Firrea and the S&l Bailout
| Publication year | 1990 |
| Pages | 2021 |
| Citation | Vol. 19 No. 10 Pg. 2021 |
1990, October, Pg. 2021. FIRREA and the S&L Bailout
The government, the press and the public are expecting heads to roll in the costly bailout of the thrift industry. In testimony before the Senate Banking Committee, Comptroller General Charles Bowsher stated that $325 billion would be needed to resolve the savings and loan crisis and pay off the obligations of the Federal Savings and Loan Insurance Corporation ("FSLIC").(fn1) More recently the estimate has been increased to nearly $500 billion, with an estimated cost to taxpayers in excess of $3,000 for every man, woman and child.
This article discusses the savings and loan ("S&L") bailout legislation and addresses specific problems related to parallel proceedings, grand juries and immunity, attorney liability and the attorney-client privilege. Additionally, the article focuses on the pitfalls associated with the authorized sharing of grand jury information.
The costs of stabilizing the savings and loan industry, restoring the public's confidence in the industry and in a deposit insurance fund, and restructuring the industry to prevent future abuses were addressed by Congress in its enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA" or the "Act").(fn2) In enacting FIRREA, Congress has attempted to protect the thrift industry against the insider abuses and fraud that have contributed to the crisis threatening the viability of affordable housing finance.(fn3)
Pursuant to FIRREA, the S&L industry has been administratively restructured, and penalties have been increased substantially. Some of the most significant changes include:
1) the Federal Deposit Insurance Corporation ("FDIC") now is assigned the duty of insuring the deposits of not only banks, but S&L institutions as well, under the umbrella of "financial or depository institutions";
2) the Resolution Trust Corporation ("RTC") has been established to serve as the receiver for S&L institutions placed in conservatorship or receivership between January 1, 1989, and August 9, 1992;
3) civil penalties for violations of various statutes include assessments of $1 million per day;
4) maximum criminal penalties have been increased to twenty years' incarceration, in addition to million-dollar fines;
5) banking offenses have been specifically enumerated as offenses within the racketeering laws (RICO); and,
6) property forfeitures are now statutorily authorized for specified violations of the laws related to financial institutions.(fn4)
Since the adoption of FIRREA, additional amendatory legislation has been
Patrick T. Murphy is a partner in the law firm of Martin, McAllister & Murphy, P.C., and is a former Chief of the Criminal Division in the Colorado U.S. Attorney's Office. Kathryn Haight Meyer, also with Martin, McAllister & Murphy, is a former Assistant U.S. Attorney with the Mountain States Organized Crime Drug Enforcement Task Force.
To facilitate enforcement, FIRREA required the U.S. Department of Justice ("Justice Department") to establish a regional office of the Criminal Division's Fraud Section in Dallas---the Northern District of Texas. Additional regional fraud offices may be created as needed.(fn6) For each of the next three years, the Act authorizes the Justice Department to receive $10 million per year for civil enforcement proceedings involving financial institutions and $65 million per year for the investigation and prosecution of banking crimes.(fn7) Moreover, $10 million was appropriated for the federal judiciary to cover the anticipated costs of increased litigation.(fn8) Additional appropriations are being considered by Congress. In the District of Colorado, more Assistant U.S. Attorneys as well as Special Agents with the Federal Bureau of Investigation ("FBI") are to be added to the S&L prosecution team. Colorado's U.S. Attorney has created a new section within the Criminal Division dedicated to the enforcement of complex fraud and white-collar cases.
The FBI currently has 8,000 cases of potential banking fraud across the country, 1,300 of which have been inactive for lack of resources.(fn9) As the government's resources are marshalled, long-term investigations will undoubtedly focus on a broad network of individuals. These include the officers, directors, partners, employees, lenders, agents and borrowers of savings and loans. Investigations also will focus on the attorneys and other professionals who have advised those institutions.
Because the savings and loan crisis is not subject to a criminal prosecution response alone, a garden variety of civil and administrative litigation will continue to proliferate. However, as the criminal prosecution response to the S&L scandal gears up, RTC attorneys, attorneys representing witnesses or targets of these investigations, and other counsel increasingly will face a variety of difficult legal and ethical issues, complicated by a vocal and unsympathetic public.
While the public continues to demand indictments, the federal government's prosecutorial response has been glacierlike: gradually growing, moving slowly, but eventually impossible to stop. Significantly, FIRREA legislation encourages this slow prosecution response: the usual five-year statute of limitations has been doubled to ten years for offenses involving financial institutions.(fn10) Thus, although it is unrealistic to expect that indictments in these white-collar cases will be returned by grand juries any time soon, indictments are a certainty. In the meantime, hundreds of civil cases have been filed and are in the discovery process, and many of the witnesses and potential targets of future and even simultaneous criminal investigations are being deposed.
Bank officers and directors unwarily may be providing the rope to hang themselves by testifying in civil cases and before administrative panels, unaware that they may become targets of criminal investigations. As such, a prosecutor's ally may be the delayed timing of the criminal investigations. Therefore, it is important for civil attorneys to warn and provide adequate counsel to vulnerable clients who may be testifying parties or witnesses in related civil litigation or in administrative proceedings.
Parallel civil and criminal proceedings frequently present ethical and legal problems for litigators. Consider the following scenario, which may be retold over and over in the coming years: An RTC attorney represents an insolvent S&L institution in receivership or conservatorship. A former loan officer is scheduled to be deposed in a contract suit brought by the RTC against a real estate developer for his or her failure to perform under the terms of a promissory note related to the purchase of Property A. The developer has counter-claimed, asserting lender liability and alleging, inter alia, that the loan officer required the developer to pay a fee as payment to secure the loan.(fn11) If the loan officer in fact received a bonus or a finder's fee for arranging the institution's loan to the developer, there is a strong possibility that, in the federal investigation, the fee would be considered an unlawful "kickback," proscribed by 18 U.S.C. § 215.
Plainly, the RTC attorney is in need of the bank officer's testimony to rebut the counterclaims; however, the loan officer may be vulnerable to criminal prosecution and should consult...
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