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COLUMN-Barclays previews defense in billion-dollar DOJ securities case: Frankel
March 9, 2017 / 6:51 PM / 9 months ago

COLUMN-Barclays previews defense in billion-dollar DOJ securities case: Frankel

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Alison Frankel

NEW YORK, March 9 (Reuters) - Facing a Justice Department suit claiming it misrepresented the quality of loans underlying tens of billions of dollars of mortgage-backed securities sold between 2005 and 2007, Barclays claimed this week that the government’s suit is based on an overly expansive interpretation of a 1989 law intended to protect U.S. banks from self-dealing insiders.

In a March 6 letter to the judge overseeing the Justice Department suit, U.S. District Judge Kiyo Matsumoto of Brooklyn, Barclays’ lawyers from Sullivan & Cromwell and Williams & Connolly suggested the government is twisting the Financial Institutions Reform, Recovery and Enforcement Act of 1989 to take advantage of the law’s 10-year statute of limitations.

The clock has already run out on federal securities fraud or common law fraud claims for mortgage-backed securities sold a decade ago. Without FIRREA, in other words, the government would not have a viable case against Barclays.

Barclays, of course, is not the first bank to claim the Justice Department is overreaching in its reading of FIRREA. The law, enacted after the savings-and-loan crisis of the 1980s, permits the Justice Department to sue defendants that engage in mail or wire fraud “affecting a federally insured financial institution.”

In mortgage-backed securities suits against Bank of New York Mellon, Wells Fargo and Bank of America, the government argued the banks were affected by their own misrepresentations. In 2013, three well-regarded federal judges in Manhattan allowed the Justice Department to proceed with cases based on this “self-affecting” theory.

Williams & Connolly, which represented Bank of America in the government’s FIRREA suit, asked the 2nd U.S. Circuit Court of Appeals in 2015 to reject the Justice Department’s self-affecting interpretation of FIRREA in BofA’s appeal of a $1.2 billion judgment in the “Hustle” MBS case. The 2nd Circuit ended up overturning the judgment against BofA on other grounds.


The government’s FIRREA theory against Barclays is different than the self-affecting argument asserted against U.S. banks.

As Barclays’ lawyers pointed out in this week’s letter to Judge Matsumoto, Barclays is not a U.S.-insured financial institution so the Justice Department cannot use FIRREA to claim the bank hurt itself by misrepresenting the quality of its securitizations.

Instead, the government alleges that Barclays’ misrepresentations affected federally-insured financial institutions that bought Barclays’ mortgage-backed securities.

But the 198-page complaint against Barclays does not specify whether federally insured banks invested in all of the 36 securitizations the government alleges to have been tainted by fraud. Nor does it disclose the magnitude of investment by federally insured banks in the Barclays mortgage-backed offerings.

Barclays’ letter contends the government’s allegations fall well short of showing FIRREA’s requisite effect on U.S. insured banks.

The letter is not a formal motion to dismiss the government suit. Under Judge Matsumoto’s rules, Barclays submitted the letter to request a pre-motion conference on its dismissal arguments.

On Thursday, the judge granted the request and set a conference date of April 7. She ordered the Justice Department to respond to Barclays’ pre-motion arguments by March 28.

In addition to attacking the government’s FIRREA theory, Barclays also argues that despite the complaint’s machine-gun spray of accusations, the suit does not plausibly allege a bankwide scheme to defraud investors and does not meet the heightened standard for fraud claims because it does not raise sufficiently specific allegations of the bank’s fraudulent intent.

But those arguments are specific to this case. The Justice Department’s novel use of FIRREA – essentially leveraging investment by an unknown number of U.S.-insured banks vastly to expand the time frame for securities fraud claims – is what other banks, foreign and domestic, should be watching.

It’s anyone’s guess, of course, how aggressively the Trump administration plans to pursue banks for allegedly defrauding investors. And mortgage-backed securities litigation has long since fallen out of the headlines. The Barclays case, however, has the potential to establish precedent that will haunt banks when the next crisis comes along. (Reporting by Alison Frankel. Editing by Alessandra Rafferty.)

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