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If you are the general counsel, CFO, COO or CEO for a financial institution, large or small, please take note: there is a new litigation threat on the horizon, and it may be moving quickly to your doorstep. You read in the papers how, broadly speaking, the U.S. government is extending its regulatory reach and criminal investigative and charging authority, and here is another example — one affecting the banking industry. In the current operating environment, where banks are threatened by the economy, borrowers cannot perform, and there are higher capital thresholds and changing regulatory standards, keeping vigilant about emerging enforcement trends and practical ways to remediate or defend is a necessary business step in protecting your franchise. The purpose of this newsletter is to emphasize a subtle but emerging enforcement trend but, more importantly, to give you practical steps to take in response. To that end, we inform you that U.S. Attorneys across the country are resurrecting an old tool in their arsenal that enables them to obtain hefty fines against banks for alleged criminal acts while intentionally leveraging the benefits of civil law's less rigorous burden of proof and more generous discovery rules. Their weapon of choice is the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA").
Over the past several years, courts across the country have seen a growing number of lawsuits brought pursuant to FIRREA, a statute enacted in 1989 in response to the savings and loans crisis. FIRREA is extremely broad in scope and allows the government to bring civil actions based on allegations of bank fraud, mail fraud, wire fraud, receiving commissions or gifts for procuring loans, misapplication of funds, or making misrepresentations to the government1 — types of conduct typically addressed via criminal charges. The government may bring these cases as civil actions under FIRREA and seek substantial civil penalties when the alleged "crimes" affect federally insured financial institutions or involve false statements to the Federal Deposit Insurance Corporation ("FDIC"), the Department of Housing and Urban Development ("HUD") and other federal entities.2
In recent months, the government has been suing banks under FIRREA and seeking millions of dollars in civil penalties. The lawsuits have most commonly focused on alleged mortgage fraud, but the government's reach is expanding. The basis for these actions have ranged from allegations that banks submitted false reports to HUD, to allegations that banks made false statements to clients about the banks' services. CitiMortgage, for example, just settled a FIRREA action in February for $158.3 million.
FIRREA is an Appealing Tool for Government Attorneys
FIRREA is a comparative walk in the park for government attorneys accustomed to the rigorous burden of proof required in criminal cases and the criminal discovery rules, which are focused largely on protecting a criminal defendant's rights. First, FIRREA has the benefit of only requiring the civil burden of proof, meaning violations must be proven by a preponderance of the evidence rather than beyond a reasonable doubt. FIRREA also allows for multi-million dollar civil penalties. With a lower burden of proof, government attorneys can more easily enforce FIRREA's civil penalties. Government attorneys bringing civil FIRREA claims based on violations of criminal statutes also have the benefit of the extensive pretrial discovery available in civil litigation.3 Additionally, the discovery in FIRREA cases appears to be one-sided in favor of the government. Traditional civil litigation in private disputes allows the opposing sides to depose each other and each party's respective witnesses. In FIRREA litigation, however, government attorneys have the liberty to depose the defendants accused of wrongful conduct, but it is unclear what witnesses on the "plaintiff's" side, if any, the defendants would be able to depose. Finally, unlike the three- to five-year statute of limitations under typical state civil fraud statutes, FIRREA carries a ten-year statute of limitations.4 The combination of broad scope, lower burden of proof, high penalties, pre-trial discovery and extended statute of limitations makes FIRREA a powerful civil enforcement weapon.
Fighting Back
There are a number of steps those in the financial institutions industry can take now to evaluate exposure and maximize their protection against a FIRREA complaint in the future. First, the individuals who are responsible for running these institutions should conduct a thorough review of their director and officer insurance policies, and specifically the scope of corporate indemnification.
Second, if banks are aware of potential FIRREA claims, strategizing early about FIRREA defenses before the claims emerge may assist in getting the case dismissed before discovery begins, and perhaps even before a formal lawsuit is filed.
Third, financial institutions and those affiliated with these institutions must be exceptionally careful in responding to subpoenas and other seemingly routine discovery and structuring settlement agreements; general counsels need to have special procedures in place to ensure this risk is appropriately managed. They should keep in mind the risk that representations made during these activities could be used in future criminal proceedings.
Fourth, whistleblower complaints should be handled promptly and carefully, and investigated with the FIRREA risks in mind. A recent study revealed that 89% of whistleblowers report their concerns internally before reporting to the government.5
Fifth, for residential or commercial lenders, particularly those with significant credit losses or credit portfolio issues, consider conducting an internal (preferably privileged and confidential) review of historical lending practices. Tailor the review to identify potentially problematic areas (as identified by current cases), consider corrective actions and pursue defensive measures.
Sixth, perform an audit on Suspicious Activity Reports (SARs) filed within recent years to assess potential FIRREA-based claims exposure, and to determine whether any "safe harbor" or similar self-reporting steps could be taken to minimize or eliminate FIRREA-based claims exposure.
Finally, those individuals and entities who fall within the target areas or who might otherwise be at risk of being named in FIRREA litigation should stay attuned to developments in this area of the law, potential risks of a FIRREA claim, and any possible defenses to such claims that may be evolving in the courts. Keeping ahead of the government's enforcement actions is the first line of defense.
1 12 U.S.C. ý 1833a(c).
2 12 U.S.C. ý 1833a(a), (c).
3 12 U.S.C. ý 1833a(g).
4 12 U.S.C. ý 1833a(h).
5 Impact of Qui Tam Laws on Internal Compliance, National Whistleblowers Center Report, Dec. 17, 2010, at 4.