LEGAL
A new wave of claims against financial institutions and rating agencies could breathe new life into a previously moribund law. Federal prosecutors have dusted off the statute books and turned to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), a two-decade old civil anti-fraud law passed in the wake of the savings and loan crisis, to bring claims related to the most recent financial crisisi. FIRREA was passed, in part, to "enhance the regulatory and enforcement powers of Federal financial institutions' regulatory agencies." The obvious precedent event was the Savings & Loan Crisis that caused billions of dollars in losses to investors and federally insured deposit funds.
Two key facets of FIRREA are critical to its new-found use by prosecutors. First, FIRREA has a ten-year period of limitations. The five-year limitations for several anti-fraud causes of action have lapsed for events dating back to the height of the financial crisis in 2007. With the limitation period moving beyond 2008, legal observers expected a tapering off in certain types of anti-fraud lawsuits. However, the ten-year limitations period afforded by FIRREA would extend back through the entire crisis period and provide federal prosecutors with fertile ground for new lawsuits.
Second, FIRREA is a civil fraud statute which reduces the government's burden of proof standard to "preponderance of the evidence," a much easier threshold than "beyond reasonable doubt." Furthermore, because the actions pursued by the government involve civil penalties, fewer procedural safeguards are available to civil defendants than those for criminal defendants.
The "preponderance" proof standard obviously extends government prosecutors with flexibility to win cases, than a criminal "beyond reasonable doubt" standard. The latter standard has proved difficult in prosecutions involving the financial crisis, most notably in the not-guilty verdicts for former Bear Stearns' hedge fund managers, Matthew Tannin and Ralph Cioffi, a case widely seen as a rebuke of federal prosecutors.
FIRREA affords the Attorney General the opportunity to bring a civil fraud case against whomever "derives pecuniary gain" from a violation, or where a violation "results in a pecuniary loss to a person other than the violator." Violations or conspiracies to violate several criminal statutes dealing with financial fraud may be punishedii. In addition, violations "affecting a federally insured financial institution" are also punishableiii. The Attorney General can exercise power via an administrative subpoena, compelling compliance or empowering a court to issue an order of contempt.
A FIRREA claim may require a party to produce documents and other media to the government in response to an administrative subpoena. The procedure is similar to that for a Civil Investigative Demand (CID) under 18 U.S.C. Sec. 1968. This is not a trivial fact. As noted by the Wall Street Journal "FIRREA is one of the few federal statutes that gives the Justice Department's civil lawyers subpoena authority."iv
Moreover, the government may require the attendance of witnesses to testify and can seek documents consistent with the request for such testimony. The authority to request evidence is quite broad. Specifically a subpoena may require "the production of any books, papers, correspondence, memoranda, or other records which the Attorney General deems relevant or material to the inquiry."
Predicting the success of a FIRREA claim in federal court involves some guesswork given that the federal government has pursued FIRREA claims in different district courts and many previous claims have settled. Presently, the scorecard on matters moving toward trial favors the government. However, it is unlikely that the final word will rest with the lower courts.
i 12. U.S.C. §§ 1833, et. seq.
ii 18 U.S.C. §§ 215, 656, 657, 1006, 1007, 1014 or 1344.
iii 18 U.S.C. §§ 287, 1001, 1032, 1341, or 1343 (mail fraud, wire fraud, false statements, false claims, asset concealment)
iv Back From the Dead: A Law Called FIRREA, Joe Palazzolo, Wall Street Journal (Feb. 5, 2013)
Rajat Soni, Esq., is an Assistant Vice President of Litigation Solutions at Pangea3®. Rajat is a senior U.S. litigator who will manage all aspects of document review intake, operation, and delivery, especially on complex document reviews. Rajat joined Pangea3 in 2010 after litigating at Davis Polk & Wardwell and at Fulbright & Jaworski. During his tenure at those firms, Rajat specialized in litigations involving antitrust, securities, market regulation, internal investigation, and Foreign Corrupt Practices Act examinations. He holds a J.D. from Northwestern University and a B.A. from Dartmouth College.
-->
