Nov 06

The “Effects” of Fraud that “Affect” a Financial Institution

The Department of Justice has recently dusted off the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) – enacted following the savings and loan crisis of the 1980s to protect financial institutions from fraud – as an offensive weapon against financial institutions themselves.

Much has been made of a trio of recent cases from the Southern District of New York in which the courts have interpreted FIRREA to expand civil liability of financial institutions where they are the alleged malfeasants, not the victims, of the alleged fraudulent conduct.  See United States v. Wells Fargo Bank, N.A., No. 12 Civ. 7527 (JMF), 2013 WL 5312564 (S.D.N.Y. Sept. 24, 2013); United States v. Countrywide Financial Corporation, No. 12 Civ. 1422 (JSR), 2013 WL 4437232 (S.D.N.Y. Aug. 16, 2013); United States v. Bank of New York Mellon, No. 11 Civ. 6969 (LAK), 2013 WL 1748418 (S.D.N.Y. Apr. 24, 2013).  Indeed, on October 23, 2013, a jury returned a verdict in Countrywide holding Bank of America liable for mortgage fraud under this theory.

Lest one think that this Alex P. Keaton-era legislation is limited to civil litigation brought by the DOJ, a pair of recent decisions filed just a day apart show the government’s use of the FIRREA amendments in criminal prosecutions.  These FIRREA provisions increase maximum penalties from 20 to 30 years for mail and wire fraud and also extend the statute of limitations from five to ten years for fraudulent conduct that “affects a financial institution.”  See 18 U.S.C. §§ 1341, 1343 (increasing maximum penalties to 30 years for mail and wire fraud); 18 U.S.C. § 3293 (increasing statute of limitations for certain financial offenses).

On October 17, 2013, the Ninth Circuit issued its opinion in United States v. Stargell, No. 11-50392, 2013 WL 5645171 (9th Cir. Oct. 17, 2013), which affirmed the conviction of a defendant who prepared fraudulent tax returns to obtain refund anticipation loans.  Although only one of the four charged fraudulent returns resulted in a loan default and a corresponding actual loss to a financial institution, the court held that the other false returns resulted in an “increase risk of loss” for the banks that issued the loans.

Just one day earlier, in United States v. Murphy, No. 12-CR-235, 2013 WL 5636710 (W.D.N.C. Oct. 16, 2013), the district court for the Western District of North Carolina similarly addressed the type of conduct that “affects a financial institution” for purposes of extending the statute of limitations from five to ten years.  The defendant in Murphy is a former employee of Bank of America, a co-conspirator, who is alleged to have participated in a municipal bond bid-rigging scheme.  The court held that the defendant’s conduct (from 1998 to 2002) caused Bank of America to be “susceptible to substantial risk of loss” and, in fact, ultimately resulted in the bank paying restitution to federal and state authorities.  The court rejected the defendant’s arguments that Bank of America must have been a “victim” of the fraud.

Ultimately, the DOJ can’t tack on five more years to prosecute an individual or corporation under heightened penalties because a financial institution happens to play some extraneous role in the alleged fraudulent conduct.  At some point, the relationship “becomes so attenuated, so remote, so indirect that it cannot trigger the ten-year period.”  United States v. Mullins, 613 F.3d 1273, 1278 (10th Cir. 2010).  For example, alleged fraudulent conduct does not “affect a financial institution” if the scheme involves the “mere utilization of the financial institution in the transfer of funds.” United States v. Ubakanma, 215 F.3d 421, 426 (4th Cir. 2000).

Nevertheless, those counseling individuals and financial institutions need to keep the eye on “financial institution” ball in any alleged fraudulent scheme.  The effects of conduct that “affects” a financial institution can be significant.

Leave a Reply