Clock Ticking for SEC on Crisis Prosecutions

Sunday, 28 Apr 2013 12:20 PM

By Michael Kling

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If regulators hope to prosecute crimes involved in the 2008 financial crisis they had better get moving. Investigations and whistle-blower complaints are fast approaching their five-year statute of limitations.

Eliminating any doubt that the clock is ticking, the Supreme Court in Gabelli vs. the SEC ruled that the agency must complete enforcement actions within five years of financial crimes — not within five years of uncovering a possible crime, as the SEC argued.

It is difficult to determine how many cases are about to run out of time. In one example outlined by The New York Times, a whistleblower said SunTrust Banks misrepresented its exposure to no-documentation mortgages.

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Many of those risky loans, called "liar loans" because they did not document borrowers' income or assets, ended up with Fannie Mae and Freddie Mac, the government-supported mortgage giants.

Fannie and Freddie required the loans to meet their guidelines accepting them. But the whistleblower alleges that SunTrust mortgage sales people input bogus income and asset information into Fannie's automated underwriting system.

Although the whistleblower has documentation to support the charges, the case appears to be going nowhere, according to the Times.

“I’m sure the SEC takes the Gabelli decision seriously,” Aegis J. Frumento, a lawyer at Stern Tannenbaum & Bell who represents the whistle-blower, told the Times. “The logic of the ruling is that the SEC is supposed to know when there have been securities law violations because that’s their job. I think the SEC may end up being too late to file a lot of cases that it is now sitting on. But not this one, yet.”

The Justice Department hopes to exceed the five-year limit by invoking the Wartime Suspension of Limitations Act. The 1948 law says prosecutors have no time limits to prosecute alleged fraud during wartime, and the U.S., the government argues, is now at war in Afghanistan.

Prosecutors are suing Wells Fargo, alleging the bank passed fraudulent loans to the Federal Housing Administration, bilking it out of millions of dollars. Wells Fargo counters that the charges have nothing to do with the law's purpose, the Wall Street Journal reports.

"The [Department of Justice] is under a lot of political pressure to bring more cases and more
aggressive prosecution of financial-fraud cases," former assistant U.S. Attorney David Laufman, now a white-collar defense lawyer, told the Journal. "It may be that they are leaning farther in and fully exercising the full range of some of these statutes."

Editor's Note: Save, shop and invest like an insider! Our experts lead the way each month in The Franklin Prosperity Report. Click here to learn more.

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