Editor: David Reiss
Brooklyn Law School

May 7, 2013

Reiss on FIRREA!

By David Reiss

Law360 quoted me in a story, Rakoff Ruling In $1B BofA Case May Halt DOJ Hot Streak, that reflects some judicial skepticism about the federal government’s broad reading of FIRREA:

Prosecutors have seized on an obscure 1989 law to launch a series of splashy cases against banks in recent years, but a prominent New York federal judge with a penchant for scrutinizing government actions could soon reverse the trend in a $1 billion mortgage fraud suit against Bank of America Corp.

The Financial Institutions Reform Recovery Enforcement Act, enacted in the wake of the savings and loan crisis, allows the government to sue entities that negatively “affect” the stability of federally insured banks. The law was used sparingly for decades, but it has been dusted off in a series of recent complaints that seek to hold firms liable for hurting their own stability. In the BofA case, for example, the bank is accused of putting its health at risk by selling shoddy loans that were later packaged into securities.

U.S. District Judge Jed Rakoff is threatening to stem the tide. He said at an April 29 hearing that he was “troubled” by the government’s novel interpretation of FIRREA and vowed to issue a formal ruling on the issue by May 13.

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“The federal government is searching for different theories of liability, and FIRREA is incredibly attractive right now,” said David Reiss, a professor at Brooklyn Law School. “I have no doubt this issue will rise in the court of appeals, and potentially make its way to the U.S. Supreme Court.”

Judge Rakoff’s call is expected to have a ripple effect either way. A decision allowing the government to sue banks for self-inflicted wounds may embolden prosecutors to launch even more cases, experts say.

A ruling in favor of BofA would be a coup for financial institutions as they seek to limit legal exposure from the crisis, according to Reiss.

But if the government loses FIRREA as a fraud enforcement tool, it won’t be out of options. The BofA case and some other FIRREA actions also include claims under the federal False Claims Act, which allows prosecutors to collect treble damages and penalties.

“As Judge Rakoff seems to say, I don’t think this issue has been settled,” Reiss said.

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