By: Allan M. Siegel
Federal investigators were able to get a record $16.65 billion penalty against Bank of America Corp., following a probe into Bank of America's mortgage practice in the years leading up to the financial crisis. Three individuals, and one company, provided the government with information helping it show how Bank of America, or the company it acquired in 2008, Countrywide Financial Corp., committed financial misdeeds, including inflating the value of mortgage properties and selling defective loans to investors.
And what do these "whistleblowers" receive in exchange for their help in the investigation? - $170 million combined. The individuals and the company that received awards for their help had initiated individual lawsuits against Bank of America that were eventually combined into the bank's settlement with the government in August. All three of the individuals were executives with LandSafe or Countrywide, companies acquired by Bank of America prior to the financial crisis of 2008. One of the whistleblowers, Robert Madsen, left the company in 2013 and started his own business to help banks, investors, and others identify potential fraud in appraisal work. Two of the other suits brought by the whistleblowers, helped lay the foundation for the government's successful case against the company over Countrywide's mortgage program that sold defective mortgage loans to mortgage-finance companies Fannie Mae and Freddie Mac. The company that filed a whistleblower suit, Mortgage Now, had alleged that Bank of America had misrepresented loans it had submitted to the Federal Housing Administration for reimbursement.
While these payouts to whistleblowers are considered unprecedented in the financial sector, the federal government is hoping to boost payouts to motivate insiders and potential whistleblowers to come forward with useful information. In the past, large whistleblower awards had been associated more with drug companies or health-care fraud, than financial investigations. These payouts come on the heels of an announcement by the Securities and Exchange Commission in September that it was paying an informer a record award of $30 million, more than twice as much as the highest previous award.
All of these payouts and suits are a result of "qui tam" actions brought under the federal False Claims Act. A qui tam action is a lawsuit brought by an individual on behalf of the federal government against a corporation or organization that they claim is committing fraud against the federal government. Once a person has brought a suit on behalf of the government, the Department of Justice can intervene and take over the case against the defrauding company. In exchange for exposing the fraud, the person bringing the qui tam action receives a portion of the ultimate proceeds from the case, usually somewhere between 15-30% of the final settlement or verdict amount. This compensation system is designed to incentivize people to come forward and expose fraud, while giving them the financial protection they need as such a case may make them unable to work for their former employer or profession.