July 15, 2014
Law360 quoted me in Feds Deploy Potent Bank Fraud Law In $7B Citi Pact (behind a paywall). It reads in part:
The U.S. Department of Justice’s $7 billion mortgage bond settlement with Citigroup Inc. on Monday may not have been possible without the help of a once-obscure fraud law that has become a legal magic wand for prosecutors.
Citigroup’s settlement included a $4 billion civil fine under the Financial Institutions Reform Recovery and Enforcement Act, the largest such penalty in history. FIRREA was passed in the wake of the 1980s savings-and-loan crisis but has been dusted off in recent years as prosecutors have targeted major Wall Street banks that packaged and sold toxic residential mortgage-backed securities before the 2008 economic collapse.
The law’s government-friendly provisions are well-documented. FIRREA contains a 10-year statute of limitations, rather than the typical five-year window for fraud suits. That has permitted the government to comfortably sue banks over conduct that occurred in 2006 and 2007, when many of the shoddy loans implicated in the crisis were securitized. Prosecutors can use tolling agreements to keep potential claims alive even longer.
* * *
The sheer size of the government’s FIRREA fines thus far, combined with the lack of case law underpinning the statute, has placed banks and their defense counsel in a difficult negotiating position, according to David Reiss, a professor at Brooklyn Law School.
“The message for people in negotiations is: Expect to pay a lot, or else, the government is going to call your bluff,” Reiss said. “It’s the Wild West for civil penalties.”
Monday’s settlement relates to Citigroup’s due diligence on loans that were packaged into securities and sold to investors for tens of billions of dollars. According to an agreed-upon statement of facts, the bank “received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations provided to investors about the pools of loans to be securitized.”
In one case, a Citigroup trader wrote an internal email questioning the quality of loans in mortgage-backed securities issued in 2007. The trader said that he “went through the diligence reports and think that we should start praying … I would not be surprised if half of these loans went down.”
The bank did not admit to breaking any particular law, and neither it nor any individual employees were criminally charged. At the same time, DOJ officials were quick to point out that the settlement did not release Citigroup or any individuals from potential criminal liability.
Reiss said the threat of criminal prosecution could become a hallmark of FIRREA cases, giving banks another cause for concern.
“That again demonstrates a lot of leverage on the side of the government,” Reiss said. “It’s a powerful tool to keep in your back pocket.”| Permalink