Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca2-15-02449/USCOURTS-ca2-15-02449-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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15‐2449                                                                                                                                                                                   

Paul Bishop v. Wells Fargo  

   UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT      

_______________      

August Term, 2015

(Argued: March 1, 2016     Decided: May 5, 2016)

Docket No. 15‐2449

_______________        

PAUL BISHOP, ROBERT KRAUS, UNITED STATES OF AMERICA, EX REL PAUL BISHOP, EX

REL ROBERT KRAUS,

      Plaintiffs‐Appellants,

STATE OF NEW YORK, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF

DELAWARE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, DISTRICT OF COLUMBIA, EX

REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF FLORIDA, EX REL PAUL BISHOP,

EX REL ROBERT KRAUS, STATE OF HAWAII, EX REL PAUL BISHOP, EX REL ROBERT

KRAUS, STATE OF CALIFORNIA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE

OF INDIANA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF ILLINOIS, EX REL

PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF MINNESOTA, EX REL PAUL BISHOP,

EX REL ROBERT KRAUS, STATE OF NEVADA, EX REL PAUL BISHOP, EX REL ROBERT

KRAUS, STATE OF NEW HAMPSHIRE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS,

COMMONWEALTH OF MASSACHUSETTS, EX REL PAUL BISHOP, EX REL ROBERT KRAUS,

STATE OF NEW MEXICO, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF

MONTANA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NORTH

CAROLINA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEW JERSEY, EX

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REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF OKLAHOMA, EX REL PAUL

BISHOP, EX REL ROBERT KRAUS, STATE OF RHODE ISLAND, EX REL PAUL BISHOP, EX

REL ROBERT KRAUS, STATE OF TENNESSEE, EX REL PAUL BISHOP, EX REL ROBERT

KRAUS, COMMONWEALTH OF VIRGINIA, EX REL PAUL BISHOP, EX REL ROBERT

KRAUS,

Plaintiffs,

—v.—

WELLS FARGO & COMPANY, WELLS FARGO BANK, N.A.,

          Defendants‐Appellees.

*

_______________        

B e f o r e: KATZMANN, Chief Judge, SACK and LOHIER, Circuit Judges.

_______________

Appeal from the dismissal of a qui tam action under the False Claims Act

(“FCA”) by the United States District Court for the Eastern District of New York

(Brian M. Cogan, Judge). The relators allege that defendants Wells Fargo &

Company and Wells Fargo Bank, N.A., defrauded the government within the

meaning of the FCA by falsely certifying that they were in compliance with

various banking laws and regulations when they borrowed money at favorable

rates from the Federal Reserve’s discount window. The district court granted the

defendants’ motion to dismiss, holding that the banks’ certifications of

compliance were too general to constitute legally false claims under the FCA and

that the relators had otherwise failed to allege their fraud claims with

particularity. We agree with the district court that the relators have not

sufficiently pleaded their claims under the FCA, and therefore affirm.

_______________        

 

* The Clerk of the Court is respectfully directed to amend the caption to conform to the

above.

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JOEL M. ANDROPHY, ZENOBIA HARRIS BIVENS (Rachel L. Grier, on the

brief), Berg & Androphy, Houston, Texas (George C. Pratt,

Uniondale, New York, on the brief), for Plaintiffs‐Appellants.

GERALD A. NOVACK, K&L Gates LLP, New York, New York (Amy P.

Williams, K&L Gates LLP, Charlotte, North Carolina; Noam A.

Kutler, K&L Gates LLP, Washington, District of Columbia, on

the brief), for Defendants‐Appellees.

_______________        

KATZMANN, Chief Judge:

At the heart of the case before us is the False Claims Act (“FCA”), which

forbids “knowingly present[ing], or caus[ing] to be presented, a false or

fraudulent claim for payment or approval” to the United States government. 31

U.S.C. § 3729(a)(1)(A). In 2011, Robert Kraus and Paul Bishop (together, the

“relators”) brought a qui tam action under the FCA on behalf of the United States

against Wells Fargo & Company and Wells Fargo Bank, N.A. (together, “Wells

Fargo”). The relators’ claims hinge on what they allege to be massive control

fraud perpetrated by Wachovia Bank and World Savings Bank from at least 2001

through 2008. World Savings Bank merged into Wachovia in 2006, and the

combined entity merged into Wells Fargo in 2008. The relators contend that

Wachovia and, after the merger, Wells Fargo defrauded the government within

the meaning of the FCA by falsely certifying that they were in compliance with

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various banking laws and regulations when they borrowed money at favorable

rates from the discount window operated by the Federal Reserve (the “Fed”). The

relators contend that the Fed would not have permitted the banks to borrow at

those favorable rates had it known that they were undercapitalized as a result of

the fraud. The government declined to intervene in the relators’ suit. Wells Fargo

filed a motion to dismiss, which the district court granted, holding that the banks’

certifications of compliance were too general to constitute legally false claims

under the FCA and that the relators had otherwise failed to allege their fraud

claims with particularity. The relators appealed.

We agree with the district court. As this Court has long recognized, the

FCA was “not designed to reach every kind of fraud practiced on the

Government.” Mikes v. Straus, 274 F.3d 687, 697 (2d Cir. 2001) (quoting United

States v. McNinch, 356 U.S. 595, 599 (1958)). Even assuming the relators’

accusations of widespread fraud are true, they have not plausibly connected those

accusations to express or implied false claims submitted to the government for

payment, as required to collect the treble damages and other statutory penalties

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available under the FCA. Accordingly, we affirm the district court’s judgment

dismissing the suit.

BACKGROUND

A. Relevant Banking Regulations

We begin with some context about the banking regulatory scheme at work

here. As the relators point out in their briefing, financial institutions in the United

States are subject to many different laws and regulations, and are overseen by a

number of different regulators, including the Fed. The Fed is responsible for

maintaining the stability of the U.S. financial system. See Bd. of Governors of the

Fed. Reserve Sys., The Federal Reserve System: Purposes and Functions 1 (9th ed. June

2005). As part of this mandate, the Fed, acting through its regional Federal

Reserve Banks, acts as a backup lender of last resort for banks through its

“discount window.” Id. at 45–46. One of the purposes of the discount window is

to enable banks to borrow to meet their reserve requirements. Under federal

regulations, banks must hold certain balances, either in cash or in certain accounts

with the Fed. Id. at 31. A low level of reserves does not by itself indicate that the

bank is suffering from financial weakness; for example, a bank could have

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anticipated receiving cash from another source that did not come through at the

expected time. Id. at 45.  

Nonetheless, banks were historically reluctant to borrow through the Fed’s

discount window out of fear of being stigmatized as financially weak. The Fed

had previously lent money to banks at below‐market rates, but it did not want

banks to borrow at the discount window only to relend at higher rates to other

banks. Accordingly, it imposed a requirement that borrowers first prove they had

exhausted other avenues for credit. See Extensions of Credit by Fed. Reserve

Banks; Reserve Requirements of Depository Insts., 67 Fed. Reg. 67,777, 67,778

(Nov. 7, 2002). The result was that borrowing from the discount window

indicated to the public that the bank had no other options. According to the Fed,

this stigma “in turn . . . hampered the ability of the discount window to buffer

shocks to the money markets,” especially in times of financial crisis, when the Fed

most needed to strengthen the financial system. Id. To address this concern, the

Fed adopted a new two‐tiered structure in 2003.  

Under that structure, banks in “generally sound financial condition” are

eligible to borrow at the primary credit rate, which is set above the target Federal

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Funds Rate. 12 C.F.R. § 201.4(a); Bd. of Governors of the Fed. Reserve Sys.,

Lending to Depository Institutions, available at http://www.federalreserve.gov/

monetarypolicy/bst_lendingdepository.htm. Banks that are not eligible for the

primary credit rate can instead borrow at the secondary credit rate, set above the

primary credit rate. 12 C.F.R. § 201.4(b). Although the discount window is still

intended to be only a “backup source of liquidity,” banks eligible for the primary

credit rate no longer need to show that they have first exhausted other sources of

credit. 67 Fed. Reg. at 67,780. Indeed, purposefully little is required of the

borrower at the time of the loan; the Fed describes the primary credit program as

a “‘no questions asked’ program with minimum administration,” meaning that

“qualified depository institutions seeking overnight primary credit ordinarily are

asked to provide only the minimum amount of information necessary to process

the loan. In nearly all cases, this would be limited to the amount and term of the

loan.” J.A. 437. The Fed clarified that these changes were necessary to induce

banks to borrow from it, in turn increasing the Fed’s ability to protect the financial

system. See 67 Fed. Reg. at 67,778.  

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To enhance its ability to influence liquidity during the recent financial

crisis, the Fed instituted the Term Auction Facility (“TAF”) from December 2007

through 2010. Term Auction Facility, Bd. of Governors of the Fed. Reserve Sys.,

https://www.federalreserve.gov/monetarypolicy/taf.htm (last updated Nov. 24,

2015). TAF operated as an auction; banks would bid on the amount of money they

wanted to borrow at specific interest rates, and the Fed would match the amount

it wanted to lend with the amounts requested, starting with the highest offered

rates. The Fed would then set the rate for all borrowers at the lowest rate which

would satisfy the total amount of money allotted to be loaned out. See Extensions

of Credit by Fed. Reserve Banks, 72 Fed. Reg. 71,202, 71,203 (Dec. 17, 2007). Only

banks in “generally sound financial condition” (i.e., those eligible for the primary

credit rate) were permitted to participate. 12 C.F.R. § 201.4(e). There is no dispute

that Wachovia and Wells Fargo borrowed money through the discount window

at the primary credit rate and through TAF after the Fed deemed them eligible.  

The Fed’s authority to lend to banks is governed by Regulation A, 12 C.F.R.

pt. 201, which was promulgated under the Federal Reserve Act and the

International Banking Act of 1978, see 12 C.F.R. § 201.1. Regulation A provides

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that a “Federal Reserve Bank may extend primary credit on a very short‐term

basis, usually overnight, as a backup source of funding to a depository institution

that is in generally sound financial condition in the judgment of the Reserve Bank.

Such primary credit ordinarily is extended with minimal administrative burden

on the borrower.” 12 C.F.R. § 201.4(a). Similarly, Regulation A gives a Federal

Reserve Bank the discretion to lend “to a depository institution that is not eligible

for primary credit if, in the judgment of the Reserve Bank, such a credit extension

would be consistent with a timely return to a reliance on market funding

sources.” 12 C.F.R. § 201.4(b). Regulation A is explicit that any loan is made at the

sole discretion of the Fed: “This section does not entitle any person or entity to

obtain any credit or any increase, renewal or extension of maturity of any credit

from a Federal Reserve Bank.” 12 C.F.R. § 201.3(b).  

Regulation A also mandates the information that a Federal Reserve Bank

must collect to determine whether a given bank is eligible to receive a loan

through either the primary or the secondary credit program. See 12 C.F.R. § 201.4.

Although Regulation A tasks each Federal Reserve Bank with obtaining adequate

information about the banks under its supervision, it does not require the

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borrowing banks themselves to provide any specific information. See id. In

practice, the Federal Reserve Banks rely on information that the banks are

otherwise required to report to regulators, including quarterly Call Reports filed

with banks’ designated federal supervisory agencies. See 12 U.S.C. § 1817(a)(3);

The Fed. Reserve System: Purposes and Functions supra, at 62–64. The Fed also relies

on information gathered during bank examinations, which are conducted at

regular intervals by banks’ primary regulators. For example, Wells Fargo is

primarily regulated by the Office of the Comptroller of the Currency, which

conducts a “[f]ull‐scope, on‐site review” of each bank in its purview every 12–18

months and also frequently reviews each bank’s compliance with specific federal

laws or regulations. See Examinations: Overview, Office of the Comptroller of the

Currency, http://www.occ.treas.gov/topics/examinations/examinations‐

overview/index‐examinations‐overview.html (last visited May 4, 2016).  

B. Wells Fargo’s Alleged Fraud

Notwithstanding this regulatory oversight, the relators allege that

Wachovia and World Savings Bank engaged in massive fraud in the early‐to‐mid‐

2000s, before Wachovia merged into Wells Fargo. According to the relators,

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Wachovia’s executives relied on improper accounting practices to hide toxic

assets off its balance sheet, making the bank look more profitable and in better

financial health than it was. In reality, the relators allege, Wachovia was severely

undercapitalized. Similarly, the relators assert that World Savings Bank violated

applicable laws and regulations by failing to put in place required internal

controls and by making inappropriate loans.  

Both relators claim to have witnessed these misdeeds firsthand. Robert

Kraus was a controller for two Wachovia groups from June 2005 to September

2006; Paul Bishop was a residential mortgage salesperson for World Savings Bank

from November 2002 to May 2006. Each was fired after he complained internally

about the bank’s improprieties. Kraus also reported his allegations of fraud to the

Federal Bureau of Investigation in 2007 and to the Securities and Exchange

Commission (“SEC”) in 2009. Bishop likewise reported his allegations of fraud to

the SEC. It does not appear that either agency took action as a result.  

The bulk of the relators’ complaint is spent detailing those fraud

allegations, but they are not the subject of this suit. Rather, the relators’ FCA

claims rest on their assertion that every time Wachovia and, eventually, Wells

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Fargo attempted to borrow money from the Fed’s discount window, including

through TAF, the banks had to make certain representations and warranties

contained in the Fed’s Operating Circular No. 10 (the “Lending Agreement”). The

relators argue that Wachovia and Wells Fargo could not have truthfully made

three of those representations as a consequence of the underlying fraud:

Section 9.1: The Borrower represents and warrants that . . .

(b): the Borrower is duly organized, validly existing and in good

standing under the laws of the jurisdiction of its organization and is

not in violation of any laws or regulations in any respect which could have

any adverse effect whatsoever upon the validity, performance or

enforceability of any of the terms of the Lending Agreement; . . .  

(g): no statement or information contained in the Lending Agreement

or any other document, certificate, or statement furnished by the

Borrower to the Bank or any other Reserve Bank for use in connection with

the transactions contemplated by the Lending Agreement, on and as of the

date when furnished, is untrue as to any material fact or omits any

material fact necessary to make the same not misleading, and the

representations and warranties in the Lending Agreement are true

and correct in all material respects; . . .  

(i): no Event of Default has occurred or is continuing.

J.A. 204–05 (emphasis added). The Agreement stipulates that an “Event of

Default” occurs when the bank fails to repay obligations as they become due,

becomes insolvent, fails “to perform or observe any of its obligations or

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agreements under the Lending Agreement,” or submits a “representation or

warranty . . . under or in connection with the Lending Agreement . . . [that] is

inaccurate in any material respect on or as of the date made or deemed made.”

J.A. 196. Section 9.2 of the Lending Agreement provides that “[e]ach time the

Borrower requests an Advance, incurs any Indebtedness, or grants a security

interest in any Collateral to a Reserve Bank, the Borrower is deemed to make all

of the foregoing representations and warranties.” J.A. 205.  

The relators contend that when Wachovia and, post‐merger, Wells Fargo

borrowed money from the discount window from 2007 through 2011, knowing

they were “in violation of” banking “laws or regulations,” per Section 9.1(b), they

were making false statements for the purpose of obtaining government funds.

Similarly, the relators argue that because the financial documents the Fed relied

on in making its determination that the banks were eligible for the primary rate

were “untrue” or “misleading,” the banks’ Section 9.1(g) representations were

fraudulent. As a result, the relators also allege that the banks lied in certifying

compliance with Section 9.1(i) because their other representations were materially

“inaccurate.” Although all of the underlying fraud alleged in the complaint took

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place in or before 2006, the relators claim that the fraud was of such a magnitude

that Wells Fargo could not have been in compliance with applicable laws and

regulations when the complaint was filed in 2011.  

C. Procedural Background

The relators filed this action against Wells Fargo and its subsidiaries and

affiliates under seal in November 2011, and eventually filed two amended

complaints. After the government declined to intervene, the relators filed a third

amended complaint. They sought to recover the treble damages and civil

penalties provided by the FCA—nearly $900 billion—for false claims filed by

Wachovia and Wells Fargo from 2007 through the date they filed the initial

complaint. The relators listed some of the payments in an appendix to their

complaint, but did not detail each fraudulent loan request.  

The defendants filed a motion to dismiss for failure to state a claim under

Rule 12(b)(6) and for failure to plead fraud with particularity under Rule 9. The

district court granted the motion, dismissing all of the relators’ claims with

prejudice and denying leave to amend. The relators have appealed some of those

claims to this Court.  

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STANDARD OF REVIEW

We review a district court’s grant of a motion to dismiss under Rule

12(b)(6) de novo, “accepting as true the factual allegations in the complaint and

drawing all inferences in the plaintiff’s favor.” Biro v. Condé Nast, 807 F.3d 541, 544

(2d Cir. 2015). We review a district court’s decision to deny a motion to amend for

abuse of discretion. See Spiegel v. Schulmann, 604 F.3d 72, 78 (2d Cir. 2010).

This Court has held that FCA claims fall within the scope of Rule 9(b),

which requires that plaintiffs “state with particularity the specific statements or

conduct giving rise to the fraud claim.” Gold v. Morrison‐Knudsen Co., 68 F.3d

1475, 1477 (2d Cir. 1995). Pleadings subject to Rule 9(b) 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.” Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004)

(quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).  

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DISCUSSION

A. The False Claims Act

As noted at the outset of this opinion, the FCA prohibits “knowingly

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

or approval” to the United States government. 31 U.S.C. § 3729(a)(1)(A).

Accordingly, to prove their claims under the FCA, the relators “must show that

defendants (1) made a claim, (2) to the United States government, (3) that is false

or fraudulent, (4) knowing of its falsity, and (5) seeking payment from the federal

treasury.” Mikes, 274 F.3d at 695.1 The parties do not dispute that the banks’

requests for loans through the discount window constitute claims to the United

States government seeking payment from the federal treasury. But the defendants

contend, and the district court found, that those claims were not “false or

fraudulent” within the meaning of the FCA. The Act does not define either term.  

The FCA was enacted in 1863 to combat fraud by defense contractors

during the Civil War. See, e.g., Paul E. McGreal & DeeDee Baba, Applying Coase to

Qui Tam Actions Against the States, 77 Notre Dame L. Rev. 87, 121 (2001) (“Army

 

1 Congress amended the FCA in 2009, but the changes to the statute do not materially

alter our analysis of the issues involved in this case.

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officers had reported numerous incidents where the federal government had paid

for certain supplies only to receive defective goods or nothing at all.”). Consistent

with its origin, the archetypal FCA claim involves a factually false request for

payment from the government, as when a contractor delivers a box of sawdust to

the military but bills for a shipment of guns. See Michael Holt & Gregory Klass,

Implied Certification Under the False Claims Act, 41 Pub. Cont. L.J. 1, 16 (2011). Over

time, courts have extended the FCA’s reach to “legally false” claims, those in

which “a party certifies compliance with a statute or regulation as a condition to

governmental payment,” but is not actually compliant. Mikes, 274 F.3d at 697. In

1994, the Federal Court of Claims broadened the definition of a false claim even

further to include “impliedly false” claims, where the submission of the claim

itself is fraudulent because it impliedly constitutes a certification of compliance.

See Ab–Tech Constr., Inc. v. United States, 31 Fed. Cl. 429, 434 (1994), aff’d without

written opinion, 57 F.3d 1084 (Fed. Cir. 1995). Other courts adopting this theory of

liability, including this one, have warned about its potentially “expansive” reach.

See, e.g., Mikes, 274 F.3d at 699 (“[C]aution should be exercised not to read this

theory expansively and out of context.”).  

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From its enactment, the FCA has encouraged private citizens to report

fraud by promising a percentage of any eventual recovery. See McGreal & Baba

supra, at 121. Under the current version of the statute, each false claim exposes the

perpetrator to “a civil penalty of not less than $5,000 and not more than $10,000  

. . . plus 3 times the amount of damages which the Government sustains because

of the act of that person.” 31 U.S.C. § 3729(a)(1). Qui tam relators are eligible to

receive up to 30% of the government’s total recovery, in addition to any expenses,

fees, or costs incurred in bringing the suit. 31 U.S.C. § 3730(d)(2).

B. Relators’ Express Certification Claims

In this case, the relators allege that Wells Fargo violated the FCA in several

ways: by making express false certifications under Sections 9.1(b), (g), and (i) of

the Lending Agreement; by making an implied false certification under Section

9.1(b); by fraudulently inducing the government to lend to it; and by conspiring

to submit false claims. The district court determined that the relators did not meet

their burden to show that the defendants violated the FCA. We agree and address

each claim in turn below.

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a. Section 9.1(b) of the Lending Agreement

The district court first dismissed the relators’ claim that the defendants

made an express false certification under Section 9.1(b) of the Lending

Agreement. The relators allege that the defendants’ underlying fraud made it

impossible for the banks to certify that they were “not in violation of any laws or

regulations” when they borrowed from the discount window. The district court

determined that Section 9.1(b) is too broad to give rise to a claim under the FCA,

based on this Court’s holding in Mikes.  

In Mikes, this Court affirmed the dismissal of a qui tam suit alleging that a

medical practice had violated the FCA by submitting Medicare reimbursement

requests for procedures that did not meet the requisite standard of care. This

Court clarified that the FCA was not intended to police general regulatory

noncompliance; “it does not encompass those instances of regulatory

noncompliance that are irrelevant to the government’s disbursement decisions.”

Mikes, 274 F.3d at 697. Thus, we held that “not all instances of regulatory

noncompliance will cause a claim to become false.” Id. This Court then rejected

the relator’s claims of express and implied false certification.  

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For an express false certification, the Mikes Court held that the plaintiff

must allege that the defendant submitted “a claim that falsely certifies compliance

with a particular statute, regulation or contractual term, where compliance is a

prerequisite to payment.” Id. at 698 (emphasis added). Following Mikes, this Court

has not addressed how narrow a certification of compliance must be to constitute

an express false claim, nor to our knowledge has any court considered whether a

provision of the Fed’s Lending Agreement can serve as the basis for an FCA

claim. But, as the district court noted, other district courts in this circuit have

frequently rejected FCA claims that are too broad or vague. See, e.g., United States

ex rel. Feldman v. City of New York, 808 F. Supp. 2d 641, 652 (S.D.N.Y. 2011) (“[A]

claim that there has been an express false certification cannot be premised on

anything as broad and vague as a certification that there has been compliance

with all ‘federal, state and local statutes, regulations, [and] policies.’”); United

States ex rel. Colucci v. Beth Israel Med. Ctr., 785 F. Supp. 2d 303, 315 (S.D.N.Y. 2011)

(“General certifications of compliance with the law are insufficient.”), aff’d sub

nom. Colucci v. Beth Israel Med. Ctr., 531 F. App’x 118 (2d Cir. 2013). Other circuit

courts have held similarly. See, e.g., United States ex rel. Steury v. Cardinal Health,

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Inc., 625 F.3d 262, 268 (5th Cir. 2010) (citations omitted) (“We have thus

repeatedly upheld the dismissal of false‐certification claims (implied or express)

when a contractor’s compliance with federal statutes, regulations, or contract

provisions was not a ‘condition’ or ‘prerequisite’ for payment under a contract.

This prerequisite requirement seeks to maintain a ‘crucial distinction’ between

punitive FCA liability and ordinary breaches of contract.”); United States ex rel.

Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1219 (10th Cir. 2008) (rejecting

an FCA claim where the certification “contains only general sweeping language

and does not contain language stating that payment is conditioned on perfect

compliance with any particular law or regulation”).   

On appeal, the relators attempt to distinguish between statutory and

contract‐based certification claims. They argue that we should analyze the

relevant provision here under principles of contract interpretation, rather than

look to a specific statute or regulation. They point to the Tenth Circuit’s analysis

in United States ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1171 (10th

Cir. 2010), in which that court concluded that a certification of compliance with

“all contractual requirements” was not too broad to support an FCA claim. We do

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not find this reasoning persuasive. Even though the Lending Agreement is a

contract, Section 9.1(b) does not require banks to certify compliance with all

contractual requirements, as was the case in Lemmon. Rather, the Lending

Agreement requires banks to certify compliance with “any laws or regulations in

any respect which could have any adverse effect whatsoever upon the validity,

performance or enforceability of any of the terms of the Lending Agreement.” The

universe of potentially applicable laws or regulations is vast, compared to the

finite number of potential requirements in a contract, as the district court

observed. See United States ex rel. Kraus v. Wells Fargo & Co., 117 F. Supp. 3d 215,

222 (E.D.N.Y. 2015) (“Without considering whether [Lemmon’s] ruling is correct in

the context of a contract, where it makes at least some sense (because there is

obviously a limit to how many terms that would refer to), it is not the same as a

certification of compliance with any statute or regulation—a certification that is

potentially limitless in scope.”).

Second, the relators assert that Section 9.1(b) is not “overbroad” because the

“law or regulation” alleged must “have an adverse effect on the validity,

performance, or enforceability of the terms of the Lending Agreement.” See

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Relators’ Br. at 41 (emphasis omitted). We are not persuaded that the latter phrase

sufficiently cabins the sweep of the provision. As noted, banks are subject to

thousands of laws and regulations that could plausibly affect the “validity,

performance, or enforceability of the terms of the Lending Agreement,” from

banking‐specific laws and regulations like the Bank Secrecy Act or the Volcker

Rule to more general ones applicable to any corporation, including employment

or tax laws. Reading this provision as the relators urge would give rise to “exactly

the kind of overbroad certification requirement” that we have previously rejected.

Kraus, 117 F. Supp. 3d at 222.

The relators next assert that any other interpretation of Section 9.1(b) would

be at odds with “banking industry customs and practices,” which typically

require “individual borrowers [to] provide representations and warranties in

their lending agreements with banks, similar to the representations and

warranties in the Lending Agreement.” Relators’ Br. at 43. But the Fed is not a

typical commercial lender, and borrowing banks are not typical loan customers:

For one, the Fed’s purpose in lending to banks is different from a commercial

lender’s purpose in lending to individuals. The Fed’s mission is to ensure the

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stability of the nation’s monetary and financial system. The Fed. Reserve System:

Purposes and Functions supra, at 1. Nowhere in the Fed’s mission statement does it

mention earning a profit from its lending activity, and its actual income from

loans is negligible. See Bd. of Governors of the Fed. Reserve Sys., 101st Annual

Report at 307 (2014). Moreover, the Fed already has a wealth of information about

each bank before any request for a loan is made, given the Fed’s access to

information obtained by the bank’s other supervisors. That contrasts with the

typical lending transaction, where a bank has only the information provided by

the borrower at the time of the loan request. In addition, loans through the

discount window are usually very short‐term, typically overnight. “Banking

industry customs and practices” governing longer‐term loans between banks and

individual borrowers thus do not govern our analysis here.  

The relators also argue that the district court’s interpretation would lead to

the “absurd result” of banks getting a “free pass to make false certifications

without repercussions under the FCA.” Relators’ Br. at 45. This argument is also

unavailing. The federal government has many tools other than the FCA at its

disposal to discipline banks and to ensure compliance with banking laws and

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regulations, ranging from informal reprimands to fines to involuntary

termination of a bank’s status as an insured depository institution. See, e.g., 12

U.S.C. § 1818(2); The Fed. Reserve System: Purposes and Functions, supra, at 66–67.

Finding no FCA liability here does not give banks a “free pass” to defraud the

government.  

Moreover, there is a risk to expanding the FCA to cover these claims: It

could incentivize individuals to bring suit without regard for the larger

implications on the financial system. Permitting qui tam plaintiffs like the relators

here to proceed on the facts of this case could discourage banks from accessing

the discount window out of concern that they might face FCA liability if they are

not in compliance with “any law or regulation.” The result would be precisely the

opposite of the Fed’s intentions in changing discount window operations in 2003.

See Extensions of Credit by Federal Reserve Banks, 67 Fed. Reg. at 67,778; see also

Conner, 543 F.3d at 1221–22 (under a broad reading of the FCA, “[a]n individual

private litigant, ostensibly acting on behalf of the United States, could prevent the

government from proceeding deliberately through the carefully crafted remedial

process . . . . It would . . . be curious to read the FCA, a statute intended to protect

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the government’s fiscal interests, to undermine the government’s own regulatory

procedures.”); Holt & Klass, supra, at 43–44 (“When the federal government

brings a suit under the FCA, it has presumably balanced any costs of interference

with other regulatory mechanisms against the benefits of recovery under the Act.

The qui tam plaintiff has little or no reason to take such regulatory interference

into account.”).

b. Sections 9.1(g) and (i) of the Lending Agreement

The relators next allege that the defendants violated the FCA by falsely

certifying compliance with Sections 9.1(g) and (i) of the Lending Agreement. They

acknowledge that to support a claim of express false certification under Section

9.1(g), they must “allege that Defendants provided the Federal Reserve falsified

documents or made false statements to the Federal Reserve in connection with

borrowing funds.” Relators’ Br. at 49–50. They have not done so. The documents

that the relators submitted to the district court show that Wachovia and Wells

Fargo did not need to submit any financial information “in connection with”

borrowing through the discount window; thus, the relators cannot show that the

defendants violated Section 9.1(g). Further, we agree with the district court that

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the relators’ allegations are “far too speculative to constitute a well‐plead[ed]

claim” of fraud. Kraus, 117 F. Supp. 3d at 225.

Appendix 3 to the Lending Agreement describes the documents that a bank

must submit when it applies for a loan through the discount window: (1) a letter

of agreement stipulating that the borrower agrees to the provisions of the

Lending Agreement; (2) a certificate attaching copies of documents specifying the

official name of the borrower and providing contact information so the Fed can

make an effective UCC‐1 financing statement; (3) authorizing resolutions,

typically from a board of directors, giving the bank the legal authority to borrow

from the Fed; and (4) an official OC‐10 Authorization List, which lists individuals

who are authorized to borrow money on the bank’s behalf.  J.A. 217–22; 698. The

list of required documents does not include or reference the bank’s balance sheet

or any other detailed financial information. This omission is likely intentional; as

noted, one of the Fed’s stated purposes in amending the process to access the

discount window in 2003 was to reduce the administrative burden on borrowing

banks. Banks are required to report financial information to their designated

regulators, but that information is used for many purposes, not necessarily “in

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connection with” the Fed’s lending programs. Under the relators’ view, a

falsehood in any document submitted by a bank to its regulator could lead to

FCA liability because that document might be used by the Fed in its later

determination of eligibility for lending. To endorse that view would risk

substantially broadening the scope of FCA liability and potentially undermining

the Fed’s ability to maintain the stability of the financial system.  

The relators’ argument that the defendants falsely certified compliance with

Section 9.1(i) depends on the same allegations as their argument that the

defendants falsely certified compliance with 9.1(b) and (g), and therefore fails for

the same reasons. See Relators’ Br. at 57 (acknowledging that non‐compliance

with Section 9.1(i) hinges on a violation of another provision of the Lending

Agreement). Put another way, because the relators cannot show that the

defendants submitted a “representation or warranty . . . under or in connection

with the Lending Agreement . . . [that] is inaccurate in any material respect,” they

cannot show that the defendants committed an “Event of Default” as defined by

the Lending Agreement. J.A. 196.

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C. Relators’ Implied Certification Claim

Separate from their express certification claims, the relators also argue that

the defendants are liable under the FCA for making implied false certifications

under Section 9.1(b). In Mikes, this Court warned that “the False Claims Act was

not designed for use as a blunt instrument to enforce compliance with all medical

regulations—but rather only those regulations that are a precondition to

payment—and to construe the impliedly false certification theory in an expansive

fashion would improperly broaden the Act’s reach.” 274 F.3d at 699. Accordingly,

this Court held that “implied false certification is appropriately applied only

when the underlying statute or regulation upon which the plaintiff relies expressly

states the provider must comply in order to be paid.” Id. at 700.

In this case, the district court rejected the relators’ implied certification

claim, observing that “Relators have not briefed an ‘implied false certification’

theory in any great depth, nor have they alleged it with any detail.” Kraus, 117 F.

Supp. 3d at 222. The court concluded that the claim was “misplaced,” as the

relators did not argue that “any of the many alleged violations of laws and

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regulations that took place at the defendant banks was ever a violation of a statute

that governed eligibility for the primary credit program.” Id. at 223.  

On appeal, the relators argue first that the district court erred in dismissing

this claim because the defendants’ certifications of compliance with Section 9.1(b)

constituted a “material condition to payment,” and thus their “bad acts went to

the heart of the bargain that they negotiated with the Government.” Relators’ Br.

at 23–24. But this Court has never adopted the relators’ “heart of the bargain” test

for implied false certification claims under the FCA; rather, the relators appear to

be referencing the district court’s decision in Mikes. See United States ex rel. Mikes v.

Straus, 84 F. Supp. 2d 427, 436 (S.D.N.Y. 1999) (“I cannot conclude that compliance

with 1320c–5 lay ‘at the heart of’ Defendants’ agreement with Medicare. Mikes

therefore cannot rely upon the implied certification theory to satisfy the second

element of her FCA claim.”). This Court did not adopt that test in affirming the

district court’s judgment, and we decline to do so now.2

 

2 The relators cite this Court’s decision in Mikes for the proposition that “certain

representations are so key to an agreement that they are clearly conditions for payment

and that failing to comply with these representations ‘may be actionable under § 3729 [of

the False Claims Act], regardless of any false certification conduct.’” Relators’ Reply Br.

at 9 (quoting Mikes, 274 F.3d at 703). But they fail to acknowledge that the quoted text in

Mikes referred to a worthless services claim, where a plaintiff alleges that a defendant

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In the alternative, the relators contend that they have complied with Mikes’

express statement requirement. They point to the Federal Reserve Act and its

accompanying regulations, particularly Regulation A, as expressly incorporated

in the Lending Agreement. But Regulation A governs the Fed’s authority to lend

to banks. See 12 C.F.R. pt. 201. By its plain terms, it does not apply to the banks

themselves, and nowhere do the relators allege that banks were required to

submit any financial information in connection with borrowing from the discount

window. It is true, as the relators point out, that the Fed could not have made

decisions about the banks’ eligibility to borrow without examining their financial

statements, but the tangential relationship between banks’ submission of

documents to regulators and the Fed using that information to determine

eligibility at some later point is not sufficient to support liability under an implied

certification claim. See Mikes, 274 F.3d at 702.  

Recognizing that our holding in Mikes likely precludes their implied

certification claim, the relators attempt to distinguish that precedent as only

applicable to fraud by a healthcare provider. Although the Mikes court examined

 

sought “reimbursement for a service not provided.” Mikes, 274 F.3d at 703. The Mikes’

court expressly characterized these types of claims as “distinct” from false certification

claims. Id. There is no analogous allegation in this case.  

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the meaning of the FCA within the context of alleged Medicare fraud, we do not

read the text of the opinion to limit its holding to the healthcare industry. See

United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94, 113‐14 (2d Cir.

2010) (applying the holding in Mikes to a case involving an elevator

manufacturer), rev’d on other grounds, 563 U.S. 401 (2011). But see United States ex

rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1177 (9th Cir. 2006) (distinguishing

Mikes as limited to Medicare claims); United States ex rel. Feldman v. City of New

York, 808 F. Supp. 2d 641, 653‐54 (S.D.N.Y. 2011) (same).  

Another reason for not limiting the holding in Mikes to healthcare fraud is

that some of the same concerns raised by the Court in that case are also relevant

to the banking industry. In Mikes, this Court observed that “a limited application

of implied certification in the health care field reconciles, on the one hand, the

need to enforce the Medicare statute with, on the other hand, the active role actors

outside the federal government play in assuring that appropriate standards of

medical care are met.” Mikes, 274 F.3d at 699–700. As the relators argue,

federalism issues may not be as relevant to the already federally‐regulated banks

as they were in the healthcare context, but the same concern about the “active

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role” of other actors is just as pertinent here. As with Medicare, there are other

actors involved in regulating banks who are better suited to “assuring that” banks

comply with applicable laws and regulations while at the same time ensuring that

the entire banking system remains stable. The Fed, which has the discretion to

lend to banks if it determines that doing so helps to maintain a functioning

economy, is more likely the best party to enforce its own requirements. Cf. United

States v. Sanford‐Brown, Ltd., 788 F.3d 696, 712 (7th Cir. 2015) (citations omitted)

(“The FCA is simply not the proper mechanism for government to enforce

violations of conditions of participation. Rather, under the FCA, evidence that an

entity has violated conditions of participation after good‐faith entry into its

agreement with the agency is for the agency—not a court—to evaluate and

adjudicate.”(citation omitted)); Raichle v. Fed. Reserve Bank of N.Y., 34 F.2d 910, 915

(2d Cir. 1929) (“It would be an unthinkable burden upon any banking system if its

open market sales and discount rates were to be subject to judicial review. Indeed,

the correction of discount rates by judicial decree seems almost grotesque, when

we remember that conditions in the money market often change from hour to

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hour, and the disease would ordinarily be over long before a judicial diagnosis

could be made.”).  

Lastly, the relators contend that applying Mikes’ express statement rule to

this case would be contrary to the FCA’s goal of punishing any fraud against the

government. But this argument ignores the explicit statements from the Supreme

Court and other courts clarifying that the FCA does not sweep so broadly. See,

e.g., McNinch, 356 U.S. at 599 (“[I]t is . . . clear that the False Claims Act was not

designed to reach every kind of fraud practiced on the Government.”); Steury, 625

F.3d at 268 (“The FCA is not a general ‘enforcement device’ for federal statutes,

regulations, and contracts.”(quoting United States ex rel. Thompson v.

Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997))).

D. Relators’ Fraudulent Inducement and Conspiracy Claims

The relators next contend that the district court’s failure to address their

fraudulent inducement and conspiracy claims warrants reversal. We conclude

that the court’s decision not to address either of these claims does not constitute

reversible error. These claims are merely derivative of the relators’ other claims.

Especially under these circumstances, the district court was not required to

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respond in detail to each argument made by the relators. See, e.g., Malbon v. Penn.

Millers Mut. Ins. Co., 636 F.2d 936, 939 n.8 (4th Cir. 1980) (“It is, of course, not

absolutely necessary, that a judge, in disposing of a motion, specifically recite or

otherwise discuss each contention advanced by the parties.”); cf. Fed. R. Civ. P.

52(a)(3) (“The court is not required to state findings or conclusions when ruling

on a motion under Rule 12 . . . .”).  

Although it would perhaps have been preferable for the district court to

discuss its reasoning in dismissing these claims, the relators present no reason on

appeal why their fraudulent inducement claim is distinct from their other claims

and would not fail for the same reasons. Likewise, under the facts of this case, the

relators cannot show a conspiracy to commit fraud given that they have not

sufficiently pleaded fraud under the FCA. Their appellate briefing simply states

that the district court failed to address their claims without providing any

argument in support of the merits. “Issues not sufficiently argued in the briefs are

considered waived and normally will not be addressed on appeal. . . . [M]erely

incorporating by reference an argument presented to the district court, stating an

issue without advancing an argument, or raising an issue for the first time in a

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reply brief likewise did not suffice.” Norton v. Sam’s Club, 145 F.3d 114, 117 (2d

Cir. 1998).

E. Leave to Amend the Third Amended Complaint

Finally, the relators argue that the district court abused its discretion in

denying their request for permission to file a fourth amended complaint, although

they did not file a formal motion for leave to amend. The district court

determined that any amendments would be “futile” because “their expansive

theory of FCA liability simply is not viable. The facts plead[ed] do not suggest

that any further information available to relators will change that.” Kraus, 117

F.Supp. 3d at 228. As the district court determined, it is apparent from the

Lending Agreement which documents needed to be included with the application

for borrowing, so there is no need for the relators to “discover” which precise

documents the defendants submitted. The relators have not indicated how

permitting them to file a fourth amended complaint now will change the outcome

of the case.  

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CONCLUSION

For the foregoing reasons, we conclude that the relators have not

sufficiently pleaded their claims under the False Claims Act, and we accordingly

AFFIRM the district court’s dismissal of their complaint.

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