March 11, 2013
Reiss on Booming Structured Finance Litigation
Law360 interviewed me about the boom in structured finance litigation arising from the Financial Crisis (here, behind a paywall):
banks will not be able to let their guard down anytime soon, thanks to the U.S. Department of Justice’s rediscovery of a statute developed in response to the late 1980s savings and loan crisis and the increasing ability of plaintiffs attorneys to expand claims first brought in mortgage cases to other consumer finance products, according to Brooklyn Law School professor David Reiss.
“I would still be worrying if I were the [general counsel] of a large financial institution about the cases that might still be filed,” Reiss said.
Most of the fraud claims available under federal securities law have a statute of limitations that expires after five years. Because most of the securities that failed did so in 2007 and 2008, 2013 looked like the end of the line for many of the government’s claims.
That was until the DOJ sued Standard & Poor’s Financial Services LLC in February, claiming it was rife with conflicts of interest and that it ignored evidence that mortgage-backed securities were stuffed with subprime mortgages that were likely to fail. In bringing its suit, the DOJ dusted off the 1989 Financial Institutions Reform, Recovery and Enforcement Act, a federal response to the savings and loan crisis of the late 1980s that allows the government to bring claims against defendants that adversely affect federally insured financial institutions.
Using that statute was a game-changer, Reiss said.
Among a host of other measures provided in the law, FIRREA extended the statute of limitations on those claims from five to 10 years, giving prosecutors more time to bring claims. It also gave the government the chance to bring civil versions of mail, wire and other fraud claims that normally would be brought in a criminal context, meaning the government will now only have to prove its allegations to a jury by a preponderance of evidence, rather than beyond a reasonable doubt.
“If courts favor DOJ’s expansive reading of FIRREA, all bets are off as to how much financial institutions may still be on the hook for suits arising from the financial crisis brought by the government,” Reiss said.
Prosecutors are also looking to bring more cases as pressure from lawmakers mounts.
After Attorney General Eric Holder admitted Wednesday that some banks were “too big to jail,” the spotlight has been turned anew on whether regulators have been tough enough on banks. Critics say that prosecutors and bank regulators have been too timid in their pursuit of crimes allegedly committed by banks.
That could also push the DOJ and the other regulators to find new theories to bring cases, Reiss said.
“It does seem that there is a bit more of a populist bent to prosecutions now that we are past the worst of the crisis,” he said.
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