U.S. prosecutors are showing new resolve in pursuing cases against the financial institutions that sold the shoddy mortgages that led to the global financial crisis of 2007-08.
As part of this new drive, Justice Department lawyers are studying whether they can use section 1079A(b) of the Dodd-Frank Act. The obscure provision extends to six years from five the statute of limitations for criminal prosecutions under certain sections of federal securities laws.
More tantalizing, prosecutors say they may be able to apply the extension retroactively, so that the six-year clock starts ticking for offenses allegedly committed prior to the law's signing on July 21, 2010. This was expressed publicly by Lorin L. Reisner, chief of the criminal division for the U.S. attorney in Manhattan, at a Nov. 15 conference at Columbia University.
If Reisner acts on his surprise (and little-noticed) pronouncement, he could reach back to the summer of 2008, when most lenders and Wall Street banks realized the housing jig was up and stopped dealing in toxic loans. But that would work only if indictments could be brought by the summer of 2014, at the end of the sixth year.
So what should prosecutors newly intent on bringing bad guys to book do with the six to eight months left on the reset clock? Might they cast a fresh eye on long-closed cases against the senior executives who caused the meltdown?
The answer is yes -- probably. I say "yes" because law enforcers and regulatory agencies are responding to public pressure to make up for bad calls and lost time. One example is last month's $13 billion Justice Department settlement with JPMorgan Chase & Co., in which the U.S. dusted off old statutes and found novel ways around legal roadblocks to extract half the bank's projected 2013 earnings in penalties and restitution.
Another is the Manhattan U.S. attorney's successful civil action against Bank of America Corp. and Rebecca Mairone, a Countrywide Financial Corp. mortgage banker. In that case, a federal jury on Oct. 23 found the bank and the banker liable for about $1 billion in losses at Fannie Mae and Freddie Mac, having sold them defective home loans. Until then, no major U.S. bank had been forced to defend its actions during the housing boom in a courtroom.
Witness also the Securities and Exchange Commission's new policy of disallowing "no admit, no deny" settlements in selected cases.
But I also say "probably" because Dodd-Frank is silent on whether retroactivity is permitted. In general, prosecutors refrain from retroactively applying longer statutes of limitations in criminal cases in order to avoid the taint of prosecutorial abuse.
If Reisner brings such a case, says former SEC lawyer Jacob S. Frenkel, "The legal world would be shocked. There would be an immediate challenge" on constitutional grounds. While this doesn't mean Justice won't try, doing so would invite controversy it may wish to avoid.
In my next post, I will explain how prosecutors might proceed, assuming they can clear the statute-of-limitations hurdle.
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter: @paulaEdwyer.)