By Jonathan Stempel
NEW YORK (Reuters) - Wells Fargo & Co <WFC.N> faces a new legal worry after a federal appeals court on Thursday revived a whistleblower lawsuit by two former employees who said they were fired for trying to report misconduct by lenders that the bank later absorbed.
The 2nd U.S. Circuit Court of Appeals in Manhattan ordered a federal district judge to revisit the case, which concerned behavior predating the 2008 financial crisis and recent scandals concerning Wells Fargo's own practices, after the Supreme Court made it easier for some whistleblowers to sue.
"We look forward to stating our legal position with the district court," Wells Fargo spokeswoman Elise Wilkinson said.
Robert Kraus, a former Wachovia Corp controller, and Paul Bishop, a former World Savings Bank mortgage salesman, had accused their employers of hiding mortgage improprieties and billions of dollars of losses.
They said this enabled the lenders, along with San Francisco-based Wells Fargo, to falsely certify their compliance with banking laws, and borrow or receive aid from the Federal Reserve at favorable rates.
Wachovia bought World Savings' parent Golden West Financial Corp, an adjustable-rate mortgage specialist, for $24.2 billion in 2006, and Wells Fargo took over both for $12.7 billion at the end of 2008.
The plaintiffs sued under the federal False Claims Act, which lets whistleblowers pursue claims that the government was defrauded and, if successful, share in recoveries.
U.S. District Judge Brian Cogan in Brooklyn dismissed the case in 2015, and the appeals court upheld his decision in May 2016.
But the next month, the Supreme Court ruled in another case that some courts made it too hard to pursue False Claims Act cases, and said whistleblowers could sue over misrepresentations that were "material to the government's payment decision."
Ordered to reconsider Kraus' and Bishop's case, the appeals court directed Cogan to apply this new materiality standard to their claims.
Tejinder Singh, a partner at Goldstein & Russell representing the whistleblowers, in an interview said the decision serves as a warning for companies.
"Going forward, companies will likely feel far less safe taking undue advantage of government programs, and when they do transgress it will be easier for whistleblowers and the government itself to obtain redress," he said.
Wells Fargo is also combating fallout from practices including its creation of up to 3.5 million unauthorized accounts, charging 800,000 borrowers for unneeded auto insurance, and enrolling a potential 528,000 customers for online bill-paying without permission.
The case is U.S. ex rel. Bishop et al v Wells Fargo & Co et al, 2nd U.S. Circuit Court of Appeals, No. 15-2449.
(Reporting by Jonathan Stempel in New York; Editing by Phil Berlowitz)