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Tenth Circuit Court of Appeals Dismisses Failed Bank Shareholder Derivative Suit under FIRREA
On April 21, the United States Court of Appeals for the Tenth Circuit upheld the dismissal of a bank shareholders’ suit against a bank holding company – and its officers and directors – for breach of fiduciary duty. Barnes v. Harris, No. 14-4002 WL 1786861 (10th Cir. Apr. 24, 2015) The shareholders had filed a derivative suit in 2012 against the officers and directors of the bank holding company after the bank failed in 2010 and was placed into FDIC receivership. The FDIC filed a motion to intervene in the suit, which was granted. Upon a bank’s failure, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) states the FDIC owns “all rights, titles, powers, and privileges of the [bank], and any stockholder … of such [bank] with respect to the [bank] and the assets of the [bank].” The applicability of FIRREA to a derivative suit against a failed bank’s holding company in this court was a question of first impression and the Tenth Circuit agreed with the Fourth, Seventh, and Eleventh Circuits who have all concluded FIRREA gives the FDIC sole ownership of shareholder derivative claims and state law must be used to determine if the claims are derivative. In this case, though the shareholders were alleging harm to the holding company, all of that harm was due to the failure of the bank, which was the holding company’s only asset. The claims were found to be derivative, with the exception of a poorly pleaded fraud complaint that belonged solely to the holding company, and the district court’s dismissal of all claims was affirmed.
D.C. Federal District Court Dismisses Lawsuit Seeking to Block $13 Billion DOJ Settlement
On March 18, the U.S. District Court for the District of Columbia dismissed a lawsuit brought by a non-profit organization challenging the $13 billion global settlement agreement entered by the U.S. Department of Justice (DOJ) and a national financial services firm and banking institution arising out of the 2008 financial crisis. Better Markets, Inc. v. U.S. Dept. of Justice, No. CV 14-190 (BAH), 2015 WL 1246104 (D.D.C. Mar. 18, 2015). The plaintiff—an advocacy group founded to “promote the public interest in the financial markets”—alleged that the DOJ’s decision to enter into the 2013 settlement agreement with the firm was in violation of the Constitution, the Administrative Procedure Act, and FIRREA. The court dismissed the lawsuit on grounds that the advocacy group lacked standing, concluding that the group had failed to show “a cognizable harm, or that the relief it seeks will redress its alleged injuries.”
Federal and State Agencies Announce $714 Million FX Settlement
On March 19, four federal and state agencies –DOJ, the Department of Labor (DOL), the SEC, and New York Attorney General – entered into a proposed $714 million settlement agreement against a large bank to resolve allegations of fraudulent conduct involving the pricing and misleading representation of a specific foreign exchange product. According to the settlement, for over a decade the bank misled clients about the pricing they received on the bank’s automatic platform used to execute trades on the clients’ behalf. The bank quoted clients prices that were at or near the least favorable interbank rate, purchased the most favorable interbank rate for themselves, and sold the highest prices to clients, profiting from the difference. Under the proposed settlement, the bank will pay (i) a $167.5 million civil penalty to the DOJ to resolve allegations brought under federal statutes including FIRREA and the False Claims Act; (ii) $167.5 million to the State of New York to resolve claims brought under the Martin Act; (iii) $14 million to the DOL for ERISA claims, (iv) $30 million to the SEC to resolve violations of the Investment Company Act, and (v) $335 million to settle private class action suits filed by customers. The bank also agreed to end its employment relationship with senior executives involved in the conduct.
DOJ Announces Settlement with California Bank Over BSA & FIRREA Violations
On March 10, the DOJ announced a $4.9 million civil and criminal settlement with a California-based bank. The bank admitted to the DOJ’s allegations that, from December 2011 through July 2013, it ignored warning signs indicating that its third party processor was defrauding hundreds of thousands of consumers by allowing fraudulent merchants to withdraw money from customers’ accounts without consent. The bank chose to ignore the complaints and inquiries it received regarding the third party processor’s activity, failing to terminate its affiliation with the entity or file a Suspicious Activity Report. The DOJ’s complaint alleges that the bank violated FIRREA; the $4.9 million settlement will cover both the criminal and civil charges, however under an agreed deferred prosecution agreement, criminal charges will be deferred for two years contingent upon the bank admitting to wrongdoing and giving up claims to approximately $2.9 million from accounts seized by the government.
DOJ Settles False Claims Act Allegations Against Pharmaceutical Manufacturer
On February 11, the DOJ announced a $7.9 million settlement with a Delaware-based pharmaceutical manufacturer for allegedly violating the False Claims Act by engaging in a kickback scheme with a pharmacy benefits manager corporation. The pharmaceutical manufacturer denies the DOJ’s allegations that it paid $40 million to a pharmacy benefits manager corporation in exchange for “sole and exclusive” recommendation of a certain drug. According to the two whistleblowers, both former employees for the accused pharmaceutical manufacturer, the accused manufacturer paid the pharmacy benefits manager “through price concessions on [other] drugs.” Under the whistleblower provision of the False Claims Act, the two former employees will receive a combined payment of $1,422,000.
Attorney General Holder Comments on Financial Fraud and the DOJ's Concern for Action
On September 17, Attorney General Holder commented on the DOJ’s efforts to pursue criminal activity against corporate financial fraud. Specifically, Holder argued for Congress to modify the FIRREA whistleblower provision by increasing the $1.6 million cap on awards, possibly to False Claims Act levels, so that there is greater “individual cooperation.” Currently, under the False Claims Act, an individual whistleblower can receive up to 30 percent of a sanction. In addition to Holder’s focus on increasing the award whistleblowers are given, he referenced the significance the DOJ places on investigating the individual executives at financial firms for criminal activity, stating that the department “recognizes the inherent value of bringing enforcement actions against individuals, as opposed to simply the companies that employ them.” Holder identified the following three main reasons for its continued efforts in pursuing both the individuals and the companies: (i) accountability – the department is focused on identifying the “decision-makers at the company who ought to be held responsible” for corporate misconduct; (ii) fairness – the company should not solely endure the punishment when “the misconduct is the work of a known bad actor, or a handful of known bad actors”; and (iii) the deterrent effect – while an individual person found guilty of a fraud crime will likely go to prison, there are few things that discourage a company from performing illegal activity.
Federal, State Mortgage-Related Investigations Yield Largest Ever Civil Settlement
On August 21, the DOJ announced that a large financial institution agreed to resolve federal and state mortgage-related claims through what the DOJ characterized as the largest ever civil settlement with a single entity. The agreement actually resolves numerous federal and state investigations related to various alleged practices conducted by the institution and certain former and current subsidiaries that it acquired during the financial crisis. Such allegations relate to the packaging, marketing, sale, arrangement, structuring, and issuance of RMBS and collateralized debt obligations (CDOs), as well as the underwriting and origination of mortgage loans. In total, the institution agreed to pay $9.65 billion in penalties and fines and provide $7 billion in relief to borrowers. Of the more than $9 billion in civil payments, $5 billion resolves several DOJ investigations related to RMBS and CDOs under FIRREA, as well as the allegedly fraudulent origination of loans sold to Fannie Mae and Freddie Mac or insured by the FHA. The origination investigations centered on alleged violations of the False Claims Act in the selling of, or seeking of government insurance for, loans alleged to be defective. Other penalty payments resolve RMBS-related claims by the SEC, the FDIC, and several states. In total, the state participants will receive nearly $1 billion, with California and New York obtaining the largest amounts at $300 million each. An independent monitor will be appointed to oversee the borrower relief provisions, which will require the institution to: (i) offer principal reduction loan modifications; (ii) make loans to “credit worthy borrowers struggling to obtain a loan”; (iii) make donations to certain communities harmed during the financial crisis; and (iv) provide financing for affordable rental housing. The institution also agreed to provide funding to defray any tax liability that will be incurred by borrowers who receive certain types of relief if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007.
Texas Federal Court Upholds HUD's Suspension of Mortgagee
On August 5, the U.S. District Court for the Southern District of Texas held that HUD's decisions to immediately suspend a HUD mortgagee and its CEO were not “arbitrary and capricious” and did not violate due process. Allied Home Mortg. Corp. v. Donovan, No. H-11-3864, 2014 WL 3843561 (S.D. Tex. Aug. 5, 2014). In October 2011, a U.S. Attorney’s Office sued the mortgagee, its CEO, and related parties under the False Claims Act and FIRREA for allegedly making false statements and false claims to HUD in connection with FHA-insured mortgage loans. Shortly thereafter, based on information obtained by the U.S. Attorney’s Office, HUD immediately suspended the mortgagee’s HUD/FHA origination and underwriting approvals and suspended the CEO from participation in procurement and nonprocurement transactions as a participant or principal. The mortgagee plaintiffs argued that such suspensions were “arbitrary and capricious” (and thus violated the Administrative Procedure Act) given the age of the evidence against the CEO and the limited evidence directly attributable to the mortgagee. Specifically, the mortgagee plaintiffs argued that HUD failed to follow its own standards for issuing immediate suspensions because it did not have adequate evidence of any present or imminent threat to the financial interests of the public or HUD that would warrant an immediate suspension. The court, however, held that the evidence uncovered in the investigation was sufficient to support HUD’s action, and that HUD “drew rational inferences based on the severity, persistence, and length of the [alleged] misconduct.” The court also denied the mortgagee plaintiffs’ due process claim, reasoning that the initial suspensions were temporary and could have been administratively appealed. The court denied the mortgagee plaintiffs’ motion for summary judgment and dismissed the case with prejudice.
SDNY Orders Bank To Pay $1.3 Billion Following Verdict In GSE Civil Fraud Case
On July 30, the U.S. District Court for the Southern District of New York ordered a bank to pay a nearly $1.3 billion civil penalty after a jury found the bank liable in October 2013 on one civil mortgage fraud charge arising out of a program operated by a mortgage lender the bank had acquired. The case was the first in which the government alleged violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. The government originally sought damages of $1 billion based on alleged losses incurred by Fannie Mae and Freddie Mac. Subsequently the government argued the penalty should be calculated not based on loss to the GSEs, but rather based on gross gain to the lender, in order to accomplish “FIRREA’s central purpose of punishment and deterrence.” The government calculated a gross gain of $2.1 billion, and requested that the court impose a penalty in that amount.
In its order on civil penalties, the court noted that FIRREA provides no guidance on how to calculate a gain or loss or how to choose a penalty within the broad range permitted. To quantify the gain or loss on the 17,611 loans at issue, the court focused on the general principle that the “civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in favor of those purposes.” The court determined that both gain and loss should be viewed in terms of how much money the lender “fraudulently induced” the GSEs to pay. Even though many of the loans were in fact high quality, the Court included all of the loans in the gain and loss analysis because the jury found that the lender engaged in an intentional scheme to defraud the GSEs and that the lender intended to represent loans as being materially higher quality than they actually were. The court reasoned that the “happenstance that some of the loans may still have been of high quality should not relieve the defendants of bearing responsibility for the full payments they received from the scheme, at least not if the purposes of the penalty are punishment and deterrence.” As a result, the Court found the proper measure of both gain and loss to be the amount Fannie and Freddie paid for all loans at issue, and set $2,960,737,608 as the statutory maximum for the penalty. As a compensating factor, the court considered that 57.19 percent of the loans were not materially defective and reduced the penalty to 42.81 percent of the statutory maximum, or $1,267,491,770.
Federal, State Authorities Obtain Another Major RMBS Settlement
On July 14, the DOJ, the FDIC, and state authorities in California, Delaware, Illinois, Massachusetts, and New York, announced a $7 billion settlement of federal and state RMBS civil claims against a large financial institution, which was obtained by the RMBS Working Group, a division of the Obama Administration’s Financial Fraud Enforcement Task Force. Federal and state law enforcement authorities and financial regulators alleged that the institution misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. They claimed, among other things, that the institution received information indicating that, for certain loan pools, significant percentages of the loans reviewed as part of the institution’s due diligence did not conform to the representations provided to investors about the pools of loans to be securitized, yet the institution allowed the loans to be securitized and sold without disclosing the alleged failures to investors. The agreement includes a $4 billion civil penalty, described by the DOJ as the largest ever obtained under FIRREA. In addition, the institution will pay a combined $500 million to settle existing and potential claims by the FDIC and the five states. The institution also agreed to provide an additional $2.5 billion in borrower relief through a variety of means, including financing affordable rental housing developments for low-income families in high-cost areas. Finally, the institution was required to acknowledge certain facts related to the alleged activities.