DOJ: Fond Of FIRREA

A concoction of Congress from the financial crisis previous to the most recent financial crisis is proving to be a big hit with prosecutors at the US Department of Justice. As Winston & Strawn lawyers Dan Webb and Robb Adkins explain, the DOJ has grown fond of FIRREA. In fact the DOJ "has filed more FIRREA actions in the past few years than it did in the first 20 years of the statute's existence."

The statute also sought to protect banks by providing enforcement authority to combat the perceived fraudulent conduct of individuals and third parties against financial institutions. Accordingly, Section 951 of the statute, codified at 12 U.S.C. 1833a, permits the U.S. attorney general to bring a civil action against anyone who violates 14 enumerated criminal statutes affecting a financial institution.

Some of these criminal statutes, such as bank fraud, clearly affect a financial institution. Other enumerated criminal statutes, such as mail and wire fraud, do not expressly concern financial institutions; therefore, for those offenses, the government must additionally prove that the fraud is one “affecting a federally insured financial institution.”

Prosecutors love FIRREA because it's a civil statute with a lower burden of proof than a criminal statute (preponderance of the evidence versus beyond a reasonable doubt), it provides the ability to issue pre-filing administrative subpoenas, and it has a hefty 10-year statute of limitations.

So far, so what, you might ask.

As an older statute is repurposed for new application, the DOJ finds itself asserting untested theories in an attempt to conform the law to the facts. Perhaps nowhere is this more starkly demonstrated than in a series of recent cases in which the DOJ brought action against financial institutions under FIRREA, putting at issue the statute provision “affecting a federally insured financial institution.” The “affecting” provision is not defined in the statute and, due to limited litigation in its first 20 years, no court cases had addressed the provision until recently.

 

In support of its recent FIRREA actions in financial crisis cases, the DOJ has asked the courts to interpret the  “affecting” requirement as permitting an action against the financial institution for allegedly engaging in fraud  that affected itself. See, for example,United States v. Bank of New York Mellon, 2013 WL 1749418 (S.D.N.Y. 2013). 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.

 As the authors caution, lawyers representing defendants must now be especially careful in responding to administrative subpoenas, since they are not secret (as are, for example, grand jury subpoenas)and could be used to gather information for "parallel investigations" that involve criminal penalties. Overall, they warn, "given that FIRREA is no longer being viewed by the DOJ as a statute designed to protect financial institutions from fraud, but rather to file actions against them for fraud, practitioners must proceed cautiously in responding to administrative subpoenas and assume that the financial institution may be a target of the investigation."

Yes, with an activist DOJ using FIRREA as another arrow in its quiver to punish "Too Small To Save" banks and those who serve them, assuming that you may be a target is always a wise assumption.