The FBI is shifting more than $75 million in resources from counterterrorism work to help sort through what has been characterized as "the wreckage of the financial meltdown," and financial industry professionals are bracing themselves for the newest wave of recourse: criminal prosecution.
Recent indictments, and convictions, have originated from a number of federal institutions now providing direct assistance to the FBI, including the Internal Revenue Service, the Securities Exchange Commission, the Federal Deposit Insurance Corp., the Department of Housing and Urban Development, and the Financial Crimes Enforcement Network.
State and local authorities are also handing over significant investigations to federal authorities for prosecution. According to recent reports, there are at least 18 mortgage fraud task forces and 47 working groups across the country. The FBI is also relying on private and/or undercover efforts to aid in the prosecution of economic crimes. Private investigative and accounting firms have reported increasing involvement in the collection of evidence, questioning of witnesses, and grand jury testimony.
Authorities are not only focused on cases of blatant fraud, such as illegal pension fund kickbacks or property "flipping" through "straw buyers." An increasing majority of criminal investigations involve common allegations in the context of civil litigation, such as inaccurate appraisals, false information on loan applications, and inadequate underwriting. Further, lenders have come under increased criticism for subprime mortgages. Stated income loans, for example, raise questions with respect to whether lending institutions should be held criminally negligent for failing to require proof of income, which arguably led to increased foreclosure rates, and subsequent losses on mortgage-backed securities.
Federal agents recently dismantled the largest mortgage-fraud conspiracy in the history of the state of Washington. The indictment, thus far, involves 40 counts and names two mortgage brokers, an escrow company, and at least one real estate agent. The FBI predicts that this will be the first of many Seattle-based investigations.
Also, there is an ongoing investigation of Washington Mutual Bank, being pursued by the U.S. Attorney's Office. A grand jury has been convened and investigators are looking into whether Wamu officials misled investors or regulators with regard to the sale of securities bundles that were based on subprime mortgages and other risky home loans. Further, authorities have indicated that they plan to examine whether any events leading to the thrift's demise can be tied to criminal misconduct.
Increased class-action litigation resulting from failed investments, corporate bankruptcies, and pension fund losses is also fueling criminal prosecution. In the ongoing criminal investigation of Washington Mutual, for example, federal authorities admit that they are utilizing evidence emerging from a massive shareholder class-action lawsuit against the thrift and its officers.
In addition to mortgage lenders and brokers, real estate brokers, credit rating industry companies, investment companies, private equity firms, and pension fund placement agents have all recently gained increased media attention with respect to accusations of economic crimes.
It is no longer safe to assume that allegations of economic misconduct will disappear when civil claims are resolved. Similarly, once-routine regulatory audits may lead to criminal indictments. This means hiring experienced counsel even before civil issues arise. It is important to quickly identify potential gaps in company policies and procedures and plan ahead. Taking adequate preventative methods will limit evidence of intent, which is a necessary element in many criminal actions.
Moreover, experienced counsel must think ahead in the context of civil litigation. Carefully negotiated protective orders and confidentiality agreements and following up on alleged patterns of misconduct are critical for minimizing the impact of potential criminal investigations.
Know how to respond in the event criminal charges becomes a reality. Whether you are approached formally (subpoena or indictment) or informally (such as a request for an interview), the safe response always includes the advice of legal counsel. Initial questioning can lead to a Pandora's box of legal landmines and even the most innocent response can be misconstrued.