Weiner Brodsky Kidder, PC — 2nd Circuit Holds Loan from Federal Reserve Bank Covered by False Claims Act

Here is Rohan's comments on Twitter. Not new but I just pick it up and thought to pass it on.

Rohan Grey
@rohangrey
Level 1:
1. A tweet thread on a recent court case of relevance to monetary theorists: U.S. v Wells Fargo (2d Cir. 2019) (https://jdsupra.com/legalnews/2nd-circuit-holds-loan-from-federal-93164/
) H/t @sam_a_bell
 & @PeterContiBrown
. 1/n
2nd Circuit Holds Loan from Federal Reserve Bank Covered by False Claims Act
The U.S. Court of Appeals for the Second Circuit recently ruled that, under certain circumstances, an entity which borrows money from a Federal Reserve Bank (FRB) has made a claim to the...
jdsupra.com
5:26 PM · Jan 6, 2020·Twitter Web App
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Jan 6
Level 2:
2. US v Wells Fargo was a dispute over whether a fraudulent loan request presented to the emergency lending facilities of a Federal Reserve Bank (“FRB”) constituted a claim under the False Claims Act (“FCA”) (31 USC 3729 et seq.). 2/n
Rohan Grey
@rohangrey
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Jan 6
Level 3:
3. The district court concluded that it didn’t, but the 2nd Circuit disagreed and vacated/remanded. Wells Fargo and the US Govt were named parties, but the Fed Board of Governors (BoG), and the FRBs of New York and Richmond also submitted amici briefs. 3/n
Rohan Grey
@rohangrey
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Jan 6
Level 4:
3. The district court concluded that it didn’t, but the 2nd Circuit disagreed and vacated/remanded. Wells Fargo and the US Govt were named parties, but the Fed Board of Governors (BoG), and the FRBs of New York and Richmond also submitted amici briefs. 3/n
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Rohan Grey
@rohangrey
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Jan 6
Level 5:
5. To qualify under the latter category, the money requested from a contractor/grantee/other recipient must be i) “spent or used on the Govt’s behalf or to advance a Govt program or interest; and ii) provided for or reimbursed, at least in part, by the US Govt. 5/n
Rohan Grey
@rohangrey
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Jan 6
Level 6:
6. Additionally, the FCA clearly states that it does not matter whether the US Govt has “title” to the money it “provides” to the contractor/grantee/other recipient (this distinction will prove relevant). 6/n
Rohan Grey
@rohangrey
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Jan 6
Level 7:
7. The decision offers many insights, but ill focus on the three core issues that the Court considered: 1) the “officer/employee” issue; 2) the “agent” issue; and 3) the “money” issue. 7/n
Rohan Grey
@rohangrey
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Jan 6
Level 8:
8. FIRST, the 2nd Circuit held that FRB personnel were not officers or employees of the US Govt. 8/n
Rohan Grey
@rohangrey
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Jan 6
Level 9:
9. This holding is consistent with longstanding caselaw, including a SCOTUS decision from 1928 (275 US 415) concluding that FRBs were not “departments of the Government.” 9/n
Rohan Grey
@rohangrey
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Jan 6
Level 10:
10. It’s also consistent with the amici briefs of the FRBs of New York and Richmond, which argued that FRBs were established to ‘serve the interests of, but stand apart from, the sovereign.’ 10/n
Rohan Grey
@rohangrey
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Jan 6
Level 11:
11. Critically, however, the Court distinguished the FRBs from the BoG, which it called “an independent agency within the executive branch” 11/n
Rohan Grey
@rohangrey
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Jan 6
Level 12:
12. Additionally, the Court noted that since the founding of the Federal Reserve System in 1913, Congress had “transferred functional ownership and control of the FRBs to the Treasury and to the BoG.” 12/n
Rohan Grey
@rohangrey
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Jan 6
Level 13:
13. SECOND, the Court held that although FRB personnel were not direct employees/officers of the US, FRBs were nevertheless “agents” of the US *when operating emergency lending facilities.* 13/n
Rohan Grey
@rohangrey
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Jan 6
Level 14:
14. Notably, the Court declined to extend its finding beyond the narrow scope of the emergency lending program, leaving open the question of whether other FRB activities constitute the actions of an agent of the US Govt. 14/n
Rohan Grey
@rohangrey
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Jan 6
Level 15:
15. This finding refuted the view expressed in the FRBs’s amici briefs, that FRBs were “federal instrumentalities,” but nevertheless were not agents of the US Govt when conducting emergency lending. 15/n
Rohan Grey
@rohangrey
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Jan 6
Level 16:
16. In particular, the Court held that the US created the FRBs to “act on its behalf in extending emergency credit to banks,” and that FRBs did so in compliance with Congressional strictures and BoG rules. 16/n
Rohan Grey
@rohangrey
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Jan 6
Level 17:
17. Importantly, the Court held that the FCA did not require “agents of the US” to be “agents of a US agency,” only that FRBs “act, and be empowered by law to act, on behalf of the US.” 17/n
Rohan Grey
@rohangrey
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Jan 6
Level 18:
18. Additionally, the Court clarified that its holding that FRBs were agents of the US Govt did not imply FRBs were acting on behalf of the BoG in particular. 18/n

Rohan Grey
@rohangrey
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Jan 6
Level 38:
38. The Court rejected the FRBs’ argument that the money lent in the emergency credit programs was not provided by the US Govt because it did not come from the US Treasury, but was instead created “ex nihilo, at a keystroke,” by FRBs 38/n
Rohan Grey
@rohangrey
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Jan 6
Level 39:
39. Instead, the Court held that the FCA “nowhere limit[ed] liability to requests involving ‘Treasury Funds,’” and instead adopted a “deliberately broad” framework that applies “whether or not the US Govt has title to the money” in question 39/n
Rohan Grey
@rohangrey
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Jan 6
Level 40:
40. Thus, the Court agreed with the US and BoG’s view that the word “provides” in the FCA is “properly read to reach some circumstances in which the Govt makes money available through an exercise of its legal authority outside the appropriations process” 40/n
Rohan Grey
@rohangrey
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Jan 6
Level 41:
41. This conclusion is consistent with an earlier decision, US ex rel. Health v Wisconsin Bell, Inc., (E.D. Wis. 2015), which held that “[t]he fact that [Universal Service] Fund money does not pass through the Treasury does not make the Gvt any less its source” 41/n
Rohan Grey
@rohangrey
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Jan 6
Level 42:
42. Additionally, the Court noted that when banks who received emergency lending “withdr[ew]” the process of those loans in the form of Federal Reserve Notes (FRNs), they “quite literally receive money ‘provided’ by the BoG,” 42/n
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Rohan Grey
@rohangrey
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Jan 6
Level 43:
43. The Court noted that FRNs are one of two types of legal tender in the US, along with coins, and while the Treasury (Mint) determined the supply of coins (31 USC 5111(a)(1)), the BoG controlled the supply of notes (12 USC 411). 43/n
Rohan Grey
@rohangrey
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Jan 6
Level 44:
44. This authority, the Court concluded, was a delegation of Congress’s exclusive power to create money under Art. I, S. 8 of the US Constitution, building on the Mixt Money case from 1605, and reaffirmed in Knox v. Lee, 49 US 457 (1871) 44/n
Rohan Grey
@rohangrey
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Jan 6
Level 45:
45. The Court saw “no reason why Congress’s decision to separate the FRBs from the Board and the Board from the Treasury” should “alter [its] conclusion that the US is the source of the purchasing power” extended via emergency lending facilities 45/n
Rohan Grey
@rohangrey
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Jan 6
Level 46:
46. Thus, the Court found that the BoG, like the Mint, was an agency of the US, and the fact that the BoG “unlike the Mint, is not also a bureau of the Treasury Department is of no legal significance here” 46/n
Rohan Grey
@rohangrey
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Jan 6
Level 47:
47. Instead, the Court determined that Congress “empowered” the BoG and FRBs to act “in conjunction” to issue legal tender, and “[h]ad Congress not delegated this power to the Fed, the FRBs would be unable to extend the loans at issue in this case” 47/n
Rohan Grey
@rohangrey
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Jan 6
Level 48:
48. Consequently, the Court found that in extending reserves the FRBs were acting as “issuers of base money” on behalf of the US Govt as “federal instrumentalities” 48/n
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Rohan Grey
@rohangrey
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Jan 6
Level 49:
49. Additionally, the Court rejected as irrelevant 12 USC 244, which provides that the “funds derived” by the BoG through assessments on FRBs “shall not be construed to be govt funds or appropriated monies” 49/n
Rohan Grey
@rohangrey
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Jan 6
Level 50:
50. In the Court’s view, the purpose of 12 USC 244 was to distinguish the money used to fund the BoG’s operating budget from Congressionally appropriated money, and had nothing to do with the creation of reserves by FRBs 50/n
Rohan Grey
@rohangrey
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Jan 6
Level 51:
51. Overall, this case is, in my view, a validation of the merits of the ‘consolidation’ approach to Tsy-Fed analysis, as well as a direct refutation to the conspiracy theorish claims that the Fed is merely a “private entity owned by banks”. 51/n