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April 19, 2014

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and Financial Institutions Anti-Fraud Enforcement Act (FIAFEA): A Novel Approach To Protecting Financial Institutions From Themselves

In a matter of first impression, Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York ruled that the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") not only prohibits fraud perpetrated by a third party that harms a financial institution, but also renders unlawful fraudulent conduct committed by a financial institution that results in harm to itself. In the case of U.S. v. Bank of New York Melon ("BNYM"), the Government alleged that BNYM violated FIRREA by engaging in a scheme to defraud its clients regarding the pricing of foreign exchange trades and that the bank was ultimately harmed by its own misconduct. 

FIRREA was passed in the late 1980s in reaction to the savings and loan crisis, and although it has been around for nearly a quarter century, it has not been utilized very often until recently. The law allows the Government to bring a civil action against any individual or entity for violating a number of criminal statutes prohibiting fraud, including mail and wire fraud, if the fraud affects a federally insured financial institution. In the case against BNYM, the Government asserted that the bank committed mail and wire fraud by making false representations regarding its pricing of foreign currency trades in connection with its "standing instruction" program. Under BNYM's standing instruction program, the bank automatically set the price of foreign currency trades, relieving the client of the need to contact the bank directly and negotiate a price. BNYM allegedly represented that its standing instruction program provided "best execution" with respect to its foreign currency trades, which within the financial industry was commonly understood to mean that the client received the best available market price at the time the trade was executed. According to the lawsuit, however, BNYM did not provide best execution as the term was understood within the industry and instead priced its currency trades within a range least favorable to its clients. 

Over time, BNYM's clients allegedly learned about its pricing practices, which led to a number of lawsuits being filed against the bank by investors and customers, potentially exposing the bank to billions of dollars in liability. In addition, many of BNYM's clients allegedly terminated their relationship with the bank in the wake of the revelations about its currency pricing policies. Thus, according to the lawsuit, BNYM's fraudulent misrepresentations with regard to its currency pricing practices ultimately harmed the bank by causing it to lose customers and exposing it to liability.

In response, BNYM argued that it could not be held liable under FIRREA because the financial institution harmed by the fraud must be the victim of the fraud or an innocent bystander, not the perpetrator of the fraud. The Court rejected this argument explaining that, in passing FIRREA, Congress's goal was to broadly deter fraudulent conduct that might put a federally insured financial institution at risk. Accordingly, it was entirely consistent with Congress's intent to render unlawful fraudulent conduct perpetrated by a financial institution and its employees that affects the financial institution itself in order to deter these institutions from engaging in such misconduct in the future. 

This decision represents a potentially important breakthrough for whistleblowers. Under the Financial Institutions Anti-Fraud Enforcement Act ("FIAFEA"), a whistleblower that provides information to the Government regarding fraudulent activity affecting a financial institution that constitutes a violation of FIRREA may be entitled to a reward if the Government obtains a monetary recovery. Unlike other whistleblower statutes, a whistleblower recovery under FIAFEA does not hinge on whether the Government has suffered a monetary loss. If a whistleblower is aware of fraudulent conduct affecting a financial institution-even if the only financial institution that is harmed by the fraud is the very same institution that engaged in it-FIAFEA provides an avenue for disclosing the fraud to the authorities with the potential upside of a substantial reward for doing so. Given the recklessness and misconduct that led to the Great Financial Disaster, the Government's use of FIRREA and FIAFEA to protect financial institutions from their own excesses is not only warranted, but may also deter future misconduct, just as Congress intended.

© 2014 by Tycko & Zavareei LLP

About the Author

Lorenzo B. Cellini, Tycko & Zavareei Law Firm, Litigation Attorney
Associate

Lorenzo B. Cellini graduated magna cum laude from the University of Arizona, James E. Rogers College of Law in 2004. In law school he was a member of the moot court board, a legal writing fellow and the recipient of the E. Thomas Sullivan Antitrust Award. He also received his B.A. from the University of Arizona, graduating magna cum laude and as a member of Phi Beta Kappa.

Mr. Cellini joined Tycko & Zavareei LLP in November 2006. Since joining the firm he has practiced primarily in the area of civil litigation. He has represented both individuals and companies in a variety of...

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