US Supreme Court’s Ruling in Wachovia Case is a Win for Whistleblower

The US Supreme Court has vacated a lower court’s ruling that tossed out a lawsuit brought by two whistleblowers accusing Wachovia’s investment bank of accounting rule violations. The U.S. Appeals Court for the Second Circuit had affirmed that the lower court’s dismissal. Now, the nation’s highest court has revived the plaintiffs’ case.

Paul Bishop and Robert Kraus filed their whistleblower lawsuit in 2011. They accused Wachovia of defrauding US agencies that lent the bank money and provided it with other help during the financial crisis. According to the plaintiffs, Wachovia allegedly used an off-balance sheet entity, known as the Black Box, to enhance its books. Wachovia purportedly could conceal certain loans to avoid review by moving them into the Black Box. Kraus claimed this was a problem since accounting rules mandate that off-balance sheet vehicles be “demonstrably distinct” from the entities moving loans to them. The alleged accounting fraud was significant. According to the complaint, the Black Box held about $6 billion in assets, which was nearly 13% of Wachovia’s equity capital, as of August 2005.

Kraus and Bishop believe that the Black Box allowed the bank to deceive federal regulators regarding its financial state, which means that when federal entities gave the bank financial help in the wake of the worsening mortgage crisis, the payments were issued under “false pretenses,” writes the New York Times. If Wachovia’s actual financial health had been disclosed, it may not have gotten the money it received at the rates offered from the government. Wells Fargo has since acquired Wachovia.

The plaintiffs were fired after reporting the fraud to their bosses. At the time, Bishop was a World Savings residential sales representative and Kraus was a Vice President and controller at Wachovia. Wachovia bought World Savings in 2006. Since Kraus’s dismissal, he has had to work at McDonald’s and he almost lost his home. Bishop works in insurance. Bishop and Kraus believe taxpayers should be paid damages and that this should be the difference between what Wells Fargo and Wachovia paid for the billions of dollars in financial help they received and what they would have gotten if they had told the truth about Wachovia’s financial health. Bishop also contends that at World Savings, borrowers received residential mortgages but were not notified of the actual risks involved. He said he was let go after he asked superiors to notify Wachovia that it was purchasing toxic loans.

Although the federal government did not join the whistleblower’s case, Bishop and Kraus’s lawsuit continued to proceed until it was dismissed in 2015 based on whether it fulfilled False Claim Act requirements. Now, the Supreme Court is pointing to its own decision in Universal Health Services, Inc. v. United States ex rel. Escobar in which it held that a defendant’s failure to disclose “noncompliance with material statutory, regulatory, or contractual requirements” may be grounds for a False Claims case. The Supreme Court wants the Second Circuit to consider Kraus and Bishop’s whistleblower case once more in light of the Universal Health Services ruling.

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