(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Reynolds Holding
NEW YORK, Aug 21 (Reuters Breakingviews) - Wall Street's
enforcers are stretching the law to hide their own sloth. U.S.
Attorney General Eric Holder is already late with plans to crack
down. His prosecutors are trying to buy time by suing Bank of
America (BAC.N) and other financial firms under a statute meant
to protect the companies from fraud. But that creates legal
uncertainty. If the watchdogs were serious about avenging the
2008 economic meltdown, they could have pounced sooner.
Holder's claim that financial fraud cases are still in the
offing comes just a day after prosecutors received written
permission to turn an old law on its head. The 1989 Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA) was
enacted after the U.S. savings and loan debacle to punish
misdeeds against the financial companies concerned. Despite its
low burden of proof, harsh civil penalties and long 10-year
statute of limitations, the law went largely unused, except
against the occasional executive of a failed bank.
Last year, however, it attracted renewed interest from
federal prosecutors facing five-year filing deadlines for
financial crisis cases. Though FIRREA was aimed at misconduct
that "affected" institutions, the attorneys argued that BofA and
others violated it themselves by attracting costly litigation
with alleged lies about housing loans. The victim, in essence,
was also the offender.
Jed Rakoff approved this novel claim in a U.S. court opinion
on Monday, becoming the latest judge to stretch a statute beyond
its original purpose. The racketeering law known as RICO,
enacted to tackle organized crime, now covers a variety of
mundane schemes. The definition of mail and wire fraud,
meanwhile, expanded to include almost any suspicious behavior
until the Supreme Court imposed limits in 2010.
A broad-brush approach can seem sensible when it frees
prosecutors to pursue, say, banks that stuck unsuspecting
investors with toxic assets. But it risks punishing behavior
never meant to be illegal. The Rakoff ruling arguably makes
banks liable under FIRREA for defending even meritless
litigation that "affects" them with its high cost.
Federal prosecutors could have pursued banks – and perhaps
imprisoned executives – before five-year statutes of limitation
on other laws expired. They concentrated instead on insider
trading and other offenses. Relying now on FIRREA's 10-year
deadline leaves financial firms even more uncertain about their
legal liability. Banks don't deserve much sympathy, but they
shouldn't have to pay extra for Holder's dawdling.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- U.S. Attorney General Eric Holder on Aug. 20 told the Wall
Street Journal that the Justice Department is finishing
investigations of large financial firms and plans to file within
months new cases involving the 2008 economic meltdown.
- Though the typical five-year deadlines for such cases are
expiring, federal prosecutors are beginning to rely on the
10-year statute of limitations under the Financial Institutions
Reform, Recovery and Enforcement Act (FIRREA), a 1989 law
enacted to protect banks from wrongdoing by others.
- On Aug. 19, U.S. District Judge Jed Rakoff issued an
opinion that allows the Justice Department to sue Bank of
America for alleged mortgage fraud under FIRREA. The judge said
the statute's prohibition on fraud that "affected" a financial
institution could include a bank's own misconduct. In March,
another federal judge ruled that the Bank of New York (BK.N)
could also be sued under FIRREA for its own alleged wrongdoing.
- In addition to having an unusually long statute of
limitations, FIRREA requires a lower standard of proof for
showing violations of otherwise criminal statutes and provides
for high penalties of up to $1.1 million per violation or $5.5
million for a continuing violation.
- Rakoff opinion: link.reuters.com/wam52v
Justice Department planning new action against financial
firms: report [ID:nL4N0GM254]
Judge endorses U.S. use of fraud law against Bank of America
Pencils down [ID:nL2N0GH0XN]
Double jeopardy [ID:nL1E8M137U]
- For previous columns by the author, Reuters customers can
click on [HOLDING/]
(Editing by Richard Beales and Martin Langfield)
Keywords: BREAKINGVIEWS FINANCE/LAWSUITS
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