This week the Wall Street Journal reported that federal prosecutors are actively pursuing criminal cases against bank executives for their roles in allegedly bundling and selling flawed mortgage securities.  The probes of the Royal Bank of Scotland Group PLC (RBS) and J.P. Morgan Chase & Co. (J.P. Morgan) are follow-investigations to large civil settlements previously negotiated between the banks and the SEC and the Department of Justice.

The Justice Department is working against a 10-year statute of limitations for the alleged infractions which expires in 2017.  Most previous bank settlements tied to the financial crisis have invoked a law that gives prosecutors 10 years to pursue charges where misconduct affected a financial institution, according to the Wall Street Journal.  It was also reported that several of the U.S. Attorney’s offices are funding the criminal investigations against individuals with funds received from bank civil settlements.  The U.S. Attorney’s Office located in Brooklyn, N.Y., recently advertised four short-term positions for federal prosecutors that are expected to end in September 2017.  This further supports the theory that there will be an increase in criminal investigations of bank executives.  It is perhaps also another indication of the Justice Department’s implementation of the Yates Memo policies and guidelines regarding targeting individuals both criminally and civilly. (See U.S. Department of Justice Ready to Impose Civil and Criminal Penalties on Corporate Execs)

Both of the criminal investigations are focused on establishing that the bankers ignored warnings from associates that they were packaging too many risky mortgages into investment offerings.  In the RBS criminal investigation, the role of the lead banker responsible for structuring a $2.2 billion subprime-mortgage offering in 2007 is under scrutiny and comes as a result of the November 2013 civil settlement in which the RBS agreed to pay $150 million to resolve SEC claims that it misled investors.  The SEC alleged that RBS knew that almost 30% of the loans included in the offering should have been kicked out because they deviated so far from the guidelines.  RBS neither admitted nor denied the SEC’s allegations in its 2013 settlement and the lead banker has not been publicly identified.

In the J.P. Morgan case, the bank reported the criminal inquiry in its November 2 quarterly SEC filing, referring for the first time to “an ongoing investigation being conducted by DOJ’s Criminal Division” and further stated the bank was now dealing with “two United States Attorney’s Offices.”  The J.P. Morgan probe, conducted by the U.S. Attorney’s office in Sacramento, uncovered a 2007 memo written by a bank employee warning her bosses that they were putting bad loans into securities offerings.  The warning predated the financial crisis and was ignored by bank management.  That memo was a key element in the then-record $13 billon civil settlement in November 2013 in which J.P. Morgan neither admitted nor denied wrongdoing, but it agreed to a “statement of facts” regarding its conduct.  The current criminal investigation is alleged to focus on two unidentified individuals who worked on different residential-mortgage securities deals. 

Justice Department officials who spoke with the Wall Street Journal said they believe they have a viable criminal case in the RBS probe however, they do not expect to make a decision on whether to bring charges until early next year.  The J.P. Morgan probe has been stalled because officials were divided over whether they have sufficient evidence to charge anyone with a criminal offense however, the investigation has recently become more active.  If indictments are issued in either case, they would be the first pursued against specific employees for their roles in the alleged corporate wrongdoing that lead to the financial crisis and housing collapse of 2008.