Recent decisions have helped open the door for federal prosecutors to use a 1980s statute to bring civil claims against major financial institutions related to the sub-prime meltdown of 2008. This includes the jury award against Bank of America for “the hustle,” with potential penalties approaching $1 billion. The statute at issue is the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which Congress passed as a response to the savings and loan crisis of the late 1980s and early 1990s. At a glance, it is clear why prosecutors have seized on the statute.
A broad basis upon which to bring civil claims is available. It references over a dozen criminal statutes that can support a suit. As expected, some of FIRREA’s enumerated criminal offenses intrinsically relate to financial institutions, such as prohibitions on bribery for receiving loans (18 U.S.C. § 215) or bank embezzlement (18 U.S.C. § 656). However, FIRREA also offers civil liability for bread and butter criminal charges, in particular false claims (18 U.S.C. § 287), mail fraud (18 U.S.C. § 1341), or wire fraud (18 U.S.C. § 1343), even if the statute adds a requirement that the conduct must “affect a federally insured financial institution.”
As a civil statute, FIRREA offers a lower burden of proof. While the underlying allegations in a FIRREA claim relate to criminal offenses, the government need only meet the civil ”preponderance of the evidence” standard. This is especially helpful where the government has been dissuaded from pursuing criminal cases because of concerns over whether the element of the crime could be shown beyond a reasonable doubt.
It provides for a 10-year statute of limitations, which means it has sufficient reach to go back well beyond the beginning of the sub-prime meltdown. Given the lengthy investigations that may be necessary to build and bring a case, this presents a distinct advantage compared to other criminal and civil statutes.
FIRREA can carry considerable bite in terms of monetary penalties. While the civil penalties are generally capped at $1.1 million, that penalty adds up for each day of an ongoing violation up to $5.5 million total. More important, a penalty can be increased to the full amount of gain to the violator or loss to another. In one suit, the government has invoked this to assert $5 billion in damages. However, FIRREA itself does not dictate how damages are determined. As result of such ambiguity, courts have tended to focus on various factors including bad faith, injury to the public, whether the violation was repeated, potential criminal fine as well as the defendant’s profit and ability to pay.
The government is afforded the power to issue subpoenas and engage in extensive pre-trial investigations, including deposing witnesses, without seeking the approval of the court.
Thus far, courts have been receptive to government’s claims under FIRREA. A key early legal test, including in the Bank of America case, was the issue of whether losses caused by a financial institution’s own conduct qualify as conduct “affecting a federally insured financial institution.” Defendants argued that they could not be liable under FIRREA if their conduct caused losses to themselves – at least, for allegations of criminal violations of the statute, such as mail and wire fraud. Several courts, however, have allowed cases to move forward even where the alleged “victim” of the fraud was the perpetrator. As one judge in the Southern District of New York ruled, a self-affecting theory “requires nothing more than straightforward application of the plain words of the statute.” It’s not clear, at the moment, whether that will stand up on appeal; however, federal prosecutors are wasting no time bringing additional actions.
 U.S. ex rel. O’Donnell v. Bank of America Corp et al (S.D.N.Y.); United States of America v. Wells Fargo Bank, N.A. (S.D.N.Y.); United States of America v. Bank of New York Mellon, (S.D.N.Y.); U.S. v. McGraw-Hill Cos., Inc., (C.D. Cal.).