In an opinion posted online today, Judge Rakoff allowed the federal government to proceed with civil claims against Countrywide and Bank of America under the Financial Institutions Reform, Recovery, and Enforcement Act, or “FIRREA,” for having misrepresented the quality of home loans sold to Fannie Mae and Freddie Mac. FIRREA applies only to conduct that “affects” a federally-insured financial institution, and Judge Rakoff, reaching the same conclusion as Judge Kaplan (see our prior post here), rejected the defendants’ argument that FIRREA could not be premised on a defendant allegedly “affecting” itself:
There is no dispute that Fannie Mae and Freddie Mac are not “federally insured financial institutions” under the statute. The Government contends, however, that the defendants’ alleged fraud “affected” federally insured financial institutions in two ways, either of which would be sufficient under FIRREA. First, since Bank of America N.A. is itself a federally insured financial institution, its wrongful conduct (and the conduct of Countrywide imputed to it) “affected” a federally insured financial institution. (The parties refer to this as the “self-affecting” theory.) Second, the defendants’ misconduct affected those federally insured banks whose investments in Fannie Mae and Freddie Mac were wiped out as a result of the impact of the loan defaults on Fannie Mae and Freddie Mac. (The parties refer to this as the “derivative effect” theory.) Although the parties spend endless pages discussing each of these theories in terms of legislative history, policy considerations, and the like, in the Court’s view validation of the first theory — that it is enough that the fraud affected BofA– requires nothing more than straightforward application of the plain words of the statute. The key term, “affect,” is a simple English word, defined in Webster’s as “to have an effect on.” See Webster’s New World Collegiate Dictionary 23 (4th ed. 2002). The fraud here in question had a huge effect on BofA itself (not to mention its shareholders). The Amended Complaint itself alleges that BofA has paid billions of dollars to settle repurchase claims by Fannie Mae and Freddie Mac made a result of the fraud here alleged. See Am. Compl. ¶¶ 149-50. The defendants’ endlessly complicated argument that this is somehow not an effect that Congress intended to encompass within the broad phrase “affecting a federally insured financial institution” rests not on the plain meaning of section 1833a(c)(2), but rather on such things as extended inferences from the omission of the “affecting” limitation from the neighboring subparagraphs of FIRREA, speculation drawn from selected snippets of legislative history, and the like. Though clever, the arguments are utterly unconvincing, for the simple reason that they cannot explain away the plain language of section 1833a(c)(2), which is as unambiguous as it is dispositive. That, as the Supreme Court and Second Circuit have repeatedly cautioned, ends the Court’s enquiry.