Issa, Grassley, Smith and McHenry Probe Justice Dept on Lawsuit Quid Pro Quo Arrangement

September 27, 2012

WASHINGTON – Oversight and Government Reform Committee Chairman Darrell Issa, R-Calif., Senate Judiciary Ranking Member Chuck Grassley, R-Iowa, House Judiciary Committee Chairman Lamar Smith, R-Texas, and House Oversight Financial Services Subcommittee Chairman Patrick McHenry, R-NC, confronted the Justice Department with revelations that a political appointee at the Department arranged a quid pro quo for the City of St. Paul, Minnesota to drop a Supreme Court lawsuit, Magner v. Gallagher.  Documents and a staff briefing show that in exchange for St. Paul dropping its case before the high court, the Justice Department declined to intervene in an unrelated False Claims Act (FCA) case that had the potential to return over $180 million in damages to the U.S. treasury. 

“We were shocked to learn during this briefing and in subsequent document examination that Assistant Attorney General Tom Perez, over the objections of career Justice Department attorneys, enticed the City to drop its lawsuit that Mr. Perez did not want decided by the Supreme Court,” wrote Issa, Grassley, Smith and McHenry.  “This quid pro quo arrangement potentially cost U.S. taxpayers over $180 million.”

At a briefing for Committee staff, Department officials conceded that the quid pro quo is unprecedented.  In sacrificing a valid claim of fraud against the federal government, the Department ignored its commitment to the rule of law and to fair and impartial justice for all.

The letter can be found here and embedded below.

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September 24, 2012

The Honorable Eric H. Holder, Jr.
Attorney General
U.S. Department of Justice
Washington, D.C. 20530

Dear Attorney General Holder:

After repeated inquiries from the Committee on the Judiciary and the Committee on Oversight and Government Reform, the Department of Justice (Department) briefed staff about its involvement in the decision of the City of St. Paul, Minnesota, to withdraw is petition for certiorari in Magner v. Gallagher.[1]  We were shocked to learn during this briefing and in subsequent document examination that Assistant Attorney General Tom Perez, over the objections of career Justice Department attorneys, enticed the City to drop its lawsuit that Mr. Perez did not want decided by the Supreme Court.  This quid pro quo arrangement potentially cost U.S. taxpayers over $180 million.  As such, we write to ask that you produce all documents to the Committees and make Department officials available for transcribed interviews.

On February 10, 2012, the City of St. Paul abruptly abandoned a case before the U.S. Supreme Court that observers said it was poised to win.[2]  Slumlords had sued the city to prevent it from enforcing its housing code on the grounds that it disproportionately decreased the amount of housing available to minorities.[3]  The City argued that the Fair Housing Act of 1968 (FHA) prohibits only intentional discrimination, not neutral practices like code enforcement that happen to impact particular groups disproportionately.[4] 

Mr. Perez fretted that a decision in the City’s favor would dry up the massive mortgage lending settlements his Division was obtaining by suing banks for housing discrimination based on disparate effects rather than any proof of intent to discriminate.[5]  Accordingly, as documents reviewed by Committee staff show, he orchestrated a deal to induce the City to drop its Supreme Court challenge.  In exchange for St. Paul dropping its case before the high court, the Justice Department declined to intervene in an unrelated False Claims Act (FCA) case that had the potential to return over $180 million in damages to the U.S. treasury.

Many observers thought the Supreme Court was poised to hold that the FHA does not permit claims based on disparate impact when it agreed, in late 2011, to hear Magner v. Gallagher.[6]  However, on the eve of oral argument, St. Paul dropped the case.  News accounts attributed the reversal to calls from the Administration and former Senator Walter Mondale who called the decision “courageous.”[7]  However, material reviewed by the Committees reveals the decision was in fact the result of a dubious bargain brokered by Mr. Perez in which the Department agreed, over the objections of career attorneys, not to join an unrelated fraud lawsuit against the City in exchange for the City’s dropping its Magner appeal.

In early October, 2011, career attorneys from the Department’s Civil Fraud Section recommended that the United States join a lawsuit called Newell, brought by a private whistleblower charging that St. Paul violated the Federal FCA.[8]  The suit alleged that the City falsely certified it was using federal funds to create jobs for low income workers of all races, when in fact it was only focused on employing minorities.[9]  The memo authored by career Department attorneys characterized the City’s behavior as a “particularly egregious example” of false certifications.  On October 7, 2011, the Department of Housing and Urban Development (HUD) concurred in the recommendation as did the U.S. Attorney’s office in Minnesota. 

In the meantime, City attorneys and Mr. Perez began discussing a quid pro quo.  The record over the next five months paints the picture of Mr. Perez’s commitment to closing the deal over the objections of career attorneys in the Civil Division who he does not even control.  When the head of the Civil Division, Tony West, objected that HUD formally requested intervention, Mr. Perez replied he was “confident [their] position has changed.”  Mr. West was not aware that Mr. Perez had already worked out an agreement with HUD.[10]

As Mr. Perez labored to force a reversal, emails show career Department attorneys confused and frustrated.  They “cannot imagine” what the Gallagher case has to do with Newell.  “Weirdness” they call it.  “This is ridiculous . . . have no control . . . why are higher level people making phone calls.”  Notes from a meeting say it “looks like buying off St. Paul.”  As the deal closes, St. Paul’s lawyers push for even more.  Panicked attorneys email superiors to tell Mr. Perez to “make no more promises.”[11]

Meanwhile, Mr. Perez ordered career attorneys to prepare a revised memo recommending that the Department not intervene in Newell.  He further instructed them not to discuss the Magner case in explaining the reversal.  The attorneys objected and included a discussion of Magner anyway.  On February 8, 2012, Mr. West signed the revised memo.  On February 10, 2012, St. Paul requested that the Supreme Court dismiss its appeal.[12]

Reviewing the emails and voice messages, it is clear many of the attorneys involved felt there was an inappropriate quality to the quid pro quo.  If the United States had intervened in the Newell suit, taxpayers may have recovered as much as $186 million from the City.[13]  Instead, without the government’s intervention, the case was soon dismissed on grounds that would have been inapplicable had the government joined the suit.

At a briefing for Committee staff, Department officials conceded that the quid pro quo is unprecedented.[14]  According to the Department officials, Deputy Assistant Attorney General Thomas Perrelli instructed Mr. West that the decision on whether to intervene in Newell should be decided “on the merits” alone and not on the City’s offer to withdraw its appeal in Magner.[15]  Apparently those instructions were not followed.  It is unclear why the instructions of Mr. West’s and Mr. Perez’s superior were not followed.

One of the features of this quid pro quo, distinguishing it from a standard settlement or plea deal, was that it obstructed rather than furthered the ends of justice.  It was possible only because Mr. Perez knew the disparate impact theory he was using to bring fair lending cases was poised to be overturned by the Supreme Court.  So he bargained away a valid case of fraud against American taxpayers in order to shield a questionable legal theory from Supreme Court scrutiny in order to keep on using it.

This quid pro quo raises numerous legal and ethical questions of significant public interest.  In order to fully determine why the Department authorized this unusual bargain, we ask that you produce to the Committees all documents and communications reviewed by Committee staff in camera.  Further, we ask for all ethics and legal opinions related to this quid pro quo arrangement issued by any Department component, including but not limited to the Office of Professional Responsibility, Office of Legal Counsel, Office of the Deputy Attorney General, Civil Rights Division, or the Office of the Attorney General.  Please produce these materials to the Committees by September 28, 2012.

Additionally, because evidence reviewed by the Committees references critical conversations of which there is no documentary record, we ask that you make available the following Department officials for transcribed interviews: Tom Perez, Tony West, B. Todd Jones, and Chad A. Blumenfield.  Please make these officials available by September 28, 2012.  Congress and the public have a right to know the full rationale for the Department’s decision to cast aside the careful analysis of career Department attorneys on the merits of a case with tens of millions in taxpayer dollars at stake in order to get a litigant to drop a completely unrelated case.  We appreciate your assistance with this matter.

Please contact Holt Lackey or Daniel Huff of the House Committee on the Judiciary or David Brewer or Katelyn Christ of the House Committee on Oversight and Government Reform no later than September 28, 2012, to schedule the transcribed interviews.  Thank you for your attention to this matter.

Sincerely,

Lamar Smith
Chairman
Committee on the Judiciary

Darrell Issa
Chairman
Committee on Oversight and Government Reform

Patrick McHenry
Chairman
Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs
Committee on Oversight and Government Reform

Charles E. Grassley
Ranking Member
Committee on the Judiciary
United States Senate

cc:           The Hon. John Conyers, Jr., Ranking Member, Committee on the Judiciary

The Hon. Elijah Cummings, Ranking Member, Committee on Oversight and Government Reform

The Hon. Mike Quigley, Ranking Member, Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs

The Hon. Patrick J. Leahy, Chairman, Committee on the Judiciary, United States Senate