The Justice Department has aggressively tackled financial misconduct in two recent high-profile cases, the type typically handled by the Securities and Exchange Commission.
This week, Justice exacted a record $13 billion settlement with JPMorgan Chase to resolve allegations that the bank knowingly sold faulty mortgage securities. Earlier this year, it slapped Standard & Poor’s with a lawsuit that accused the firm of defrauding investors by issuing stellar ratings on shoddy securities.
Both were civil cases that Justice pursued using a powerful 1980s-era law called the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). That law has a low burden of proof, strong subpoena power and the potential for explosive fines. It also has a 10-year statute of limitations, twice as long as the usual limit for financial fraud cases.
The SEC has no authority to use that law, which the Justice Department has begun wielding in creative ways in civil securities matters. When the SEC went after JPMorgan for issuing faulty mortgages, it settled for a much smaller penalty, about $300 million.
“This creates a potential turf battle,” said Brian Feldman, a former assistant U.S. attorney in Manhattan who handled investigations under FIRREA and is now a lawyer at Harter Secrest & Emery. “It creates competition between the SEC and the Justice Department on who takes the lead on a civil case.”
The agency and the department have always had areas of overlap. But typically, the SEC handles civil cases and refers potential criminal matters to Justice. The relationship historically has been close and mutually beneficial, Feldman said. But Having both handle civil securities cases creates an element of intrigue.
“At the end of the day, these cases are about the purchase and sale of securities and securities transactions,” said Thomas O. Gorman, a lawyer at Dorsey & Whitney who has worked for the SEC’s enforcement division. “There is a legitimate question as to why they were not brought by the primary regulator of the securities market, which is the SEC.”
Adora Andy Jenkins, a Justice Department spokeswoman, said the department has worked closely with the SEC in both the JPMorgan and S&P cases. In fact, the co-director of the SEC’s enforcement division, George Canellos, played a leading role in the working group that was instrumental in crafting the JPMorgan deal, she said. “We count them as a partner,” she said.
Canellos said that the SEC “regularly coordinates and supports the work of our counterparts.”
The S&P case is pending. The credit rating agency had revealed that it was under investigation by the SEC for the high rating it granted a 2007 mortgage bond deal, but the Justice Department leapfrogged the agency when it filed the lawsuit.
Jacob S. Frenkel, a former federal prosecutor and a former SEC enforcement lawyer, said that the SEC and the Justice department divvy up their cases based on their missions. The agency aims to deter wrongdoing, and the department focuses on punishing misconduct.
“It all depends on the regulatory enforcement objective that each agency is trying to achieve,” Frenkel said. “Between the SEC and the DOJ, each will defer to the other depending on the nature of the allegations.”