Three times in five months, the Department of Justice (DOJ) has lodged high profile cases against major Wall Street firms using the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
On February 5, DOJ deployed FIRREA to sue Standard & Poor’s for fraud in its high ratings of mortgage securities that proved to be junk.
In January, DOJ used FIRREA to sue JPMorgan executive Rebecca Mairone for her role at Countrywide, her previous employer, in what the government claims was fraudulent review of mortgage quality before the firm sold them to the government-backed mortgage securitizers.
In October, 2012, DOJ unleashed FIRREA at Countrywide parent Bank of America for the same fraud.
Congress approved FIRREA in 1989 during the savings-and-loan fraud. But the government didn’t use it for many years.
Months before this current battery of litigation, former regulator and former U.S. Senate Banking Committee counsel Bartly Dzivi penned a call to arms titled “It’s Time to Get Serious,” urging more aggressive use of FIRREA. Explained Dzivi, “FIRREA authorizes the Attorney General to seek civil penalties for certain federal crimes, including the ubiquitous mail fraud, wire fraud and bank fraud provisions at the heart of most actual cases involving financial institution fraud.” Importantly, notes Dzivi, “It carries a special ten-year statute of limitation. That is double the existing five-year limitations for mail fraud and wire fraud.” What’s more, “the special ten-year statute of limitations for mail fraud and wire fraud also applies to criminal prosecutions of such activity to the extent the offense affects a financial institution.”
The new DOJ case against S&P relies exclusively on FIRREA. In its 119-page complaint, DOJ quotes the Congressional report, which Dzivi helped to write, for the 1989 law: “One of FIRREA’s stated purposes was to provide ‘enhanced enforcement powers and increased criminal and civil money penalties from crimes of fraud against financial institutions.’”
There is much to laud in the DOJ’s case against S&P. Foremost: DOJ acted. DOJ’s relative inaction has been all-too conspicuous. Also, the complaint itself is replete with chilling evidence. Insiders warned about problems. S&P officials may have stifled whistle-blowers, requiring any complaints to be delivered verbally, conveniently eliminating a paper trail. S&P officials advised that if the complainer could not find anyone “to speak with,” then any email should be addressed to “an S&P attorney.” (See paragraph 128). Such communication with an S&P attorney could be kept from government investigators under attorney-client privilege.
But the DOJ case can be improved. While the DOJ complaint mentions names, it fails to hold an individual accountable for the fraud. It accuses no individual of fraud. As it stands, the $5 billion penalty DOJ seeks will come from shareholders. These shareholders were themselves defrauded by the company, if the DOJ is correct. These shareholders depended on the same public representations that S&P ratings were independent, uncompromised, analytically sound.
Attorney General Eric Holder explained that his FIRREA litigation “marks an important step forward in the Administration’s ongoing efforts to investigate – and punish – the conduct that is believed to have contributed to the worst economic crisis in recent history.” The conduct Holder alleges came not from shareholders, but S&P executives. We look forward to an amended complaint, using FIRREA’s full firepower which should serve to shield rather than tax innocent shareholders.
Bartlett Naylor is Public Citizen’s financial policy reform advocate. You can follow him on Twitter at @BartNaylor.