As we discussed a few years ago, the current administration's Department of Justice has been a huge fan of FIRREA, using its civil money penalties potential to squeeze blood out of bank turnips on the theory that a bank committed a "fraud" that "affected" a federally insured financial institution, that "affected" insitution being the bank that (allegedly) "effected" the fraud. It's a useful theory that permits the DOJ to avoid having to prove anything "beyond a reasonable doubt," as would be the standard in a criminal prosecution, but only by the lesser "preponderance of the evidence" standard applicable to civil lawsuits. Using FIRREA also permits the DOJ to issue pre-filing administrative subpoenas in order to go on "fishing expeditions" (which, unlike grand jury proceedings, are not subject to secrecy protections of the law). Moreover, the statute of limitations under FIRREA is a long 10 years, so there's a nice long period of time to beat potential defendants about the head and shoulders without having to actual file a lawsuit against them and to put your evidence where your threats are: in front of a judge.
As we said in 2013, defendants have vigorously opposed the ingenious use of FIRREA.
Defendants have argued, among other things, that “affecting” a financial institution under FIRREA means harming or victimizing the financial institution, and that the financial institution itself cannot have “affected” itself where the government’s theory is that it is the perpetrator, rather than the victim, of the alleged fraud. Thus far, the DOJ has been successful at the district court level, but appellate courts have yet to weigh in on this legal theory.
Recently, a federal appeals court did weigh in and, while not deciding that this stretching of the concept of "affecting" was out of bounds, nevertheless poked the DOJ in the eye. Outrageously, the US Second Circuit Court of Appeals in New York actually overturned an award against the Bank of America on the grounds that when the claim is based on "fraud," the government actually has to introduce evidence of fraud. Imagine that!
The appeals court panel threw out a $1.27 billion penalty against Bank of America over mortgages sold by its Countrywide unit, in what had become known as the “Hustle” case a civil lawsuit that the U.S. attorney’s office in Manhattan filed against Bank of America in 2012. It alleged that a precrisis Countrywide program called Hustle had generated shoddy mortgages and then misrepresented those loans when selling them to Fannie Mae and Freddie Mac, which had to be bailed out by the government during the financial crisis.
The panel said the jury’s findings in 2013 that the loans sold to Fannie and Freddie were below the quality that had been promised might be considered an “intentional breach of contract.” But it said those transgressions didn’t constitute fraud, overturning the jury verdict that had been a signature win for government officials widely criticized for bringing few cases tied to the 2008 crisis.
Josh Rosenkranz, who represented Ms. Mairone, said the ruling shows “this case was a massive government overreach from inception,’’ in which prosecutors “tried to take an allegation of garden variety breach of contract and turn it into a fraud with crushing and career-ending penalties.’’
“Critically, the Government presented no proof at trial that any quality guarantee was made with fraudulent intent at the time of contract execution,” the panel said. “In essence, the Government’s theory would convert every intentional or willful breach of contract…into criminal fraud.”
At a hearing in December, U.S. Appeals Judge Reena Raggi questioned whether the government was stretching the bounds of what constitutes fraud. “What you’re asking for is a major change in how we view breach,” Judge Raggi said at the hearing.
I guess the government stretched the bounds to the breaking point.
The DOJ will likely appeal the decision. The battle is also likely to last for a few more years, at least. Given the unpredictability of which clown might be chosen to run the circus this November, there is no guarantee that a change of administration would have any effect on the use of FIRREA by the DOJ to find banks defrauding themselves here, there, and everywhere "by a preponderance of the evidence." However, it's nice to see someone occasionally slap the backs of the federal government's "massively overreaching" hands.