FIRREA and Financial Frauds

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)

Our country’s recent history in the banking, finance, and investment industries demonstrates the importance of whistleblowers against fraud and other illegal conduct.Through the 1980s and into the mid-1990s, our country experienced a banking crisis in the Savings & Loan (S&L) industry. As a result of rapid expansion and investment in risky projects,S&Ls began to fail across the country. By the time the dust settled in the mid-1990s, over 700 S&Ls were closed and the taxpayers were left to cover losses estimated at around $124 billion.The crisis even essentially bankrupted a federal agency – the former Federal Home
Loan Bank Board.

The S&L industry did not collapse only because of regulatory malfeasance and difficult economic conditions. Fraud and illegality played a big role. According to reporting by the N.Y. Times, by 1992, over 1,000 people were prosecuted for major S&L fraud, and over 800 were convicted.

How fraud becomes part of a corporate culture was aptly described by William Black, former senior regulator for several federal agencies during the S&L crisis.

The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don’t directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That’s big bonuses for the folks who make the best numbers. It sends the message — making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing — the most common way that frauds are found in America — because the system draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.

Against this backdrop, Congress passed FIRREA, and its companion law, FIAFEA – the Financial Institution Anti-Fraud Enforcement Act of 1990.

Under FIRREA, the Department of Justice can file civil lawsuits for a variety of criminal violations applicable to the financial services industry, including bank fraud, mail fraud, wire fraud, embezzlement, and making false statements. And under FIAFEA, whistleblowers who expose such violations can receive financial awards of up to $1.6 million for their information.

FIRREA not only covers frauds committed against financial institutions, but it also covers frauds committed by financial institutions. And penalties under FIRREA can be substantial – up to about $2 million per single violation, and up to about $10 million for continuing violations. Recently, multiple whistleblowers assisted the DOJ in famously using FIRREA to collect more
than $100 billion in fines against numerous banks, for their role in the subprime mortgage scandal and subsequent recession – an event some believe we are doomed to repeat, amid growing concerns about the subprime auto loan industry.

Our system depends on whistleblowers to assist in the enforcement of laws and regulations designed to protect customers, taxpayers and investors, as well as to help regulators stay ahead of the latest deceptions invented by those in the banking, finance and investment industries that are determined to sharply bend and break the rules for personal gain.

Taking the Next Step

If you have information that may help the establish one or more violations of the laws and regulations affecting the financial services industry, we would welcome the opportunity to talk with you. Contact your DC whistleblower attorney now!