DOJ’s Misuse of FIRREA
SIFMA urges the Department of Justice (“DOJ”) to reconsider its novel and unprecedented use of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) to extract tens of billions of dollars from issuers and underwriters of residential mortgage-backed securities (“RMBS”). DOJ continues to misuse FIRREA in pursuing lawsuits and investigations more than 10 years after the events in question, and its actions threaten significant, far-reaching harm not only to RMBS markets, but to securities markets generally. The new DOJ leadership has already shown its willingness to reevaluate prior interpretations of FIRREA that were contrary to FIRREA’s text and intent and harmful to the U.S. financial markets and economy. SIFMA respectfully requests that DOJ do so again with respect to the application of FIRREA to securities issuances.
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Introduction
Following the 2007-2008 financial crisis, DOJ began sweeping investigations of virtually every financial institution that issued or underwrote RMBS. Investigations into the issuance and underwriting of RMBS and other securities ordinarily are conducted pursuant to securities laws, but because the applicable statutes of limitations under those laws had expired, DOJ’s past leadership turned to FIRREA, a statute designed to protect financial institutions with federally insured deposits (“federally insured financial institutions” or “FIFIs”) from fraud or other harm perpetrated by insiders. FIRREA had never before been applied to securities issuances, but its 10-year statute of limitations allowed DOJ to avoid dismissal of its claims as time-barred. Faced with the prospect of DOJ lawsuits seeking massively inflated and company-threatening FIRREA penalties, several RMBS issuers and underwriters made the business judgment to pay penalties that, while enormous and not justified under FIRREA, could be paid without risking their existence. To date, DOJ has extracted more than $21 billion in FIRREA penalties in connection with these RMBS investigations, based on an unprecedented reading of FIRREA that is contrary to the statute’s text and intent.
DOJ continues to advance its flawed interpretation of FIRREA in RMBS-related lawsuits against Barclays and a former employee of Deutsche Bank, and in ongoing RMBS-related
investigations of HSBC, Nomura, RBS, UBS, and Wells Fargo. DOJ’s actions have imposed additional burdens on the securitization market, which the Treasury Department recently described as “a vital financial tool to facilitate growth.” The effects of DOJ’s actions are not limited to the RMBS or even the securitization markets: DOJ’s aggressive interpretation extends FIRREA to cover alleged fraud in any securities offering that directly or indirectly “affected” a FIFI or FIFI affiliate. Given that nearly all securities offerings involve FIFIs or FIFI affiliates in some fashion, issuers, underwriters, and other securities market participants could face massive penalties for the entirety of FIRREA’s 10-year statute of limitations in connection with any offering in which they participate. Such an interpretation is inconsistent with the text and intent of FIRREA. Even if FIRREA did cover such a broad range of conduct (and it does not), DOJ should—at a minimum acknowledge that FIRREA limits DOJ’s potential recovery (i) to losses incurred by FIFIs and actually caused by the fraud, or (ii) to the wrongdoer’s net profit from sales to FIFIs.