Yesterday a Houston jury awarded the government approximately $90 million in a case originally filed by us against Allied Home Mortgage. This is only the second major lender to go to trial on a False Claims Act case since the financial crisis in 2008. The jury verdict is a major win for the government and taxpayers.
Our firm filed the original whistleblower complaint in May 2011. The case was first filed in Boston, Massachusetts but the case was later transferred to the Southern District of New York in Manhattan. In recent years, many of the major financial fraud cases have been prosecuted in New York City.
The case was originally filed on behalf of a whistleblower, Peter Belli who was a former manager for Allied. In the run up to the financial crisis, Allied Home Mortgage was one of the largest FHA lenders in the nation.
Original Whistleblower Complaint Against Allied Home Mortgage
We are proud to have filed this action. According to our original complaint, Allied operated a net branch scheme in violation of HUD rules. Since at least 2000, HUD required lenders to closely supervise their branch operations. That included a requirement that the lender be responsible for all branch expenses. By requiring lenders to have a financial stake in their branch operations, HUD hoped that the lenders would more closely monitor activities in these branches.
Our investigation revealed that the Allied Home Mortgage operated many of its branches essentially “off grid.” These branches were not registered with HUD making it difficult for regulators to inspect their operations. We also found that in many cases, it was the branch manager who shouldered the financial burden of running the branch, not Allied.
When individuals run their own branch and become personally liable for rent, payroll, utilities and other expenses, there is more of an incentive to cut corners when money becomes tight. A true employee of a lender could lose his or her job when money is tight but a branch manager personally on the hook for rent and bills could lose his home and life savings. That is precisely why HUD wants banks and mortgage companies like Allied to have skin in the game.
During the run up to the 2008 financial crisis, Allied Home Mortgage wrote hundreds of thousands of residential mortgages. Like most banks and lenders today, Allied did not keep these mortgages. They made a commission when the loan was sold. To facilitate the sale of these loans, the FHA guaranteed these loans. (This is much like Fannie Mae, Freddie Mac and the VA back loans.) If the loan later defaults, the government is on the hook for any deficiency.
Without these loan guarantees, no one would buy these loans and there wouldn’t be any mortgage money available for home buyers.
Allied was caught violating the HUD branch rules in 2001 and entered a consent decree with HUD in 2003. As part of the settlement, they agreed to not violate the net branch rules. Unfortunately, they didn’t abide by their promise to clean up their act. Instead, things got worse.
Our complaint also said that Allied engaged in lax underwriting standards and encouraged branch managers to “look the other way” when loan applications weren’t up to snuff. This meant that bad loans were being written; loans that were backed by our tax dollars. In at least one branch, Allied loan officers were accepting knowingly false tax returns in order to push more loan applications through the underwriting process.
Justice Department Intervenes in Allied Case
Under the False Claims Act, the government has the right to investigate and intervene in whistleblower cases. In our Allied case, the government intervened shortly after filing and took over prosecution. Because the government believed the company’s default rate was so bad, HUD closed them down. Allied then sued the government in Houston and the government continued our prosecution against the company in New York. Ultimately, the cases were consolidated and heard in Texas.
Most lenders settle once the government signals its intent to take over the prosecution. Because HUD had shut them down, however, we believe the company thought it had little to lose and elected to go to trial. This is one of just two major lenders who post 2008 took their case to trial. In both cases, the jury sided with the government. (The other case is the United States ex rel Edward O’Donnell vs. Countrywide also known as the HSSL case. HSSL was short for Countrywide’s “streamlined” underwriting process called the High Speed Swim Lane. Both cases alleged shoddy underwriting processes).
When the government intervened in our case, it named other Allied Home Mortgage related entities as defendants. They also sued Jim Hodge, Allied’s CEO and Jeanne Stell, the company’s executive vice president. Stell settled before trial.
The government’s complaint says that “Allied has profited for years as one of the nation’s largest FHA lenders by engaging in reckless mortgage lending, flouting the rules of the FHA mortgage insurance program and repeatedly lying about its compliance. In the past decade, Allied has originated loans out of hundreds of branches it never disclosed to HUD…”
The government claims that things at the company were so bad that between January 2001 and the end of 2010, nearly one third of Allied’s loans defaulted resulting in $834 million in insurance claims paid by HUD. In other words, $834 million came out of taxpayers pockets. In 2006 and 2007, the percentage of bad loans had skyrocketed to an estimated 55% default rate.
We believe that Allied’s decade of deceit resulted in tens of thousands of defaulted loans, thousands of Americans losing their homes and hundreds of millions of dollars in losses to taxpayers.
Allied went to trial in October of 2016. The jury awarded the government $90 million on November 29th after a lengthy trial. The verdict against Allied Capital, an affiliate of Allied Home Mortgage , was $92,982,775. Jim Hodge, the CEO, was found to be liable for $7,370,132. Those sums are subject to being trebled by the court meaning Allied coud have to pay $279 million.
In addition to the False Claims Act award, the court must still set damages on the FIRREA counts of the case. FIRREA is the Financial Institutions Reform, Recovery and Enforcement Act. That law also has a whistleblower award provision, although the awards are typically much smaller than those under the False Claims Act.
Heroes of the Case
Obviously, the real heroes in all these cases are the whistleblowers. The brave men and women who step forward to report fraud and misconduct. We applaud the bravery of our client, the late Peter Belli and his family.
The other heroes in this case are the prosecutors from the U.S. Attorney’s Office who fought this battle for over 5 years. The docket sheet alone has over 400 entries! This was not an easy case and shows the willingness of the Justice Department to roll up their sleeves and get the job done.
This case never would have happened without thousands of hours by the civil division fraud unit of the U.S. Attorney’s Office in Manhattan. Special thanks to Anthony Dietz and Joe Bird both who were formerly associated with MahanyLaw. Both put countless hours into putting this case together. (Joe Bird prepared the complaint for the firm.)
Whistleblower Awards under the False Claims Act
Under the False Claims Act, whistleblowers like Belli can file lawsuits in the name of the government. If successful, the whistleblower is entitled to an award of up to 30% of whatever the government collects. Recognizing that awards alone may not be enough to get people to report their employer for wrongdoing, the law also provides for powerful ant-retaliation protections.
To date our whistleblower clients have helped recover well over $1 billion for taxpayers. For their efforts, they also received over $100 million in awards.
To qualify for an award, one must have inside information about misconduct involving government programs or funds. In residential mortgage cases, that includes loans insured by Fannie Mae, the VA, the FHA and Fannie Mae.
Earning an award includes filing a sealed complaint in federal court and the willingness to cooperate and even prosecute the case if the government fails to intervene. That makes having a great whistleblower lawyer essential. (Although the government intervened in this case, in most cases they do not.)
For a private, confidential consultation, give us a call. All inquiries are protected by the attorney-client privilege. We never charge a fee unless you collect an award.
For more information, visit our financial services fraud whistleblower page or contact attorney Brian Mahany directly at or by telephone at (414) 704-6731.
MahanyLaw – America’s Whistleblower Lawyers