Southern District of Ohio Concludes that Regional Federal Reserve Banks are not “the Government” Under the FCA

By on October 16, 2018
Posted In Uncategorized

On August 20, 2018, U.S. District Judge Algenon L. Marbley of the United States District Court for the Southern District of Ohio granted summary judgment in favor of The Brink’s Company (Brink’s), concluding that Regional Federal Reserve Banks (RFRB) are not “the Government” for purposes of the federal False Claims Act (FCA).

The relator’s qui tam action was premised on an alleged penny-swapping scheme. Brink’s and other armored carriers regularly enter Coin Terminal Agreements (CTA) with RFRBs to transport and store coins. Pursuant to one such CTA, Brink’s received, weighed, tracked and stored the Federal Reserve Bank of Cleveland’s coins and provided similar services to other customers. Although Brink’s maintained electronic records of the coins in its inventory, it did not segregate physical coins by customer.

The relator, a former Brink’s employee, alleged Brink’s violated its contract with the Federal Reserve Bank of Cleveland and defrauded the government by engaging in a penny-swapping scheme with Jackson Metals. In essence, the relator alleged that Brink’s entered into a secret agreement, allowing Jackson Metals to purchase commingled pennies, cull out the pennies minted prior to 1982, and replace them with pennies minted after 1982. Pennies minted prior to 1982 have a higher metallurgical value because of their copper content. The replacement pennies are made from lower-value zinc. The relator argued that this penny-swapping scheme deprived the government of the value of the copper.

In moving for summary judgment, Brink’s argued, in part, that the FCA did not apply because RFRBs are not “the Government” under the FCA. The court agreed. First, Judge Marbley examined the structure of the Federal Reserve. He contrasted the Board of Governors with RFRBs, noting that RFRBs “are ‘private corporations whose stock is owned by the member commercial banks within their district.’”

Second, Judge Marbley examined United States ex rel. Kraus v. Wells Fargo & Company and United States ex rel. Pasto v. Megagbyte Business Systems—the only two cases to consider previously whether RFRBs are “the Government.” The Kraus court concluded that RFRBs are not the Government for purposes of the FCA and dismissed the relator’s case. Judge Marbley observed that in reaching this conclusion, the Kraus court “reasoned that in creating the dual structure with the Board of Governors of the Federal Reserve System overseeing the RFRBs, Congress intended the RFRBs to remain private, nongovernmental entities . . .” The Kraus court also applied the factors articulated in two Supreme Court cases — Rainwater v. United States and United States v. McNich — to determine whether an entity acts as the government under the FCA. Judge Marbley noted that in applying those factors, the Kraus court found that:

(1) the enabling statute makes clear that RFRBs are privately owned bodies; (2) RFRBs are private corporations made up of private stockholders and do not receive government appropriations to operate; (3) although the Board of Governors appoints three of the nine-member board of directors of each RFRB, the controlling majority is elected by member banks, and in any event RFRB employees are not Government employees; and (4) RFRBs have no lawmaking authority and operate largely independently of the Board of Directors.

In contrast, the court noted that the unpublished Pasto decision held that RFRBs are the government for purposes of the FCA because “the Federal Reserve Bank’s activities are subject to the general supervision of the Federal Reserve Board and its excess capital is turned over to the Treasury.” Judge Marbley adopted the reasoning of the Kraus court, finding it more persuasive and consistent with Supreme Court guidance.

Finally, Judge Marbley concluded that, “to the extent that reasonable minds could differ on the question whether RFRBs are subject to the FCA, ‘the tie must go to the defendant. . . .’” As Judge Marbley cautioned, allowing causes of action under the FCA for fraud directed at private actors “threaten[s] to transform the FCA into an all-purpose antifraud statute.”

Although the court found that the RFRBs status as non-governmental entities was sufficient to grant Brink’s motion for summary judgment, it noted that the relator’s claim was deficient in other respects, including a lack of evidence that the pennies at issue were from RFRB accounts.

Shamis Beckley
Shamis Beckley advises clients on civil and criminal litigation matters, including white-collar and securities defense matters. Shamis provides legal guidance on anti-corruption and corporate governance matters, including compliance with the Foreign Corrupt Practices Act and the False Claims Act. Additionally, Shamis has firsthand experience with export-related international trade issues and, as part of her pro bono engagements, has represented a nonprofit organization dedicated to improving the lives of survivors of human trafficking and sex slavery. Read Shamis Beckley's full bio.