More Whistleblowers - Not Working Groups - Needed For Housing Crisis, Ex-Assistant U.S. Attorney Says
In his State of the Union address, President Obama announced that the Attorney General would form a “special unit” of federal and state prosecutors to investigate “abusive lending and packaging of risky mortgages that led to the housing crisis.” The announcement garnered great applause and received continued praise. But Brian M. Feldman, counsel at the law firm of Harter Secrest & Emery LLP in Rochester, New York, wonders why, if this unit is a silver bullet in investigating the housing crisis, it has been so long coming. Feldman (pictured) is a particularly interesting voice on this subject: As an Assistant U.S. Attorney in the Southern District of New York until September 2011, he served in that Office’s Civil Frauds Unit as Senior Litigation Counsel and as the lead attorney on the government’s case against Deutsche Bank and its mortgage lending subsidiary, MortgageIT. His thoughts follow:
“In truth, federal and state prosecutors have been salivating over and diligently searching for possible new leads and big breaks in their multifold investigations into the roots of the housing crisis since that crisis exploded in 2008. They were not waiting for a magic unit to bring their investigations to life. Indeed, the public would have legitimate grievances against this Attorney General if he had puttered around for three years before forming the right team to kick off those efforts. No doubt aware of that fact, Attorney General Holder was on the defensive in announcing the special unit trumpeted a few days earlier in the President’s speech. It turns out that, in the Attorney General’s telling, the special unit is not particularly special. Rather than being a new team created from whole cloth, the unit is merely a working group formed from a pre-existing task force, which has already been pursuing these investigations. Even the name of the new unit – the Residential Mortgage-Backed Securities Working Group – sounds familiar, like a quick re-scrambling of the Mortgage Fraud and Securities and Commodities Fraud working groups already on the task force’s masthead. As Mr. Holder took pains to emphasize, the new working group isn’t ‘starting from scratch’ because the task force has been busily investigating these matters for the last three years.
“Of course it has. Although conspiracy theories abound positing that the Justice Department and SEC are looking the other way (allegedly based on ties between government lawyers and the industry players in the mortgage crisis), those theories make little sense. As SEC Enforcement Chief Robert Khuzami told Charlie Rose, ‘Ask yourself candidly, what law enforcement authority, what SEC staffer wouldn’t like to bring the case against the high-profile executive?’
“Until last September, I served as an Assistant United States Attorney in Manhattan, in the Civil Frauds Unit of the Southern District of New York, and I can assure you that no sane government attorney would turn these cases away. That’s especially true of my former boss, the United States Attorney in Manhattan, Preet Bharara, who now appears on the cover of Time with the words ‘This Man Is Busting Wall St.’ scrawled across his face, and who brings to his job a keen intellect, boundless energy, and a devoted following of some of the nation’s most hard-driving lawyers. Mr. Bharara and his peers at the Justice Department and SEC would, presumably, love nothing more than to bring to justice those responsible for any crimes or frauds committed during the housing crisis.
“Indeed, Mr. Bharara and his colleagues have made great efforts and scored laudable successes in this field. And yet, most of the lenders and investment banks – and their executives – likely implicated in the run-up to the crisis have managed to survive without finding themselves defendants in government prosecutions or penalty suits. There were shoddy mortgages everywhere, along with people who blessed them and people who packaged them up to look like great deals and sold them off. Despite the government’s tremendous efforts, enforcers appear to have hit a wall when it comes to the evidence, which is not especially surprising with efforts scattered over such an extensive set of actors. A new working group will not change that.
“There is another approach that might: whistleblower actions. The sheer magnitude of the housing crisis means that, throughout the various industries involved (e.g., mortgage lenders, investment banks), hundreds or even thousands of individuals had hands-on exposure to the root problems. They were in the trenches, churning out mortgages, selling them to eager buyers, pooling them into securities, and figuring out how to market junk as gold. There was top-to-bottom exposure at these firms to information that could unlock these cases: from the mortgage underwriters who knew not to look too hard to the corporate executives who understood their standards were meaningless. Any of these individuals could have blown the whistle.
“They still can, and the potential rewards are enormous. Under one law, the False Claims Act, a whistleblower is generally entitled to 15 percent to 25 percent of the government’s recovery. Under another, the SEC’s new whistleblower law, rewards are in the range of 10 percent to 30 percent of any monetary sanctions the SEC collects. These laws generally provide for rewards regardless of how the government collects the money – whether through criminal prosecutions, civil judgments, administrative sanctions, or settlements. With potential recoveries in the hundreds of millions or even billions, the proportional rewards for whistleblowers – tens or hundreds of millions of dollars – are simply staggering.
“With such immense rewards looming, where are these whistleblowers, and why haven’t they stepped forward? Some of them (e.g., the mortgage underwriters) are out of work and struggling, and would seem to have much to gain and little to lose from spilling the beans. They may simply not realize that these opportunities exist. Indeed, there have been no well-publicized rewards for whistleblowers who helped launch cases relating to the housing crisis. As for many of the well heeled and best placed insiders (e.g., the corporate executives and managers), they landed on their feet and may well fear the repercussions of speaking out against their friends and colleagues. These industries are powerful, and for individuals, careers – often lucrative ones – are at stake.
“The good news is that the laws are set up to protect whistleblowers. The FCA, for instance, protects whistleblowers’ identities through a court sealing order, usually until the point where, following substantial government investigation, the whistleblower knows whether the case is likely to haul in a massive recovery or wither on the vine. The law gives the whistleblower the choice, at that point, to withdraw its action and remain anonymous in perpetuity. Likewise, SEC provisions allow whistleblowers to provide their tips anonymously, through their lawyers, until the whistleblower is ready to claim his or her award. To get the full benefit of these laws, whistleblowers really should contact lawyers who work in this field; fortunately, most of those lawyers will not charge anything unless and until the whistleblower collects at the end of the case.
“The President’s State of the Union address reflects the growing consensus that it is time to find a new approach to try and hold accountable those companies and individuals that engaged in the reckless and criminal practices at the root of the housing crisis. Yet, it takes a certain naivety to believe that the Justice Department was holding off for three years on building the right team for tackling these cases, and that a new working group will suddenly shake everything up. Something drastically different is required. Perhaps that something is a call to insiders to come forward. The financial incentives are there; but the word still needs to get out. These insiders not only witnessed the events that caused the historic housing crisis; they’re also holding lottery tickets for huge jackpots with devastatingly good odds.”