Justice Department Brandishes Rarely Used Weapon—FIRREA—In Full-Scale Assault On S&P, And California Joins The Battle With Separate State False Claims Act Complaint

The Justice Department's February 4, 2013 lawsuit against credit rating agency Standard & Poor's Ratings Services ("S&P"), a subsidiary of McGraw-Hill Co., puts an exclamation point on the latest era in civil fraud enforcement. Following close on the heels of several high profile complaints in the Southern District of New York in 2012 in so-called "mortgage fraud" cases, the United States has now fully embraced the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA")—a 23 year-old statute whose civil penalty provisions had atrophied from nonuse. The Justice Department appears committed to dusting off this powerful weapon and using it either in tandem with the civil False Claims Act ("FCA") or, as in the case of S&P, as the sole basis for extracting huge damages and penalties from companies whose allegedly fraudulent conduct affects federally insured financial institutions.

The lawsuit against S&P arises out of a criminal investigation by the Financial Fraud Enforcement Task Force, but it alleges civil causes of action under FIRREA, a statute enacted to strengthen the federal deposit insurance system and to protect financial institutions from fraud. FIRREA's civil penalty provisions authorize the United States to bring civil suits based on violations of fourteen specific criminal offenses, primarily from Title 18—including bank, mail, and wire fraud. The government has the burden of proving—under the preponderance of the evidence standard—the right to recover substantial penalties based on violations of these so-called "predicate offenses." 12 U.S.C. § 1833a(f). In addition, a civil cause of action under FIRREA can be brought up to 10 years after the cause of action accrues. 12 U.S.C. § 1833a(h).

The complaint alleges that S&P engaged in a scheme to defraud investors in connection with Residential Mortgage-Backed Securities ("RMBS") and Collateralized Debt Obligations ("CDOs") ahead of the 2007-08 financial crisis. The Attorney General's public announcement of the lawsuit stated that twelve states would be bringing separate suits against S&P under state unfair competition laws. And, the next day, California filed suit against S&P under its own False Claims Act, seeking treble damages and penalties based on the same underlying conduct.

The FIRREA Claims

The Allegations. The U.S. complaintwhich is being handled by Main Justice attorneys from the Civil Division's Consumer Protection Branchcenters on S&P's representations that its credit ratings of RMBS and CDOs were (a)...