Criminal Actions Against Failed Bank Executives

Author:Mr Ralph MacDonald III, George T. Manning, R. Christopher Cook, Martha Boersch, Jonathan B. Leiken, Charles M. Carberry, Jean-Paul Boulee, Richard H. Deane Jr., Garrett L. Bradford, Randy S. Grossman, Henry W. Asbill, Dan Reidy, Theodore T. Chung and Brian A. Sun
Profession:Jones Day

One of the defining characteristics of the current financial crisis has been the large number of banks that have failed—348 during 2008 through March 2011—taking investor money and the FDIC's Deposit Insurance Fund ("DIF") funds with them. These failed banks had approximately $604.4 billion of assets, and cost the DIF approximately $80.1 billion. Not surprisingly, the financial crisis has triggered an outcry from politicians, the public, regulators, and law enforcement, who are concerned that improper behavior contributed to the economic meltdown, or caused losses to the Troubled Asset Relief Program ("TARP") or the DIF, and believe that those responsible should be held accountable and pursued civilly and/or criminally. Much of this outcry has been directed toward "Wall Street," although executives and directors of failed banks, most of which were community banks, are now potential targets of prosecutorial zeal. A handful of bank executives have been charged, and brief summaries of those cases are provided to illustrate the approach taken so far. It is unknown whether this small number of prosecutions is just the beginning of a trend similar to the over 1,800 criminal cases brought against bank insiders in the wake of the savings & loan crisis of 1988—1994 (the "S&L Crisis"), but these cases should be watched by those involved with troubled or failed banks. These cases also provide useful examples of operating risks and the need for strong internal controls and active oversight for healthy banks. The Fraud Enforcement and Recovery Act of 2009 was enacted as a response to the financial crisis. This Act, among other things, authorized significant appropriations for various federal agencies including the Department of Justice ("DOJ"), FBI, and SEC to hire new agents and staff to investigate and prosecute financial fraud. The Emergency Economic Stabilization Act of 2008 also created the Special Inspector General for the TARP ("SIGTARP") to uncover and prosecute fraud and waste of TARP funds. Additionally, the DOJ launched a specialized interagency Financial Fraud Task Force to combat financial crime, with Attorney General Eric H. Holder, Jr., vowing to root out financial wrongdoing that helped bring about the meltdown and prosecute future criminal actions by "unscrupulous executives," boldly declaring, "We will investigate you, we will prosecute you, and we will incarcerate you."1 This increase in resources continued into 2010, with the DOJ securing a 12 percent budget increase to fight financial fraud and requesting an additional 23 percent increase in 2011.2 The enforcement effort also has continued to clearly target executives of financial entities, including banks. For example, in a September report to the Senate on current Fraud Enforcement, Assistant Attorney General Lanny A. Breuer described the ongoing "aggressive efforts to hold bank executives to account" and stressed DOJ's intention to make enforcement examples out of them through future prosecutions.3 Despite the rhetoric, increased resources, and ever-increasing list of failed banks, there have been only a handful of prosecutions of failed bank executives. There are significant numbers of ongoing investigations and prosecutions relating to mortgage fraud and bad loans,4 but, other than the several bank actions summarized below, the vast majority of the prosecutions to date have been against mortgage brokers and borrowers rather than bank executives. This may be because individual mortgage brokers and borrowers are "low hanging fruit" for prosecutors, with politically attractive results on behalf of consumer borrowers. Still, executives of failed and failing banks should be wary. First, prosecutions of bank executives often involve complex and resource-intensive investigations, which delay the bringing of charges. It is difficult to distinguish between what actions were merely business judgments that ended poorly in the recession versus actions that were made with criminal intent. After the S&L Crisis, over 1,800 bank insiders were prosecuted between 1990 and 1995, resulting in more than 1,000 officers, directors, and other officials being sent to prison—but the prosecutions were often brought years later, as late as 1998.5 Indeed, the FDIC's current deputy inspector general, Fred W. Gibson, noted that charges often are not filed for at least 18 months after a bank has failed.6 Second, prosecutors appear convinced there were plenty of bad actors in the banking industry leading to the meltdown. Undoubtedly, many banks were merely victims of fraudulent borrowers and mortgage brokers, or the economic downturn. The FDIC's acting general counsel assured bankers in late 2010 that "as long as they compl[ied] with their legal duties, they don't have anything to worry about."7 However, federal officials are seeking to identify bankers who played fast and loose with regulations, looked the other way as borrowers diverted funds from their intended purpose, or failed to properly account for the true market value of assets. Even though few such cases have been brought so far, prosecutors have publicly stated that they are actively pursuing criminal investigations in connection with a number of failed banks, and further indictments are likely.8 After each bank failure, the FDIC investigates, along with the DOJ and the FBI, possible grounds for recovery of its losses against bank officers, directors, and insiders, and whether the likely recoveries outweigh the expenses of pursuing claims against insiders.9 This can be a long process. The FDIC has recently confirmed that it is actively conducting investigations and considering criminal claims against insiders of about 50 failed banks, with the targeted individuals typically ranking as vice president or higher (including former directors), and it expects the heightened industry scrutiny to continue for years.10 Third, when prosecutors do decide to institute a criminal proceeding as a result of improper conduct, they have a wide range of laws with which to prosecute bankers. Beyond traditional bank fraud11 and embezzlement12 statutes, prosecutors can also base charges on a wide range of banking and general fraud violations including making false statements13 or concealing material facts,14 making false entries in bank books and records,15 receipt of commissions or gifts for procuring loans,16 mail or wire fraud,17 and organizing a continuing financial crimes enterprise.18 Additionally, there are newly created offenses related to fraud connected with TARP funds.19 Bank insiders should be mindful of the heightened scrutiny of the industry and increased government resources being focused on seeking to identify and prosecuting fraud. The facts uncovered in civil actions and FDIC investigations, as well as bank regulatory examinations and enforcement actions taken before a FDIC-insured institution fails, may be used in criminal actions.

Criminal Prosecutions of Executives of Failed Banks

The following is a short summary of the primary criminal prosecutions to date of executives of failed banks from the current financial crisis, including the first two TARP-fraud indictments ever, as well as prosecutions that may be on the horizon. Integrity Bank, Alpharetta, Georgia. Integrity Bank ("Integrity") failed in August 2008. Real estate developer Guy Mitchell and related parties obtained over $80 million in business loans from Integrity between 2004 and January 2007 with the help of Integrity's Executive Vice President and Chief Lending Officer...

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