Fraud Enforcement and Recovery Act of 2009

Fraud Enforcement and Recovery Act of 2009 was a major legislative response to the Financial crisis of 2007–2008, enacted to bolster the federal government's ability to investigate and prosecute complex financial crimes. Signed into law by President Barack Obama, it significantly expanded the scope of existing fraud statutes and increased funding for law enforcement agencies. The act also established a high-profile commission to examine the causes of the crisis and created new tools for recovering taxpayer funds lost to fraud.

Background and legislative history

The impetus for the legislation stemmed directly from the collapse of the subprime mortgage market and the ensuing global financial panic, which exposed widespread fraud in the mortgage-backed securities market and at major institutions like Lehman Brothers and AIG. In the wake of the Emergency Economic Stabilization Act of 2008, which created the Troubled Asset Relief Program (TARP), lawmakers grew concerned that existing federal fraud laws were insufficient to address the scale and complexity of the crimes that precipitated the meltdown. The bill was introduced by Senator Patrick Leahy, Chairman of the United States Senate Committee on the Judiciary, and received strong bipartisan support, reflecting the urgent political climate. It passed the Senate with a 92-4 vote and was quickly reconciled with the House version before being signed at a ceremony in the White House.

Major provisions

The act contained several key components designed to strengthen the financial fraud enforcement regime. It authorized substantial new appropriations, exceeding $490 million, for the Department of Justice, the Federal Bureau of Investigation, the Securities and Exchange Commission, and other agencies to hire investigators and prosecutors. A significant portion of the law focused on amending core federal fraud statutes to cover modern financial instruments and schemes. Furthermore, it enhanced protections for whistleblowers and expanded the reach of the False Claims Act to include fraud involving federal economic stimulus funds.

Creation of the Financial Crisis Inquiry Commission

A landmark feature of the act was the establishment of the Financial Crisis Inquiry Commission (FCIC), a ten-member bipartisan panel modeled after the Pecora Commission of the 1930s and the 9/11 Commission. The FCIC was tasked with examining the domestic and global causes of the financial crisis, including the roles of financial institutions, government regulators like the Federal Reserve, and credit rating agencies such as Moody's and Standard & Poor's. The commission was granted subpoena power and was required to issue a final report to the President and Congress by December 2010.

Amendments to federal fraud statutes

The act broadly amended federal criminal codes to close perceived loopholes. It expanded the definition of "financial institution" in fraud statutes to include mortgage lending businesses and entities like Fannie Mae and Freddie Mac, which were not previously covered. It also revised the securities fraud statute to explicitly encompass fraud schemes involving commodity futures and derivatives. Additionally, the law strengthened the federal money laundering statute to apply to the proceeds of fraud against the Troubled Asset Relief Program and other government relief efforts, thereby giving prosecutors like those in the Southern District of New York more powerful tools.

Impact and criticism

The act's impact was immediate, leading to a surge in investigations and prosecutions by the Department of Justice's Financial Fraud Enforcement Task Force. It played a crucial role in cases against firms like Goldman Sachs and individuals such as Bernard Madoff. The Financial Crisis Inquiry Commission's final report provided a comprehensive, though politically divided, analysis of the crisis. Critics, including some members of the United States Chamber of Commerce, argued the law was overly broad and created excessive liability for businesses. Some legal scholars and former officials from the Securities and Exchange Commission also contended that while the law enhanced punitive measures, it did little to address the underlying regulatory failures that contributed to the crisis.

Category:2009 in American law Category:United States federal financial legislation Category:111th United States Congress