Patience is a virtue, and waiting for cases from the financial crisis has certainly called for such a temperament. In a recent interview, Attorney General Eric H. Holder Jr. indicated that the wait might be over, but it is unlikely to satisfy those who have found the Justice Department’s response to be tepid at best.
“My message is, anybody who’s inflicted damage on our financial markets should not be of the belief that they are out of the woods because of the passage of time,†Mr. Holder said in an interview with The Wall Street Journal last week. “If any individual or if any institution is banking on waiting things out, they have to think again.â€
The attorney general has hinted at future cases before. Over three years ago, in January 2010, he told the Financial Crisis Inquiry Commission that
the Justice Department is using every tool at our disposal - including new resources, advanced technologies and communications capabilities, and the very best talent we have - to prevent, prosecute and punish these crimes. And by taking dramatic action, our goal is not just to hold accountable those whose conduct may have contributed to the last meltdown, but to deter such future conduct as well.
It is certainly questionable whether there has been any “dramatic action†involving the financial crisis, at least on the criminal front. The government already had to significantly revise downward the number of cases that it had boasted of bringing in 2012 related to distressed homeowners - the very type of inflating of numbers that it has accused others of doing.
The latest talk about impending cases does not appear to involve criminal charges. In his recent interview, Mr. Holder chose his words carefully and did not talk of prosecutions, instead only saying that “significant matters†would be brought.
The hesitancy over criminal actions, however, does not seem to be influenced by the statute of limitations. Mail and wire fraud statutes can incorporate older conduct into a broader scheme, and securities fraud can be prosecuted up to six years after the last act.
But pursuing criminal cases from the financial crisis gets increasingly difficult, especially against individuals, because unlike a good bottle of wine, evidence does not age well. Memories dim and the chance of finding the “smoking gun†e-mail or recording that can help implicate a defendant in a fraudulent scheme becomes less likely with the passage of time.
Mr. Holder will more likely pursue charges under a civil statute that has become the Justice Department’s favorite tool of late against banks: 12 U.S.C. 1833a. The statute provides for civil penalties for violations “affecting a financial institution†of up to $5.5 million or the amount the defendant gained from the misconduct.
Congress enacted this provision in 1989 during the savings and loan crisis as part of the Financial Institutions Reform, Recovery and Enforcement Act to give prosecutors another tool to pursue cases involving fraud and other misconduct at banks.
The law is a hybrid: it requires prosecutors to establish that criminal conduct occurred while using the lower civil burden of proof to establish the violation. That makes it easier for the Justice Department to make its case and can even allow a court to make a favorable ruling based solely on written evidence without a trial.
Section 1833a contains other favorable measures for the government. The law extended the statute of limitations for a host of banking crimes to 10 years from the usual 5-year period, so the Justice Department faces little time pressure in pursuing cases involving the mortgage market during the lead up to the financial crisis.
The statute only requires that the violation affect a financial institution, a term that has been broadly construed in recent district court decisions. Last week, Judge Jed S. Rakoff of Federal District Court in Manhattan rejected a challenge by Bank of America to a lawsuit involving the sale of faulty mortgages by its Countrywide Financial subsidiary. He found that the financial institution affected by the fraud could be Bank of America itself, so that even a self-inflicted wound could be the basis for pursuing a civil penalty action.
The range of potential violations is quite broad in the statute, covering more than just frauds. In a lawsuit filed on Aug. 6 against Bank of America related to its sale of $850 million worth of mortgage-backed securities, prosecutors charged that the bank made false statements in violation of 18 U.S.C. § 1014 by not disclosing that the loans packaged for sale had not been properly evaluated. This is a much easier case because it does not require proving intent to defraud, only that the bank knew it had not made complete disclosure of material information.
Whether the public will view cases brought under Section 1833a as significant is a different issue. Unlike a criminal prosecution, civil filings - many of which are ultimately settled - result only in the payment of money, giving the impression that the punishment is just another cost of doing business.
And at some point you wonder whether more lawsuits against Bank of America, JPMorgan Chase (which has disclosed that its own mortgage-backed securities offerings are being scrutinized by the Justice Department) and other big banks are particularly meaningful. When cases are filed for discrete acts, it is hard to see how they have much effect on the banks beyond making another payment or the public perception that misconduct is being successfully redressed.
The Justice Department has already filed a number of lawsuits under the 1989 act, and if past practice continues, then it is unlikely any individuals will be named in the cases Mr. Holder said will be filed. Unlike a claim against a corporation in which the conduct of a range of employees can be aggregated to show a violation, proving an individual committed a crime is much more difficult.
So the question is whether a stream of civil actions naming various banks for their role in the financial crisis will be the type of “dramatic action†that deters future misconduct.
