BofA $1 Billion Whistleblower Also Faced Fraud Claims

BofA Whistleblower in $1 Billion Case Also Faced Fraud Claims
Bank of America Corp. has denied the allegations against it in the whistle-blower suit. Photographer: Victor J. Blue/Bloomberg

The whistle-blower helping the U.S. government mount a $1 billion fraud lawsuit against Bank of America Corp. was himself accused of fraud by an investor in a financing company he co-founded, and now works at Fannie Mae, one of two entities he claims the bank defrauded.

Edward O’Donnell sued Bank of America, the second-biggest U.S. lender by assets, in February under the False Claims Act, saying the bank’s Countrywide Financial unit, where he once worked, issued defective mortgages and sold them to Fannie Mae and Freddie Mac. Last month, the Justice Department joined his suit, making it the first time the U.S. has accused a bank of fraud over loans sold to the two government-sponsored mortgage-finance companies.

To make the case, the U.S. may have to confront its whistle-blower’s own tangled history. A year after leaving Countrywide, O’Donnell was sued by an investor in a deal organized by a commercial financing firm he co-founded. Bank of America may use that lawsuit, and O’Donnell’s job at Fannie Mae, to raise doubts about his credibility before a jury, according to Peter Hutt, a lawyer who defends whistle-blower cases.

“It could certainly be argued that the whistle-blower had an interest in making the allegation either to secure employment at Fannie Mae or making himself look good at Fannie Mae,” Hutt, a partner at Akin, Gump, Strauss, Hauer & Feld LLP in Washington, said in a phone interview.

Documentary Evidence

Still, if documents and other evidence support O’Donnell’s claims, “there won’t be any direct effect” on the U.S. case from disclosures about his background, said Hutt, who isn’t involved in the Bank of America lawsuit.

O’Donnell referred a call about the earlier lawsuit to his lawyer, David Wasinger, who declined to comment. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in New York, whose office joined the Bank of America case, declined to comment on O’Donnell.

The bank has denied the allegations against it in the whistle-blower suit.

“Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters,” Lawrence Grayson, a spokesman for the Charlotte, North Carolina-based company, said in a statement after the U.S. joined the case. “Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.” Grayson declined to comment on the investor claims made against O’Donnell.

False Claims

The False Claims Act lets U.S. citizens sue on behalf of the federal government and share in any recovery. Under the law, which penalizes companies for defrauding the government, whistle-blowers such as O’Donnell may collect as much as 25 percent of a recovery.

The largest individual recovery ever under the law was $96 million for Cheryl Eckard, a former quality assurance manager for GlaxoSmithKline Plc, who was fired after pushing the company to fix manufacturing flaws at a plant. Bradley Birkenfeld, a former UBS AG banker who told the Internal Revenue Service how the bank helped thousands of Americans evade taxes, secured an award of $104 million under a different statute.

O’Donnell stands to get as much as $250 million if the government wins the $1 billion in unreimbursed losses that it’s seeking from Bank of America, said David Engstrom, a Stanford Law School professor, who said the amount may also be much less.

The U.S. wins a recovery in 90 percent of the whistle-blower cases it elects to join, said Engstrom, who has analyzed thousands of such lawsuits filed since 1986. The government joins about one-fourth of all False Claims Act cases that have been unsealed and made public by judges, he said.

“That’s a very good situation for him,” Engstrom said of O’Donnell. “He’s cleared a major hurdle.”

Risk Management

O’Donnell, who lived in Texas, worked at Countrywide from 2003 to 2009, rising to the position of an executive vice president, responsible for risk management of loans, according to his complaint. Countrywide, once the largest mortgage lender in the U.S., was acquired by Bank of America in 2008.

After leaving Countrywide, O’Donnell co-founded Dallas-based Rightway Partners LLC, a commercial financing firm, according to state records and O’Donnell’s ex-business partner, Mark Dusza. O’Donnell now works at Fannie Mae, according to a spokesman for the company.

Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

‘Private Citizen’

“Mr. O’Donnell filed this action as a private citizen,” Andrew Wilson, the spokesman for Washington-based Fannie Mae, said in an e-mailed statement. “It alleges facts relating to his professional experience prior to working at Fannie Mae. Fannie Mae was not involved in any way with the filing of Mr. O’Donnell’s complaint.”

Wilson said O’Donnell “does not work on any matters that are the subject of the complaint.”

In the complaint, which was filed under seal in Manhattan federal court and unsealed Oct. 24, O’Donnell accused Countrywide and Bank of America of trying to increase volume by ignoring quality-control guidelines and underwriting loans that soon defaulted. The loans were sold to Fannie Mae and McLean, Virginia-based Freddie Mac, which buy single-family mortgages to provide market liquidity.

O’Donnell’s “concerns were disregarded and Countrywide continued to ignore underwriting and quality control,” according to the complaint. “Billions of dollars of poor quality loans continued to be originated and sold” to Fannie Mae and Freddie Mac, O’Donnell said.

The Hustle

The government intervened in the case on Oct. 24. In its complaint, the U.S. said O’Donnell warned the bank that a strategy for underwriting called the Hustle -- short for its “high-speed swim lane” model of loan origination -- “presented a disastrous layering of risk” by eliminating underwriter review of most applications and letting unqualified employees determine whether to make loans.

“Concerned about the high defect rates from the pilot of the Hustle and a rapid deterioration in loan quality, O’Donnell directed some of the underwriters to conduct quality checks on the Hustle loans pre-funding, in the hope that the defects could be corrected,” the Justice Department said. From 2007 to 2009, Countrywide hid from Fannie Mae and Freddie Mac the “alarming spike in defect rates” in loan defaults, according to the complaint.

Fourteen months before O’Donnell accused Countrywide of running a scheme that cost the U.S. billions of dollars, he was accused of fraud by an investor in a deal sponsored by Rightway Partners.

‘Four Guys’

Rightway was formed in 2009 by O’Donnell, an Arizona man named Patrick McMullan, Dusza and one other person, according to Dusza. The firm sought to obtain financing for companies seeking to expand, he said.

“We were just four guys who knew each other,” said Dusza, who said he worked and socialized with O’Donnell while at Countrywide and then joined him at Rightway. He called O’Donnell “a very upstanding guy.”

“He’s always been a do-the-right-thing guy. Very respected in the industry, always been very honest,” Dusza said.

Rightway was unable to find financing for a single client, he said.

“We had no money pass through the company,” said Dusza, citing the harsh lending climate in 2009 and 2010. “We were reaching out to people who were advertising deals on the Internet.” Dusza said he spent about a year at the firm.

Still, Rightway tried to broker at least one deal, according to court papers.

‘Origination Fee’

In early 2010, O’Donnell and McMullan allegedly told three investors they could double their money in “a matter of days” by placing a total of $575,000 with Rightway, according to lawsuits the investors later filed. The $575,000 would act as an “origination fee” securing a $100 million loan to Rightway from one or more banks, the investors said they were told, according to court filings.

O’Donnell, McMullan and David Rosenberg, a Connecticut lawyer, allegedly said the “arrangement was safe and secure and a proven financial process,” investors James VinZant and David Martin said in their lawsuit against Rightway. Thomas Madison, a third Rightway investor, sued the firm, O’Donnell, McMullan and Rosenberg over the same deal.

The three said they lost their money and claimed Rightway didn’t use their investments as promised, didn’t contribute at least $200,000 that it pledged toward the origination fee and deceived the investors when McMullan and O’Donnell said the investment was safe.

‘Repeated Statements’

“Mr. O’Donnell repeated statements to the effect that Rightway’s interests in making sure this deal closed was the same as mine as they had funds at risk, just as I did,” Madison said in an affidavit attached to the complaint he filed in federal court in New Haven, Connecticut, in December 2010.

The investors also claimed that Rightway hid that the Nevada-based company that was supposed to secure the $100 million loan on Rightway’s behalf had been accused of fraud in 2009, along with its two officers. A federal judge in Las Vegas last month entered a summary judgment against the two officers.

Madison’s suit against Rightway was settled confidentially this year after a judge in Connecticut refused Rosenberg’s dismissal bid. The VinZant suit is pending. McMullan didn’t return telephone calls.

No Loan

Mark Johnson, a lawyer for O’Donnell, McMullan and Rightway, said his clients denied wrongdoing. Rosenberg, the Connecticut lawyer, said in a phone interview that the $100 million loan “did not materialize” after “representations O’Donnell and McMullan made.”

These details about O’Donnell’s background may never be aired before a jury in the whistle-blower lawsuit.

It’s “exceedingly rare” for False Claims Act cases to reach trial, said Engstrom. Because the U.S. has probably amassed documents and other evidence to support the claims, details of O’Donnell’s background may be no more than “atmospherics” that don’t affect the outcome, he said.

Engstrom predicted the government might join other mortgage cases. That it took the Justice Department eight months to decide to join O’Donnell’s lawsuit -- compared with an average of 24 months in other whistle-blower cases -- indicates that the U.S. is taking such allegations seriously, he said.

“It certainly suggests to me that this is part of a broader strategic decision by DOJ to intervene in this space,” he said.

The government’s case is U.S. v. Bank of America Corp., U.S. District Court, Southern District of New York (Manhattan). O’Donnell’s suit is U.S. ex rel. Edward O’Donnell v. Bank of America, 12-cv-1433, U.S. District Court, Southern District of New York (Manhattan). The investor cases are Madison v. Rightway Partners, 10-cv-1912; and VinZant v. Rightway Partners, 12-cv-472, U.S. District Court, District of Connecticut (New Haven).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE