Whistleblower Cases Involving Securities & Financial Fraud. Wm. Paul Lawrence, II Waters & Kraus, LLP Washington, D.C.

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1 Whistleblower Cases Involving Securities & Financial Fraud Wm. Paul Lawrence, II Waters & Kraus, LLP Washington, D.C. Table of Contents Introduction... 1 Historical Context... 1 The Dodd-Frank Act... 2 The Bounty Provisions of Dodd-Frank... 2 Contingency Fees under Dodd-Frank... 3 Frauds Actionable Under Dodd-Frank... 4 Quantum of Recovery Under Dodd-Frank... 6 Applicable Statutes of Limitations under Dodd-Frank... 7 FIRREA & FIAFEA... 7 The Bounty Provisions of FIAFEA... 7 The Contingency Fee Provision of FIAFEA... 8 Frauds Actionable under FIRREA and FIAFEA... 9 Quantum of Recovery under FIRREA Applicable Statutes of Limitations under FIRREA and FIAFEA Conclusion... 11

2 Introduction In 2010 Congress passed The SEC whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 15 U.S.C. 78u-6 et seq., providing bounties of 10% to 30% of the government s recovery to whistleblowers whose complaints to the SEC about securities fraud and foreign corrupt practices result in SEC sanctions totaling $1 million or more. Older but little-used laws, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ( FIRREA ), 12 U.S.C. 1833a et seq., and the Financial Institutions Anti-Fraud Enforcement Act of 1990 ( FIAFEA ), 12 U.S.C et seq., also provide bounties of 5% to 30% and contingency fees on the government s recovery in frauds that affect federally-insured financial institutions. This paper provides an introduction to all of these laws and explains why trial lawyers should be paying attention to them. 1 Historical Context Whistleblower bounty laws have proliferated during an era of concern about fiscal imbalances in government, overspending on entitlement programs and national defense, and more recently an out-of-control financial industry that came close to taking down the world financial order in The mother of all whistleblower statutes is the Federal False Claims Act ( FCA ), a Civil-War-era law originally enacted to punish suppliers of bad mules to the federal troops. 2 In 1986, in response to a new wave of fraud in defense contracting, the FCA was amended to guarantee rewards of 10% to 30% of the government s recovery for whistleblowers along with statutory attorney s fees (in addition to any contingency fee earned on the bounty). These significant financial incentives led to a steady increase in the number of qui tam cases filed over the ensuing 25 years, with the focus of attention shifting to Medicare and Medicaid fraud because fraud in those programs was having a huge impact on governmental budgets. In the mid-1990s, state and local governments began enacting versions of the FCA to combat Medicaid fraud, with the result that there are now some 28 states, the District of Columbia and four large municipalities with FCA statutes. 3 Qui tam lawyers and their whistleblower clients, working with the Justice Department, have now recovered some $30 billion for federal taxpayers. 4 Recoveries in state FCA actions have perhaps totaled another $4 billion. Because of the huge success of the FCA, Congress in late 2006 decided to apply the same incentives to tax collection, adopting the Tax Relief and Health Care Act of 2006, guaranteeing rewards of 15% to 30% in tax whistleblower matters exceeding $1 million. 1 I would like to acknowledge and thank attorneys Caitlyn Silhan, of the Dallas office of Waters & Kraus, and Jennifer McIntosh of the San Francisco office of Waters, Kraus & Paul, for their assistance with this paper. 2 Lary Lahman, Bad Mules, A Primer on the Federal False Claims Act, Oklahoma Bar Journal Articles (Jan. 3, 2012),

3 After the financial meltdown of 2008, Congress again employed the whistleblower device to serve public policy by adopting the whistleblower reward provisions of the Dodd-Frank Act, permitting whistleblowers with knowledge of securities law violations to recover rewards of 10% to 30% in cases where the SEC recovers fines and disgorgement of profits that exceed $1 million. Unlike most of the previous whistleblower statutes, Dodd-Frank deputizes whistleblowers and their lawyers to assist the government in recovering damages suffered by private parties or disgorging wrongfully-obtained profits of private parties, rather than limiting the remedy to recovery of damages suffered by the government itself. This is a significant, gamechanging development. FIRREA and FIAFEA have been on the books since the savings and loan crisis of the late 1980s, but have so far been largely ignored by whistleblowers and their lawyers. These laws permit whistleblowers to recover rewards for reporting frauds that affect federally-insured financial institutions, perhaps even those where the institutions are the perpetrators, rather than victims, of the fraud. Again, the damages at issue under FIRREA and FIAFEA are not necessarily those suffered by the government as the result of payouts on deposit insurance, but appear to include damages suffered by private parties as the result of fraud that affects financial institutions. The Dodd-Frank Act The Bounty Provisions of Dodd-Frank Under Section 21E of the Securities Exchange Act of 1934, as amended by Sec 922 of the Dodd-Frank Act, any person can file a complaint with the SEC voluntarily providing original information about a violation of the securities laws. The complaint is filed on Form TCR, but is usually accompanied by detailed report similar to a disclosure statement under the FCA. The complaint is investigated subject to confidentiality obligations similar to the seal in a qui tam case. 17 C.F.R F-9. There is a public disclosure bar and an original source exception to the bar that are similar to those under the FCA. Id. at F-4(b) ( original information ), F-4(b)(1)(iii)(excluding information derived solely from public sources from the definition of original information unless the whistleblower is the original source). Unlike the FCA, the complaint is not filed in court, but rather with the SEC. 5 If the complaint leads to a successful enforcement action involving more than $1 million in monetary sanctions, the SEC is required to pay an award of 10% to 30% of the monetary sanctions it collects. The precise amount of the award lies in the discretion of the SEC based upon criteria set forth in the statute and regulations, including the significance of the information to the success of the action and the degree of assistance provided by the whistleblower and his counsel. However, an award of at least 10% is mandatory. 5 There are also unique independent knowledge and independent analysis sections of the DFA. 17 C.F.R F-4(b)(1)(i) (including independent knowledge or independent analysis under the definition of original information ), F-4(b)(2) (defining independent knowledge ), F-4(b)(3) (defining independent analysis ). 2

4 I will discuss below how fines and disgorgement damages are assessed in SEC enforcement actions, but it should be mentioned here that the amounts involved can be very substantial in major investment frauds such as those now beginning to work their way through the system as a result of the 2008 Wall Street meltdown. The table below shows a range of potential bounties that might be collected in an appropriate case, but even more could be at stake in a whistleblower complaint involving a major fraud at a large investment bank. Gov't Recovery Bounty (Low) Bounty (High) $1,000,001 10% $100,000 30% $300,000 $5,000,000 10% $500,000 30% $1,500,000 $10,000,000 10% $1,000,000 30% $3,000,000 $25,000,000 10% $2,500,000 30% $7,500,000 $50,000,000 10% $5,000,000 30% $15,000,000 $100,000,000 10% $10,000,000 30% $30,000,000 $300,000,000 10% $30,000,000 30% $90,000,000 Contingency Fees under Dodd-Frank Dodd-Frank does not contain a provision for recovery of attorney s fees by the whistleblower or his attorney, so the attorney representing a Dodd-Frank whistleblower will typically enter into a contingency fee contract with his client providing for the lawyer to receive a percentage of the bounty. Because the awards in Dodd-Frank cases can be quite large, so too can be the attorney s fee. However, because the lawyer s contingency fee is a percentage of his client s bounty percentage, effective case selection requires the lawyer to focus upon cases in which the potential quantum is substantial. To appreciate this point, it helps to look again at the ranges of recovery reported in the table above, this time focusing on the attorney s fee: Gov't Recovery Atty Fee % (Gross) Bounty % (Low) Net Atty Fee % (Low) 3 Net Atty Fee $ (Low) Bounty (High) Net Atty Fee % (High) Net Atty Fee $ (High) $1,000,001 40% 10% 4% $40,000 30% 12% $120,000 $5,000,000 40% 10% 4% $200,000 30% 12% $600,000 $10,000,000 40% 10% 4% $400,000 30% 12% $1,200,000 $25,000,000 40% 10% 4% $1,000,000 30% 12% $3,000,000 $50,000,000 40% 10% 4% $2,000,000 30% 12% $6,000,000 $100,000,000 40% 10% 4% $4,000,000 30% 12% $12,000,000 $300,000,000 40% 10% 4% $12,000,000 30% 12% $36,000,000 With a net attorney s fee of only 4% to 12%, whistleblower cases with a quantum less than $10 million probably will not work out well for most law firms with substantial overhead. Effectively prosecuting a whistleblower complaint is not simply a matter of filing a tip form with the SEC whistleblower office. The office has already received tens of thousands of those,

5 most of which will never see the light of day. What matters is presenting a well-researched and compelling case to the SEC staff attorneys, perhaps retaining experts on key liability and damages issues, and working with the government over a period of months or years as the investigation is conducted, the SEC hears the defense position and the case is prepared for trial or settlement. Frauds Actionable under Dodd-Frank Securities Fraud Matters the SEC can pursue under the securities laws based upon the complaint of a whistleblower are quite broad, in no small part because a security includes almost any scheme for using other peoples money. Section 2(a)(1) of the Securities Act of 1933, 15 U.S.C. 77B, defines a security as including, among other things any note, stock,... bond, debenture... investment contract... put, call, straddle, option, or privilege on any security... or, in general, any interest or instrument commonly known as a security..... Section 3(a) of the Securities Exchange Act of 1934, 15 U.S.C. 80B-2, contains an almost identical definition. Courts have attempted to adapt these statutory definitions to meet the countless and variable schemes devised by those who seek the use of the money of others. See e.g. SEC v. W.J. Howey Co., 328 U.S. 293, 299 (1946). The anti-fraud provisions of the securities laws prohibit a wide range of conduct considered deceptive. Section 17(a) of the 1933 Act makes it unlawful, in the offer or sale of any security, (1) to employ any device, scheme or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 10(b) of the 1934 Act makes it unlawful to use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the SEC may prescribe. Note that the 1933 Act applies only to sellers, but the 1934 Act applies to both buyers and sellers. Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. 80b-6, contains almost identical provisions, but applies to investment advisors and requires neither a purchase nor sale. Anyone who reads the newspapers knows that insider trading is one type of fraud in which the SEC takes great interest. 6 Whistleblowers frequently bring something of value to the table in these cases because only insiders know what information has changed hands in private. Another type of fraud in which the SEC is taking strong interest, and where whistleblower can make a valuable contribution, is the mispricing of obscure securities that do not have prices quoted on public exchanges. Hedge funds often hold in their portfolios over-the-counter securities, the value of which is not readily apparent, such as emerging-market stocks and bonds that are not traded on national exchanges. Private equity funds often acquire entire companies and the value of these investments is not readily apparent because their stock is not publicly traded. 6 Mode. 4

6 In reporting on the value of these investments to their investors, hedge funds and private equity funds often have motives for overstating or understating their value. For example, a fund might want to overstate the value of its portfolio to increase compensation to the fund managers based upon gains in the portfolio or for purposes of impressing potential investors with past investment gains. A fund might want to understate the value of its portfolio during times, like the recent market crash, when investors in the fund are being forced by margin calls and other liquidity concerns to pull their money out of the fund by redeeming their shares. If the fund managers have an investment in the fund, underpayment of withdrawing investors is equivalent to buying their interests at less than fair value. Other types of securities subject to difficult-to-detect pricing frauds are complex derivative instruments, such as the credit default swaps ( CDSs ) and collateralized debt obligations ( CDOs ) that were at the center of the meltdown of subprime mortgage securities in During the height of the financial crisis, investment banks may have mispriced CDS instruments in order to misrepresent their solvency and/or to avoid contractual obligations to provide collateral to counter parties. Whistleblowers with knowledge of what took place will likely find the SEC very interested in what they know. Foreign Corrupt Practices The Foreign Corrupt Practices Act ( FCPA ) was enacted in 1977, amending the Securities Exchange Act of 1934 to prohibit and punish corrupt payments (i.e. bribes) to foreign officials in order to obtain or retain business or induce them to neglect their legal duties. Pub. L. No , 91 Stat (1977) (codified at 15 U.S.C. 78a, 78dd-1 et seq., 78ff, 78m, 78(o) (2006)). It was amended in 1998 to reach conduct occurring outside of the territorial jurisdiction of the United States, as well as to reach the corrupt conduct of foreign individuals and companies while present in the United States. International Anti-Bribery and Fair Competition Act of 1998, Pub. L. No , 112 Stat (1998). The FCPA applies to issuers, 7 domestic concerns 8 or United States persons, 9 and foreign corporations. 10 The FCPA also prohibits issuers from improperly recording corrupt payments in their books and records. Common FCPA scenarios 7 15 U.S.C. 78dd-1 (applying to any issuer who has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title ) U.S.C. 78dd-2(h)(1) (defining a domestic concern as (A) any individual who is a citizen, national, or resident of the United States; and (B) any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States or territory, possession, or commonwealth of the United States. ). 9 Id. at 78dd-2(i)(2) (defining a United States person as a national of the United States... or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship organized under the laws of the United States or any State, territory, possession, or commonwealth of the United States, or any political subdivision thereof. ). 10 Id. at 78dd-3(f)(1) (defining a person as any natural person other than a national of the United States... or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship organized under the law of a foreign nation or political subdivision thereof. ). 5

7 involve a company paying bribes to a foreign official through an agent in that country. These payments are often falsely characterized as agents commissions, when in fact they are corruptly paid to obtain and retain business abroad, or to induce a foreign official to neglect to do his or her legal duty. FCPA cases are considered high-priority within the SEC, as they jeopardize the company paying the bribe, as well as integrity of the domestic and foreign markets in which they operate. Quantum of Recovery under Dodd-Frank Securities Fraud Remedies for securities law violations include civil penalties, disgorgement and prejudgment interest. See 15 U.S.C. 80b-9 (2000); 15 U.S.C.A. 78u; SEC v. Haligiannis, 470 F.Supp.2d 373, 385 (S.D.N.Y. 2007). Penalties that can be assessed for each violation are up to $150,000 against a natural person and up to $750,000 against a legal entity. When multiple investors have been harmed by a single fraudulent scheme, a separate penalty can be imposed for the harm done to each investor. See SEC v. Kenton Capital LTD, 69 F. Supp. 2d 1 (D.D.C. 1998). The amount of disgorgement ordered need only be a reasonable approximation of profits causally connected to the violation, and any risk of uncertainty in calculating disgorgement should fall on the wrongdoer whose illegal conduct created that uncertainty. SEC v. Patel, 61 F.3d 137, (2d Cir. 1995). The court can order disgorgement of all profits reaped from securities fraud, even if it exceeds actual damages to the victims. SEC v. Haligiannis, supra, 385 (S.D.N.Y. 2007). In large scale frauds involving multitudes of individual transactions and numerous investors, penalties alone can result in recoveries sufficient to make investors whole. Disgorgement takes from the defendant ill-gotten gains, an amount that may exceed investor losses. The remedies are cumulative, since the purpose of the penalty provision is to punish the wrongdoer and deter future wrongdoing, whereas the disgorgement remedy is more akin to recovery of damages. The whistleblower s reward, although calculated on amounts collected by the SEC, is paid from a separate fund established by Congress and does not diminish amounts that the SEC distributes to defrauded investors in order to make them whole. Foreign Corrupt Practices Act In addition to the remedies available to the SEC in general, the FCPA sets out specific civil penalties that may be assessed against violators. Any firm or natural person that violates the anti-bribery provisions of the FCPA may face a fine of up to $2 million, 11 and issuers are subject to an additional $10,000 civil penalty in an action brought by the SEC. 12 Individuals who violate U.S.C. 78ff(c)(1)(A)(civil fines for issuers), 78dd-2(g)(1)(A) (civil fines for domestic concerns); 78dd- 3(e)(1)(A) (civil fines for foreign firms) U.S.C. 78ff(c)(1)(B). Note: the government may recover additional penalties in an action brought by the Attorney General. 6

8 the act may be fined up to $100,000, imprisoned for up to 5 years, or both. 13 Violators of the FCPA s books and record-keeping provisions face penalties pursuant to 15 U.S.C. 78u and 78ff(c). Applicable Statutes of Limitations under Dodd-Frank A 5-year statute of limitations is generally applicable to securities violations and applies as well in DFA actions. 28 U.S.C This period may be tolled, however, by operation of either the equitable tolling doctrine, 14 or the continuing violations doctrine. 15 Importantly, the 5-year statute of limitations only applies to fines, penalties, or forfeitures; it does not apply to disgorgement orders. See Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010) (collecting cases). FIRREA & FIAFEA The Bounty Provisions of FIAFEA Under FIAFEA, any person may file a declaration of a violation giving rise to an action for civil penalties under FIRREA affecting a depository institution insured by the Federal Deposit Insurance Corporation or any other agency or entity of the United States. 12 U.S.C (a). The declaration is similar to a disclosure statement under the False Claims Act and is investigated subject to confidentiality obligations similar to the seal in a qui tam case. 12 U.S.C & There is a public disclosure bar and an original source exception to the bar that are similar to those under the False Claims Act. 12 U.S.C FIAFEA permits the whistleblower to recover a reward on the first $10 million of the recovery in a FIRREA case. 12 U.S.C (d). The bounty percentage decreases as the amount of the government s recovery increases, ranging from 20% to 30% of the first million to 5% to 10% of the last $5 million. The reward structure can be summarized as follows: Gov't Recovery Bounty (Low) Bounty (High) 1st $1,000,000 20% $200,000 30% $300, U.S.C. 78ff(c)(2)(A)(civil fines for certain employees and agents of issuers), 78dd-2(g)(2)(A) (civil fines for domestic concerns); 78dd-3(e)(2)(A) (civil fines for foreign firms). Note: Under 78ff(c)(2)(B), the Commission may seek additional civil penalties of up to $10,000 against certain employees and agents of issuers who violate the FCPA; 78dd-2 and 78dd-3 do not contain analogous provisions, but instead require the Attorney General to bring an action for civil penalties. 14 See SEC v. Koening, 557 F.3d 736, 739 (7th Cir. 2009) (holding that victim of fraud has the full time from the date that the wrong came to light, or would have done had diligence been employed. And the United States is entitled to the benefit of this rule even when it sues to enforce laws that protect the citizenry from fraud, but is not itself a victim. ) (citations omitted). 15 This applies where the violation at issue continues to occur within the limitations period[.] SEC v. Huff, 745 F. Supp. 2d 1284, 1333, 1334 (S.D. Fla. 2010) (citations omitted), amended by SEC v. Huff, 758 F. Supp. 2d 1288 (S.D. Fla. 2010), aff d SEC v. Huff, no , 2012 WL (11th Cir. Jan. 3, 2012). 7

9 next $4,000,000 10% $400,000 20% $800,000 next $5,000,000 5% $250,000 10% $500,000 total $10,000,000 9% $850,000 16% $1,600,000 This reward a maximum of 16% of the first $10 million -- pales in comparison to the relator s share awards sometimes recovered in traditional qui tam cases under the FCA or rewards recoverable under Dodd-Frank. On the other hand, a $1.6 million bounty is nothing for a whistleblower to thumb his nose at, especially if counsel has a way to obtain adequate compensation for the risks of the representation without taking a contingency fee from the whistleblower s recovery. The attorney s fee provisions of FIAFEA may make that possible because they provide for the attorney to recover a contingency fee, in appropriate cases, based upon the government s entire recovery, not just the whistleblower s bounty. The Contingency Fee Provision of FIAFEA A FIAFEA whistleblower has the right to select counsel to prosecute a civil action on a contingency fee basis if the Attorney General agrees that an action based upon his declaration should be referred to private counsel, 12 U.S.C (b), or fails to proceed with the action within one year, 12 U.S.C Section 4205 states that the declarant [whistleblower], after consultation with the Attorney General, shall have the right to select counsel to prosecute the action. Section 4207 provides that, if the whistleblower s allegations have not been addressed by the DOJ within one year of filing of the declaration and the whistleblower notifies the Attorney general that he desires such a contract to be awarded to his counsel, the Attorney General shall either grant the contract to counsel or proceed with the action himself. Contracting with the whistleblower s counsel under FIAFEA is governed by the provisions of 12 U.S.C et seq. Under these provisions, [t]he amount of the contingency fee payable for legal services... shall not exceed the contingency fee that counsel engaged in the private practice of law in the jurisdiction wherein the legal services are furnished typically charge clients for furnishing the same or comparable legal services. 12 U.S.C (c). Since the contingency fees awarded in class action cases, or charged in private law practice, are typically 25% to 33% in most jurisdictions, and the fees charged by qui tam lawyers are often 40% to 50%, a contingency fee of 25% to 40% would seem to fall within the dictates of the statute. Since the contingency fee recoverable in a FIAFEA/FIRREA action where counsel is retained to represent the United States is calculated on the government s entire recovery, not just the whistleblower s bounty, counsel should be able to prosecute cases with lower total quantum if the government agrees to a fee in the higher part of this range. Conversely, in cases with high potential quantum, counsel could negotiate a fee in the lower end of this range and still earn a fee equal to or greater than those available in Dodd-Frank and FCA actions. Compare the following table, assuming a contingency fee of 25% to 40% of the government s recovery, to the one above for Dodd-Frank cases: 8

10 Gov't Recovery Atty Fee (Low) Atty Fee (High) $1,000,001 25% $250,000 40% $400,000 $5,000,000 25% $1,250,000 40% $2,000,000 $10,000,000 25% $2,500,000 40% $4,000,000 $25,000,000 25% $6,250,000 40% $10,000,000 $50,000,000 25% $12,500,000 40% $20,000,000 $100,000,000 25% $25,000,000 40% $40,000,000 $300,000,000 25% $75,000,000 40% $120,000,000 Frauds Actionable under FIRREA and FIAFEA FIRREA is a complex statute that permits the Department of Justice to prosecute civil actions for a wide variety of frauds, including but not limited to mail and wire fraud under 18 U.S.C & 1343, that affect financial institutions of many different types. Although the predicate offenses under FIRREA are generally criminal statutes, the government is required to prove its case only by a preponderance of the evidence and is not required to prove that the government suffered damages. 12 U.S.C. 1833a (f). As stated above, the recovery can be based upon damage suffered by third-party victims or gains realized by the perpetrator. For purposes of FIRREA actions initiated by a whistleblower under FIAFEA, the most significant limitation is that the fraud must be one affecting a depository institution insured by the Federal Deposit Insurance Corporation or any other agency or entity of the United States. 12 U.S.C (a). Under FIRREA, the government can prosecute actions involving a wide range of financial institutions, not just those that are federally insured. Whistleblowers, on the other hand, are limited by FIAFEA to claims affecting federally-insured institutions. An action filed on October 4, 2011, by the United States Attorney for the Southern District of New York against The Bank of New York Mellon Corporation ( BYNM ) illustrates the application of this provision. The case involves allegations of fraudulent pricing of foreign exchange transactions that affected federally-insured financial institutions. BNYM allegedly executed foreign exchange trades for numerous federally-insured financial institutions. The other potentially significant limitation upon FIAFEA whistleblower claims under FIRREA is that the fraud must be one affecting a financial institution. It is not yet entirely clear whether the financial institution must be a victim of the fraud or can also be the perpetrator of the fraud. In interpreting federal criminal statutes, the courts have gone both ways. For example, in United States v. Esterman, 135 F. Supp. 2d 917, 920 (N.D. Ill. 2001), the court stated that [A]ffecting means having an impact on, and that in turn requires a showing of either an unfavorable or favorable impact from the wire fraud (with the latter of course being an extraordinary possibility). In United States v. Bennett, 161 F.3d 171, & n.12 (3d Cir. 1998), the court held that a financial institution was affected where it was exposed to liability as a result of its own fraud (the financial institution was affected where a securities firm that was used as an instrumentality of the fraud was sued by a bankruptcy trustee for $150 million). 9

11 Other cases have held that a financial institution was affected where: it incurred legal expenses, suffered a damaged reputation, harm to employees morale, and harm to consumer relations, United States v. Schinnell, 80 F.3d 1064, 1070 (5th Cir. 1996); where, even though the bank was an active participant in the fraud, defendants used the bank to perpetuate a tax shelter and the bank was forced to pay over $24 million in settlements and $4.2 million in legal fees, United States v. Ohle, 678 F. Supp. 2d 215 (S.D.N.Y. 2010); and where the fraud was perpetuated on a wholly-owned subsidiary of the financial institution, United States v. Pelullo, 964 F.2d 193, (3d Cir. 1992). On the other hand, there are cases holding that the financial institution must be a victim of the fraud for it to be affected. See e.g. United States v. Ubakanma, 215 F.3d 421, 426 (4th Cir. 2000) (holding that a wire fraud offense under section 1343 affected a financial institution only if the institution itself were victimized by the fraud, as opposed to the scheme's mere utilization of the financial institution in the transfer of funds. ) (collecting cases). See also United States v. Mizrachi, 48 F.3d 651, 656 (2d Cir. 1995) (requiring victimization of the financial institution for the crime to affect it); United States v. Grass, 274 F. Supp. 2d 648 (M.D. Pa. 2003) (holding that transferor banks costs of transfer and loss of interest income from executing orders valid on their face was not sufficient to affect the financial institutions for criminal forfeiture purposes); Esterman, 135 F. Supp. 2d at 920 (holding that a financial institution was not affected for purposes of criminal forfeiture where it was merely a conduit for the transfer of funds). Should the courts hold for purposes of FIRREA and FIAFEA that a fraud perpetrated by a financial institution s management upon the general public, for example a fraud upon private investors in the bank s mortgage-backed securities, is one affecting the institution, perhaps because it diminishes public trust in the institution and the securities it issues, then whistleblower cases actionable under FIRREA and FIAFEA could go to the heart of some of the practices that led to the financial meltdown of Even if FIAFEA cases are limited to frauds in which banks are the victims, the interconnectedness of the banking system means that a fraud committed by one bank will often have widespread effects upon other banks as victims. An example of this is provided by the recently-filed case against BNYM. Another example is fraud in the securitization of subprime mortgage debt. The collapse in value of CDOs and synthetic CDOs during the 2008 financial crisis had widespread ripple effects upon banks worldwide, including federally-insured banks. 16 The same can be said about manipulation of LIBOR interest rates, another fraud recently in the news. 17 Quantum of Recovery under FIRREA FIRREA permits the government to collect civil penalties of $1 million to $5 million per violation. 12 U.S.C. 1833a (b)(1) & (2). In cases of large frauds involving multiple individual transactions, each of which could constitute a separate fraud, the statutory penalties collected could rise into the hundreds of millions of dollars

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