The U.S. District Court for the Eastern District of New York decided a long-running whistleblower case last month, which alleged that Wells Fargo and its predecessors-in-interest had defrauded Federal Reserve Banks (FRBs) in order to borrow money at lower interest rates. In United States v. Wells Fargo & Co., No 1:11-cv-05457 (E.D.N.Y. May 9, 2018), the Court ultimately dismissed the False Claims Act (FCA) case, which had been remanded from the Second Circuit in September 2017.

The relators, former employees of Wachovia Bank and World Savings Bank, both of which merged into Wells Fargo in 2008, argued that the FRBs were government agencies for purposes of their FCA case. In addressing this issue, the Court looked to two Supreme Court decisions, Rainwater v. United States and United States v. McNinch, for a non-exclusive list of factors to consider.

Relators relied on provisions of the Federal Reserve Act that create a financial connection between FRBs and the U.S. government. For example, Section 289 states that surplus funds are to be transferred to the Federal Reserve Board and then deposited into the U.S. Department of Treasury's (Treasury) general fund. Based on this provision, the relators argued that because Wells Fargo and its predecessors did not pay as much for loans as they should have, the FRBs that issued the loans had less money to send back to Treasury, thereby depriving the government of money to which it was entitled. The Court found this was "too tenuous of a connection" that "taken to its extreme would render any fraud that reduced a party's liability to the [g]overnment actionable under the FCA." Ultimately, the Court ruled that FRBs are not the U.S. government or its agents for purposes of the FCA because the government has a considerably limited financial connection with FRBs, and as a result, the Court granted the defendants' motion to dismiss the relators' fourth amended complaint for failure to state a claim.

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