THE INDICTMENT OF ABACUS BANK:

CORPORATE CRIMINAL LIABILITY FOR

THE HOUSING MARKET COLLAPSE?

 

By Robert Y. Lewis, Esq.

On May 31, 2012, the Manhattan DA’s Office announced the indictment of ABACUS FEDERAL SAVINGS BANK and eleven of its former employees alleging a false document mortgage fraud scheme resulting in the sale by the Bank of hundreds of millions of dollars worth of fraudulent loans to the Federal National Mortgage Association, commonly known as “Fannie Mae.”

The indictment of ABACUS is important for a number of reasons. First, it is one of the few criminal prosecutions undertaken in connection with the collapse of the housing market in 2008 and 2009. Second, based on my experience as a former federal prosecutor and current criminal defense lawyer, it is a rare instance of criminal (rather than civil) charges being brought against a corporation. Third, although Manhattan is the financial capital of the world, the prosecution marks the first time in over two decades that a bank has been indicted in Manhattan. That last occurred in 1991 when a Manhattan grand jury indicted the Bank of Credit and Commerce International (BCCI).

The infrequency of corporate indictments reflects concern that indicting a corporation often leads to the demise of the entire business, thus harming many innocents, including customers, creditors and uninvolved employees. The 2005 federal prosecution of Arthur Andersen is a case in point. The government charged the accounting firm criminally with obstructing the government’s Enron investigation. Arthur Andersen was convicted at trial, resulting in its bankruptcy and dissolution, which in turn left all its employees without work, clients experiencing disruptions in accounting and auditing service, and creditors, including pensioners, unsatisfied. Ultimately, the Supreme Court overturned the conviction, but it was too late to save the business or prevent the collateral damage. To avoid this collateral harm, prosecutors generally abstain from indicting corporations, focusing exclusively on culpable individuals working in a corporation.

In this E-Update, we discuss the legal theory for holding a corporation criminally liable, the standard of corporate criminal liability on which the ABACUS case will likely turn, and what to watch for as the case against ABACUS proceeds toward trial.

I. The Legal Standard for Holding Corporations Criminally Liable

At common law it was unsettled whether a corporation could be convicted of a crime. Some courts held that a corporation, being an intangible entity, could not commit a crime because any illegal act of a corporate agent was done without authority of the corporation and was ultra vires (that is, beyond the corporate charter or authority). Today, however, the law is clear in virtually all jurisdictions in the United States that a corporation may be held criminally liable.

Although standards vary somewhat among jurisdictions, New York’s standard, which was codified in 1965 and will apply to the ABACUS case, is a good example. New York Penal Law §20.20 provides three different standards of corporate criminal liability. A corporation is criminally liable where the conduct constituting the crime:

“(a) consists of an omission to discharge a specific duty of affirmative performance imposed on a corporation by law”

(PL§20.20(2)(a)),

“(b) is engaged in, authorized, solicited, requested, commanded or recklessly tolerated by the board of directors or a high managerial agent acting within the scope of his employment and in behalf of the corporation”

(PL §20.20(2)(b)), or

“(c) is engaged in by an agent of the corporation while acting within the scope of his employment and in behalf of the corporation, and the offense is (i) a misdemeanor or a violation, (ii) one defined by a statue which clearly indicates a legislative intent to impose such criminal liability on a corporation, or (iii) any offense set forth in title twenty-seven of article seventy-one of the environmental conservation law”

(PL §20.20(2)(c)).

II. The Corporate Criminal Liability Standard in the ABACUS Case

In the ABACUS case, standard (b) will likely be applied. The grand jury has charged the Bank with grand larceny, conspiracy, residential mortgage fraud, and falsifying business records in connection with selling loans to Fannie Mae. None of these charged statutes imposes a specific duty of affirmative performance on banks or any other corporation; therefore, standard (a) will not apply. The indictment charges felonies (not a misdemeanor or violation); the charged statutes do not “clearly indicate a legislative intent to impose criminal liability on a corporation”; and the charged crimes are not environmental crimes; therefore standard (c) will not apply, leaving standard (b).

Applicable standard (b) requires the government to show that “the board of directors or a high managerial agent” acting within the scope of his employment and in behalf of the corporation “engaged in, authorized, solicited, requested, commanded or recklessly tolerated the conduct constituting the crime.” PL §20.20(1)(b). The statute defines a “high managerial agent” as “an officer of a corporation, or any other person who is authorized to act in behalf of the corporation.” PL §20.20.

In a Press Release issued after the indictment was announced, ABACUS asserted the following defense, with obvious focus on standard (b): “Senior executives at the bank took the immediate, decisive action that initiated this investigation, and there is no evidence that any senior executive at the bank engaged in illegal behavior.”

It appears that the government will try to satisfy standard (b) in at least two ways.

First, the indictment charges not only the Bank, but also at least two individuals who, the government will argue, qualify as “high managerial agents”. These include (i) Yiu Wah Wong, the Banks’ Chief Credit Officer, Vice Present and Underwriting Supervisor, and (ii) Wai Hung Tam, the Loan Origination Supervisor. According to the DA’s Press Release, these ABACUS managers trained lower level employees that the accuracy of loan application information was immaterial. If the jury finds either of these “high managerial agents” guilty, it will presumably return a guilty verdict against the Bank as well under standard (b).

Another avenue the government might pursue in seeking to convict the Bank under standard (b) is to show that the sale of loans given in reliance on false information from the borrowers was so pervasive at the Bank that the board and/or high managerial agents (whether they were indicted or not) had to have “authorized, solicited, requested, commanded or recklessly tolerated” the fraud. PL§20.20(1)(b). In this regard, the indictment charges five “Loan Originators” or loan officers; and, according to the DA’s Press Release, five other Loan Originators have already pleaded to felony charges. It is likely that most, if not all of those Loan Originators who have pleaded guilty did so pursuant to cooperation agreements with the government and will testify at trial as government witnesses in hopes of receiving leniency at sentencing.

Thus, to show the pervasiveness of the fraud, the government will present evidence to the jury that at least ten low-level employees were involved in the fraud (five as defendants and five as witnesses), plus two high-level employees. The D.A. will also attempt to show the pervasiveness of the fraud by pointing out, as it did in its Press Release, that the Bank wrote at least $380 million worth of mortgages in the 2006 to 2008 period, a very large amount for such a relatively small bank, thus profiting handsomely from the alleged fraud.

III. What to Watch For: Possible Cooperation by the Chief Credit Officer Against the CEO?

The indictment of ABACUS reflects a prosecutorial decision that the alleged fraud was so rampant that the institution itself -- not just individuals -- needed to face criminal charges, even if it means the demise of an important Chinatown-based community bank. The Bank was founded in 1984, and now has branches in New York, New Jersey, and Pennsylvania.

Asked at a press conference why ABACUS is the only bank to face criminal prosecution when many others contributed to the crisis, the D.A. said that while many banks have come under scrutiny, prosecutors found in ABACUS extensive and powerful proof of systematic and repeated fraud that rose to the level of crime. “We have to deal with each case on the facts that we have,” Vance said. “The answer to ‘Why in this case?’ is: because it had to be done.”

Fair enough. However, if the pervasiveness of the fraud justifies indicting the corporation, one would expect that it reached the highest echelon of the Bank – to the Chief Executive Officer – and that he would have been indicted. Yet, he was not. Presumably, that is because the D.A. lacked sufficient evidence of his individual culpability.

The D.A., however, has likely not given up. One would expect that at some point before trial or even after trial of those already indicted, the D.A. will attempt to enter into a plea deal with one of the indicted employees (perhaps the Chief Credit Officer who reported to the CEO) in exchange for his giving testimony against his former boss.

Robert Y. Lewis is a former federal prosecutor and has represented criminal defendants for many years. Freeman Lewis LLP is a boutique business dispute resolution firm, whose founders Jennifer Freeman and Robert Y. Lewis together have more than 50 years of experience assisting clients resolve business disputes through litigation, arbitration, mediation and negotiation. Their firm focuses on commercial litigation, employment law, securities arbitration, white-collar criminal, and ERISA. For more information, visit http://www.freemanlewis.com.