Whistleblowers Get Boost From the Supreme Court

A recent Supreme Court decision comes as a welcome relief to two bank whistleblowers who invested years of their lives fighting their former employer in court. The two saw evidence of wrongdoing and raised concerns to their superiors and were fired for having done so. They later brought whistleblower claims under the False Claims Act against Wells Fargo, the bank that now owns their previous employers, only to have those claims rejected by several lower courts. Thankfully, the Supreme Court took notice and handed down a victory, at least in this case, to the little guy.

The case was brought under the False Claims Act, an important piece of federal legislation that allows whistleblowers to file lawsuits on behalf of the U.S. government. These suits must be aimed at individuals or organizations that have defrauded the government in some way. The whistleblower bringing the suit is then entitled to collect up to 30 percent of any damages or penalties awarded as a result of the case. In this case, given the issues involved, the potential damages could be enormous.

The case was filed by two former bank employees, Robert Kraus and Paul Bishop, both of whom claim that fraud occurred at their financial institutions. Kraus presents a particularly unfortunate story. As VP and Controller for the Real Estate Capital Markets group at Wachovia, a major financial institution at the time, he says he discovered that accountants at the company were using an illegal maneuver to hide toxic assets in an off-balance sheet entity. The goal was to make Wachovia’s books look better, and less risky, than they actually were.

Kraus brought his concerns to superiors and was promptly terminated. Today, the former executive with a business degree from NYU is working at McDonalds, unable for years to find work in an industry where he had decades of experience. The case, according to Kraus, has taught him to be skeptical of institutions that he believed would have his back for doing the right thing and bringing the fraudulent behavior to light. The hope is the recent decision by the Supreme Court helps to restore some of that faith.

According to both Kraus and Bishop, the fraud that they uncovered harmed the government because the financial institution that they worked for received government money as part of the financial industry bailout that took place back in 2008. When the government started handing out bailout funds, the interest rate owed by the financial institutions depended on the level of risk the bank was deemed to present to taxpayers. By hiding risks in an outside entity, the False Claims Act lawsuit alleges the government and taxpayers were damaged by losing out on the higher interest rate Wells Fargo should have paid to receive the loans.

Two lower courts rejected the whistleblower claim after taking a narrow reading of the False Claims Act. According to the Supreme Court, judges should take a more expansive view of the False Claims Act. In this case, that means that means the whistleblowers will be able to have their case heard, revealing potentially important information about how financial institutions operated after taking billions of dollars from taxpayers. Experts believe that beyond this particular case, the decision is good news for whistleblowers. The hope is that courts across the country will be more open to a wide array of whistleblower cases, expanding their idea of what qualifies as a False Claims Act case.

Sources:

Supreme Court Breathes New Life into Whistleblower Case Against Wells Fargo, by , published at The Charlotte Observer on February 21, 2017.

Score One for the Bank Whistle-Blowers, by Gretchen Morgenson, published at The New York Times on February 24, 2017.

 

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