Since the financial meltdown of 2008, the general public has been enraged that the bankers and the “too big to fail” institutions who caused the crisis have not been held accountable.  Banking Executives have avoided prosecution and received generous bonuses despite losses to the public associated with the government bailouts. Yet, there exist often-overlooked laws and measures that are in place to hold these banks accountable and help prevent further inequality.

What are FIRREA and FIAFEA?

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the Financial Institutions Anti-Fraud Enforcement Act of 1990 (FIAFEA) are laws enacted after the Savings and Loans crises of the late 1980s. Still in place today, these laws protect whistleblowers with knowledge of banking fraud and make it possible for them to collect large bounties and attorneys’ fees for their information and legal counsel.

However, whistleblowers with knowledge of fraud and their potential counsel frequently overlook the possibilities presented by these laws. Qui Tam attorneys and legal centers can provide valuable opportunities for whistleblowers to aid and increase accountability while combating fraud. In turn, FIRREA and FIAFEA can be effective ways for Qui Tam attorneys to recover for their clients in cases where a financial fraud has not resulted in a loss to the United States or where a violation of a securities law is not present.

Qui Tam is a writ or law that gives a private individual who assists a prosecution a portion of the penalty imposed. In the United States, the False Claims act allows individuals to bring qui tam lawsuits on behalf of the government.

Similar to the False Claims Act, FIRREA and FIAFEA can work as viable alternatives to the False Claims act in cases where an instance of fraud has not directly adversely affected the United States or violated securities law.

What are the bounty provisions of FIAFEA?

FIRREA and FIAFEA allow whistleblower’s attorneys to recover contingency fees of 25% to 33% on an entire recovery. While the bounties and attorney’s fees available under FIRREA and FIAFEA are generally not as large as those allowable under the False Claims or the Dodd-Frank Acts, the percentages of contingency fees tend to be larger than those in cases with larger recoveries.

The FIAFEA allows anyone to file a declaration of a violation that initiates a civil action for penalties “affecting a depository institution insured by the Federal Deposit Insurance Corporation or any other agency or entity of the United States.”  (See 12 U.S.C. §4201 (a).) This broadens the reach of FIAFEA to institutions that are ensured or sometimes otherwise related to the United States, allowing for whistleblower protection to extend to cases related to non-governmental entities as well.

The FIAFEA declaration is similar to the disclosure statement under the False Claims Act and is investigated subject to confidentiality obligations similar to the seal in a qui tam action.  (See 12 U.S.C. §4202 & 4203.) FIAFEA also has a public disclosure bar and an original source exception to the bar that bear similarities to those of the False Claims Act.  (See 12 U.S.C. §4204.)

Under FIFEA a whistleblower may recover a bounty on the first $10M of the recovery in an FIRREA action.  (See 12 U.S.C. §4205 (d).) The bounty percentage decreases as the amount of the government’s recovery increases. The bounty can range from 20% to 30% of the first million dollars to 5% to 10% of the last five million dollars. An example of FIFEA’s reward structure is as follows:

Government Recovery             Whistleblower’s Share (Low)   Whistleblower’s Share (High)

$1M               20%                               $200K  30%                                                     $300K

$4M                10%                              $400K  20%                                                     $800K

$5M                 5%                              $250K  10%                                                      $500K

$10M                                                   $850K                                                          $1.6M

The FIFEA reward  allows for a maximum of 16% of the first $10M. While this figure may appear lower than the relator’s share awards sometimes recovered in traditional qui tam cases under False Claims Act, it can nevertheless be significant.[1] A $750 million settlement might yield a whistleblower reward of up to $1.6 million, which can be a favorable bounty for a whistleblower. As with a class action case, FIFEA can offer the prospect of contingency fees as motivation to qui tam attorneys.

The Contingency Fee Provision of FIAFEA

Certain requirements must be met in order for a FIFEA whistleblower to choose counsel for a civil action on a contingency fee basis. First, the Attorney General must agree that the action arising from the whistleblower’s declaration “should be referred to private counsel.” Alternatively, if the Attorney General fails to move forward with the action within one year of filing the declaration, the whistleblower, “after consultation with the Attorney General, shall have the right to select counsel to prosecute the action.” (12 U.S.C. §4205). According to Section 4207, within one year of filing, the Attorney General shall either grant the contract to counsel or proceed with the action.

In several FIAFEA/FIRREA whistleblower cases, the relator and counsel may be best served if the action is contracted to counsel as opposed to the government. This is because in a case brought by counsel, the $1.6 million cap on contingency may be waived. However, in the interest of full disclosure between the whistleblower and counsel, counsel is well advised to fully disclose the contingency agreements and its implications in the fee agreement with the client.

FIAFEA further provides that in contracting with the whistleblower’s counsel, “the amount of the contingency fee payable for legal services… shall not exceed the contingency fee that counsel engaged in the private practice of law in the jurisdiction wherein the legal services are furnished typically charge clients for furnishing the same or comparable legal services” (U.S.C. § 4241(c)). Because most contingency fees awarded in class action or private practice cases range from 25% to 33% and qui tam lawyers generally charge between 40% and 50%, the provision suggests that contract negotiations with the Department of Justice should yield a contingency fee between 25% and 50%.

However, few private counsel to date have contracted with the Department of Justice and used the contingency fee agreements in place. As awareness of these opportunities increases, experienced private qui tam counsel should and hopefully will work with the Department of Justice to bring forward actionable financial fraud cases that the government may not have adequate resources to pursue. Government contracting with private counsel may be especially appropriate and fruitful in cases of fraud where the government has not been directly harmed financially. As the qui tam bar continues to file more cases under FIRREA and FIAFEA, the Department of Justice will likely contract such cases on a contingency fee basis.

Quantum Recovery under FIRREA

Under FIRREA, the government may collect civil penalties ranging from $1 million to $5 million per violation (12 U.S.C. § 1833 (b)(1) & (2)). Thus, cases with several violations such as multiple single transactions – each of which constitutes a separate fraud – can yield statutory penalties of hundreds of millions of dollars.

The government may also recover a civil penalty exceeding the statutory limits of $1 million to $5 million if any person derives pecuniary gain from the violation, or if the violation results in pecuniary loss to a person other than the violator” (12U.S.C. § 1833a (b)(3)). In these cases, the amount recovered may total up to the entire amount of loss suffered by the victims or the total amount of gains derived by the perpetrator. These penalties, too, could reach or exceed hundreds of millions of dollars.

Frauds Actionable Under FIRREA and FIAFEA

A wide variety of frauds may be prosecuted under FIRREA. 18 U.S.C § 1341 and §1343 outline the different types of fraud actionable under FIRREA. Because FIRREA and FIAFEA allow the government or its contracted counsel to prosecute financial institutions beyond those that are federally insured, FIRREA whistleblowers have several more opportunities to bring action under FIRREA and FIAFEA than under the False Claims Act. FIAFEA, however, limits whistleblower claims to those affecting federally-insured institutions. Under both FIRREA and FIAFEA, the government must prove its case only by a preponderance of evidence standard and does not need to prove that the government was harmed; the recovery may be based on harm caused to a third-party victim or on fraudulent financial gains by the perpetrator.

Another limitation present in FIAFEA whistleblower claims is the requirement that any actionable fraud must “affect” a financial institution. This requirement raises the question of whether or not financial institutions must be only victims of fraud, or if they can also be the wrongdoers. United States courts have interpreted federal criminal statutes in both ways.

Past Cases Brought Under FIRREA and FIAFEA

Cases brought under FIRREA and FIAFEA and their decisions shed important light on the status and viability of present and future actions. On October 4, 2011, the United States Attorney for the Southern District of New York filed an action against the Bank of New York Mellon Corporation (BYNM) with allegations of fraudulent pricing of foreign exchange transactions. The US Attorney claimed that these transactions “affected” particular federally-insured financial institutions. In this case, it was a FIAFEA whistleblower claim that seemed to have initiated the government’s action against BYNM. Had the government begun its own inquiry without the whistleblower, the DOJ may not have limited the FIRREA claims to only those affecting federally-insured financial institutions.

In United States v. Easterman, 135 F. Supp. 2d 917, 920, the court ruled that “affecting means ‘having an impact on,’ and that in turns requires a showing of either an unfavorable or favorable impact from the wire fraud (with the latter of course being an extraordinary possibility),” thus shedding light on the issue of interpreting the phrase “to affect.” In another case – United States v. Bennett, 161 F.3d 171, the court held that a financial institution was “affected” when it was exposed to liability as a result of its own fraud (in this case, where a securities firm that was used as an instrumentality of the fraud was sued by a bankruptcy trustee for $150 million).

Some court decisions have held that a financial institution was “affected” in cases where the institution had legal expenses; took damages to its reputation; lowered employee morale; and weakened relations with its customers. In United States v. Schinnell, 80 F.3d 1064, in which the bank had participated in the fraud, defendants used the bank to continue a tax shelter and the bank was made to pay over $24 million in settlements and $4.2 million in legal fees. In United States v. Ohle, 678 F. Supp 2d 215, the fraud was alleged against a wholly owned subsidiary of the financial institution in question.

On the other hand, some cases held that the financial institution must be a victim of fraud in order for it to qualify as being “affected.” United States v. Ubakanma, 215 F.3d 421 held that “a wire fraud offense under section 1343 ‘affected’ a financial institution only if the institution itself were victimized by the fraud, as opposed to the scheme’s mere utilization of the financial institution in the transfer of funds.” In United States v. Mizrachi, 48 F.3d.651, the court required “victimization” on the part of the financial institution in order that the crime “affect” it. The court in United States v. Grass, 274 F. Supp. 2d 648 held that transferor banks’ costs of transfer and loss of interest income from executing orders that seemed valid was not sufficient to “affect” the institutions for criminal forfeiture purposes. Finally, in United States v. Easterman, the court stated that a financial institution was not “affected” for purposes of criminal forfeiture where it was merely a conduit for the transfer of funds.

If the courts hold for FIRREA and FIAFEA purposes that a fraud by a financial institution’s management upon the public is one “affecting” the institution because it hurts the public trust in that institution, then the whistleblower cases actionable under both FIRREA and FIAFEA could encompass the practices that led to the financial meltdown of 2008.  However, even if FIAFEA cases are limited to frauds in which banks are the victims, a fraud committed by one bank can have effects on other banks as victims due to the interdependence of the banking system.  The recent BYNM case is an example of this.  Furthermore, FIAFEA may provide a remedy to recover from bank executives the exorbitant bonuses and compensation that some officers have received if the remuneration is viewed as gained through fraud or because the public has suffered losses resulting from the frauds by those executives.

Statutes of Limitations

The statute of limitations for frauds prosecuted under FIRREA and FIAFEA is ten years “from the date the cause of action accrues.” (12 U.S.C. § 1833a (h).) This means that it is not too late for whistleblowers and their counsel to prosecute frauds that led to the crisis in 2008.

Conclusion

FIRREA and FIAFEA make available previously unknown remedies for whistleblowers and members of the qui tam bar.  The statutes may prove to be one way in which whistleblowers might help redress the frauds that contributed to the financial crisis of 2008.


[1] Whereas a $750 million government False Claims Act Settlement with GlaxoSmithKline yielded a $90 million relator’s share last year, a comparable FIRREA settlement would limit its whistleblower reward to $1.6 million.