U.S. tests rare legal path in financial crisis cases
Fri Apr 13, 2012 9:45am EDT
By Aruna Viswanatha
WASHINGTON (Reuters) - An Obama administration task force established to investigate misconduct that fueled the financial crisis is turning to a little-used statute that may make such cases easier to bring, according to people familiar with the matter.
The federal statute, FIRREA, was passed in the wake of the savings-and-loan scandals in the 1980s. It requires a lower burden of proof than criminal charges, has a longer statute of limitations than other financial laws and potentially could bring big fines.
But it has appeared in only a few dozen cases since it was enacted in 1989.
The task force, which is in the Justice Department, used FIRREA earlier this year when it issued more than a dozen civil subpoenas to top financial institutions, including Citigroup, the people familiar with the matter said.
The subpoenas ask for documents related to mortgage-backed securities offerings between 2006 and 2008.
President Barack Obama announced the task force during his State of the Union address in January and hailed it as a way to hold accountable those who broke the law and contributed to the housing crisis.
The Securities and Exchange Commission has brought a handful of high-profile cases related to the 2007-2009 financial crisis, including against former Countrywide Financial Chief Executive Angelo Mozilo and Wall Street giant Goldman Sachs. But the Justice Department has struggled to bring criminal charges.
The frustration, in part, has been because such charges involve securing evidence that shows beyond a reasonable doubt a defendant intended to break the law.
For example, a federal jury in 2009 acquitted two former Bear Stearns hedge fund managers accused of continuing to push souring investments as sound.
Jurors said prosecutors did not prove the case, which relied on e-mail evidence, beyond a reasonable doubt. Since then, the Justice Department has brought few major prosecutions tied to the subprime crisis.
But people familiar with the thinking of the task force say the group believes FIRREA - the Financial Institutions Reform, Recovery, and Enforcement Act - may prove a critical tool.
FIRREA allows the government to bring civil charges if prosecutors believe defendants violated certain criminal laws but have only enough information to meet a threshold that proves a claim based on the "preponderance of the evidence."
Adam Lurie, a lawyer at Cadwalader, Wickersham & Taft who worked in the Justice Department's criminal division until last month, said that although criminal cases based on problematic e-mails without a cooperating witness could be difficult to prove, the same evidence could meet a "preponderance" standard.
That means a jury must only find that something is more likely than not. It is "a much easier case to make," he said.
The law also gives the department broad investigative tools, including the ability not only to subpoena documents, but also to take testimony from individuals, an ability prosecutors are not normally afforded in civil cases.
TASK FORCE MEMBERS
The task force includes the Justice Department, the SEC, the FBI and the Department of Housing and Urban Development, among others. It is charged with investigating the pooling and sale of home loans that contributed to the financial crisis.
While the group faced some skepticism, considering the crisis began nearly five years ago, there are signs it is serious about bringing cases.
The co-chairs meet formally every week and talk almost every day to coordinate on "a range of investigations," a Justice Department official said, on condition of anonymity.
About 50 staff members are working on the effort, and the task force has identified separate office space in Washington and will move some personnel there, the official said.
The Justice Department last month posted a one-year position of full-time coordinator for the working group who could help manage discovery and coordinate investigations, according to the job posting.
The DOJ has also requested a $55 million increase for the fiscal year beginning in October to increase efforts to combat financial and mortgage fraud.
"Significant efforts continue to move forward and if they uncover evidence of fraud or other illegal conduct, we will pursue such conduct aggressively," DOJ spokeswoman Adora Andy said.
FIRREA was initially designed to go after individuals who defrauded federally insured financial institutions. But it is a broad statute that allows prosecutors also to bring civil charges against mail and wire fraud.
The law allows for civil penalties of up to $1 million for each violation and up to $5 million for continuing violations, with a 10-year statute of limitations.
"As time goes on this may become one of the only vehicles left to prosecute some of these residential mortgage-backed securities cases," said Eli Kay-Oliphant, a securities and white-collar defense lawyer at the law firm Latham & Watkins.
The statute has quietly been used in the past year by federal prosecutors in New York City in a number of recent cases.
In March 2010, U.S. Attorney Preet Bharara in Manhattan announced the creation of a new civil fraud unit and filed its first lawsuit under FIRREA in December of that year, against a mortgage fraud scheme.
In February, Bharara's office entered a settlement with Citigroup over allegations that its CitiMortgage unit defrauded the government into insuring thousands of risky home loans.
A whistleblower originally filed the claims under the False Claims Act, but the government added FIRREA allegations when it resolved the case.
The $25 billion mortgage servicing settlement approved last week, which resolved federal and state allegations that five top U.S. banks engaged in misconduct when servicing home loans and processing foreclosures, also included violations of FIRREA. [ID:nL2E8F59PS]
TESTING THE WATERS
It is unclear how successful the growing use of FIRREA will be. Lurie, the former Justice official, said it's "largely uncharted territory," and defense lawyers have already started pushing back on the government's use of the law.
In November, Manhattan federal prosecutors sued Allied Home Mortgage seeking penalties under FIRREA for hundreds of false statements allegedly submitted by Allied to HUD.
In a motion to dismiss the lawsuit filed last month, Allied said the government had sued the company under provisions of the law that apply only to individuals.
Regardless, prosecutors around the country are turning to the law. Lawyers who received the subpoenas from the federal task force said they have also seen FIRREA subpoenas from other U.S. attorneys' offices, including in Colorado, Philadelphia and Boston.
"If the Department now intends to step up its use of the statute, companies could face a new paradigm in anti-fraud enforcement," Lurie said.
(Reporting By Aruna Viswanatha, Editing by Karey Wutkowski and Dan Grebler)