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Financial Services Law Insights and Observations

Federal District Court Holds Financial Institution's Fraud On Itself Triggers Potential FIRREA Liability

DOJ Enforcement False Claims Act / FIRREA Foreign Exchange Trading

Consumer Finance

On April 24, the U.S. District Court for the Southern District of New York held that a federally insured financial institution may be prosecuted under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) for allegedly engaging in fraud that “affects” the same institution. U.S. v. Bank of N.Y. Mellon, No. 11-6969, 2013 WL 1749418 (S.D.N.Y. Apr. 24, 2013). In this case, the government alleges that the bank and one of its employees provided clients with false, incomplete and/or misleading information about the way it determined currency exchange rates for its “standing instruction” foreign exchange transactions, from which the bank profited, and which ultimately exposed it to “billions of dollars in potential liability.” Based on a lengthy analysis of textual meaning and congressional intent, the court concluded that the “text and purpose of FIRREA amply encompass the alleged conduct,” and that the government’s complaint sufficiently alleged that the bank was negatively affected by the fraud. The decision represents the first time a court has interpreted the meaning of the phrase “affecting a federally insured financial institution” under FIRREA to allow the government to prosecute a financial institution for its own alleged misconduct.

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