The inflated charges added up to hundreds of millions of dollars, according to a False Claims Act suit that also named 16 banks that serviced mortgages held by Fannie Mae, Freddie Mac or the Federal Housing Administration. On Saturday, U.S. District Judge Jed Rakoff in Manhattan let the financial institutions off the hook, dismissing the charges against them with prejudice. It was a big win for a veritable army of outside counsel led by Buckley Sandler, which represented eight of the mortgage servicers, with co-counsel from Boies Schiller Flexner; Debevoise & Plimpton; Alston & Bird; Troutman Sanders; K&L Gates; Mayer Brown; Winston & Strawn; Wachtell, Lipton, Rosen & Katz; Shearman & Sterling and Morgan, Lewis & Bockius. But Rakoff kept alive the case against one defendant—the law firm Rosicki, Rosicki & Associates . Specializing in mortgage foreclosures, the firm has offices in the New York towns of Plainview, Fishkill and Batavia. And he allowed the plaintiffs to file an amended complaint against another firm, McCabe, Weisberg & Conway, which has 10 East Coast offices (but only lists 12 lawyers on its website). The suit is playing out in classic FCA style. The government opted not to intervene in the case against the banks—a tell-tale sign that the allegations were weak. And sure enough, those claims got tossed for lack of scienter. But the feds did intervene against Rosicki—a good indication that the firm is in for a world of hurt, since the Justice Department rarely walks away empty-handed once it undertakes an FCA case. The case began in 2012, when whistleblower Peter Grubea, a consumer bankruptcy lawyer in Buffalo, New York, noticed something fishy. As Rakoff recounts in his decision, Grubea, who is represented in the qui tam action by Susman Godfrey, started to see “a pattern of foreclosure-related proofs-of-claims presenting unreasonable costs.” When Grubea challenged the costs on behalf of his bankruptcy clients, the mortgage servicers or their law firms often reduced the rates. He did some digging and heard scuttlebutt from other lawyers that the banks “paid these inflated and unnecessary foreclosure expenses without making any real effort to obtain the best value or to exercise quality control over fees and costs,” Rakoff wrote. How inflated? Rakoff cites one example, involving the foreclosure of a house in Angola, New York. The actual cost for service of process was $63.50, but the law firm charged $650—a ten-fold markup. Which is not to suggest that the bank defendants, which include Citibank, U.S. Bank, Wells Fargo, PNC Bank, Bank of America and J.P. Morgan, are in the habit of blindly paying their legal bills, even little ones like these. But these bills got passed on to Fannie Mae, Freddie Mac or the FHA for reimbursement. It wasn't the banks' money. “By abdicating their responsibilities and wrongfully seeking reimbursements for unreasonable and unnecessary foreclosure expenses, the bank defendants opened the door to rampant profiteering by foreclosure expense vendors,” the complaint states. But Rakoff noted that the False Claims Act requires that someone “knowingly” presented a false or fraudulent claim to the government for payment. Rakoff found the whistleblower allegations didn't meet this burden. “At best, they support an inference that the servicers were negligent.” The judge also noted that while the law firm charges were high, they still fell within the maximum that the feds said they would pay. “The amounts are facially believable,” Rakoff wrote. “After all, for the scheme alleged against the law firm defendants to work, it was necessary that the charges be below absolute cut-offs established by [Fannie and Freddie] and the FHA.” As detailed in the government's complaint , the Rosicki firm was paid a flat fee for its foreclosure work on behalf of the feds—an arrangement that left “few legitimate opportunities to increase its profit margins other than by increasing the volume of foreclosures that it handles.” Rosicki, which is represented by McLaughlin & Stern, created two affiliates—a title search company and a process server. The firm in a letter told Fannie Mae this “eliminates unnecessary coordination with the middle person.” In reality, DOJ lawyers allege, the affiliates “acted as vehicles for marking up foreclosure expenses as much as possible, while adding as little operating expense as possible, in order to maximize the revenue …on behalf of their owners, the Rosicki partners.” According to the complaint, the affiliate companies didn't even do the work themselves—they used cheap third party vendors. The affiliates “would then generate an invoice for service of process that would exponentially mark up the cost of the services as charged by the vendors.” Rakoff in refusing to dismiss the case against the firm sounded distinctly unsympathetic. “These were classic half-truths: true 'so far as it goes' in that Rosicki was in fact billed by its affiliates for these amounts, but materially misleading because the charges were part of a scheme to bilk the servicers and the government.” |

Lateral Watch

Morgan, Lewis & Bockius added Scott Fischer, formerly the highest-ranking insurance regulatory official in New York State, to the firm's insurance industry team, focusing on restructuring and bankruptcy issues involving insurance companies, as well as insurance transactional and regulatory compliance matters. He will formally join Morgan Lewis's New York office on July 9. For more, see Top Insurance Regulatory Official in NY Joins Morgan Lewis |

What I'm Reading

Plaintiffs Lawyers Want to Depose J&J Exec Over Missing Talc Samples But company lawyers say the plaintiffs “are trying to create a sideshow.” Reed Smith Bolsters Readiness in Russia Case, Adding Appellate Duo A sign that they're in this for the long haul? Judge Again Rules Sperm Bank Lawsuit Barred as 'Wrongful Birth' Claim It's the third time the judge has tossed claims seeking to hold an Atlanta sperm bank accountable for providing semen from a donor it falsely touted as a highly intellectual scholar. Company Defends Firing Employee Who Flipped Off Trump's Motorcade The fleeting moment of protest along a Virginia roadway tees up legal questions over the scope of protections for employee speech. Supreme Court Upholds Texas Redistricting Plan Previously Reversed for Racial Gerrymandering “The court rightly recognized that the Constitution protects the right of Texans to draw their own legislative districts.” Manhattan Federal Prosecutors Cancel Sit-Down With Stormy Daniels Michael Avenatti (in his typically understated fashion) called the decision “ridiculous.”