During a speech this week at New York University’s law school, Attorney General Eric Holder urged Congress to amend legislation and allow the Department of Justice to increase whistleblower rewards in cases that involve financial institutions.
“Since no financial fraud case is prosecutable unless we have sufficient evidence of intent – we should seek to better equip investigators to obtain this often-elusive evidence,” Holder said. “This means, among other things, thinking creatively about ways to incentivize witness cooperation and encourage whistleblowers at financial firms to come forward.”
Where Congress can step in, Holder said, is by empowering the Department of Justice to take full advantage of the Financial Institutions Reform, Recovery, and Enforcement Act, FIRREA by lifting a statutory cap on whistleblower rewards.
Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act in 1989 as a tool to pursue banks responsible for the savings and loan crisis. FIRREA established the Resolution Trust Corp., used to shutter hundreds of insolvent thrifts, and created the Office of Thrift Supervision. But it is other aspects of the legislation that have appealed to the Justice Department so many years later. It empowers federal prosecutors to seek civil penalties for a wide range of offenses—including mail and wire fraud, bank fraud, and false statements made to the government—that specifically affect federally insured financial institutions. Civil claims brought under the law only have to meet the “preponderance-of-evidence” standard, rather than the much harder to prove “beyond-a-reasonable-doubt” threshold that criminal cases require. The law also has a 10-year statute of limitations, instead of the typical five-year statute for most fraud cases.
Holder said that, over the last few years, the Residential Mortgage-Backed Securities Working Group – a part of President Obama’s Financial Fraud Enforcement Task Force, “has been aggressive in using this law to develop the types of cases that have resulted in major settlements with JPMorgan, Citigroup and Bank of America, among many others.
Like the False Claims Act, FIRREA includes a whistleblower provision. But unlike the FCA, the amount an individual can receive in exchange for coming forward is capped at just $1.6 million, “a paltry sum in an industry in which, last year, the collective bonus pool rose above $26 billion, and median executive pay was $15 million and rising,” Holder said.
“In this unique environment, what would – by any normal standard – be considered a windfall of $1.6 million is unlikely to induce an employee to risk his or her lucrative career in the financial sector, he added, urging legislators to increase the incentives for individual cooperation.
“Investigating financial crimes in real-time requires knowing where to look, which is exceedingly difficult at a time when financial innovation is occurring so quickly and constantly,” Holder added. “Understanding the nature of what took place during the mortgage crisis is easy by the time Michael Lewis writes a book about it, but it is a lot harder to identify and grasp fast-emerging industry trends, and the opportunities for abuse they create, in the moment. Realistically, staying ahead of these developments requires incentivizing individuals from within the industry to come forward and cooperate with ongoing investigations.”
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