"It allows and permits the government to go after all kinds of malfeasance that some people thought that maybe you couldn't go after before," U.S. Attorney Preet Bharara, whose office brought the case against Bank of America, said in an interview on Thursday.
FIRREA, the Financial Institutions Reform, Recovery and Enforcement Act, was passed in 1989 in response to the savings-and-loan crisis but had largely collected dust until Bharara's office resurrected it in 2010.
The Justice Department is now invoking FIRREA in nearly every case it is bringing against financial institutions, from securities fraud to shoddy lending practices to money laundering.
It has used the statute to accuse Standard & Poor's of fraud in rating mortgage bonds, for example, and to go after First Bank of Delaware for allegedly processing withdrawals on behalf of fraudulent merchants.
Tapping Grand Jury material
The law, which allows the Justice Department to sue over fraud affecting a federally insured financial institution, gives civil lawyers the ability to tap grand jury material and subpoena documents they would not otherwise be able to get.
It also has a 10-year statute of limitations, longer than the typical five years for fraud cases, potentially giving lawyers in Bharara's office and other arms of the Justice Department more time to investigate the 2007-2008 financial crisis.
The pattern bears a striking resemblance to what Bharara's predecessor Rudy Giuliani did in the 1980s. After facing problems in trying to prosecute the Teamsters over their mob connections, Giuliani turned to the civil RICO law, which allowed him to successfully go after the whole institution.
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"It's a permanent change in the mindset," said Brian Feldman, who worked in Bharara's civil frauds unit, referring to the way prosecutors will now consider FIRREA in deciding how to investigate and charge bank cases after seeing the Bank of America verdict.
While bank misconduct might have previously only faced either a criminal case or no case at all, FIRREA offers a new middle ground.
"This is the genie that is never going back in the bottle," said Feldman, who helped build some FIRREA cases and is now in private practice at the law firm Harter Secrest & Emery.
In the Bank of America case, a federal jury on Wednesday found it liable under FIRREA for a fraud the government said its Countrywide unit orchestrated, originating shoddy home loans in a process called "Hustle" that were then sold to Fannie Mae and Freddie Mac.
The jury also found a former Countrywide executive, Rebecca Mairone, liable for fraud.
Civil fraud unit
The recent use of FIRREA began taking hold in a new unit Bharara created in 2010 to look at civil fraud cases.
The unit has brought several cases using FIRREA and another law, the False Claims Act, over reckless mortgage lending, scoring some settlements along the way. In February 2012, Citigroup agreed to pay $158.3 million to settle claims it defrauded the government into insuring faulty mortgages.
But its use of FIRREA was called into question when three banks facing cases under the law—Bank of America, Wells Fargo, and Bank of New York Mellon—decided to fight their cases in court rather than settle.
Through the litigation, Bharara's office fought to have courts endorse a broad interpretation of the statute that would allow the government to sue a bank for fraud when the bank was itself the financial institution allegedly affected.
Defense lawyers have questioned whether that interpretation was Congress' intent in passing the law, since the concern in the wake of the savings-and-loan crisis was on curtailing fraud by third parties.
"The thought was, 'I'm going to get sued for doing an act to myself, that somehow I did a crime and am victim of that crime,'" said Marvin Pickholz, a lawyer at the law firm Duane Morris who specializes in white-collar defense. "It's a hard concept to accept."
But U.S. District Judge Jed Rakoff, who oversaw the Bank of America case, endorsed the government's self-affecting theory, and two other judges in Manhattan federal court reached similar conclusions.
Bank of America has promised to appeal the verdict. While it has not said on what grounds, lawyers in Bharara's office anticipate Rakoff's FIRREA ruling could be part of its appeal.
Meanwhile, Bharara warned that similar cases remained in the offing: "The pipeline is not dry," he said.