By Christina Rexrode and Aruna Viswanatha 

Edward O'Donnell blew the whistle on "the Hustle," a high-speed mortgage-selling scheme that led to a $1.27 billion fine against Bank of America in 2014. On Monday, an appeals court threw out the penalty -- but Mr. O'Donnell still gets to keep a $58 million reward.

How come? The answer lies in a complex web of cases against the bank and the different funds used to cover different alleged violations.

Mr. O'Donnell was the government's star witness in its trial against Bank of America in 2013 over the so-called Hustle, the nickname for a program named "High-Speed Swim Lane," or HSSL, that encouraged employees to sell high volumes of mortgages quickly. But he didn't get paid from the $1.27 billion penalty since the bank decided to appeal it. So Mr. O'Donnell instead filed a separate, similar whistleblower lawsuit against the bank in June 2014, when the company was in the late stages of negotiating what became a $16.65 billion mortgage-securities settlement with the Justice Department.

The Justice Department set aside money from that settlement for Mr. O'Donnell and three other whistleblowers who had raised different allegations about programs at the bank and Countrywide Financial Corp., the mortgage giant that Bank of America acquired at the height of the financial crisis. Mr. O'Donnell and two of the other whistleblowers were employees of Countrywide.

In all, the bank paid $1.05 billion to resolve the four whistleblowers' accusations; the Justice Department sent $170 million to the whistleblowers themselves. The remaining amount -- in this case, $880 million -- usually goes to the Treasury Department or to "victim agencies," according to the Justice Department. Among the other whistleblowers is Jim Marchese, a former star of "Real Housewives of New Jersey" whose mortgage firm was awarded $8.5 million.

Whistleblower lawsuits allow ordinary citizens and corporate insiders to sue on behalf of the U.S. if the allegations involve fraud against the federal government. If a case is successful, the tipster can collect a portion of the penalties.

Regulators and law enforcers say whistleblowers are key to rooting out wrongdoing on Wall Street and beyond, and they are calling for bigger payouts and greater protections for them. Whistleblowers often lose their careers when they accuse a company of wrongdoing.

"Every whistleblower lawyer tells the client to be prepared for lengthy delays and protracted litigation," said whistleblower attorney David Colapinto.

The Hustle lawsuit put Mr. O'Donnell and his lawyer, David Wasinger, in the middle of one of the signature cases of the financial crisis, and what the government has hailed as a victory in its quest to punish banks for the financial crisis.

In the Monday ruling, which was narrow in scope, a three-judge panel said the bank might have engaged in "intentional breach of contract" but that the Justice Department hadn't proved fraud.

The panel said the issue turned on timing, and that the government needed to show -- and didn't -- that Countrywide intended to defraud Fannie Mae and Freddie Mac when it entered into contracts for the housing entities to purchase the loans at issue.

The U.S. attorney's office in Manhattan, which brought the case, had argued in a court filing that the contracts "expressly stated" that the representations about the quality of the loans were essentially renewed each time a loan was sold.

Mr. Wasinger said the average person would view the decision as a technical ruling, in which "the bank got off the hook after a jury and federal judge both found them liable."

Mr. Wasinger said Tuesday that Mr. O'Donnell had taken a huge risk by turning on his former employer, and had provided invaluable help to the Justice Department. Mr. Wasinger declined to say how much he received in legal fees for the case.

Messrs O'Donnell and Wasinger were old business acquaintances when Mr. O'Donnell came to him in 2012 saying that he wanted to go public with misdeeds he said he witnessed at his former employer, Countrywide.

Mr. Wasinger, an attorney at a small firm in St. Louis, had mostly dealt in local business litigation and had only been to New York twice, but he agreed to represent Mr. O'Donnell. As a result, he also stumbled into another major case: He later represented the whistleblower who helped the Justice Department secure a $614 million settlement against J.P. Morgan Chase & Co., which was accused of submitting questionable mortgages for federal insurance.

By the time Mr. O'Donnell filed his original lawsuit, he was working for Fannie Mae, one of the companies that he said the bank had defrauded. His attorney declined to say what he is doing now.

 

(END) Dow Jones Newswires

May 24, 2016 19:20 ET (23:20 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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