United States: Second Circuit Revives False Claims Act Suit Stemming From ‘08 Crisis, Finding Federal Reserve Banks Were "Agents" Of U.S.

In United States ex rel. Kraus v. Wells Fargo & Co., No. 18-1746 (2d Cir. Nov. 21, 2019), two employees of banks later acquired by Wells Fargo alleged a "pervasive pattern" of fraud in connection with the securitization and sale of toxic mortgages. When the economy imploded, Wells Fargo looked for help from the Federal Reserve Banks ("FRBs"). In their False Claims Act suit, the whistleblowers alleged that Wells Fargo lied about its financial condition to the FRBs in order to obtain billions of dollars in emergency loans at more favorable interest rates.

The False Claims Act imposes liability for fraudulent claims "for money or property" presented to "an officer, employee, or agent of the United States." 31 U.S.C. § 3729(b)(2)(A)(i) (emphasis added). After the case traveled to the Supreme Court and back on the merits, the Second Circuit faced a new issue for resolution: whether the FRBs – quasi-private entities set apart from any branch or department of the government – are "officer[s], employee[s], or agent[s]" of the United States such that False Claims Act liability can attach. The district court had found that FRBs were not a part of the government, but the Second Circuit disagreed.

Citing the fact that "Congress has gone out of its way to formally separate the FRBs from the Government," Kraus, slip op. at 18, and noting the distinct corporate governance structure of FRBs, the Court first concluded that FRB personnel are not "officers" or "employees" of the United States. The FRBs, as amici, argued that they were not government "agents" either. Id. at 24. The Court saw otherwise. Applying general principles of agency law, the Court found that the United States created FRBs to act on its behalf, and under its oversight (notwithstanding the FRBs' limited autonomy). Id. at 22. Accordingly, there existed an agent-principal relationship between the FRBs and the United States.

However, the Court was careful to circumscribe its decision, finding only that FRBs are "agents" of the United States within the meaning of the FCA when extending emergency loan credits, because the Government exercises "substantial control" over FRB emergency lending activities. Id. at 25. Whether or not FRBs are agents of the United States within the FCA "in any other contexts" remains an open question. Id. at 29.

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