The Federal Deposit Insurance Corporation (“FDIC”) this week announced it is working with the FBI to investigate crime in federally insured financial institutions and to recover more money from persons formerly affiliated with such banks. The FDIC has long held the power to investigate member-insured institutions, as well as individuals, defined by statute as “institution-affiliated parties.” However, the FDIC has laid low for a decade, making some forget that it enjoys a lower standard of proof to recover civil remedies and a wide berth in the criminal arena as well. Current and former bank executives, as well as other individuals with relationships to financial institutions, should be prepared for several years of increased civil and criminal scrutiny.

Areas of particular interest to the investigation would include:

  • Fraud/Obstruction. It is a crime for an institutional or individual target to lie to a financial institution to obtain money or property that doesn’t belong to him, as well as to lie to an agent who is investigating such actions.
  • Acting “Knowingly.” To prove an institution or an affiliated party acted criminally, the government must prove the target acted “knowingly,” commonly defined as being aware of one’s own actions and conduct, and not acting through ignorance, mistake or accident. The law also says a trier of fact may infer knowledge from a combination of suspicion and indifference to the truth.
  • Acting “Recklessly.” On the other hand, the FDIC may sue an institution or person civilly when it or he acts “recklessly,” which requires a lower standard of proof. For example, Illinois law defines “reckless” behavior as a conscious disregard for a substantial and unjustifiable risk that circumstances exist or that a particular result will follow —e.g., funding “unsound” loans which were unlikely to return a profit over time.
  • “Institution-Affiliated Party” Liability. The Federal Reserve Act identifies situations in which an “institution-affiliated party” may be held liable for “unsound practices,” and covers almost any natural person with any contact with a financial institution, short of a customer or bank robber, and in certain instances, can include entities. Thus, if any such person “knowingly or recklessly” violates any state or federal law, breaches a fiduciary duty or engages in “any unsafe or unsound practice,” likely to result in a “more than minimal loss to, or a significant adverse effect on,” an institution, he may be subject to the FDIC’s broad remedial powers and penalty provisions.
  • Civil Suits. So far, the FDIC has taken credit for only a couple of filed civil lawsuits arising out of the recent banking crisis, but the Wall Street Journal reports that the FDIC’s board of directors has approved 50 more such suits. The fact that courts have not yet been clogged with FDIC-backed filings likely is the result of careful investigation by regulators and agents, as well as a 10-year statute of limitations for bank fraud prosecutions.

The FDIC’s announcement this week is a harbinger of things to come: namely, an increased volume of civil lawsuits and criminal indictments, to recover losses due to allegedly “reckless” and “unsound” practices over the last decade. Given the broad authority Congress granted the FDIC in the Federal Reserve Act, it was only a matter of time before the agency made such an announcement. As other federal agencies partner with the FDIC, the scope of these lawsuits – civil and criminal – is likely to soon outpace even the FDIC’s announcement this week.

For a more detailed discussion of this topic, please go to Legal News Alert: Consumer Financial Services Litigation.