The Residential Mortgage-Backed Securities Working Group
Kelley Drye Client Advisory
January 31, 2012

President Obama announced in his State of the Union address on January 24, 2012, that he would “establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments.”  He requested that Attorney General Eric Holder “create a special unit of federal prosecutors and leading state attorney[s] general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.”  The purpose of this unit would be to “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.” 

In the days following the State of the Union address, the “Financial Crimes Unit” was formally announced as the Residential Mortgage-Backed Securities Working Group (RMBS Working Group or Working Group) under President Obama’s Financial Fraud Enforcement Task Force (FFETF).  The structure of the Working Group, its mission, and the implications going forward are discussed in this advisory.

Structure and Composition of the RMBS Working Group

The RMBS Working Group brings together the Department of Justice (DOJ), several state law enforcement officials – led by New York Attorney General Eric Schneiderman –  and other federal entities including HUD, the FBI, IRS, Consumer Financial Protection Bureau, Financial Crimes Enforcement Network, and Federal Housing Finance Agency Office of Inspector General.  In addition to Attorney General Schneiderman, the Working Group will be co-chaired by Lanny Breuer, Assistant Attorney General, Criminal Division, DOJ; Robert Khuzami, Director of Enforcement, SEC; John Walsh, U.S. Attorney, District of Colorado; Tony West, Assistant Attorney General, Civil Division, DOJ.  Other state attorneys general will also join the effort.

Attorney General Holder announced that 15 attorneys, investigators, and analysts from the DOJ and throughout the U.S. Attorneys’ Offices are currently supporting the Working Group’s investigative efforts.  The FBI has assigned 10 agents and analysts who will begin working with the group immediately.  Another 30 attorneys, investigators, and support staff from the U.S. Attorneys’ Offices are expected to join the Working Group in the coming weeks.

The RMBS Working Group’s Mission

Attorney General Schneiderman stated that the RMBS Working Group’s mission is to:

  •  Hold accountable any institutions that violated the law;

  • Compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and

  • Help us finally turn the page on this destructive period in our nation’s history.

At a January 27 press conference, Attorney General Holder stated that the Working Group’s first full meeting would take place immediately after the press conference and that the Working Group would “streamline and strengthen current and future efforts to identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities.”  Attorney General Holder further stated that the Working Group’s co-chairs had already met to discuss the structure of investigative efforts, how teams should be organized, and how information would be shared.  The Attorney General also stated that the Working Group would “bring the appropriate criminal or civil charges” if evidence of fraud or other illegal conduct was to be uncovered, and stated that the Working Group had recently issued civil subpoenas related to the RMBS market to eleven different financial institutions.

RMBS Working Group v. Financial Fraud Enforcement Task Force (FFETF)

The composition and mission of the RMBS Working Group raises the question: What is the difference between the FFETF and the RMBS Working Group, and is the RMBS Working Group unnecessary?  President Obama established the FFETF by executive order in November 2009 to investigate and prosecute significant financial crimes and hold accountable those who were involved in bringing about the financial crisis.  The task force includes more than 20 federal agencies, 94 U.S. Attorneys’ Offices, and state and local partners.

A January 27 Department of Justice press release stated that the task force had “made great strides” in investigating and prosecuting financial crimes, addressing discrimination in the lending and financial markets, and conducting outreach to the public, victims, and financial institutions.  According to the press release, in the past two years, the FFETF charged a record number of mortgage fraud cases, trained more than 100,000 professionals responsible for overseeing Recovery Act funds, and held regional summits across the country to meet with communities most affected by the financial crisis.

Public statements and press releases from the various government agencies and officials involved indicate that in addition to supplementing the FFETF’s work, the Working Group will focus more narrowly on the mortgage-backed securities industry than the FFETF.  The FFTEF has investigated a variety of different types of fraud, including corporate fraud, insider trading, and Ponzi schemes.  The RMBS Working Group is expected to narrowly target fraud related to the origination and securitization of mortgage loans. 

The RMBS Working Group is also different from the FFETF in that it will pool state and federal resources and allow for better coordination among the states and the federal government.  Robert Khuzami, Director of the SEC’s Division of Enforcement, stated, “[t]o be clear, investigations into RMBS offerings have been ongoing at the SEC.”  The SEC’s efforts would be “greatly aided” by the RMBS Working Group, which would “enhance coordination, efficiencies and the sharing of expertise. . . . [and] ensure that we pool the different capabilities, resources, legal theories and remedies that each of us bring to the effort.”  Attorney General Schneiderman stated that having many different law enforcement groups working together “enables us to go places where each of us individually could not go.”  For example, “having the I.R.S. on the team opens up the possibility of looking into tax issues that hadn’t existed before.”

Implications of the RMBS Working Group:  Questions, Concerns, and Criticism

Election Year Politics

The news media and political analysts have pointed out that the formation of the RMBS Working Group during an election year and its mission are simply “window dressing” and political re-branding of existing efforts that fit neatly within one of President Obama’s re-election themes: making the economy fairer.  Indeed, the President’s “Blueprint for an America Built to Last,” released at the time of the State of the Union address, discusses the “Financial Crimes Unit” under a section entitled “Ensuring Everyone Plays by the Same Set of Rules and Pays Their Fair Share.”  Whether the RMBS Working Group amounts to more than election year public relations remains to be seen.

Settlement Talks

A concern voiced by some in the financial industry is that the RMBS Working Group will collide with ongoing settlement talks between major banks, regulators, and state attorneys general over deceptive foreclosure practices including robo-signing.  On the other hand, state and federal officials are reportedly close to reaching a settlement that is valued at as much as $25 billion, and some observers note that the formation of the RMBS Working Group may assuage state prosecutors’ concerns that liability provisions in the settlement would restrict related government investigations.  Shaun Donovan, the Secretary of HUD, has stated that that the settlement discussions would not thwart the RMBS Working Group’s investigations, and that any releases being negotiated “are narrow enough to allow us to go forward aggressively.”  Attorney General Schneiderman also stated that the settlement is being structured in a manner that does not interfere with RMBS Working Group investigations.

Investment Advisers

Some observers have predicted that the RMBS Working Group will have a significant impact on investment advisers by adding momentum to the SEC’s Asset Management Unit.  Others expect the Working Group to focus on advisers and broker-dealers only to the extent they are involved in the marketing of RMBS products, and that the Working Group would generally focus on market-level fraud rather than individual brokers and advisers.