The government’s ever-evolving response to the United States financial crisis has come full circle, as civil Justice Department Attorneys seek to rely on legislation enacted to protect financial institutions from fraud to sue those very same institutions. Recently, the United States Attorney’s Office for the Southern District of New York has initiated a number of law suits under the “obscure” Financial Institutions Reform Recovery Enforcement Act (FIRREA). FIRREA was enacted in 1989 in response to the massive failure of almost half of America’s savings and loan institutions. In its 24 year history, the law typically has been used to bring suit against officers and directors of failed institutions. The government now seeks to expand the statute’s reach to include the institutions themselves.
Section 951 of FIRREA permits the government to bring an action for civil penalties against anyone who violates any of a number of criminal statutes, including those prohibiting mail and wire fraud, when the fraud is one “affecting a federally insured financial institution.” In the Southern District of New York, civil prosecutors have sued the Bank of New York Mellon (BNYM) alleging that the bank and one of its employees engaged in a scheme to defraud the bank’s clients by representing that the bank provided “best execution” when pricing foreign exchange trades. Last month, Judge Lewis A. Kaplan addressed the question of whether a federally insured financial institution may be held civilly liable under the FIRREA for allegedly engaging in fraudulent conduct “affecting” itself. Judge Kaplan answered the question in the affirmative, rejecting defendant BNYM’s contention that the affected institution must be either the victim of or an innocent bystander to the alleged fraud, not the perpetrator. Judge Kaplan stated, “In passing FIRREA, Congress sought to deter fraudulent conduct that might put federally insured deposits at risk. Where, as alleged here, a federally insured financial institution has engaged in fraudulent activity and harmed itself in the process, it is entirely consistent with the text and purposes of the statute to hold the institution liable for its conduct.”
Judge Kaplan’s decision was significant in light of other pending FIRREA cases brought by the government, such as the $1 billion civil FIRREA suit filed against the Bank of America. In presiding over that case, Judge Kaplan’s colleague, Southern District of New York Judge Jed S. Rakoff seemed to hold a different view of FIRREA’s reach. At an April 29 hearing in the BOA case, Judge Rakoff announced that he was “troubled” by the government’s novel interpretation of the law, and many believe Judge Rakoff’s statements foretold of a split in the Southern District on the issue of FIRREA’s reach. Two days later, however, Judge Rakoff changed course, writing that for reasons to be set forth in a forthcoming written opinion, he would allow the government’s FIRREA claims to proceed. As of this writing, that opinion had not yet been released.
For now, it seems the government’s recently filed FIRREA cases against banks and financial institutions will proceed to trial. The expanded reading of FIRREA allows the government to make mail and wire fraud allegations, traditionally categorized as criminal acts, under the lower standard of proof required in civil actions. In addition, the government is able to recoup large sums of money without imposing the collateral consequences that accompany the criminal conviction of a corporation.
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