1 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) October 19, 2016
2 Today’s Presenters Harold Gordon 212-326-3740 [email protected]Special Thanks to Our Colleague James Gross Rajeev Muttreja
3 Historical BackgroundEnacted in 1989 in the wake of S&L crisis Mid-1980s: S&L institutions widely began to fail after unanticipated spikes in interest rates The Federal Savings Loan and Insurance Company (FSLIC), created by Congress in the 1930s, was rendered insolvent
4 Enactment of FIRREA Congress passed FIRREA in August 1989 to impose “sweeping changes” on the industry with the stated goal to “strengthen the enforcement powers of Federal regulators of depository institution[s]” Subjected financial institutions to higher standards and restricted lending practices Established additional government oversight of financial institutions
5 FIRREA’s Provisions on Civil PenaltiesFIRREA also sought to “strengthen the penalties for defrauding or otherwise damaging financial institutions” (Conf. Committee Joint Explanatory Statement at 395) At the time of enactment, however, these provisions on civil penalties were largely an afterthought Commentators instead focused on whether the new requirements would further strain the S&L industry
6 Period of Dormancy From enactment until the 2008 financial crisis, very few actions were brought under FIRREA The Supreme Court addressed FIRREA three times during this period, but never construed FIRREA’s enforcement provisions: O’Melveny & Myers v. FDIC, 512 US. 79 (1994) United States v. Winstar Corp., 518 U.S. 839 (1996) Atherton v. FDIC, 519 U.S. 213 (1997)
7 2008 Financial Crisis In May 2010, the S.D.N.Y. United States Attorney’s Office created a new civil fraud unit that would leverage FIRREA’s enforcement provisions The C.D. Cal. U.S. Attorney’s Office contemporaneously touted FIRREA as an “extremely powerful civil remed[y] available to supplement criminal prosecutions” in connection with the financial crisis Shortly thereafter, DOJ began to widely use FIRREA against financial institutions
8 FIRREA’s Enforcement Provision: 12 U.S.C. § 1833a12 U.S.C. § 1833a authorizes DOJ to bring civil actions against defendants who violate any of 14 predicate offenses relevant to financial institutions Two groups of predicate offenses: (1) Those that always trigger FIRREA (2) Those that only trigger FIRREA with a violation “affecting a federally insured financial institution”
9 12 U.S.C. § 1833a: Predicate OffensesPredicate offenses that always trigger FIRREA: 18 U.S.C. § 215: Receipt of commissions or gifts for procuring loans 18 U.S.C. § 656: Theft or embezzlement by bank officer or employee 18 U.S.C. § 657: Theft or embezzlement by receivers, agents, or employees of lending, credit, and insurance institutions 18 U.S.C. § 1005: Receiving money through a fraudulent transaction by a financial institution 18 U.S.C. § 1006: Fraudulent entries, reports, and transactions by officers, agents, and employees of federal credit institutions 18 U.S.C. § 1007: False statements made to influence the FDIC 18 U.S.C. § 1014: False statements on loan applications to federal agencies and federally insured institutions 18 U.S.C. § 1344: Bank fraud
10 12 U.S.C. § 1833a: Predicate OffensesPredicate offenses that trigger FIRREA when “affecting a federally insured financial institution”: 18 U.S.C. § 287: General false claims 18 U.S.C. § 1001: False statements 18 U.S.C. § 1032: Concealment of assets from a conservator, receiver, or liquidating agent 18 U.S.C. § 1341: Mail fraud 18 U.S.C. § 1343: Wire fraud
11 What Happens When FIRREA Is Triggered?FIRREA makes it easier for the government to prove liability and opens the door to crushing liability The DOJ can seek significant civil liability for predicate acts that would otherwise require either: A criminal prosecution under a much higher burden of proof A more demanding civil action (e.g., RICO)
12 What Happens When FIRREA Is Triggered?Burden of Proof Without FIRREA: Proof Beyond a Reasonable Doubt Under FIRREA: “Preponderance of the Evidence” (§ 1833a(f)) Statute of Limitations Under FIRREA: 10 years (§ 1833a(h)) Civil RICO: 4 years Common-law fraud: typically 3 to 6 years Penalties (§ 1833a(b)): Up to $1 million per violation Up to $5 million per continuing violation ($1m/day) Ex.: Continued fraudulent statements Penalty in the amount of any pecuniary gain or loss
13 Investigatory Powers Under FIRREA12 U.S.C. § 1833a(g) grants the U.S. Attorney General subpoena powers to investigate potential predicate acts Allows the U.S. Attorney General to compel testimony or subpoena evidence, similar to grand jury An “adverse inference” can result from invoking the Fifth Amendment in response to an investigatory request. See, e.g., Baxter v. Palmigiano, 425 U.S. 308 (1976)
14 Recent Enforcement ActionsIn recent years, DOJ has initiated approximately two dozen FIRREA actions This has led to billions of dollars in penalties for RMBS practices alone: Jan. 2014: $2 billion penalty July 2014: $4 billion penalty Aug. 2014: $5 billion penalty Feb. 2016: $2.6 billion penalty Apr. 2016: $2.4 billion penalty
15 Recent Enforcement Actions (Continued)Settlements regarding FHA loan origination, lending, and servicing: Feb. 2012: $158.3 million Apr. 2012: $25 billion June 2014: $968 million Sept. 2015: $85 million Settlements regarding payment processing and foreign exchange products: Nov. 2012: $15.5 million Mar. 2015: $167.5 million
16 Key Legal DevelopmentsUnited States ex. rel O’Donnell v. Countrywide Home Loans, 822 F.3d 650 (2d Cir. 2016) First major appellate decision since FIRREA’s revival Overturned $1.2 billion penalty imposed on Countrywide for fraud Second Circuit concluded that breach of contract alone did not give rise to mail and wire fraud (FIRREA predicate acts) Instead, as per common-law fraud principles, a contractual breach can result in FIRREA liability only if, “at the time a contractual promise was made, the promisor had no intention ever to perform the obligation.” Id. at 660.
17 Outstanding Issues: The “Self-Affecting” TheoryCertain offenses can trigger FIRREA only if they “affect[] a financially insured financial institution” The government has argued that the “affected” financial institution can be the defendant itself—i.e., the “self-affecting” theory Financial institutions have responded that some other financial institution must have been affected
18 The “Self-Affecting” Theory (Continued)Three district courts have accepted the government’s self-affecting theory No court has rejected it yet The Second Circuit declined to reach this issue in its recent Countrywide decision
19 The “Self-Affecting” Theory (Continued)Arguments for: Predicated on plain language of statute FIRREA uses term “whoever” which is to be “liberally interpreted” Likewise, courts have interpreted identical language in underlying criminal statutes broadly Arguments against: Statutory Argument – Plain Language and Context counsel against “self-affecting” interpretation Legislative History and Context – Purpose of FIRREA and the “affects” language is to protect financial institutions; thus, using this language to prosecute financial institutions is inconsistent with Congressional intent
20 Outstanding Issues: Calculation of Civil PenaltiesFIRREA provides for civil penalties of up to $1 million per violation but does not set forth how such penalties should be calculated United States v. Menendez, 2013 WL (C.D. Cal. Mar. 6, 2013) announced an eight-factor test: Defendant’s good or bad faith and degree of scienter Injury to the public and loss to other persons Egregiousness of the violation Isolated or repeated nature of the violation Defendant’s financial condition and ability to pay Criminal fine that could be levied for the conduct Amount Defendant sought to profit through fraud Penalty range available under § 1833a
21 Questions? Harold Gordon [email protected] 212-326-3740Rajeev Muttreja