| NEW YORK
NEW YORK Aug 19 A federal judge has endorsed a
broad interpretation of a savings-and-loan era law that the U.S.
Justice Department is trying to use in cases against Wall Street
U.S. District Judge Jed Rakoff in Manhattan said Monday that
a "straightforward application of the plain words" of the
Financial Institutional Reform, Recovery and Enforcement Act
(FIRREA) allowed the interpretation sought by the government.
The law has a low burden of proof, strong subpoena power and
a 10-year statute of limitations, twice as long as the typical
limit for fraud cases. Rarely asserted until recently, it has
become the basis of three lawsuits by lawyers under Manhattan
U.S. Attorney Preet Bharara against banks including Bank of
America Corp, Wells Fargo & Co and Bank of New
York Mellon Corp.
The latest decision came in a case the Justice Department
brought last October against Bank of America over toxic
mortgages that its Countrywide Financial mortgage unit sold to
Fannie Mae and Freddie Mac in the financial crisis.
The government's case, which is set for trial on Sept. 23,
focuses on a program instituted in 2007 by Countrywide called
"High Speed Swim Lane" and also known as "HSSL" or "Hustle."
The government contends the program speeded up some home
loan processing by removing quality checkpoints, resulting in
thousands of fraudulent and defective mortgages being sold to
Fannie and Freddie.
Rakoff issued a brief order in May dismissing some claims
but largely allowing the case to move forward.
His ruling on Monday explained his reasoning, particularly
why the government could proceed with claims brought under a law
adopted in the wake of the savings and loan scandals of the
The FIRREA law allows the government to pursue civil
penalties against those who commit frauds "affecting a federally
insured financial institution."
Under the government's position, claims under FIRREA can be
asserted against a bank when the affected financial institution
is the bank itself.
Banks have objected to this so-called "affect yourself"
theory, saying it ignores the statute's original purpose.
Rakoff agreed with the government. Citing a dictionary
definition of "affect," he said Bank of America paid billions of
dollars to resolve demands by Fannie and Freddie to buy back
"The fraud here in question had a huge effect on BofA itself
(not to mention its shareholders)," Rakoff wrote.
The ruling followed a similar decision in April by U.S.
District Judge Lewis Kaplan, also in Manhattan, who allowed the
advancement of a FIRREA lawsuit that accused Bank of New York
Mellon of overcharging clients for trading
The rulings mean the Justice Department can now use FIRREA
to not just go after bank fraud but the banks themselves for
defrauding others, said Andrew Schilling, a former head of the
civil division in the Manhattan U.S. Attorney's Office.
The rulings will encourage the government to tackle "a wider
range of targets in the financial services industry, and a much
broader range of alleged misconduct, including potentially
consumer fraud," said Schilling, a partner at law firm
In his ruling on Monday, Rakoff said there were limits to
the government's reach under FIRREA.
In an alternative argument, the Justice Department said it
could also use FIRREA against Bank of America because the
alleged fraud affected a small bank that invested in Fannie and
Rakoff did not rule on that alternative argument because he
had already allowed the case to proceed based on the effects on
Bank of America.
But he said Bank of America's response - that Congress had
not intended the law to cover indirect impacts on a bank - "is
not without some force."
A spokeswoman for Manhattan U.S. Attorney Bharara, whose
office has been pursuing the Bank of America case, declined to
Lawrence Grayson, a spokesman for the bank, said the bank
continues to believe "neither Bank of America nor Countrywide
defrauded Fannie Mae or Freddie Mac, and we look forward to
addressing the remaining allegations as this matter proceeds."
The case is U.S. ex rel. O'Donnell v. Bank of America Corp
et al, U.S. District Court, Southern District of New York, No.