## Facts

- Edward O’Donnell, a former Countrywide employee, filed a qui tam action under the False Claims Act; the United States later intervened and pursued civil-penalty claims under FIRREA (12 U.S.C. § 1833a) using federal mail and wire fraud as predicate offenses.
- Defendants included Countrywide Home Loans, Inc.; Countrywide Bank, FSB; Bank of America, N.A.; and Countrywide executive Rebecca Mairone (as appellants). Countrywide Financial Corp. and Bank of America Corp. were also named but were not appellants.
- Before the 2007–2008 financial crisis, Countrywide’s Full Spectrum Lending Division (FSL) focused on subprime lending. After the subprime market collapsed, Countrywide sought to transform FSL into a prime-loan origination channel.
- As part of this shift, Countrywide aimed to sell FSL-originated loans to the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac under contractual arrangements that characterized delivered loans as “investment quality” or an “acceptable investment” as of the date of delivery.
- Countrywide reorganized mortgage operations through “Central Fulfillment” and implemented a high-volume initiative called the “High Speed Swim Lane” (HSSL), also referred to as the “Hustle,” which the government contended emphasized speed and volume at the expense of underwriting quality controls.
- The government alleged that Countrywide and Mairone knowingly sold large volumes of poor-quality loans to the GSEs while using the mails and interstate wires to transmit loan data and related documentation, and that this conduct constituted mail and wire fraud affecting a federally insured financial institution, triggering FIRREA penalties.
- At trial, the government presented evidence that HSSL loans were defective and that key individuals at Countrywide were aware of quality problems. The government did not present evidence that, when the parties negotiated or entered into the GSE sale contracts, defendants intended not to perform or intended the contractual representations to be false when made.
- The jury found defendants liable on the FIRREA claims predicated on mail and wire fraud. The district court (S.D.N.Y., Rakoff, J.) imposed civil penalties of $1 million against Mairone and approximately $1.27 billion against Countrywide.
- Defendants appealed, arguing that the evidence proved, at most, a willful breach of contractual representations about loan quality at delivery, which is not enough to establish a “scheme to defraud” under the mail and wire fraud statutes absent proof of contemporaneous intent to defraud.

## Issues

1. Whether evidence that Countrywide knowingly delivered loans that failed to meet contractual “investment quality/acceptable investment” standards, without proof that defendants intended those contractual promises to be false when made, is sufficient to establish a “scheme to defraud” under the federal mail and wire fraud statutes.
2. Whether FIRREA civil penalties may be imposed when the predicate mail/wire fraud theory rests on alleged nonperformance of contractual warranties rather than a deceptive scheme supported by proof of intent to defraud.

## Decision

- The Second Circuit reversed the judgment and remanded with instructions to enter judgment for defendants.
- The court held that the government’s proof showed, at most, an intentional breach of contract—delivering loans that did not conform to contractual standards—rather than mail or wire fraud.
- Because the government did not prove the contemporaneous fraudulent intent required to treat contractual promises or warranties as actionable misrepresentations for mail/wire fraud, the predicates failed as a matter of law.
- Without valid predicate offenses, FIRREA liability and the resulting civil penalties (including the $1 million penalty against Mairone and the $1.27 billion penalty against Countrywide) could not stand.

## Legal Principles

- Mail fraud (18 U.S.C. § 1341) and wire fraud (18 U.S.C. § 1343) require proof of (1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of the mails or interstate wires in furtherance of the scheme, along with intent to deceive.
- A scheme to defraud requires a material misrepresentation (or material omission) made with specific intent to defraud; poor performance or sharp dealing alone is not enough.
- When the alleged misrepresentation is a contractual promise or warranty, fraud requires proof that, at the time the promise was made, the promisor had no intent to perform (or otherwise intended the promise to be false at that time); proof of a later knowing or willful breach does not by itself establish fraud.
- FIRREA civil penalties under 12 U.S.C. § 1833a require a proven predicate offense; if mail or wire fraud is not established, FIRREA penalties based on those predicates cannot be sustained.

## Conclusion

In United States ex rel. O’Donnell v. Countrywide Home Loans, Inc., the Second Circuit held that the government’s evidence about Countrywide’s HSSL (“Hustle”) program and the delivery of defective loans to Fannie Mae and Freddie Mac demonstrated, at most, a willful breach of contractual loan-quality representations at delivery, not a scheme to defraud under the mail and wire fraud statutes; because the government did not prove that defendants made contractual promises with intent to defraud at the time the promises were made, the mail/wire fraud predicates failed and the court reversed the $1.27 billion FIRREA judgment and directed entry of judgment for defendants.


United States ex rel. O'Donnell v. Countrywide Home Loans, Inc., 822 F.3d 650 (2016)