In a brief — and swiftly decided — per curiam decision issued June 4, 2015, the US Court of Appeals for the Second Circuit affirmed the wire fraud and wire fraud conspiracy convictions of three former UBS Financial Services, Inc. (UBS) traders, finding that their wire fraud offenses triggered a lengthy 10-year statute of limitations available to prosecutors under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).1 The decision, issued less than a month after oral argument, marks the first time in more than a decade that the Second Circuit has interpreted FIRREA’s controversial requirement that an offense “affect” a financial institution. As importantly, this case might foreshadow how the court may interpret the same language with respect to the application of FIRREA more generally.
FIRREA’s Expansive Scope
The traders in United States v. Heinz had been convicted under FIRREA’s lengthier 10-year statute of limitations for certain offenses found to “affect a financial institution.” 2 Originally passed in the wake of the savings and loan crisis, the powerful statute made sweeping reforms to the financial institution regulatory and enforcement system, most notably, under Section 1833a of FIRREA, creating harsh new civil penalties for violations of pre-existing criminal laws involving or affecting financial institutions.3 Specifically, Section 1833a imposes hefty fines — up to US$1 million per violation or US$5 million for a continuing violation.4 Prosecutors may also seek penalties for each discrete violation, enabling the government to seek potentially billion dollar aggregate penalties. Although the underlying offenses are defined in the criminal code, because Section 1833a imposes civil penalties, prosecutors need only prove FIRREA violations by a preponderance of the evidence, instead of the more burdensome “beyond a reasonable doubt” standard that applies in the criminal context.
The bundling of a civil enforcement regime with pre-existing criminal statutes has made FIRREA a go-to mechanism for the Department of Justice (DOJ) when seeking recompense for alleged financial wrongdoing over the past four years. Notably, DOJ has brought FIRREA claims against the very financial institutions the statute was designed to protect, arguing that allegedly fraudulent actions can, in practice, “affect” the banks themselves. The use of the statute against the financial institutions represents a departure from early FIRREA claims, which were typically brought against companies and individuals who allegedly defrauded financial institutions by submitting fraudulent claims to the institutions.5
Section 1833a’s “Affecting” a Financial Institution Requirement
In a series of cases brought against defendant banks by the US Attorney’s Office for the Southern District of New York, DOJ proposed a novel legal theory, arguing that FIRREA’s powerful enforcement regime applied to alleged mail and wire fraud violations because the alleged wrongdoing “affected” the banks by exposing them to legal liability and related expenditures, and by leading to increased risk of loss and actual financial loss.6 In those actions, each defendant bank filed motions to dismiss, arguing, inter alia, that it could not be both the perpetrator of the alleged fraud and the affected victim for the purposes of Section 1833a.7 Those arguments fell on deaf ears. In United States v. Bank of New York Mellon, Judge Kaplan became the first to interpret whether Section 1833a’s “affecting” requirement allowed claims to be brought against bank itself. Judge Kaplan’s opinion offered myriad reasons for supporting the government’s interpretation of the statute, looking to dictionary definitions, Congressional intent and statutory structure. The court also cited the Second Circuit’s decision in United States v. Bouyea, interpreting a different provision of FIRREA — the provision at issue in Heinz — for the proposition that an institution could be “affected” even if it were not itself the victim of the defendant’s acts.8
Two subsequent cases also turned in favor of the government’s interpretation of Section 1833a. In United States v. Countrywide Financial Corporation, Judge Rakoff noted that “affect” means “to have an effect on,” and, as such, found that the government had adequately alleged that the defendant bank had been “affected” by its paying to settle claims stemming from the alleged wrongdoing.9 In United States v. Wells Fargo Bank, N.A., Judge Furman, building upon both Bank of New York Mellon and Countrywide Financial Corporation, also held that the government had sufficiently alleged that the defendant bank had “affected” itself through both actual harm and, significantly, an increased risk of loss, including potential damages from the government’s suit itself.10
United States v. Heinz
Against this backdrop the Second Circuit issued its per curiam in Heinz, interpreting FIRREA’s “affecting” requirement for the first time in more than a decade. In Heinz, the three appellant traders had been convicted on substantive and conspiracy wire fraud charges relating to their manipulating the bidding process for municipal bonds and other finance contracts while employed at UBS. Before trial, the district court rejected the traders’ argument that the case was time barred because the transactions identified in the indictment occurred more than six years before the indictment was filed — i.e., beyond the five- and six-year statutes of limitations for wire fraud and wire fraud conspiracies, respectively.11 The district court found that the government’s proffered evidence — including the fact that alleged co-conspirator financial institutions entered into non-prosecution agreements (which required certain monetary payments) — was sufficient to permit a jury to find that the traders’ conduct had “affected” a financial institution, thereby triggering FIRREA’s 10-year statute of limitations.12 On appeal, the defendants argued that FIRREA’s tenyear statute of limitations was incorrectly applied to the case, as the government had not alleged that the traders’ actions had either defrauded a financial institution or caused a financial institution to lose money. 13
Referring to its decision in Bouyea, the Second Circuit affirmed that the “affecting” requirement under 18 U.S.C. § 3293(2) — FIRREA’s 10-year statute of limitations — “‘broadly applies to any act of wire fraud that affects a financial institution,’ provided the effect of the fraud is ‘sufficiently direct.’” 14 The court noted that the non-prosecution agreement and settlement agreements entered into by the co-conspirator banks had been prompted, in part, by the traders’ conduct. Accordingly, the court reasoned that the payments required under the agreements and the related fees “affected” the banks for the purpose of FIRREA. The fact that the banks were co-conspirators in the underlying conduct, and were not victims themselves, did “not break the necessary link between the underlying fraud and the financial loss suffered.”15
Conclusion: The Second Circuit May Continue to Construe “Affecting” Broadly
Importantly, Heinz interprets a different FIRREA section than the one at issue in the Southern District Section 1833a cases discussed above. 16 In Heinz, the court interpreted FIRREA’s statute of limitations provision, while the Section 1833a cases interpreted the applicability of FIRREA’s civil enforcement mechanism more generally. Moreover, Heinz can be further distinguished by the fact that it considered the conduct of individuals that affected financial institutions — not the conduct of financial institutions themselves — and therefore is not a true application of the so-called “self-affecting” theory. Whether the Second Circuit considers those to be meaningful distinctions will be revealed when the court decides the Countrywide appeal.