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United States ex rel. Bibby v. Wells Fargo Bank, N.A.

United States District Court, N.D. Georgia, Atlanta Division

January 5, 2015

WELLS FARGO BANK, N.A., individually and as s/b/m with WELLS FARGO HOME MORTGAGE, INC., et al., Defendants

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For United States of America Ex Rel, Plaintiff: Amy L. Berne, LEAD ATTORNEY, Office of United States Attorney, Northern District of Georgia, Atlanta, GA; Paris A. Wynn, LEAD ATTORNEY, U.S. Attorney's Office-ATL, Atlanta, GA.

For Victor E. Bibby, Brian J. Donnelly, Plaintiffs: James Edward Butler, Jr., LEAD ATTORNEY, Butler, Wooten, Cheeley & Peak, LLP, Atlanta, GA; Brandon L. Peak, Butler, Wooten, Cheeley & Peak, LLP -C.GA, Columbus, GA; Joseph Marshall Colwell, Butler, Wooten, Fryhofer, LLP, Columbus, GA; Marlan Bradley Wilbanks, Tyrone M. Bridges, Wilbanks & Bridges, LLP, Atlanta, Ga; Mary Louise Cohen, PRO HAC VICE, Phillips & Cohen, LLP, Washington, DC; Mary Kathleen Weeks, Butler, Wooten, Cheeley & Peak, LLP, Columbus, GA; Timothy P. McCormack, Phillips & Cohen, LLP, Washington, DC.

For Wells Fargo Bank, National Association (Inc.), individually and as?, successor by merger with, Wells Fargo Home Mortgage, Inc., Defendant: Amy Pritchard Williams, LEAD ATTORNEY, PRO HAC VICE, K & L Gates-NC, Charlotte, NC; Charles T. Huddleston, LEAD ATTORNEY, Nelson Mullins Riley & Scarborough-ATL, Atlanta, GA; Robert J. Sherry, LEAD ATTORNEY, PRO HAC VICE, K& L Gates LLP-TX, Dallas, TX.

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Amy Totenberg, United States District Judge.

Before the Court is Wells Fargo's Motion to Dismiss [Doc. 409]. Wells Fargo seeks to dismiss Relators from this case based on their violations of both the statutory seal requirement of 31 U.S.C. § 3730(b)(2), as well as the Court's seal orders. For the following reasons, Wells Fargo's motion is DENIED. However, as discussed below, the Court finds that significant monetary sanctions are warranted against Relators for violations of the Court's seal orders.

I. Background

Relators Victor E. Bibby and Brian J. Donnelly allege that certain lenders, including Wells Fargo, engaged in a fraudulent scheme to overcharge veterans on closing costs during the origination of loans under a United States Department of Veterans Affairs (" VA" ) loan refinancing program. Relators are licensed mortgage brokers and were officers of U.S. Financial Services, Inc. d/b/a Veteran's Mortgage Company (" USFS" ). Relator Brian Donnelly is himself a veteran of the armed services. USFS specialized in the brokering and origination VA loans, including through the VA Interest Rate Reduction Refinancing Loan (" IRRRL" ) program. Through USFS, Relators helped broker thousands of veterans' loans since 2001. As brokers, Relators worked directly with veterans to take their applications, gather necessary documents, and connect veterans with a lender that actually originates the loan. Relators acted as intermediaries between the lender and borrower. Lenders must approve the loan application as well as ensure and guarantee compliance with VA regulations prior to the loan closing. Relators' allegations of mortgage fraud by lenders are based on their significant background with the process of brokering VA loans.

Relators filed their Complaint on March 8, 2006, complying with all qui tam filing requirements. In particular, on March 8, Relators moved to seal the case, which the Court granted that same day. Then, between 2006 and May 2009, the Government requested and obtained 11 extension of the seal, none of which the Relators opposed. Shortly after the May 2009 grant of the Government's request for an extension, the two Relators began violating the Court's seal orders by privately communicating with the media. They continued to violate the seal order for many months, during which time the case remained under seal or partial seal pursuant to 7 additional extensions.

The Government filed its eighteenth and final motion for an extension of the seal in September 2011, but this time, the Relators objected. The Court granted the Government's last request for an extension,

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over Relators' objection. On September 30, 2011, the Government elected not to intervene. Thus, on October 3, 2011, the Court ordered that the Complaint and its amendments, the First Amended Complaint and Second Amended Complaint, be unsealed.

Relators have independently litigated the case from that point on. To date, they have succeeded in obtaining settlements against six defendant lenders (other than Wells Fargo, which was a major player engaging in these VA loans, closing a substantial proportion of them), recovering over $161,000,000 on behalf of the Government. The False Claims Act (" FCA" ) provides that where the Government declines to intervene in a case, successful relators are entitled to between 25 and 30 percent of the recovered proceeds. 31 U.S.C. § 3730(d)(2). Accordingly, Relators have so far received $43,161,500 for their efforts in this case, out of which they have paid attorney's fees, taxes, expenses, etc. This $43,161,500 amounts to almost 27% of the total recovery.

On March 25, 2014, counsel for Relators first informed the Court that Relators had repeatedly disclosed the existence of this case to third parties beginning in mid-2009. These disclosures came to the attention of Relators' counsel while responding to Wells Fargo's subpoena of USFS for the production of documents. Relators have represented that neither their current counsel, nor their original qui tam counsel, were aware of these disclosures. Defendant to date has not challenged counsel's representation.

Wells Fargo swiftly moved to dismiss Relators on April 4, 2014. The parties, including the Government, briefed the issues presented by Wells Fargo. On May 12, 2014, the Court notified the parties that it would hold a hearing to address Relators' seal violations and consider in particular, " [w]hat sanctions other than dismissal should be considered by the Court as it reviews whether some form of sanction may be warranted based either on the provisions of the False Claims Act or based on the Court's exercise of its inherent power to sanction?" (May 12, 2014 Ord., Doc. 419.) The Court then held an evidentiary hearing on this matter on June 11, 2014 and subsequently received supplemental briefing from Relators on the issue of monetary sanctions. ( See Doc. 441-1.)

A. Nature of Seal Violations

In or about July 2009, while this action remained under seal pursuant to a Court order, Relators contacted local and national news media about this case via email. Relators did not receive a substantive response from most of the news organizations they contacted. However, Relators were successful in building a relationship with two individuals at Fox-5, an Atlanta Fox television affiliate. Relators regularly communicated with Dale Russell, a Fox-5 reporter, and Mindy Larcom, a Fox-5 producer, from mid-2009 until the unsealing of this case in October 2011. According to the Relators, these two journalists agreed to maintain complete confidentiality of the information they were provided regarding this qui tam case until the seal was lifted. None of the parties contend that there is evidence that Fox-5 or any other reporters or media outlets disclosed information provided by relators before the formal lifting of the seal in this case in October 2011.

The earliest written communication available between Relators and the two Fox-5 journalists is an email dated July 27, 2009 from Mr. Russell to Relator Bibby. In it, Mr. Russell states that he is " following up" with Relator Bibby, suggesting that Relators had made prior

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contact with the journalists.[1] Relators maintained an ongoing dialogue with Mr. Russell and Ms. Larcom from that point until the unsealing of this case. During this time, Relators discussed this and similar cases (not under seal) with Mr. Russell and Ms. Larcom. After this suit was initially filed in 2006, third-party veterans filed unsealed cases, including at least one class action, which involved similar claims against Wells Fargo.[2] These other cases attracted media attention, and at points Relators provided Mr. Russell and Ms. Larcom with updates and background on those cases and other mortgage related litigation. Relators frequently also provided Mr. Russell and Ms. Larcom with general, non-confidential information about the VA's mortgage program.

The Court has reviewed roughly 175 pages of emails and their attachments between Relators, Mr. Russell, and Ms. Larcom. (June 11, 2014 Hrg. Ex. 13.) The content of these emails and their attachments ranges from the exchange of jokes, conversational quips, and copies of news articles to detailed discussions of the progress of this lawsuit and status of the Government's involvement in this qui tam action. To be clear, some of the messages between Relators and the two Fox-5 journalists, along with their lengthy attachments, relate to other publicly disclosed cases and news developments or were otherwise harmless. Nevertheless, other emails show that Relators were deliberately sharing information about this suit with Mr. Russell and Ms. Larcom while the case remained under seal.

Beyond disclosing the existence of the case, Relators kept Mr. Russell and Ms. Larcom appraised of developments that were relevant to this qui tam suit. For instance, Relators stated in an email that they had recently received an update from their attorney about the litigation and offered to discuss the details over the phone. Relators repeated this practice on multiple occasions with Russell and Larcom. In another email, Relators forwarded an email sent by their attorney that conveys their attorney's thoughts about the importance of an attached article. Along similar lines, Relators frequently emailed their counsel to advise them of relevant news stories or VA policy updates while blind copying the same email to Mr. Russell or Ms. Larcom.

Relators also provided details about the investigation of this case by virtue of sharing documents and memoranda prepared by Relators' counsel for transmission to the Government. Relators disclosed these documents and discussed meetings between Relators' counsel and the Government. In one disclosed memo, addressed to the U.S. Attorney, Relators' counsel described the details of the alleged fraud Relators claimed was being perpetrated against veterans, including citations to statutes, regulations, and other applicable law. In another disclosure, Relators' counsel described her personal impression of a meeting with the Government; the same email included a detailed memo with case analysis from Relators' counsel that was provided to the Government for that meeting. In the course of these and other disclosures, Relators revealed the names

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of Government attorneys and investigators who were involved in the case.

Fox-5 appears to be the only media organization with which Relators discussed this case in detail. However, the Court notes Relators' unsuccessful attempts to engage other news media. In at least two outreach efforts, Relator Bibby created and used an anonymous email account to convey information about the sealed case.[3] The most egregious email disclosed was one that Relator Bibby sent to MSNBC on February 5, 2010:

To Whom It May Concern:
We are federal whistleblowers in an ongoing federal investigation on banks that have defrauded the federal government and veterans on home refinancing loans through the VA home loan guarantee program. This is a sealed case and therefore has not been publicly disclosed. This investigation has been going on for over (4) years and still has no resolution to date. The fraud spans the entire country and has affected over 750,000 VA loans over the past nine years. This practice of fraud has been going on for well over 20 years. The feds are in talks now with one of the many banks/mortgage companies that have been named by us in the case. One of the odd turns in the case has been the reluctance of the Dept of VA to aggressively pursue recourse for the damage. This could be due to either poor record keeping or as we suspect a good old fashion [ sic ] cover up. We have documented proof and recordings that we have supplied the DOJ and would like to speak with you off the record about the case. There is much more we can tell you about the case without blowing our anonymity such as the upcoming congressional hearings on the subject matter involved in this case. If you have an interest in speaking with us off the record please email us back with a contact name and number and we will call to discuss in greater detail.

(Ex. 7, Doc. 409-1 at 49.) MSNBC does not appear to have responded to this message.

Relators admit to violating the seal in this case, and that they knew these disclosures were impermissible. At the evidentiary hearing on this matter, Relators testified that they did so to protect veterans. Relator Bibby testified that he was instructed by the Government to continue brokering IRRRL loans for years after this qui tam suit was first filed, even though the alleged fraud had not been resolved. (Doc. 445 at 82-84.) Relator Donnelly, who is himself a veteran, testified that he was " fed up" with the alleged fraud that continued to be committed against veterans over four years after this case was filed. (Doc. 445 at 102-103.) Relators' emails to Mr. Russell and Ms. Larcom express their desire to publicize this case, as well as their frustration with the length of the seal. Both Relators represent that they violated the seal to minimize the harm inflicted on veterans.[4]

B. Impact of Seal Violations

Despite Relators' disclosures, there is no evidence that the ...

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