Tag Archives: Henning

Reiss on FIRREA Penalties

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Bloomberg quoted me in S&P Faces Squeeze After $1.3 Billion Countrywide Fine. It opens,

Standard & Poor’s (MHFI)’ chances of settling the government’s lawsuit over mortgage-bond ratings for less than $1 billion may have slipped away after Bank of America Corp.’s Countrywide unit was socked with a $1.3 billion fine.

The Countrywide ruling was the first to lay out what penalties financial institutions could face under a 1989 bank-fraud law the Obama administration is using against alleged culprits of the subprime mortgage crisis. It has boosted the government’s hand against McGraw Hill Financial Inc.’s S&P, said Peter Henning, a law professor at Wayne State University.

“If the starting negotiation point for the Justice Department to settle was $1 billion before, that number has just gone up,” Henning said in a phone interview.

The U.S. sued S&P and Countrywide under the Financial Institutions Reform, Recovery and Enforcement Act, a law passed by Congress in the wake of the savings and loan crisis of the 1980s. The administration, which seeks as much as $5 billion from S&P, is using the law to punish alleged misconduct in the creation and sale of residential mortgage-backed securities blamed for the financial crisis two decades later.

For the Justice Department, the case against S&P goes to the heart of the financial crisis, attacking the company’s claims that its ratings — relied on by investors worldwide — were honest and neutral. S&P has countered that the case is really retribution for it downgrading the U.S. government’s own debt and it has subpoenaed officials including former Treasury Secretary Timothy Geithner in an effort to prove that.

Hearing Today

A hearing on the company’s request to force Geithner and the government to turn over records is scheduled for today in federal court in Santa Ana, California.

Countrywide was found liable by a federal jury in Manhattan for lying about the quality of the almost $3 billion in mortgages it sold to Fannie Mae (FNMA) and Freddie Mac (FMCC) in 2007 and 2008. U.S. District Judge Jed Rakoff in Manhattan agreed with the Justice Department that the penalty should be based on how much money the mortgage lender fraudulently induced the companies to pay for the loans.

“The civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in accordance with those purposes,” the judge said in his July 30 ruling.

S&P is accused of defrauding institutions that relied on its credit ratings for residential mortgage-based securities and collateralized debt obligations that included those securities. The government claims S&P lied to investors about its ratings on trillions of dollars in securities being objective and free of conflicts of interest.

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Appeal Probable

The judge’s analysis, using the nominal value of the transactions as a starting point to determine the penalty, was “out of whack” and will probably be appealed by Bank of America to the U.S. Court of Appeals for the Second Circuit in New York, said David Reiss, a professor at the Brooklyn Law School.

“The Second Circuit has no problem reversing Rakoff,” Reiss said in in a phone interview. “The ruling pushes the balance of power in favor of the government by expanding the definition of a civil penalty.”

While other judges aren’t obliged to follow Rakoff’s reasoning, they will pay close attention to the decision because the federal court in Manhattan is the leading business law jurisdiction in the country and the ruling was clearly explained, Reiss said.

A Welling of Judicial Discontent

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Reuters ran a story that provides the next chapter to my post, Federal Judge Declares War on Wells Fargo.  The Reuters story is Massachusetts Judge Challenges Wells Fargo, Sparks Legal Fight (behind a paywall) and it reads in part:

A legal battle is heating up over an unusual challenge by a Massachusetts federal judge to banking giant Wells Fargo to waive what the judge called a technical defense in a mortgage lawsuit and to argue its case at trial.

Calling the judge’s order “unauthorized and unprecedented,” Wells Fargo has asked a federal appeals court to overturn it before it sparks “copycat” demands across the country.

It seems to me that Wells Fargo is right to be concerned about “copycat” demands across the country.  My sense from reading many of the upstream and downstream cases that I blog about is that many judges have internalized the populist critique of financial institutions that has crystallized during the financial crisis. This came about, no doubt, in large part because of the relentless headlines about actionable and non-actionable misconduct by these institutions.

That being said, judges must apply the law impartially, so the First Circuit’s review of this case, Henning v. Wachovia Mortgage, F.S.B., n/k/a Wells Fargo Bank, N.A., No. 11-11428 (Sept. 17, 2013), will be of particular interest. The transcript of yesterday’s District Court hearing on a motion to stay the Henning case during the pendency of the appeal can be found here. Judge Young makes clear that he is not budging on the requirement that Wells Fargo produce a corporate resolution, although that order is stayed until the First Circuit decides the appeal.

Federal Judge Declares War on Wells Fargo

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Never saw this before:

And so, Wells Fargo wins on a technicality.  The Court never addresses the merits of this case and expresses no opinion thereon. Still, it is appropriate to point out that, were Henning to prove his case on the merits, the conduct of Wells Fargo would be shown to be nothing short of outrageous.  On the other hand, perhaps if Wells Fargo addressed the merits, its conduct would be vindicated by fair-minded American jurors.  A quick visit to Wells Fargo’s website confirms that it vigorously promotes itself as consumer friendly, Loans and Programs, page within Home Lending, wellsfargo.com, https://www.wellsfargo.com/mortgage/loan-programs/ (last visited September 17, 2013); a far cry from the hard-nosed win-at-any-cost stance it has adopted here.

The technical (and now obsolete) preemption defense upon which Wells Fargo relies is an affirmative defense which can be waived.  See, e.g., Tompkins v. United Healthcare of New England, 203 F.3d 90, 97 (1st Cir. 2000).  The disconnect between Wells Fargo’s publicly advertised face and its actual litigation conduct here could not be more extreme.  These facts lead this Court to inquire whether Wells Fargo wishes to address Henning’s claims on the merits.  After all, it may be that Wells Fargo has done nothing wrong.

ACCORDINGLY, it is ORDERED that Wells Fargo, within 30 days of the date of this order, shall submit a corporate resolution bearing the signature of its president and a majority of its board of directors that it stands behind the conduct of its skilled attorneys and wishes to avail itself of the technical preemption defense to defeat Henning’s claim.

Should it do so, judgment will enter for Wells Fargo. If no such resolution is filed, the Court will deem the preemption defense waived and both Wells Fargo and Henning will have the opportunity to address the merits (i.e., what really happened) at a trial before an American jury. (36-37)

So ends District Judge Young’s (D. Mass.) opinion in Henning v. Wachovia Mortgage, F.S.B., n/k/a Wells Fargo Bank, N.A., No. 11-11428 (Sept. 17, 2013). Henning brought suit against his lender, which sought to have it dismissed, arguing in large part that the state law claims are preempted by the federal Home Owners’ Loan Act.

Judge Young does not make clear the basis for his authority to require such a resolution from Wells Fargo. I am guessing that we will see a motion for reconsideration pretty soon.

[HT April Charney]