staff and forensic analysts); $50 million per fiscal year to US Attorney’s Offices to combat fraud; and, provides $40 million per fiscal year to the Department of Justice Criminal, Civil, and Tax Divisions to investigate and litigate fraud cases. In addition, FERA authorizes $80 million for each of the fiscal years 2010 and 2011 to the US Postal Inspection Service, the US Secret Service, and the Office of Inspector General for the Department of Urban Housing and Development to combat fraud in Government assistance programs and financial institutions.
• Creates a financial crisis inquiry commission. FERA also establishes an outside commission in the legislative branch to investigate and examine causes of the current US financial and economic crisis. Interestingly, this outside commission is similar to the Pecora congressional subcommittee investigation, which began in 1932 (and was named after the chief counsel for the investigation, Ferdinand Pecora) and examined the Stock Market Crash of 1929. FERA requires the commission to submit a report on its findings to the President and Congress on Wednesday, December 15, 2010, and requires the commission chairperson to appear before the Senate Committee on Banking, Housing, and Urban Affairs and the House of Representative Committee on Financial Services regarding the report and its findings.

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Most notably, FERA modifies the False Claims Act, 31 USC § 3729 et seq. (FCA), which Congress enacted on March 2, 1863 to respond to Civil War defense contractor fraud. [Click here to see all revisions to the FCA.] In so doing, Congress revises the FCA’s liability provisions (and reverses several judicial decisions that have limited the FCA’s reach) to make recovery under the statute easier, not only against TARP and/or other stimulus recipients, but also against all other entities that may be sued under the FCA. Some notable changes include:

• Expanding FCA liability to contractors and subcontractors who do not present claims for government money or property to the federal government by removing the “to get” language and the “by the government” limitation from the statute. Previously, liability under the FCA had been limited to claims presented to an officer or employee of the federal government. The excised language served as the basis for the intent requirement in the unanimous Supreme Court decision Allison Engines Co., Inc. et al. v. United States ex rel. Sanders et al., 128 S. Ct. 2123 (2008). This revision effectively eliminates any requirement that claims be presented directly to the government so long as the money to pay a claim submitted to a contractor, grantee or other recipient comes from or will be reimbursed by the government. As a result, the revision reverses, in part, Allison Engines and will permit inter alia lawsuits against subcontractors and third-parties that purchase distressed assets with TARP money. See Allison Engines, 128 S. Ct. at 2128, 2130 (noting that removing this intent requirement “would expand the FCA well beyond its intended role of combating ‘fraud against the Government[]’” and turn it into an “all-purpose anti-fraud statute.”) (emphasis in original).
• Adding the materiality requirement in the liability provisions of the FCA and defining the term “material” as “capable of influencing.”
• Extending liability to include conspiracy to submit a reverse false claim.
• Allowing FCA lawsuits on claims made to the federal government for money or property to which the United States does not have title.
• Including government contractors and agents in the class of individuals protected from retaliation for bringing an FCA claim.
• Expanding provisions of the FCA relating to (i) federal government intervention in qui tam actions, (ii) sharing of information by the Attorney General with a claimant, and (iii) service upon state or local authorities in sealed cases.

The enactment of FERA has major implications for prime government contractors, their subcontractors and any third-party entity receiving government funds. It has expanded the federal government’s reach to a class of entities not previously covered by the FCA and, by implication, many “non-intending” violators must be prepared. Questions regarding intent, materiality and the outer limits of the scope of government investigations are likely to be the source of future litigation as the government as committed substantial resources to the enforcement of this new law. It is important now more than ever for all organizations to have effective programs in place to ensure compliance with FERA and the FCA.

For more information about the Fraud Enforcement and Recovery Act of 2009, and how it may impact your world, please contact Jackson Toof.