The Financial Institution Anti-Fraud Enforcement Act of 1990 has the potential to be a remarkably powerful tool, yet it has never been heavily used by whistleblowers, their counsel, or the Department of Justice. Now is an excellent time to begin employing this cause of action.
This article by
TELG managing principal R. Scott Oswald and former principal David L. Scher was published by NAAUSA News on October 23, 2014.
Originally published in:
FIAFEA: The Ace that is Rarely Played
The 2008 financial crisis happened faster and the resulting recession was deeper than most observers predicted. The executive and legislative response was unprecedented. After the all of BearStearns and the shock wave it sent through the industry, banks were loaned unfathomable sums of money to prevent the collapse of the entire system, and the nation’s largest loan securitizers were placed under federal conservatorship. Americans were incensed with the industry and the pain suffered by all, even those who played little to no role in inflating the bubble.
It may be somewhat frustrating, then, to realize that, before the intense government response in the years following 2008, there was an arrow in the regulatory quiver that might have mitigated against such a profound collapse. The Financial Institution Anti-Fraud Enforcement Act of 1990 (FIAFEA) was passed in the wake of the savings and loan crisis of the 1980s, and is a powerful and broadly applicable legal tool that has thus far remained relatively dormant.
What Frauds Give Rise to a FIAFEA Claim
FIAFEA is something of an odd duck in the world of whistleblower laws. It essentially gives rise to a civil reward for a whistleblower who brings to the federal government’s attention a violation of a set of criminal fraud statutes, so long as those statutes impact a federally-insured depository institution. So FIAFEA creates a civil cause of action out of criminal fraud statutes, and allows the federal government to collect based on damages suffered by private parties, sharing the bounty with the whistleblower who discovered the fraud. A FIAFEA whistleblower may receive a reward of 20-30% of any recovery up to the first $1 million recovered, 10-20% of the next $4 million recovered, and 5-10% of the next $5 million recovered.
There are a number of applicable FIAFEA offenses, primarily related to various forms of fraud against financial institutions. While some are more specific, a few of the fraud statutes are exceptionally broad, and a small sample of those are discussed infra.
18 U.S.C. § 1014, Fraud in loan and credit applications
The criminal statute, 18 U.S.C. § 1014, reads, in relevant part:
Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of . . . any institution the accounts of which are insured by the Federal Deposit Insurance Corporation . . . shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Courts have read this fraud to apply to inaccuracies or misstatements related to a loan applicant’s income. According to the Fifth Circuit, information on a loan applicant’s income has “the capacity to influence a savings and loan institution’s decision to make a loan and the capacity to influence the exercise of a government function,” and therefore it is a material false statement. United States v. Lueben, 838 F.2d 751, 755 (5th Cir. 1988).
A statute like this might be read to apply to virtually the entire mortgage securitization and derivatives industry circa 2005–2008 to the extent the badly originated loans impacted FDIC-insured institutions. In that time period, numerous mortgage originators made consistent and regular practice of originating loans based on false or inaccurate information about the borrower, and passing those poor quality loans on to securitizers. The securitizers broke the loans into pieces and repackaged them as collateralized debt obligations (CDOs). All of the downstream institutions, from the ratings agencies who rated the CDOs to the consumers who had the worst tranches of those CDOs in their investment portfolios, were arguably defrauded by the originators. At numerous points in the process, pieces of these loans might have impacted FDIC-insured institutions. An intrepid whistleblower and creative counsel could have put a stop to the fraud and perhaps softened the blow of the 2008 collapse while collecting a reward for the effort.
18 U.S.C. § 1341 and 1343 Mail and Wire Fraud
These are other exceptionally broad statutes that create whistleblower claims for a huge number of frauds. 18 U.S.C. § 1341 reads:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises . . . for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or deposits or causes to be deposited any matter or thing whatever to be sent or delivered by any private or commercial interstate carrier . . . shall be fined under this title or imprisoned not more than 20 years, or both. If the violation . . . affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
This provision is commonly referred to as “mail fraud,” though the mailing need not even be an “essential element” of the fraud. Rather “[i]t is sufficient for the mailing to be incident to an essential part of the scheme, or a step in the plot.” Schmuck v. United States, 489 U.S. 705, 710-11, 109 S. Ct. 1443, 1447-48, 103 L. Ed. 2d 734 (1989).
While mail fraud might seem to be a bit of an anachronism in a world of wires, the mail fraud statute has a close cousin in 18 U.S.C. § 1343, which covers “wire fraud” and is also among the frauds covered by FIAFEA whistleblower claims.
The statute reads:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation . . . affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
In the modern world, it is virtually impossible to conceive of a financial fraud scheme that does not, in some incidental way, use wires to execute or coordinate the plan. This means that there exists a whistleblower reward possibility for almost any financial fraud scheme that touches on a federally insured bank.
How Does FIAFEA Work?
The whistleblower brings the claim by filing a declaration under oath describing the facts and circumstances giving rise to the fraudulent activity. The whistleblower can also attach documents and witness information that support the claim. As with other whistleblower causes of action, the declarant here must be the original source of the information.
After the whistleblower files the declaration, the Attorney General may decline to pursue the claim within a year. This would simply end the claim. The Attorney General could also decide to prosecute the action. To the extent there is a recovery, the declarant would be entitled to a share.
Finally, and most interestingly, the Attorney General may not address the declaration within a year. At this point, the whistleblower may then compel the Attorney General to either: 1) prosecute the action; or 2) award a contract to counsel of the whistleblower’s choosing to prosecute the claim. Thus, the whistleblower and his counsel become a sort of deputy US Attorney to prosecute the fraud. This is a unique construct in whistleblower laws.
FIAFEA has the potential to be a remarkably powerful tool, yet it has never been heavily used by whistleblowers, their counsel, or the Department of Justice. As the nation continues to rise from the ashes of the 2008 economic collapse, it is an excellent time to begin employing this cause of action. Doing so would put the renewed vigilance of a cautious American public to use in preventing the next great financial calamity