California Court Interprets “Affecting a Financial Institution” for FIRREA Purposes “Broadly”

七月 9, 2018

On July 2, 2018, a federal district court in California held that the alleged misconduct of a former bank employee “affected” the bank for purposes of FIRREA, making the 10-year statute of limitations in 18 U.S.C. § 3293(2) applicable to an otherwise time-barred offense. In doing so, the court (1) became the first court outside the Second Circuit to endorse the so-called “self-affecting” theory of liability, in which the government uses FIRREA to impose civil or criminal liability on a bank or one of its employees for committing a fraud that “affects” that bank, and (2) enumerated new types of FIRREA-liability triggering “effects,” including the government’s agreement to decline to prosecute the bank.

In United States v. Bogucki, 18-CR-00021 (N.D. Cal.) (Breyer, J.), the government indicted a former employee of a global bank for allegedly defrauding the bank’s counterparty in a foreign exchange transaction. After indictment, the government entered into an agreement with the bank in which it declined to prosecute the bank in exchange for the bank paying approximately $12 million in combined restitution and disgorgement. The defendant moved to dismiss the FIRREA charge as time-barred, arguing that the defendant’s conduct, which fell outside the five-year limitations period for standard wire fraud, did not directly “affect” the bank because the government had declined to prosecute the bank and the declination agreement did not contain any bank admission of wrongdoing. 

Judge Breyer denied the motion and adopted the reasoning of several New York courts that had endorsed the so-called “self-affecting” theory of FIRREA liability. Under that theory, the affected bank is the defendant, or the employer of the defendant, who allegedly committed the fraud, as opposed to a third party alleged to have defrauded the bank. See United States v. Heinz, 790 F.3d 365, 366–67 (2d Cir. 2015); United States v. Countrywide Fin. Corp., 961 F. Supp. 2d 598, 605 (S.D.N.Y. 2013); United States v. Wells Fargo Bank, N.A., 972 F. Supp. 2d 593, 630 (S.D.N.Y. 2013); United States v. Bank of New York Mellon, 941 F. Supp. 2d 438, 454–56 (S.D.N.Y. 2013); cf. United States v. Serpico, 320 F.3d 691, 695 (7th Cir. 2003) (while neither the bank nor its employees were defendants in the case, the bank participated in the fraud). Finding that “affecting” had a “broad” meaning, Judge Breyer expanded the types of risks that could form the necessary “effects,” including potential litigation risk, reputational risk, and trading risk. 

While at least one prior decision had found that actual “significant reputational harm” was sufficient together with other “effects” to trigger FIRREA, Bank of New York Mellon, 941 F. Supp. 2d at 459, Judge Breyer assessed potential reputational harm alone as a sufficient FIRREA-liability triggering “effect.” Moreover, no prior case had involved a government declination of prosecution, as opposed to a civil settlement or criminal admission of wrongdoing. And while prior settlements had involved larger payments, the court ruled that “no matter how pedestrian the crime,” a crime exposing a bank to “liability” would trigger FIRREA self-affecting liability. Finally, Judge Breyer found that the foreign exchange trading, together with misrepresentations about that trading, created a sufficient risk to that bank to qualify as an “effect.” The court rejected the defendant’s argument that there was nothing particularly risky about the trading at issue as compared to the bank’s normal trading; Judge Breyer noted that the mere fact the trading was part of a fraudulent scheme necessarily made it unusual and inherently risky. Judge Breyer’s reasoning on this point seems to suggest that the government will always be able to prove “affecting” if it alleges fraud by a bank employee since any fraud creates some risk for the bank.

The court rejected, however, the government’s argument that an operative “effect” could include trading risk to the bank’s counterparties, which were themselves financial institutions, because those counterparties were not alleged to have been defrauded. Thus, any trading risk they incurred was necessarily a result of their own trading decisions.

Key Takeaways:

1. The Government is aggressively using self-affecting FIRREA liability to pursue banks and their employees. Within the past five years or so, the government has increasingly used the self-affecting theory of FIRREA liability in both criminal and civil cases. Since the 2013 Mellon case that specifically addressed it, some of the government’s most high-profile criminal and civil cases have employed the self-affecting theory, including in cases involving alleged foreign exchange manipulation (Bogucki), alleged LIBOR manipulation (United States v. Connolly et al., No. 1:16-cr-00370 (S.D.N.Y.)), and alleged fraud involving government-backed mortgages (Countrywide and Wells Fargo). FIRREA provides for both a substantially longer limitations period and increased criminal penalties.

2. Bank liability under FIRREA is being distorted in ways Congress may not have intended. Judge Breyer’s conclusion that any action by a bank employee that incurs potential liability for the bank triggers FIRREA shows the potential breadth of FIRREA’s coverage. Under U.S. respondeat superior principles, an institution may be liable for any act of an employee (i) within the scope of employment and (ii) meant, at least in part, to benefit the institution. Given the number of employees at many financial institutions, applying FIRREA to any crime, no matter how “pedestrian,” involving any potential litigation, reputational, or trading risk, renders unwieldy the scope of banks’ potential FIRREA exposure. (Given the $12 million the bank paid in restitution and disgorgement, it may well be that Bogucki’s conduct was not “pedestrian,” but Judge Breyer did not attempt to cabin his holding to the particular facts of the case.) As certain commentators have noted, this aggressive use of FIRREA to punish banks is contrary to Congress’s intention to protect banks. See Filmon M. Sexton, The Financial Institutions Reform, Recovery, and Enforcement Act of 1989: The Effect of the “Self Affecting” Theory on Financial Institutions, 19 N.C. Banking Inst. 263, 265 (2015). Prosecutors and courts should seriously consider this disconnect going forward, as should Congress in considering amendments to the statute that would clarify its intent. An appellate court challenge—potentially to create a Circuit split—in which the defendant is a bank (as opposed to Bogucki, in which the defendant is a former employee) would best illustrate the inherent tension in the government’s “self-affecting” theory of FIRREA prosecutions.

The full text of the decision is available here.

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