Two years after Lynn Szymoniak helped the U.S. recover $95 million from Bank of America Corp. (BAC:US) and other lenders for mortgage-fraud tied to the housing bubble, the whistle-blower said the government is ignoring a chance to collect more money for identical claims against other banks.
Szymoniak got $18 million when the U.S. Justice Department intervened in her foreclosure-fraud lawsuit. The government negotiated a settlement with five lenders including Bank of America (BAC:US) and JPMorgan Chase & Co. (JPM:US)
The other banks accused of the same behavior, including Deutsche Bank AG (DBK) and HSBC Holdings Plc (HSBA), are still fighting Szymoniak’s suit, saying she isn’t a true whistle-blower. And the U.S., while continuing its crackdown on banks that packaged risky loans for sale as securities, hasn’t joined with her this time, leaving her to fight the banks alone. U.S. District Judge Joseph Anderson in Columbia, South Carolina, today is set to consider their bid to throw the case out.
“This is a case the government should take a stand on,” Reuben Guttman, one of Szymoniak’s lawyers, said in an interview. “It is curious as to why the government is not vigorously pursuing this along with us. They are leaving money on the table.”
Bank of America last month agreed to a $9.5 billion accord with the Federal Housing Finance Agency, the overseer of mortgage-finance companies Fannie Mae (FNMA:US) and Freddie Mac, which bought $26.6 billion in mortgage-backed securities. Regulators said a unit of the Charlotte, North Carolina-based bank misrepresented the bonds’ quality.
Prosecutors are seeking more than $13 billion to end federal and state probes of its sale of bonds in the run-up to the 2008 financial crisis, people familiar with the matter have said.
Szymoniak’s lawyers said the Justice Department so far isn’t interested in getting involved in the remaining claims of her suit. The government can intervene at any time, with court permission.
Allison Price, a Justice Department spokeswoman, declined to comment on why the government hasn’t joined the case against the remaining lenders.
Szymoniak, a Florida lawyer and insurance-fraud investigator, sued under a law allowing a private citizen to file fraud claims on behalf of taxpayers.
She began investigating foreclosure practices across the U.S. after her lender sought to seize her home in 2008. She contended in court filings that lawyers for the noteholder used forged documents in her foreclosure case.
The lawyer said she discovered that lenders used backdated, forged documents and records signed in bulk by people without knowledge of the facts, a practice known as robo-signing.
Szymoniak said lenders relied on fraudulent paperwork in foreclosures and then used those documents to recover payments from the U.S. on defaulted loans insured by the Federal Housing Administration.
When banks packaged mortgages into securities, some lenders failed to ensure that legal paperwork was filed transferring the loans from one owner to another, the whistle-blower alleged.
After being hit with a wave of defaults during the recession, banks and mortgage servicers that couldn’t produce loan-ownership documents used forged records, Szymoniak said.
Her findings helped the Justice Department reach a $95 million settlement with Bank of America, JPMorgan, Citigroup Inc. (C:US), Wells Fargo & Co. (WFC:US) and Ally Financial Inc. The accord was part of a $25 billion settlement the U.S. and states reached with the banks, which agreed to provide mortgage relief to homeowners.
Other banks she still accuses of mishandling mortgage documents include Deutsche Bank, based in Frankfurt, London-based HSBC, Bank of New York Mellon Corp. (BK:US) and Minneapolis-based US Bancorp.
Lawyers for Deutsche Bank and other lenders argue that Szymoniak’s claims should be dismissed because she isn’t a true whistle-blower.
“Allegations concerning the preparation and use of purportedly false or fraudulent mortgage assignments were in the public domain well before December 2009, when Szymoniak alleges she commenced her investigation,” the banks said in court papers.
Kevin Heine, a spokesman for BNY Mellon, and Juanita Gutierrez, a U.S.-based HSBC spokeswoman, declined to comment on Szymoniak’s claims. Ari Cohen, a U.S.-based Deutsche Bank representative, also declined to comment on them, as did Nicole Garrison-Sprenger of US Bancorp.
If the Justice Department decides to join the suit, it shares the work and brings the government’s resources to the case. On her own, Szymoniak is at a greater disadvantage, given the resources available to the banks.
But if she wins, she will get a bigger payout. Government intervention means a whistle-blower like Szymoniak can receive a maximum of 25 percent of any recovery under the law, known as the False Claims Act. If the Justice Department declines to join the case, a whistle-blower may get as much as 30 percent of any jury award or settlement.
The remainder would go into the government’s coffers, said Joan Krause, a University of North Carolina law professor who teaches about the anti-fraud statute.
“There could be a variety of reasons why the government would choose not to intervene in the remaining claims,” Krause said in an interview. “Given the limitations on resources, they may not have the manpower to devote to this case. The Justice Department may also be of the view that the evidence against the other defendants may not be as strong as it was against the banks that settled earlier.”
Guttman, Szymoniak’s attorney, said the allegations against the remaining banks are indistinguishable from the ones against the banks that settled.
“The government is missing an opportunity here to hold banks responsible for engaging in conduct so egregious and pervasive it is passed off as a mere statistic,” Guttman said. “It makes no sense to us.”
The case is Szymoniak v. American Home Mortgage Servicing Inc., 10-cv-01465, U.S. District Court, District of South Carolina (Columbia).
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