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

Lebanese Media Unite to Support Palestinians in Gaza

Joint newscast billed as Arab world’s first unified news bulletin in support of Hamas-controlled Gaza Strip More

Photogallery Australian PM Alleges ‘Coverup’ at MH17 Crash Site

Meanwhile, Russia's ambassador to Malaysia denies plane's black boxes were opened before they were handed over to Malaysian officials More

Despite Advances in AIDS Treatment, Stigma Lingers

Leading immunologist tells VOA that stigma is often what prevents those infected with disease from seeking treatment 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.
IAEA: Iran Turns its Enriched Uranium Into Less Harmful Formi
X
July 22, 2014 10:26 AM
Iran has converted its stockpiles of enriched uranium into a less dangerous form that is more difficult to use for nuclear weapons, according to the United Nations’ Atomic Energy Agency. The move complies with an interim deal reached with Western powers on Iran's nuclear program last year, in exchange for easing of sanctions. Henry Ridgwell reports for VOA from London.
Video

Video IAEA: Iran Turns its Enriched Uranium Into Less Harmful Form

Iran has converted its stockpiles of enriched uranium into a less dangerous form that is more difficult to use for nuclear weapons, according to the United Nations’ Atomic Energy Agency. The move complies with an interim deal reached with Western powers on Iran's nuclear program last year, in exchange for easing of sanctions. Henry Ridgwell reports for VOA from London.
Video

Video Relic of Saint Draws Catholics Worried About Immigration Issue

A Roman Catholic saint who is a figure of devotion for those crossing the border into the United States is attracting believers concerned about the plight of undocumented immigrants. Mike O'Sullivan reports from Los Angeles, where a relic of Saint Toribio has drawn thousands to local churches.
Video

Video Ukraine Rebels Surrender MH17 Black Boxes

After days of negotiations, a senior separatist leader handed over two black boxes from an airliner downed over eastern Ukraine to Malaysian experts early Tuesday. While on Monday, the U.N. Security Council unanimously demanded that armed groups controlling the crash site allow safe and unrestricted access to the wreckage.
Video

Video In Cambodia, HIV Diagnosis Brings Deadly Shame

Although HIV/AIDS is now a treatable condition, a positive diagnosis is still a life altering experience. In Cambodia, people living with HIV are often disowned by friends, family and the community. This humiliation can be unbearable. We bring you one Cambodian woman’s struggle to overcome a life tragedy and her own HIV positive diagnosis.
Video

Video Nature of Space Exploration Enters New Age

Forty-five years ago this month, the first humans walked on the moon. It was during an era of the space race between the United States and the Soviet Union. World politics have changed since then and -- as Elizabeth Lee reports -- so has the nature of space exploration.
Video

Video Chicago’s Argonne Lab Developing Battery of the Future

In 2012, the U.S. Department of Energy’s Office of Science awarded a $120 million grant to a new technology center focused on battery development - headquartered at Argonne National Laboratory in suburban Chicago, Illinois. As VOA’s Kane Farabaugh reports, there scientists are making the next technological breakthroughs in energy storage.
Video

Video In NW Pakistan, Army Offensive Causes Massive Number of Displaced

Pakistan’s army offensive in North Waziristan has resulted in the large-scale displacement of the local population. VOA's Ayaz Gul reports from northwest Pakistan where authorities say around 80 percent of the estimated 1 million internally displaced persons [IDPs] have settled in Bannu district, while much of the remaining 20 percent are scattered in nearby cities.
Video

Video Kurdish Peshmerga Force Secures Kirkuk, Its Oil

The Kurdistan regional government has sent its Peshmerga troops into the adjacent province of Kirkuk to drive out insurgents, and to secure the area's rich oil fields. By doing this, the regional government has added a fourth province to the three it officially controls. The oil also provides revenue that could make an independent Kurdistan economically strong. VOA’s Jeffrey Young went out with the Peshmerga and filed this report.
Video

Video Malaysia Reeling: Second Air Disaster in Four Months

Malaysia is reeling from the second air disaster in four months involving the country’s flag carrier. Flight 340 vanished in March and despite an extensive search, no debris has been found. And on Thursday, Flight 17, likely hit by a surface-to-air missile, came apart over eastern Ukraine. The two incidents together have left more than 500 people dead. VOA Correspondent Steve Herman reports from Kuala Lumpur.

AppleAndroid