The Department of Justice (DOJ), FDIC, Federal Reserve and federal investigators are revisiting an old statute in their latest attempts to hold banks and their officers and directors liable for the nation’s financial crisis. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), was passed in the wake of the savings-and-loan crisis of the 1980s, but has enjoyed little use until recently. The FDIC is utilizing this statute as it requires a lower standard of proof than criminal charges, has a longer statute of limitations than other financial regulations, and can assess and recover large monetary awards for longer periods of time, making it an ideal alternative to the criminal statutes tested by regulators in recent years.
FIRREA allows the FDIC and/or DOJ to initiate civil charges if prosecutors believe defendants violated certain criminal laws but want to avoid the criminal burden of proof – a common issue in the DOJ’s actions against financial institutions during the years 2007-2009. Criminal laws require that prosecutors prove allegations “beyond a reasonable doubt,” while FIRREA requires that prosecutors prove their claims by a mere “preponderance of the evidence.” Under that lower standard, the FDIC is essentially required to convince the jury that a defendant “more likely than not” engaged in the alleged wrongdoing. The reduced evidentiary burden of FIRREA is significantly easier to satisfy than the criminal standard.
Since 2009, the FDIC has authorized over 450 suits against directors and officers in connection with more than 45 bank failures, at least 22 of which were against former officers and directors of failed banks.1 In two recent FDIC cases against officers of failed banks, F.D.I.C. v. Steven Skow and F.D.I.C. v. John Saphir, the FDIC’s FIRREA claims survived defendants’ motions to dismiss, supporting the validity of FIRREA claims in this context. In both cases the judges observed that FIRREA can impose personal liability on officers and directors of financial institutions for loss or damage to the institution caused by the officer or director’s gross negligence.
FIRREA allows for civil penalties of up to $1 million for each violation and up to $5 million for continuing violations, and has a 10-year statute of limitations. It also allows investigators to subpoena documents and take testimony, two tools typically unavailable pursuant to criminal statutes. While still a new and largely undeveloped legal theory, state and federal FIRREA claims are being filed with increasing frequency.
The FIRREA innovation in bank prosecution coincides with the Consumer Financial Protection Bureau’s (CFPB) announcement that it intends to hold financial institutions liable for any wrongdoing by their third-party vendors. According to the CFPB’s April bulletin, financial institutions’ outsourcing services to third-party firms, such as such as appraisal companies and foreclosure law firms, will not relieve the institution of its responsibilities to avoid consumer harm. Wrongdoing by the third-party servicer may impose liability on both the financial institution and the servicer, according to the CFPB.
It is important for bank officers and directors to review their compliance programs and verify that they are both effective and implemented. Because the government provides leniency for self-reporting, it is wise to properly conduct internal investigations if there is a belief that the law has been violated. Finally, if you are contacted by the FDIC, consult competent legal counsel immediately.
