Whistleblower Earns $14 Million Reward in Case against Bank of America

Steve Berman on May. 29, 2012 | 0 comments

In 1998, I worked with a number of very talented attorneys general to hold Big Tobacco accountable for the damage it caused to millions of Americans through years of deception, improper marketing and a number of other nefarious tactics. Until this coordinated effort, no one – not attorneys general nor the civil justice system – could lay a glove on Big Tobacco. They had a virtual army of attorneys and lobbyists, and mountains of cash to fund their effort to avoid accountability.

And it worked, for a while.

But thanks in part to a courageous whistleblower, former Brown & Williamson executive Jeffrey Wigand, Big Tobacco finally had its day of reckoning, and eventually agreed to an omnibus settlement of $206 billion – the largest settlement ever at the time.

Mr. Wigand publicly spoke out and said what we all knew, but couldn’t prove – that the tobacco companies knew cigarettes are addictive and lethal. He also explained that companies were using additives known to increase the risk of cancer and increasing the amount of nicotine in order to make them even more addictive.

Yet, in coming forward, Mr. Wigand took a monumental risk. He also paid a price for what he did; he found himself in a series of legal battles and the victim of a smear campaign orchestrated by his former employer. His wife divorced him and his two daughters left with her.

And as he attempted to shine the light of public scrutiny on Big Tobacco, he soon found that light reflected back at him. He had to defend himself and his accusations at every turn, in the media and in the courtroom.

Of course, Mr. Wigand was ultimately vindicated and is now heralded as a hero and a champion of the public interest. Hollywood told his story in the movie “The Insider” starring Al Pacino and Russell Crowe.

His story showcases the risks and rewards that are part of being a whistleblower. David can beat Goliath, but that doesn’t make the prospect of taking on Goliath any less scary. When challenged over big issues, corporations have the power and resources to fight vigorously and delay justice for years.

Still, I think the situation for whistleblowers is improving in this country. There is a renewed sense, driven in part by the disastrous behavior we all saw on Wall Street before the financial crisis, that whistleblowers should play an important role in deterring corporate fraud.

Consider the United States Congress, who took Wall Street’s malfeasance to heart and passed the Dodd-Frank Financial Reform bill, which includes two new whistleblower programs. Under the programs, individuals who report violations of securities or commodities trading and reporting laws may receive up to 30 percent of any fines or penalties the government collects.

Another longstanding law passed during the American Civil War called the False Claims Act protects whistleblowers who report fraud committed against the government. Congress recently strengthened this law to catch more fraud and protect additional whistleblowers. Those who present a valid legal claim and recover the government’s money are entitled to a reward. We represent a whistleblower under the False Claims Act, and like Mr. Wigand, he has fought a long, costly battle against powerful corporate interests.

Our client, a former employee at appraisal company Landsafe named Kyle Lagow, blew the whistle on Countrywide Financial, now owned by Bank of America, for what he believed to be widespread appraisal, appraisal review and underwriting fraud. First, he blew the whistle to the highest levels of the company. When they wouldn’t listen, he filed a lawsuit. He alleged that Countrywide and home developing giant KB Homes, among others, used a number of tactics to inflate the appraised values of homes and set up a sham review process.

Accurate home appraisals are important for many reasons. For one thing, they serve as a check on greedy home developers or bankers hoping to cash in on interest payments from an overvalued mortgage.

They are also very important for the Federal Housing Administration (FHA), a federal agency that helps low- and moderate-income homebuyers afford homes by insuring loans. Under the program, if a house goes into foreclosure, the government steps in, pays the bank the remaining amount due on the mortgage and takes ownership of the property. In order to qualify a loan for FHA endorsement, underwriters must follow strict guidelines, including guidelines about proper appraisals. If appraisals are inaccurate and a loan goes bad, the government is forced to pay an inflated price. This helps people who might otherwise have a hard time affording a home secure a loan, but it goes without saying that the government has to be really careful about what loans they insure.

What Lagow alleged was a pattern of violating the most important rules to qualify for FHA endorsement, including inflating appraisals across the entire country. He claimed that when the real estate market collapsed and homes began to go into foreclosure in record numbers, the government was forced to overpay for the full cost of the mortgages.

Lagow’s first sign that something was deeply wrong at Landsafe and Countrywide came in early 2005, when he had a meeting with the new LandSafe president, Todd Baur, who expressed interest in having Lagow’s team of appraisers work on large multimillion dollar properties. Lagow questioned the decision, noting that such properties require specialized experience and an incredible attention to detail to produce accurate appraisals. He felt that his appraisers simply weren’t ready for such a challenge, but Baur disregarded his concerns and pushed ahead with the project.

This was the first symptom of a much wider problem. What Lagow came to notice at both Landsafe and Countrywide was a culture that disregarded the most important rule of proper appraisals; to be neutral, appraisals must be completely independent of the lending side of the equation.

Instead, Landsafe and Countrywide executives, Lagow alleged, sought to break down the federal regulations that separate appraisers and bankers, creating an environment ripe for corruption. He attested that President Baur instructed Landsafe managers that the appraisal unit needed to change and that its role was to facilitate the closing of loan deals negotiated by Countrywide.

Lagow claimed that he saw the potential for corruption fully realized when a joint venture was announced between KB Homes, one of the nation’s largest home developers, and Countrywide. He recruited appraisers to work on KB Homes’ properties, only to see his staff turned away and told that the homebuilder would decide who would perform appraisals.

Lagow claimed that KB Homes was given the power to turn away any appraiser who refused to certify as accurate whatever inflated price the developer was trying to push on a homebuyer. If you think that sounds like a rigged system, you’re right.

An extreme example of this policy in practice was found in Houston. Lagow alleged that he uncovered a scheme in which only a single appraiser was given every single KB Homes project in the city. That appraiser somehow managed to do more than 400 appraisals per month.

We’ve all heard about robo-signing lenders who claimed to have a handful of workers reviewing thousands and thousands of pages of mortgage paperwork each day. It is hard to believe those workers actually paid very much attention to each case they reviewed, and it is even harder to believe that an individual conducting 400 appraisals in a month could possibly do a full and fair analysis of the properties’ values.

What is even more shocking, but makes perfect sense when you consider KB Homes’ and Countrywide’s motives, is that Lagow claimed this appraiser was paid far more than most appraisers, $450 per appraisal. That sure sounds like a quid pro quo to me: endorse inflated appraisals and be paid an above-market rate for the trouble.

Of course, there were upstanding appraisers who refused to cooperate. As he dug deeper, Lagow claimed he discovered explicit blacklisting of those appraisers whose conscience and professional integrity prevented them from participating in inflating home appraisals.

In 2007, for instance, Lagow claimed that an appraiser he recruited precisely because the appraiser had high ethical standards told Lagow that he had been told if he refused to change his appraisals, he would be no longer assigned to KB Homes properties. Lagow alleged that the appraiser in question refused to sacrifice his integrity, and was ultimately blacklisted not only from KB Homes, but from all Countrywide projects.

Lagow continued to raise these concerns with management, but to no avail. Instead, he was instructed to keep all ethical concerns out of writing.

At the same time, he was fighting a battle to obtain the documents necessary for his appraisers to even do their jobs effectively. He claimed that KB Homes and Countrywide refused to provide final sales documents. By withholding these documents, Lagow’s appraisers were forced to use other, less accurate price listings to determine how much a home had sold for.

This is important, because one of the biggest factors in appraising a home is the answer to the question, “What have comparable homes in the same area sold for recently?” Lagow believed that KB Homes was clandestinely reducing home prices at the 11th hour in order to secure a deal, but reporting the original, higher prices for the public data. This, Lagow claimed, corrupted the data his appraisers were forced to use and encouraged inflated appraisals. Despite repeated requests for the documents, Lagow claimed KB Homes and Countrywide did not provide them.

As Lagow dug deeper and allegedly found more illegal activities, he became more desperate to convince senior executives at the company to hear him out. The more vigorously he raised the alarm, however, the more he was marginalized and his job responsibilities were reduced.

Finally, he was contacted by a senior loan officer, who asked him to “review” appraisals in order to find “missed” value. As far as Lagow was concerned, this was a direct request to participate in a conspiracy to commit fraud. He noted that because no one had given his team the appropriate documents, any analysis would not support a change in the appraisals.

Lagow claimed that this did not stop the scheme. He noticed over the next two years that if an appraisal came in too low for Countrywide and KB Homes’ taste, it would mysteriously disappear from the files. Then, a new appraisal with a higher value would just as mysteriously appear and the loan would go through.

Finally, in absolute desperation, he sent two emails to the CEO of Countrywide, Angelo Mozilo. Shortly after, he was fired, told the company wanted to move “in a different direction.”

Like tobacco whistleblower Jeffrey Wigand, Lagow suffered over the next several years. Unable to find a job and suffering from cancer, his house went into the foreclosure process. His wife and five kids also suffered the punishment for having reported fraud, experiencing poverty and hardship.

Lagow did not give up, however. He contacted our law firm and filed a lawsuit under the False Claims Act. The government has resolved a $1 billion settlement with Bank of America, based in part on Lagow’s claims and evidence.

There is light at the end of the tunnel for Lagow, as he will receive a $14 million reward for his part in the case. The reward is well deserved.

The importance of whistleblowers today cannot be understated. Lagow’s courage, tenacity and willingness to walk through fire to expose wrongdoing are the defining virtues of a good citizen. His sacrifices humble all of us, and should push us to all think more deeply about how we can contribute to the public good.