FIRREA: Expect Substantial Anti-Fraud Enforcement And Compliance Issues

Previously published in Compliance & Ethics Professional

The Department of Justice has redoubled its efforts to pursue financial crisis matters. DOJ has increased its reliance on FIRREA as a means to prosecute financial fraud. FIRREA is powerful because it has a broad reach and the preponderance of the evidence standard applies to it. FIRREA can be used against any company that transacts with a financial institution. Companies should examine how FIRREA impacts their anti-fraud compliance efforts. Since the financial crisis began, many banks and lenders have been shuttered, and dozens of major financial institutions have collapsed or merged out of existence, including household names like Bear Stearns and Lehman Brothers. The toll of the ongoing financial crisis on the American economy has been well documented. Many have questioned why the federal government has not punished a greater number of individuals and corporations that are perceived to have engaged in misconduct which allegedly contributed to or exacerbated the crisis.

As the crisis began to take hold, the Department of Justice (DOJ) acted aggressively. Indeed, in June 2008, two Bear Stearns fund managers were arrested, having been charged with a $1.6 billion securities fraud in connection with the collapse of the funds they managed. The funds had been heavily invested in residential mortgage-backed securities (RMBS), which lost substantial value during the crisis. In November 2009, following just six hours of deliberations after a three-week trial, a jury acquitted the fund managers on all charges. At trial, although numerous witnesses testified, the government did not present the testimony of a single cooperating witness. Instead, the government primarily relied upon e-mail exchanges between the defendants to prove their criminal intent. What many had assumed would be the first of many successful criminal prosecutions related to the financial crisis, instead demonstrated how difficult such criminal prosecutions can be for the government.

Whether or not the government has pursued alleged financial crisis wrongdoers with sufficient urgency will continue to be debated, but one thing is clear: the Department of Justice appears to be redoubling its efforts to pursue individuals and entities that it believes engaged in misconduct that contributed to the financial crisis.

On January 27, 2012, following the President's announcement in the State of the Union address regarding a renewed effort to pursue cases related to the financial crisis, the Attorney General announced the formation of the RMBS Working Group. Part of the Financial Fraud Enforcement Task Force, the RMBS Working Group is led by the Criminal and Civil Divisions at the DOJ, the United States Attorney's Office in Colorado, the Securities and Exchange Commission (SEC), and the New York State Attorney General's Office. According to the Attorney General, approximately 55 DOJ attorneys, analysts, agents, and investigators were initially assigned to the Working Group.

In the wake of that announcement, the Attorney General appeared at Columbia University to discuss the DOJ's resolve and commitment in this area. In doing so, the Attorney General explained: "We found that much of the conduct that led to the financial crisis was unethical and irresponsible. But we have also discovered that some of this behaviour - while morally reprehensible-may not necessarily have been criminal."

At the time, some may have interpreted the Attorney General's...