By Nate Raymond 

Nov 1 (Reuters) - When the U.S. Justice Department sued Bank of America Corp last week for $1 billion, federal prosecutors in Manhattan once again based their case on the False Claims Act, the Civil War-era whistle-blower law that's recently become the Justice Department's handiest tool in its efforts to hold banks accountable for their role in the mortgage meltdown and foreclosure crisis.

The FCA permits private whistle-blowers to file suits alleging that the government has been defrauded. The Justice Department then determines whether to intervene and litigate the whistle-blower's claims. If the suit pans out -- which is almost always the case if the government intervenes -- private plaintiffs receive a cut of whatever the Justice Department recovers.

In the recent spate of bank cases, FCA settlements already total almost $1.64 billion. The U.S. Attorney's Office in Manhattan has used the FCA in six civil fraud suits against major lenders including Citigroup Inc and Deutsche Bank, netting $493.4 million in settlements so far. The U.S. Attorney's Office in Brooklyn, meanwhile, settled two FCA cases against Bank of America for $1 billion in February, as part of the $25 billion nationwide mortgage settlement with five banks. The foreclosure settlements also resolved four other whistle-blower suits against the banks for another $146.2 million.

The whistle-blowers in these cases have been handsomely rewarded. Kyle Lagow, one of the two whistle-blowers in the Brooklyn U.S. Attorney's BofA settlement, received an award of $14.6 million. Sherry Hunt, a former employee of CitiMortgage Inc, earned $31.7 million after Citigroup agreed to a $158.3 million settlement in February.

The Manhattan U.S. Attorney's new suit against Bank of America represents a significant change in the government's use of the False Claims Act. Until last week, the FCA cases have focused on the banks' allegedly fraudulent certification of mortgages for insurance under a program administered by the Federal Housing Administration. By contrast, the new BofA suit asserts that Countrywide defrauded the government by misrepresenting the quality of mortgage loans it sold to Fannie Mae and Freddie Mac.

That raises some unique questions for the Justice Department. Fannie and Freddie were a strange hybrid of the U.S. government and private investment. As so-called government-sponsored entities, they were publicly traded companies until September 2008, when the federal government placed them in conservatorship. The FCA, remember, can only be asserted when the government has been defrauded, not private investors.

Recent amendments to the FCA under the Fraud Enforcement and Recovery Act in 2009 broadened the Justice Department's ability to go after any money spent to advance a government program or interest. Yet the complaint against Bank of America alleges conduct by Countrywide Financial Corporation and Bank of America that dates back to 2007, before the government takeover or the amendments. "Here you're dealing with a period of time when (Fannie and Freddie) are to a large degree private entities," said Mark Labaton, who heads the whistle-blower practice at Motley Rice. "And that's what I think (Bank of America's lawyers) will argue if they fight this, that you're not dealing with a public entity."

The bank appears to be gearing up for a fight. At a hearing last week attended by Reuters, Bank of America counsel Brendan Sullivan of Williams & Connelly said "fascinating issues arise here" and the lawsuit was "not like anything we have seen before." Lawrence Grayson, a spokesman for BofA, said in a statement, "The claim that we have failed to repurchase loans from Fannie Mae is simply false."

It's not clear if the Justice Department has more suits involving Fannie and Freddie mortgages in the FCA pipeline, but whistle-blower lawyers say it's a good bet that banks haven't seen the last of the False Claims Act. "I would expect plenty more financial fraud False Claims Act being unsealed in the future," said Shayne Stevenson of Hagens Berman Sobol Shapiro, who represented Lagow and Gregory Mackler, another BofA whistle-blower, in the Brooklyn settlement.

There's good statistical evidence as well. In fiscal year 2011, whistle-blowers filed 175 lawsuits involving non-defense or health claims, up from 136 a year earlier, according to the Justice Department. At least one lawyer, Joel Androphy of Berg & Androphy, said he had pending a sealed mortgage-related lawsuit on behalf of a whistle-blower against a financial institution he declined to name. "I think it's pretty significant," he said.

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