News / USA

Bank of America Verdict Spotlights US Focus on Civil Cases

FILE - Preet Bharara, U.S. Attorney for the Southern District of New York, addresses a news conference, in New York, May 28, 2013.
FILE - Preet Bharara, U.S. Attorney for the Southern District of New York, addresses a news conference, in New York, May 28, 2013.
Reuters
The U.S. Department of Justice appeared to have struck gold last week with the law it wielded against one of the nation's largest banks over conduct that fueled the financial crisis.
 
To convince a jury that Bank of America engaged in fraud, lawyers in the Manhattan U.S. Attorney's Office turned to FIRREA, a once-dormant civil fraud statute that essentially allows the government to build a criminal case against financial institutions without having to prove the wrongdoing beyond a reasonable doubt.
 
The Justice Department has tried to use the law in an array of bank cases, especially those tied to the housing bubble and subsequent collapse, after similar criminal investigations did not produce charges.
 
However, Wednesday's verdict, which faulted the bank for making bad home loans and passing them to Fannie Mae and Freddie Mac, was the first test of FIRREA that went all the way through trial. The use of the law could transform the Justice Department's relationship with Wall Street.
 
“It allows and permits the government to go after all kinds of malfeasance that some people thought that maybe you couldn't go after before,” said U.S. Attorney Preet Bharara, whose office brought the case against Bank of America.
 
FIRREA, the Financial Institutions Reform, Recovery and Enforcement Act, was passed in 1989 in response to the savings-and-loan crisis but had largely collected dust until Bharara's office resurrected it in 2010.
 
The Justice Department is now invoking FIRREA in nearly every case it is bringing against financial institutions, from securities fraud to shoddy lending practices to money laundering.
 
It has used the statute to accuse Standard & Poor's of fraud in rating mortgage bonds, for example, and to go after First Bank of Delaware for allegedly processing withdrawals on behalf of fraudulent merchants.
 
Tapping Grand Jury Material
 
The law, which allows the Justice Department to sue over fraud affecting a federally insured financial institution, gives civil lawyers the ability to tap grand jury material and subpoena documents they would not otherwise be able to get.
 
It also has a 10-year statute of limitations, longer than the typical five years for fraud cases, potentially giving lawyers in Bharara's office and other arms of the Justice Department more time to investigate the 2007-2008 financial crisis.
 
The pattern bears a striking resemblance to what Bharara's predecessor, Rudy Giuliani, did in the 1980s. After facing problems in trying to prosecute the Teamsters over their mob connections, Giuliani turned to the civil RICO law, which allowed him to successfully go after the whole institution.
 
“It's a permanent change in the mindset,” said Brian Feldman, who worked in Bharara's civil frauds unit, referring to the way prosecutors will now consider FIRREA in deciding how to investigate and charge bank cases after seeing the Bank of America verdict.
 
While bank misconduct might have previously only faced either a criminal case or no case at all, FIRREA offers a new middle ground.
 
“This is the genie that is never going back in the bottle,” said Feldman, who helped build some FIRREA cases and is now in private practice at the law firm Harter Secrest & Emery.
 
In the Bank of America case, a federal jury found it liable under FIRREA for a fraud the government said its Countrywide unit orchestrated, originating shoddy home loans in a process called “Hustle” that were then sold to Fannie Mae and Freddie Mac.
 
The jury also found a former Countrywide executive, Rebecca Mairone, liable for fraud.
 
Civil Frauds Unit
 
The recent use of FIRREA began taking hold in a new unit Bharara created in 2010 to look at civil fraud cases.
 
The unit has brought several cases using FIRREA and another law, the False Claims Act, over reckless mortgage lending, scoring some settlements along the way. In February 2012, Citigroup agreed to pay $158.3 million to settle claims it defrauded the government into insuring faulty mortgages.
 
However, its use of FIRREA was called into question when three banks facing cases under the law - Bank of America, Wells Fargo & Co and Bank of New York Mellon Corp - decided to fight their cases in court rather than settle.
 
Through the litigation, Bharara's office fought to have courts endorse a broad interpretation of the statute that would allow the government to sue a bank for fraud when the bank was itself the financial institution allegedly affected.
 
Defense lawyers have questioned whether that interpretation was Congress' intent in passing the law, since the concern in the wake of the savings-and-loan crisis was on curtailing fraud by third parties.
 
“The thought was, 'I'm going to get sued for doing an act to myself, that somehow I did a crime and am victim of that crime,’” said Marvin Pickholz, a lawyer at the law firm Duane Morris who specializes in white-collar defense. “It's a hard concept to accept.”
 
Nonetheless, U.S. District Judge Jed Rakoff, who oversaw the Bank of America case, endorsed the government's self-affecting theory. Two other judges in Manhattan federal court reached similar conclusions.
 
Bank of America has promised to appeal the verdict. While it has not said on what grounds, lawyers in Bharara's office anticipate Rakoff's FIRREA ruling could be part of its appeal.
 
Meanwhile, Bharara warned that similar cases remained in the offing: “The pipeline is not dry,” he said.
 
Bharara's office is also investigating JPMorgan Chase & Co's compliance with a government mortgage insurance program at the heart of several other cases brought by the civil frauds unit, according to regulatory filings. The bank has not said if that inquiry focuses on FIRREA or other laws.
 
Representatives for JPMorgan declined to comment, as did a spokeswoman for Bharara's office.
 
Inspiration
 
Bharara's success with the law has inspired other parts of the Justice Department.
 
Early last year the Obama administration set up a task force to investigate misconduct that fueled the financial crisis, and turned to FIRREA to help build cases.
 
However, while Bharara's office has largely used the law in cases accusing banks of making bad home loans and defrauding the government into insuring or purchasing them, the task force has used the law in a different way, attesting to just how versatile a law the government sees it to be.
 
When it separately sued Bank of America in August, it accused the bank under FIRREA of lying to private investors about how risky mortgage securities were that it sold to them, a theory that resembles a securities fraud case.
 
A lawsuit the Justice Department intended to file last month against JPMorgan Chase relied on a similar theory of FIRREA, people familiar with the matter have said. JPMorgan headed off the lawsuit by entering settlement talks and agreeing to a $13 billion package to resolve that inquiry and several others.
 
While the modern use of FIRREA has been focused on the financial crisis, Bharara said the law could allow the government to go after other types of frauds.
 
A case his office brought against BNY Mellon in 2011 that relied in part on FIRREA focuses on accusations the bank overcharged clients for trading currencies.
 
“It's not clear what other bad conduct will be taking place, whether it's some kind of exotic financial instruments being passed to or through financial institutions through fraud,” Bharara said. “But FIRREA becomes an all-purpose vehicle to get at all of those things going forward.”

You May Like

Video Is West Doing Enough to Tackle Islamic State?

There is growing uncertainty over whether West’s response to ISIS is adequate More

China Crackdown on Dual Citizens Causes Concern

New policy encourages reporting people who obtain citizenship in another country, but retain Chinese citizenship; move spurs sharp debate More

Video Coalition to Fight Islamic State Could Reward Assad

Losing ground to Islamic State fighters, Syria's government says it is ready to cooperate with international community More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Is West Doing Enough to Tackle Islamic State?i
X
Henry Ridgwell
August 29, 2014 12:26 AM
U.S. President Barack Obama has ruled out sending ground troops to Iraq to fight militants of the so-called Islamic State, or ISIS, despite officials in Washington describing the extremist group as the biggest threat the United States has faced in years. Henry Ridgwell reports from London on the growing uncertainty over whether the West’s response to ISIS will be enough to defeat the terrorist threat.
Video

Video Is West Doing Enough to Tackle Islamic State?

U.S. President Barack Obama has ruled out sending ground troops to Iraq to fight militants of the so-called Islamic State, or ISIS, despite officials in Washington describing the extremist group as the biggest threat the United States has faced in years. Henry Ridgwell reports from London on the growing uncertainty over whether the West’s response to ISIS will be enough to defeat the terrorist threat.
Video

Video Pachyderms Play Polo to Raise Money for Elephants

Polo, the ancient team competition typically played on horseback, is known as the “sport of kings.” However, the royal version for one annual event in Thailand swaps the horse for the kingdom’s national symbol - the elephant. VOA Correspondent Steve Herman in Samut Prakan reports that the King’s Cup Elephant Polo tournament is all for a good cause.
Video

Video Coalition to Fight Islamic State Could Reward Assad

The United States along with European and Mideast allies are considering a broader assault against Islamic State fighters who have spread from Syria into Iraq and risk further destabilizing an already troubled region. But as VOA State Department Correspondent Scott Stearns reports, confronting those militants could end up helping the embattled Syrian President Bashar al-Assad.
Video

Video Made in America Socks Get Toehold in Online Fashion Market

Three young entrepreneurs are hoping to revolutionize the high-end sock industry by introducing all-American creations of their own. And they’re doing most of it the old-fashioned way. VOA’s Julie Taboh recently caught up with them to learn what goes into making their one-of-a-kind socks.
Video

Video Americans, Ex-Pats Send Relief Supplies to West Africa

Health organizations from around the world are sending supplies and specialists to the West African countries that are dealing with the worst Ebola outbreak in history. On a smaller scale, ordinary Americans and African expatriates living in the United States are doing the same. VOA's Carol Pearson reports.
Video

Video America's Most Popular Artworks Displayed in Public Places

Public places in cities across America were turned into open-air art galleries in August. Pictures of the nation’s most popular artworks were displayed on billboards, bus shelters, subway platforms and more. The idea behind “Art Everywhere,” a collaborative campaign by five major museums is to allow more people to enjoy art and learn about the country’s culture and history. Faiza Elmasry has more.
Video

Video Chinese Doctors Use 3-D Spinal Implant

A Chinese boy suffering from a debilitating bone disease has become the first patient with a part of his spine created in a three-dimensional printer. Doctors say he will soon regain normal mobility. VOA’s George Putic reports.
Video

Video Uneasy Calm Settles Over Israel, Gaza Strip

Israel and the Gaza Strip have been calm since a cease-fire set in Tuesday evening, ending seven weeks of hostilities. Hamas, which controls Gaza, declared victory. Israelis were more wart. VOA’s Scott Bobb reports from Jerusalem.
Video

Video India’s Leprosy Battle Stymied by Continuing Stigma

Medical advancements in the treatment of leprosy have greatly diminished its impact around the world, largely eliminating the disease from most countries. India made great strides in combating leprosy, but still accounts for a majority of the world’s new cases each year, and the number of newly infected Indians is rising - more than 130,000 recorded last year. Doctors there say the problem has more to do with society than science. Shaikh Azizur Rahman reports from Kolkata.
Video

Video Scientists Unlock Mystery of Bird Flocks

How can flocks of birds, schools of fish or herds of antelope suddenly change direction -- all the individuals adjusting their movement in concert, at seemingly the same time? British researchers now have some insights into this behavior, which has puzzled scientists for a long time. VOA's George Putic has more.

AppleAndroid