Cleary Gottlieb Discusses Ruling that FIRREA Statute of Limitations Covers Offenses by Banks

A federal district court in California has become the latest court to hold that the 10-year statute of limitations under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) for offenses “affecting a financial institution” extends to offenses committed by banks and their employees, not just offenses committed against them.  The decision is the latest chapter in a long-running debate between the Government and financial institutions that has played out in a series of federal court decisions over the last three years regarding interpretation of FIRREA.  While this is not the first decision to hold that the 10-year limitations period applies to offenses by financial institutions, it is the first outside of the Second Circuit.

A provision of FIRREA, 18 U.S.C. § 3293(2) establishes that the statute of limitations for various criminal offenses is extended to 10 years in cases where the conduct at issue “affects a financial institution,” and permits the Department of Justice (“DOJ”) to bring both civil and criminal cases under the statute.  The debate over how to interpret FIRREA has focused on two issues.  First, there is the question of whether the statute permits a “self-affecting” theory of liability by which a financial institution could potentially be liable for its own fraud or the fraud of one of its employees.  Second, there is the question of whether the effect on the financial institution must be directly linked to the charged conduct, or if more tenuous effects, such as litigation risk, reputational risk, or settlement costs, may trigger FIRREA’s application.  As to the first question, courts in the Southern District of New York have determined that FIRREA does extend to a self-affecting theory of liability, holding that such a decision stems from the plain language of the statute.[1]  However, the Second Circuit, when presented with an opportunity to affirm this finding, did not.[2]  As to the second, the Second Circuit has held that FIRREA should be understood to permit a broad interpretation of “affecting a financial institution,” and, for example, litigation risks and losses from settlement agreements may constitute effects falling under the statute.[3]

A federal district court in California has now weighed-in on both questions.  In United States v. Bogucki, 19-cr-00021-CRB-1, the Government alleged that Robert Bogucki, a former options trader at Barclays, was involved in a conspiracy to defraud Barclays’ counterparty, Hewlett Packard (“HP”), in a foreign exchange transaction during a 2011 options trade.  Moving to dismiss the superseding indictment, Bogucki argued that the case against him was time-barred because it was filed outside of the five-year limitations period under 18 U.S.C. § 3282.  The Government’s position was that FIRREA extends the statute of limitations because Barclays was harmed by Bogucki’s conduct in that it experienced litigation risks and costs.

On July 2, 2018, Judge Breyer of the United States District Court for the Northern District of California held that the case against Bogucki was timely because FIRREA, 18 U.S.C. § 3293(2), substituted a 10-year statute of limitations in cases of wire fraud “affecting a financial institution.”  In so doing, the court rejected the defense’s two central arguments:  (1) that FIRREA’s statute of limitations does not extend to self-affecting frauds ; and (2) FIRREA does not contemplate indirect or second-order effects such as litigation risk or settlement expenses as a basis for demonstrating conduct “affecting a financial institution.”[4]  Bogucki argued that a broad application of FIRREA would subvert Congress’s intent to protect banks from fraud and instead permit the Government to essentially create the circumstances which would ensure FIRREA’s application, i.e., that the Government need only start investigating a bank in order to create the effects of litigation or reputational risk, which would then trigger § 3293(2).

Specifically, with respect to the first point, the court held that FIRREA does permit a “self-affecting” theory of liability, finding support from cases in the Southern District of New York.[5]  The court explained that permitting a self-affecting theory of liability was consistent with FIRREA’s plain language, and found that the statute did not contain any limiting language that would prevent such a theory from being applied.  Additionally, the court found that the effects contemplated by FIRREA were not limited to “direct” consequences of the alleged fraud.  Such effects, the court concluded, may include litigation or reputational risk or payments related to a settlement.  Significantly, the court found that a declination to prosecute letter that the Government had issued to Barclays—wherein the Government found Barclays to be culpable for Bogucki’s own fraud—may be used by the Government at trial to prove that the over $12 million Barclays agreed to disgorge in the letter evidenced that Bogucki’s wrongdoing affected the bank within the meaning of FIRREA.[6]  The court noted that the declination letter was “evidence that the trier of fact may consider in determining whether Bogucki’s alleged conduct risked a loss to the bank.”[7]

The Bogucki decision marks the first time the “self-affecting” theory of FIRREA liability has been litigated outside of the Second Circuit, as well as the first time a disgorgement resulting from a declination letter has been identified as an “effect” contemplated by the statute.  This is a notable expansion of FIRREA’s effects test.

The ability of the Government to create a case under FIRREA by merely investigating was noted by the court.  The court in Bogucki did not necessarily reject this concern, but rather argued that defendants are able to protect themselves from such a scenario by challenging the Government’s basis for bringing the claims once they are before the court—thereby placing a burden on the financial institutions to litigate these allegations.  It is very likely that the Government will begin to rely on FIRREA more, particularly in civil cases, especially in light of a trend of recent decisions limiting remedies, including penalties and disgorgement, to a five-year statute of limitations in civil securities enforcement actions.[8]

The Bogucki decision remains subject to appellate review.  Nonetheless, the decision serves as a strong reminder of FIRREA’s reach and financial institutions should be mindful that they are potentially liable under a 10-year statute of limitations for criminal and civil prosecution for the actions of their employees.

ENDNOTES

[1] See 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); United States v. Ohle, 678 F. Supp. 2d 215, 228-29 (S.D.N.Y. 2010).

[2] See U.S. ex rel. O’Donnell v. Countrywide Home Loans, Inc., 822 F.3d 650, 656 (2d Cir. 2016) (reversing on other grounds).

[3] See United States v. Heinz, 790 F.3d 365 (2d Cir. 2015).

[4] United States v. Bogucki, 18-cr-00021-CRB-1, 2018 WL 3219460, at *4 (July 2, 2018).

[5] See Countrywide, 961 F. Supp. 2d 598; Wells Fargo Bank, 972 F. Supp. 2d 593; Bank of New York Mellon, 941 F. Supp. 2d 438; Ohle, 678 F. Supp. 2d 215.

[6] The letter refers to this amount as the “Disgorgement Amount,” but notes that that amount shall be offset by any amount that Barclays ultimately pays to HP as restitution for the offense conduct.

[7] Bogucki, 2018 WL 3219460, at *8.

[8] See, e.g., Kokesh v. SEC, 137 S. Ct. 1635 (2017); Gabelli v. SEC, 133 S. Ct. 1216 (2013).

This post comes to us from Cleary, Gottlieb, Steen & Hamilton LLP. It is based on the firm’s blog post, “California District Court Holds that FIRREA’s 10-Year Statute of Limitations Reaches Risks Caused to Financial Institutions by Their Own Employees,” dated July 27, 208, and available here.

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