In a case of first impression, the District Court for the Southern District of New York has refused to dismiss the federal government’s suit against The Bank of New York Mellon (“BNYM”) for civil penalties under Section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). United States of America v. The Bank of New York Mellon and David Nichols, 11 Civ. 6969 (LAK), decision April 24, 2013. The case involves BNYM’s foreign exchange services: the Government contends that BNYM misrepresented its services by “conveying the impression that BNYM . . . was providing its clients the best prices it could obtain in the market . . .” when in fact its pricing substantially exceeded the “best price”.
FIRREA Section 951 (12 USC § 1833(a)) permits the Attorney General to bring an action for civil penalties against any person who violates any of a number of criminal statutes, including those prohibiting mail and wire fraud when the fraud is one “affecting a federally insured institution.” BNYM moved to dismiss the Government’s complaint, arguing that the “affected institution” must be the victim of or an innocent bystander to the alleged fraud, not the perpetrator. The district court observed that the question whether a federally insured institution may be civilly liable under FIRREA Section 951 for money penalties for engaging in fraudulent conduct “affecting” that same institution was one of first impression.
Two other cases pending in the same district raise the “self-affecting” issue, in both of which motions to dismiss are awaiting decision: United States of America v. Wells Fargo Bank, N.A. 12 Civ. 7527 (allegation that Wells Fargo committed fraud in the submission of claims to HUD). United States of America v. Bank of America Corporation, successor to Countrywide Financial, et al (allegation that Countrywide committed fraud in connection with loans sold to FNMA and FHLMC).
The District Court in BNYM found for the Government on the “self-affecting” issue:
“Where . . . a federally insured financial institution has engaged in fraudulent activity and harmed itself in the process, it is entirely consistent with the text and purposes of the statute to hold the institution liable for its conduct.”
The District Court found that the Government sufficiently alleged that BNYM had harmed itself by the alleged fraud (attorneys' fees, negative impact on business prospects, etc.) and so did not reach the question whether FIRREA would apply where the institution’s fraud had only a positive effect on the institution.
The FIRREA Section 951 civil money penalty provision continues to draw substantial attention as the Government’s case against Standard and Poor’s (“S&P”) initiated in February 2013 in federal court in California moves forward. The Government has alleged in that case that S&P engaged in fraud in issuing ratings on Collateralized Debt Obligations. Defendants have now filed a motion to dismiss, asserting a lack of intent to defraud, and that the alleged fraudulent misrepresentations were nonactionable “vague, generalized statements” and predictions.
If the Government succeeds in these FIRREA Section 951 actions, financial institutions will have yet another significant risk exposure. “Mail and wire fraud” is a broad concept, and Section 951 will permit the Government to cast a very wide net over any perceived wrongdoing by a financial institution. Decisions in the Wells Fargo, Countrywide, BNYM and S&P cases have the potential for greatly increasing the risk profile for federally insured financial institutions and their parents, officers and directors. Of special concern is the broad recovery permitted under FIRREA Section 951: the Government may collect from the defendant the amount the defendant gained or the amount the victim lost from the alleged misconduct.