Wachovia investment bank hit with whistleblower suit over accounting and controls

A recently unsealed lawsuit filed by a whistleblower on behalf of the U.S. Government says that Wachovia’s investment bank violated accounting rules and evaded internal controls to benefit management and defrauded U.S. Government. The Government’s agencies had loaned money and provided other assistance to the bank in the financial crisis.
Two whistleblowers, including a former Wachovia controller , filed their lawsuit  targeting alleged fraud that occurred in Wachovia’s Charlotte-based corporate and investment bank. That bank handled large numbers of transactions which packaged commercial real estate loans into securities. The complaint also alleges that Golden West Financial, the mortgage company Wachovia bought in 2006, had poor internal controls and inadequate underwriting practices.

Like other big banks, Wachovia began reporting billions of dollars in losses in its investment bank in 2007 after a global credit crunch spurred by a meltdown in subprime mortgages made to borrowers with spotty credit. By the fall of 2008, with losses also ballooning in its Golden West portfolio, the stalwart North Carolina institution was on the verge of failure and in need of an emergency sale to San Francisco-based Wells Fargo.

The case alleges that Wachovia defrauded the government of billions of dollars when it accepted payment from various federal programs while engaging in unsound banking practices, making false certifications about its financial statements and concealing “mismanagement and fraudulent practices.”

One whistleblower is Robert Kraus, a former Wachovia controller. The other is Paul Bishop, a former Golden West mortgage loan officer who lives in California’s Bay Area.

The pair initially filed their suit under seal, which is normal for a false claims case. The United States in July declined to officially join the suit but said the whistleblowers could continue the case on their own. The plaintiffs filed a motion this week saying they had no objection to it being unsealed.

Jeffrey Newman represents whistleblowers