FIRREA: Everything Old Is New Again

FIRREA contains both civil and criminal components ' such as the addition of bank fraud to crimes covered under the Racketeer Influenced and Corrupt Organizations Act. The civil monetary penalties have been the locus of the statute's resurgence. Among its most important are the FIRREA's civil provisions, with which the DOJ may seek monetary penalties for any of fourteen separate criminal offenses. For most of the predicate criminal acts, a simple showing of the predicate offense, alone, is sufficient to establish FIRREA liability. Others, such as false claims (18 U.S.C. ' 287) and mail or wire fraud (18 U.S.C. ” 1341, 1343) require a showing of the additional element that the conduct “affect[ed] a federally insured financial institution.” The term “financial institution,” is broadly defined to include depository institutions and mortgage lending businesses. 18 U.S.C. ' 20.'

If a defendant is found to have committed one of the predicate offenses, the penalties are high ($1.1 million per violation, or $5.5 million for “continuing” violations) and crippling for all but the largest of financial institutions. FIRREA also authorizes the U.S. Attorney General to seek civil penalties up to the amount of the losses suffered as a result of the alleged violations. For example, the FIRREA action filed early this year against Standard & Poor's regarding its rating of mortgage-backed securities and collateralized debt seeks upwards of $5 billion in damages. United States v. McGraw-Hill Companies Inc., No. CV12-00779-DOC (C.D. Cal. Feb. 4, 2013) (complaint of the United States).

The statute of limitations for FIRREA is also much longer. It allows the DOJ to bring claims up to 10 years after the claim accrues. 12 U.S.C. 1833a(h). FIRREA also gives the DOJ broad investigative tools and administrative subpoenas to conduct investigations into potential violations, including the taking depositions and compelling the production of documents. Under the federal wiretap statute, the DOJ can also petition a court to place wire taps in connection with bank fraud investigations. 18 USC '2516(c).

The Redirection of FIRREA

In its recent cases, the Government has focused on the' alleged conduct of financial institutions as the basis for its FIRREA claim. These recent decisions have affirmed that an institution's own conduct is within the meaning of “affecting a federally insured financial institution” under FIRREA.'

In United States v. Bank of New York Mellon, 11 Civ. 6969 LAK, 2013 WL 1749418 (S.D.N.Y. April 24, 2013), the Government alleged that the Bank of New York Mellon (BNYM), one of the world's largest custodial banks, and a BNYM executive, deliberately and fraudulently concealed how BNYM priced transactions for its standing instruction foreign exchange services, leading customers to believe that they were receiving the best prices available. The Government argued that such activity “affected” BNYM because the defendants' behavior resulted in lawsuits that collectively exposed BNYM to billions of dollars in potential liability. Id. at *6.

In its motion to dismiss, BNYM argued that its pricing policies of financial institutions could not be a basis for liability. In other words, BNYM argued that holding it liable under FIRREA would contravene the purpose of the statute to protect such institutions from the conduct of others, not a bank's own practices.

The court rejected the defendants' argument. It relied on an analysis of FIRREA's structure and intent, and the plain meaning of the word “affect.” The court noted that the purpose of FIRREA was to “deter fraudulent conduct that might put federally insured deposits at risk.” It concluded that when a federally insured financial institution engages in fraudulent activity and harms itself in the process, “it is entirely consistent with the text and purposes of the statute to hold the institution liable for its conduct.” Id. at *1.

Similar Interpretations

Countrywide

On the heels of Bank of New York Mellon, another S.D.N.Y. case similarly interpreted the meaning of “affect.” In United States v. Countrywide Financial Corporation, No. 12 Civ. 1422 (JSR), 2013 WL 4437232 at *1 (S.D.N.Y. Aug. 16, 2013), the United States intervened in a qui tam case alleging that the defendant banks defrauded Fannie Mae and Freddie Mac (collectively, Government Sponsored Entities, GSE) by originating billions of dollars' worth of loans that did not comply with GSE guidelines. Countrywide, according to the Government, then sold the loans to the GSEs while misrepresenting that it complied with guidelines.'

Applying the reasoning of Bank of New York Mellon, the Government argued that the defendant banks were “affected” within the meaning under FIRREA because they directly or indirectly paid billions to settle repurchase demands from the GSEs on defective loans. Cutting through the more complex arguments of statutory intent, according to the court, “[t]he key term, 'affect,' is a simple English word, defined in Webster's as 'to have an effect on,'” and Countrywide's alleged conduct “affected” the financial institution. Id. at *7.

Wells Fargo

In September 2013, a similar decision was reached in United States v. Wells Fargo Bank, N.A., No. 12 Civ. 7527 (JMF) 2013 U.S. Dist. LEXIS 136539 (S.D.N.Y. Sept. 24, 2013). The Government alleged that Wells Fargo Bank falsely certified to the Department of Housing and Urban Development (HUD) that a substantial number of loans had been properly underwritten, but instead, those were not, and they contained unacceptable levels of risk. The Government's complaint alleges that Wells Fargo exposed itself to actual losses and increased risk of loss. Wells Fargo filed a motion to dismiss, arguing that “self-affecting” misconduct is not within the scope of FIRREA. The court denied that motion on Sept. 24, 2013 referring to the Bank of New York Mellon and Countrywide Financial decisions. It explained that the “question [is] whether a financial institution, through its own aggressive approach, own misconduct, can affect itself within the meaning of FIRREA ' courts have repeatedly held it can. Id. at 15.

McGraw-Hill Companies Inc.

Last, the Government's case against Standard & Poor's (S&P) and its parent, McGraw-Hill (United States v. McGraw-Hill Companies Inc., No. CV12-00779-DOC), reflects a different expansion of “affect” in FIRREA. As in the cases above, while not focusing on an individual borrower or executive that defrauded a financial institution, the Government here alleges that S&P's false or misleading credit ratings “affected” the financial institutions that relied upon those ratings. Id.

Stepped Up Enforcement Is Here to Stay

These recent FIRREA actions reflect a broad definition of the term “affect,” which the DOJ is likely to continue to use in its cases against financial institutions. While individuals engaged in self-dealing and insider trading were once the culprit and the institution was the victim, the focus has shifted to the conduct of financial institutions themselves. From depository institutions, to mortgage companies, no financial institution ' however defined ' is beyond review. Given the difficulties of proof in a criminal case for the same conduct, the resurgence of FIRREA's civil penalties provision, with its heightened penalties, expansive discovery and long-running statute of limitations, will likely remain a viable approach for the Government for decades to come.'

Attorney General Eric Holder has stated that he would make major charging decisions in cases stemming from the 2008 financial collapse before he ends his tenure: “I expect to be here to announce a series of significant matters that we'll be bringing ' My message is, anybody who's inflicted damage on our financial markets should not be of the belief that they are out of the woods because of the passage of time.” While any settlements or judgments will be large, the commitment of the DOJ will ensure that these FIRREA developments' could reverberate for many years.'

Jonathan S. Feld ([email protected]), a member of this newsletter's Board of Editors, is a Partner at Dykema Gossett PLLC, where he focuses on civil and criminal enforcement matters. Edward W. Somers is an associate in the firm's Consumer Financial Services group. Kara B. Murphy is an associate in the firm's Business Litigation group.

In the aftermath of the savings and loan crisis of the 1980s, Congress passed a number of financial reforms, including the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Its purpose was to provide federal enforcement authorities with a powerful mechanism to pursue borrowers, bank officers and others whose fraudulent action “affected a federally insured financial institution.” In one high-profile prosecution, Charles Keating, the owner and chief executive of a federally insured thrift, Lincoln Savings and Loan Association (Lincoln), was charged in a multi-count indictment with myriad violations of federal law, including FIRREA. This prosecution ' with its focus on borrowers, appraisers and bank executives whose conduct harmed federally insured institutions ' was the norm for FIRREA cases for two decades.

Recent years have seen significant refocus of the FIRREA statute. Largely in response to the financial crisis of 2008, the government has brought claims against at least 2,900 individual defendants facing charges of mortgage fraud. While many cases involve causes of action based on the False Claims Act, 31 U.S.C. ' 3730, the government is also pursuing many of these defendants under FIRREA. 12 U.S.C. ' 1833. The language of FIRREA requiring that conduct “affect” a financial institution remains unchanged since the 1990s. The Department of Justice (DOJ) is relying on this language to address the risky lending practices of the financial institutions themselves as a basis for FIRREA claims. In other words, the focus 20 years ago was on protecting financial institutions from individuals, but FIRREA has now become an important instrument to address financial institutions' own improper lending or other business practices.

The Scope of FIRREA

FIRREA contains both civil and criminal components ' such as the addition of bank fraud to crimes covered under the Racketeer Influenced and Corrupt Organizations Act. The civil monetary penalties have been the locus of the statute's resurgence. Among its most important are the FIRREA's civil provisions, with which the DOJ may seek monetary penalties for any of fourteen separate criminal offenses. For most of the predicate criminal acts, a simple showing of the predicate offense, alone, is sufficient to establish FIRREA liability. Others, such as false claims (18 U.S.C. ' 287) and mail or wire fraud (18 U.S.C. ” 1341, 1343) require a showing of the additional element that the conduct “affect[ed] a federally insured financial institution.” The term “financial institution,” is broadly defined to include depository institutions and mortgage lending businesses. 18 U.S.C. ' 20.'

If a defendant is found to have committed one of the predicate offenses, the penalties are high ($1.1 million per violation, or $5.5 million for “continuing” violations) and crippling for all but the largest of financial institutions. FIRREA also authorizes the U.S. Attorney General to seek civil penalties up to the amount of the losses suffered as a result of the alleged violations. For example, the FIRREA action filed early this year against Standard & Poor's regarding its rating of mortgage-backed securities and collateralized debt seeks upwards of $5 billion in damages. United States v. McGraw-Hill Companies Inc., No. CV12-00779-DOC (C.D. Cal. Feb. 4, 2013) (complaint of the United States).

The statute of limitations for FIRREA is also much longer. It allows the DOJ to bring claims up to 10 years after the claim accrues. 12 U.S.C. 1833a(h). FIRREA also gives the DOJ broad investigative tools and administrative subpoenas to conduct investigations into potential violations, including the taking depositions and compelling the production of documents. Under the federal wiretap statute, the DOJ can also petition a court to place wire taps in connection with bank fraud investigations. 18 USC '2516(c).

The Redirection of FIRREA

In its recent cases, the Government has focused on the' alleged conduct of financial institutions as the basis for its FIRREA claim. These recent decisions have affirmed that an institution's own conduct is within the meaning of “affecting a federally insured financial institution” under FIRREA.'

In United States v. Bank of New York Mellon, 11 Civ. 6969 LAK, 2013 WL 1749418 (S.D.N.Y. April 24, 2013), the Government alleged that the Bank of New York Mellon (BNYM), one of the world's largest custodial banks, and a BNYM executive, deliberately and fraudulently concealed how BNYM priced transactions for its standing instruction foreign exchange services, leading customers to believe that they were receiving the best prices available. The Government argued that such activity “affected” BNYM because the defendants' behavior resulted in lawsuits that collectively exposed BNYM to billions of dollars in potential liability. Id. at *6.

In its motion to dismiss, BNYM argued that its pricing policies of financial institutions could not be a basis for liability. In other words, BNYM argued that holding it liable under FIRREA would contravene the purpose of the statute to protect such institutions from the conduct of others, not a bank's own practices.

The court rejected the defendants' argument. It relied on an analysis of FIRREA's structure and intent, and the plain meaning of the word “affect.” The court noted that the purpose of FIRREA was to “deter fraudulent conduct that might put federally insured deposits at risk.” It concluded that when a federally insured financial institution engages in fraudulent activity and harms itself in the process, “it is entirely consistent with the text and purposes of the statute to hold the institution liable for its conduct.” Id. at *1.

Similar Interpretations

Countrywide

On the heels of Bank of New York Mellon, another S.D.N.Y. case similarly interpreted the meaning of “affect.” In United States v. Countrywide Financial Corporation, No. 12 Civ. 1422 (JSR), 2013 WL 4437232 at *1 (S.D.N.Y. Aug. 16, 2013), the United States intervened in a qui tam case alleging that the defendant banks defrauded Fannie Mae and Freddie Mac (collectively, Government Sponsored Entities, GSE) by originating billions of dollars' worth of loans that did not comply with GSE guidelines. Countrywide, according to the Government, then sold the loans to the GSEs while misrepresenting that it complied with guidelines.'

Applying the reasoning of Bank of New York Mellon, the Government argued that the defendant banks were “affected” within the meaning under FIRREA because they directly or indirectly paid billions to settle repurchase demands from the GSEs on defective loans. Cutting through the more complex arguments of statutory intent, according to the court, “[t]he key term, 'affect,' is a simple English word, defined in Webster's as 'to have an effect on,'” and Countrywide's alleged conduct “affected” the financial institution. Id. at *7.

Wells Fargo

In September 2013, a similar decision was reached in United States v. Wells Fargo Bank , N.A., No. 12 Civ. 7527 (JMF) 2013 U.S. Dist. LEXIS 136539 (S.D.N.Y. Sept. 24, 2013). The Government alleged that Wells Fargo Bank falsely certified to the Department of Housing and Urban Development (HUD) that a substantial number of loans had been properly underwritten, but instead, those were not, and they contained unacceptable levels of risk. The Government's complaint alleges that Wells Fargo exposed itself to actual losses and increased risk of loss. Wells Fargo filed a motion to dismiss, arguing that “self-affecting” misconduct is not within the scope of FIRREA. The court denied that motion on Sept. 24, 2013 referring to the Bank of New York Mellon and Countrywide Financial decisions. It explained that the “question [is] whether a financial institution, through its own aggressive approach, own misconduct, can affect itself within the meaning of FIRREA ' courts have repeatedly held it can. Id. at 15.

McGraw-Hill Companies Inc.

Last, the Government's case against Standard & Poor's (S&P) and its parent, McGraw-Hill (United States v. McGraw-Hill Companies Inc., No. CV12-00779-DOC), reflects a different expansion of “affect” in FIRREA. As in the cases above, while not focusing on an individual borrower or executive that defrauded a financial institution, the Government here alleges that S&P's false or misleading credit ratings “affected” the financial institutions that relied upon those ratings. Id.

Stepped Up Enforcement Is Here to Stay

These recent FIRREA actions reflect a broad definition of the term “affect,” which the DOJ is likely to continue to use in its cases against financial institutions. While individuals engaged in self-dealing and insider trading were once the culprit and the institution was the victim, the focus has shifted to the conduct of financial institutions themselves. From depository institutions, to mortgage companies, no financial institution ' however defined ' is beyond review. Given the difficulties of proof in a criminal case for the same conduct, the resurgence of FIRREA's civil penalties provision, with its heightened penalties, expansive discovery and long-running statute of limitations, will likely remain a viable approach for the Government for decades to come.'

Attorney General Eric Holder has stated that he would make major charging decisions in cases stemming from the 2008 financial collapse before he ends his tenure: “I expect to be here to announce a series of significant matters that we'll be bringing ' My message is, anybody who's inflicted damage on our financial markets should not be of the belief that they are out of the woods because of the passage of time.” While any settlements or judgments will be large, the commitment of the DOJ will ensure that these FIRREA developments' could reverberate for many years.'

Jonathan S. Feld ([email protected]), a member of this newsletter's Board of Editors, is a Partner at Dykema Gossett PLLC, where he focuses on civil and criminal enforcement matters. Edward W. Somers is an associate in the firm's Consumer Financial Services group. Kara B. Murphy is an associate in the firm's Business Litigation group.