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Favorable Ruling in Fannie Mae Whistleblower Case

MAY 9, 2011

Bernabei & Kabat is pleased to report a favorable ruling in our Fannie Mae whistleblower case. We represent Caroline Herron, who was terminated by Fannie Mae after she kept reporting and protesting, both internally and to Treasury, the fact that Fannie Mae was knowingly wasting government funds through its mortgage modification programs. Fannie was “processing” thousands of trial modifications, even though Fannie knew that the majority of homeowners would never qualify for permanent modifications. Fannie did so in order to continue getting paid by Treasury. Senior Fannie managers also interfered with Ms. Herron’s attempts to obtain subsequent employment at Treasury, and they even told Fannie’s investigator that they did so because they were upset with her reports.

Since Fannie was and remains under a government conservatorship by the Federal Housing Finance Agency (FHFA), it was an open question as to whether Fannie was a state actor (which would allow a First Amendment claim under the Supreme Court’s Lebrondecision) or remained a private entity (which would allow a common law wrongful termination in violation of public policy claim). The defendants filed a renewed motion to dismiss Ms. Herron’s complaint, arguing that she could only bring a claim under the False Claims Act. We responded that in another case brought against Fannie Mae, the FHFA, Fannie’s conservator, successfully intervened to get a FCA claim dismissed on the grounds that since Fannie was now funded by the government, any award under the FCA would merely transfer funds from one government pocket back into the same government pocket.

The U.S. District Court for the District of Columbia, on May 5, 2011, denied defendants’ motion to dismiss, and the court’s Order recognized that Fannie had taken inconsistent positions as to whether it was a state actor, and that discovery was necessary on that point:

The outstanding issue that will govern this case and that cannot be decided without a fact record is whether Fannie Mae is, or was at the relevant time period, a “private” actor or a “federal” actor. In other litigation, the government appears to have argued that Fannie Mae is a federal actor; before this Court, Fannie Mae tries to distance itself from those arguments but neither agrees nor disagrees with it. This is what discovery will resolve.

Previously, Fannie argued in this case and elsewhere that it was not a state actor, possibly because a contrary approach would result in Fannie’s substantial debt being added to the national debt. The business and legal press have reported on this case, given its broader consequences – including Bloomberg, the Legal Times blog, and Law 360. In addition, NBC News has recently completed a series on mortgage issues, which included an interview of Ms. Herron.

Tagged with: Caroline Herron • Fannie Mae • FHFA • government funds • Whistleblower • Whistleblower Law