As Wells Fargo digs out from its fake account scandal – an issue that was ignored despite numerous internal bank and SEC whistleblower complaints – whistleblowers in a different instance highlight how a pattern of behavior occurred. For Mark Schorr, an attorney at Crow and Cushing who monitors whistleblower cases, the story of former bank Robert Kraus and Paul Bishop is both a cautionary tale, but one that provides hope — showing how progress is being made against unaccountable corporate wrongdoing. With the black cloud of retaliation from their whistleblowing actions now being lifted, Kraus and Bishop are seeing their actions benefiting a new generation of fellow whistleblowers.

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After blowing the whistle on “fraudulent” accounting practices, Krause and Bishop lost their jobs and comfortable lives

Kraus and Bishop both worked at Wells Fargo prior to the global financial crisis. Kraus was vice president and controller for the Real Estate Capital Markets group in the Corporate and Investment Bank Finance group at Wachovia. Bishop was a mortgage salesperson who knew firsthand how the “toxic” subprime loans were generated at his employer, World Savings Bank, which was acquired by Wachovia in 2006. Wachovia was later acquired by Wells Fargo on December 31, 2008.

Both Kraus and Bishop filed internal whistleblower reports alleging fraud in how toxic subprime mortgages were packaged and accounted for. Both were dismissed from their jobs after they informed supervisors about the fraud. Kraus, a highly accomplished finance executive with an MBA from New York University, has been unable to find a job in finance. Wells Fargo attempted to foreclose on his house and he now works at McDonalds. Bishop found work in insurance sales.

The scheme Kraus alleged in a Federal whistleblower lawsuit involved the bank hiding toxic mortgages from regulators, including the US Federal Reserve and internal auditors through an off-balance sheet maneuver in what was called “the Black Box,” which concealed $6 billion in toxic mortgages, nearly 13% of Wachovia’s total equity by Schorr’s account.

The move violated accounting rules that mandate such off-balance sheet vehicles must be “demonstrably distinct” from the corporate entity where the loans were transferred. Wells Fargo later received financial support from the US government.

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In a boost to whistleblowers, Supreme Court asks lower court to reconsider their decision

Kraus and Bishop filed a lawsuit under the False Claims Act, a law passed in 1863 that held accountable those who made fraudulent claims resulting in payment from the US Government. A key component of the claim was that the bank had misrepresented that it was in compliance with banking regulators when they received favorable loan rates at the Fed’s discount window.

The damages sought amount to the difference between the favorable interest rates the bank received and market rates.

Under a provision in the law, which has been amended several times since its initial passage, whistleblowers such as Kraus and Bishop are eligible to receive up to 30% of damages collected.

The courts initially rejected their claims, however, saying the issue was regulatory and not fraudulent in basis. Specifically, they ruled that there was no implicit agreement in the Fed’s loan provisions made accurate accounting a pre-condition of the loan. The lower court ruled that allegations of purposefully hiding toxic assets were not actionable under the FCA act because a true statement of financial condition was not an explicit precondition for the loan. The United States Supreme Court disagreed, and ordered that the lower court reconsider and more broadly interpret the law.

Schorr explains the ruling:

The Court directed reconsideration in light of a decision it reached in June 2016, Universal Health Serv., Inc. v. United States ex rel. Escobar. In that matter, the Supreme Court found that a Medicaid provider, a mental health facility, was liable under the FCA because it had received payment from the government for services provided by unlicensed, unqualified and unsupervised personnel. While those things were not an explicit precondition of reimbursement, failure to disclose them constituted fraud. The Court found that, had the government known of the deficiencies, which were violations of Medicaid regulations, it would not have paid for the treatment, which led to the death of a teenage beneficiary of the Medicaid program. The qualifications were a requirement material to the decision to make the payment, and the provider was guilty of an “implied false certification.”

What is next could get serious for Wells Fargo, amounting to a payday that could approach $50 million for Krause and Bishop. Their path fighting for justice might finally get rewarded – and more importantly, the knowledge that corporate wrongdoing might be held accountable could deter future bad behavior.

Justice might actually be served in the end, and whistleblowers and Schorr will be watching.