A series of recent court rulings has effectively expanded the
Department of Justice's authority to investigate and prosecute
banks for claims related to the financial crisis. These
rulings have broadly interpreted a little-known provision of the
Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA) of 1989 to allow the DOJ to seek millions of dollars in
penalties from federally insured financial institutions for
violations of criminal fraud statutes. Under Section 951 of
FIRREA, codified as 12 U.S.C. § 1833a, the DOJ need only rely
on a civil burden of proof to prove criminal fraud, provided that
the alleged fraud "affects" a federally insured financial
institution. Although the provision was originally viewed as
a measure to protect banks from fraud by third parties, three
separate courts have recently construed this "affects"
requirement broadly and affirmed that a bank can be both a
"victim of" and a "participant in" the
predicate fraud that gives rise to a FIRREA claim. As a
result, FIRREA has become the DOJ's statute of choice when
proceeding against financial institutions. Given the serious
consequences of a FIRREA suit, financial institutions should be
aware of its unique reach and legal standards.
The DOJ's use of FIRREA suits has been linked closely to its
role on the Financial Fraud Task Force. President Obama
formed the Task Force in 2009 in response to the financial
crisis. The Task Force comprises more than 20 federal
agencies, including the Department of Justice, the Consumer
Financial Protection Bureau (CFPB), the Securities and Exchange
Commission (SEC), the Internal Revenue Service, and the banking
regulatory agencies and consists of several working groups,
including a Consumer Protection Working Group and the Mortgage
Working Group. A recent press release describes the Task
Force as "the broadest coalition of law enforcement,
investigatory and regulatory agencies ever assembled to combat
fraud." Although the Task Force comprises numerous federal
agencies, it operates under the leadership and guidance of the
Department of Justice, as Attorney General Eric Holder serves as
its chair.
The DOJ has relied on FIRREA heavily in conjunction with its work
on the Financial Fraud Task Force because of the statute's
broad reach, lower burden of proof, substantial penalties, and long
statute of limitations. Specifically, FIRREA provides that
the DOJ may seek civil penalties for violations of 13 different
federal criminal laws, including mail and wire fraud statutes (18
U.S.C. §§ 1341, 1343), when those violations affect
federally insured financial institutions. See 12 U.S.C.
§1833a. Under FIRREA, the DOJ need only prove that there
was a violation of one of these predicate criminal offenses
"by a preponderance of the evidence," which is a civil
evidentiary burden. 12 U.S.C. § 1833a(f). If the
DOJ successfully proves a violation of one or more predicate
offenses, then under FIRREA, a court can impose a civil penalty
that is as much as $1 million for each violation. But in the
case of continuing violations a civil money penalty can be imposed
that is the lesser of $1 million a day or a total of $5
million. See 12 U.S.C. §§ 1833a(b)(1),(2).
However, many of the larger FIRREA cases that DOJ is currently
prosecuting against banks alleging mortgage fraud seek penalties
well in excess of these numbers, because FIRREA also imposes a
penalty if there is a finding that "any person [including any
corporation] derives pecuniary gain from the violation," or if
the violation results in a loss to a person other than the
violator. "[T]he amount of the civil penalty may exceed
the amounts [described above] but may not exceed the amount of such
gain or loss." 12 U.S.C. §
1833a(b)(3).
Furthermore, under FIRREA, the DOJ can gather evidence by a formal
process in advance of filing a civil action. FIRREA allows
the DOJ to issue administrative subpoenas seeking documents and
testimony in connection with a civil investigation initiated
"in contemplation of a civil proceeding under"
FIRREA. 12 U.S.C. § 1833a(g)(1). This
investigative authority is akin to the enforcement authority of
other agencies like the SEC, the CFPB, and the Federal Trade
Commission (FTC). In addition, FIRREA has a ten-year statute
of limitations; this allows the DOJ to investigate conduct alleged
to have occurred several years earlier during the financial crisis,
further enhancing the appeal of FIRREA in the eyes of the
DOJ. In recent years, the DOJ has brought numerous FIRREA
cases and pursued even more investigations under
FIRREA.
The DOJ's current use of FIRREA has, in many ways, strayed
from the statute's origins. Congress passed FIRREA in
response to the savings and loan crisis of the late 1980s.
The statute's legislative history suggests that Congress
focused little if any debate on Section 1833a. Rather, the
congressional debate indicates that Congress was focused more on
expanding authority to bring enforcement actions against
individuals and related parties whose fraudulent activities caused
the failure of savings and loan institutions.
As the DOJ has increased its use of FIRREA suits, courts have
increasingly examined the question of whether there are limits on
its scope and application. In several high-profile matters
pending in United States federal district court for the Southern
District of New York, banks that are defendants in FIRREA cases
have contended that their cases should be dismissed on grounds that
the banks could not – as a matter of FIRREA's plain
language and intent – engage in self-inflicting
conduct. In other words, they could not engage in alleged
wrongdoing that "affects" themselves. The courts,
however, have disagreed. On September 24, in United States of
America v. Wells Fargo Bank, N.A., 12-civ-7527, a case alleging
that Wells Fargo engaged in fraudulent mortgage underwriting, the
court held that a "financial institution, through its own
misconduct, can affect itself within the meaning of FIRREA."
This holding builds on an earlier and even more expansive opinion
issued by Judge Lewis Kaplan in United States of America v. Bank of
New York Mellon, 2013 WL 1749418 (S.D.N.Y. April 24, 2013), and has
further validated the DOJ's expansive use of FIRREA and made it
the tool of choice for bringing civil fraud cases against banks in
the aftermath of the financial crisis.
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