Back in 2009, when the current bank failure litigation wave was in its very earliest stages, I noted that in its preliminary efforts to lay the groundwork to pursue failed bank litigation, the FDIC had resurrected FIRREA, a statutory vestige from the S&L crisis in the late 80s and early 90s that had in the intervening time largely gone dormant. Though the FDIC’s reliance on Financial Institutions Reform, Recovery and Enforcement Act of 1989 in connection with the failed bank litigation is hardly surprising, what has been surprising has been the use that other regulators and prosecutors are now making of the statute.
As detailed in an August 21, 2013 memo from the King & Spalding law firm entitled “FIRREA – Aging but Agile, the Government’s Newest Formidable Weapon of Enforcement” (here), prosecutors have “added FIRREA to their arsenal by using its provisions to bring claims of financial fraud against major financial institutions.”
Since its passage over nearly 25 years ago, the statute was rarely used for civil fraud enforcement actions. Perhaps the statute’s first significant recent attempted use as a civil enforcement tool was the action that the DoJ filed in February 2013 against the three McGraw-Hill and its rating agency affiliate Standard & Poor’s. As discussed here, in reliance on claims asserted under FIRREA, the government is seeking $5 billion in penalties and alleging mail fraud. The government has filed other actions relying on FIRREA against several other major financial institutions.
There are a number of reasons that FIRREA has proved to be an attractive option for prosecutors and regulators. As the law firm memo notes, FIRREA has a lengthy statute of limitations, an “arguably low burden of proof, and the also provides the government with the ability to issue administrative subpoenas to conduct a civil investigation in advance of filing a civil complaint.
As the peak of the credit crisis recedes further into the past, the statute’s lengthy statute of limitations could prove to be particularly important. As the law firm memo notes, the statute of limitations period applicable to most anti-fraud suits is five years, which could put conduct in 2007 or 2008 beyond reach. However, FIRREA “offers a ten-year statute of limitations, which enables prosecutors to bring new lawsuits that extend back through the entirety of the crisis period.”
FIRREA also affords the opportunity for substantial financial recoveries. The statue provides for fines of various amounts, including in particular the right to recover the “actual loss incurred,” which could “aggregate to tens of millions.”
The prosecutors’ reliance on FIRREA received boost recently in two decisions out of the Southern District of New York. The government had filed actions directly against several major financial institutions in reliance on FIRREA’s provisions allowing recoveries for violations “affecting a federally insured financial institution.” The defendants in these suits questioned whether the statute authorized prosecutors to rely on this provision to bring actions against federally insured institutions for allegedly engaging in financial fraud that “affects” itself.
In an earlier decision by Judge Lewis Kaplan and in an August 19, 2013 decision by Judge Jed Rakoff (here), the courts held with respect to these so-called “self-affecting” claims that prosecutors may indeed pursue a bank for its own misdeeds. As the law firm memo notes, “without a ‘victim’ in play, this interpretation could greatly expand the class of defendants sued under FIRREA for financial fraud.” The memo’s authors add that these rulings, which endorse the expanded use of FIRREA, “likely will embolden the Justice Department to pursue financial institutions for fraud against third parties where the ultimate financial impact on the bank and its shareholders is substantial. “
As a result of these developments, the memo concludes that “the government’s actions appear to promise a host of suits targeting many financial institutions.” The government’s “renewed use of an creative theories regarding [FIRREA]…should be closely watched given the potential risks for financial institutions.”
Special thanks to a loyal reader for providing me with a copy of Judge Rakoff’s decision.