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WEIL v. LONG ISLAND SAVINGS BANK

August 22, 2001

RONNIE WEIL, ET AL, PLAINTIFF(S),
v.
THE LONG ISLAND SAVINGS BANK DEFENDANT(S).



The opinion of the court was delivered by: William D. Wall, United States Magistrate Judge.

ORDER

Before the court is a letter motion by the plaintiffs dated July 3, 2001 (Edwards Letter), seeking an order to compel the production of "all documents relating or referring to a `criminal referral' filed by the Bank concerning the relationship of James J. Conway . . . with the defendant Law Firm." The motion is opposed by the Bank and Director defendants by letter dated July 12, 2001 (Brooks Letter), and is also opposed by the Office of Thrift Supervision ("OTS") by letter dated July 18, 2001 (Roberts Letter). For the reasons set forth below, the motion is granted in part and denied in part.

BACKGROUND

This is a class action lawsuit alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962; the Truth-in-Lending Act ("TILA"), 15 U.S.C. § 1638; the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2607; common law fraud, violations of section 349 of New York General Business Law, and negligent supervision. The plaintiffs are all individuals who obtained residential mortgage loans from the Bank ("LISB") during the period January 1, 1983 to December 31, 1992, and were required to pay LISB's legal fees in connection with their loan transactions. Those legal fees were paid to the law firms of Power, Meehan & Petrelli, P.C. and Power, Meehan & Power, P.C., which were successors in interest to Conway & Ryan, P.C. (collectively, the "Law Firm" or "Law Firm defendants"), the former law firm of LISB's chief executive officer, defendant James J. Conway, Jr. ("Conway"). The plaintiffs maintain that the legal fees were inflated above those which would normally be charged for the processing and closing of residential mortgage loans, and that the excess was used to pay $11 million in kickbacks to Conway and his family for Conway's promise to use the Law Firm as LISB's attorneys in connection with all of LISB's mortgage loans.

Conway's conduct was the subject of investigations by both the United States Attorney's Office for the Eastern District of New York and the OTS. Conway pled guilty to criminal charges in connection with an indictment in the Eastern District of New York and, as part of a settlement reached with the OTS, agreed to withdraw from the banking business for life. In March 1994, after the press had reported the results of the OTS investigation, class representative Ronnie Weil commenced this litigation.

In 1992, LISB commenced an action before the United States Court of Claims against the United States (Index No. 92-517C) alleging breach of contract and seeking damages from the government arising out of the phase-out and elimination of regulatory capital treatment for supervisory goodwill ("the goodwill case"). The United States has recently asserted affirmative defenses and counterclaims in that action, related to the conduct of Conway that is at issue in this action. In May 2001, the Bank filed a brief in the goodwill case "stating that `it had informed OTS upon learning the facts [concerning Conway's relationship with the Law Firm] and filed a criminal referral with OTS and other law enforcement agencies'." See Edwards Letter at 1, & Ex. C. The plaintiffs now seek to compel the production of "all documents relating or referring to" the criminal referral form filed with the OTS. Id.

The court assumes that the "criminal referral" mentioned by the plaintiffs is a document also known as a Suspicious Activity Report ("SAR"), inasmuch as the parties' and the OTS's arguments are all couched in the law regarding disclosure of SARs. The plaintiffs claim that the Bank's acknowledgment that an SAR was filed "is flatly inconsistent with the position defendants have taken in this litigation," that "there was nothing wrong with Conway's relationship with the Law Firm." Edwards Letter at 1. Plaintiffs assert that the filing of the SAR specifically contradicts the Bank's 30(b)(6) testimony by John Conefry. Mr. Conefry, the former vice-chairman of the Bank, testified that counsel for a Special Audit Committee of the Board "found no evidence of any wrongdoing on the part of the Bank or any of its officers or directors or employees." Edwards Letter at 1 & Ex. A at 42-43.

The Bank opposes the production of the documents on various legal grounds, discussed infra, and also argues, in regard to Mr. Conefry's testimony, that the "Bank and Director Defendants have stipulated that they will not rely upon testimony about the internal investigation in defending this matter." Brooks Letter at 3.

DISCUSSION

Applicable Law:

Both the defendants and the OTS object to the production of any SAR concerning James Conway that LISB may have submitted to federal law enforcement agencies on the ground that SARs are exempt from disclosure under 31 U.S.C. § 5318(g), the Annunzio-Wylie Act, and 12 C.F.R. § 563.180(d), a regulation enacted pursuant to that statute. Congress passed the Annunzio-Wylie Anti-Money Laundering Act ("the Act") in 1992. The provisions of the Act go beyond money laundering, however, and inter alia, give the Secretary of the Treasury power to require banks and other financial institutions to report various suspicious transactions to the appropriate authorities. See Nevin v. Citibank, 107 F. Supp.2d 333, 340 (S.D.N.Y. 2000). The regulations promulgated require a financial institution to file an SAR "no later than thirty (30) days after the initial detection of a known or suspected violation of federal law, a suspected transaction related to money laundering activity, or a violation of the Bank Secrecy Act." Lee v. Bankers Trust Co., 166 F.3d 540, 543 (2d Cir. 1999) (citing 12 C.F.R. § 208.20(d) (1997)).

The court in Lee also noted that, pursuant to the regulations, "Institutions are prohibited from acknowledging filing, or commenting on the contents of, an SAR unless ordered to do so by the appropriate authorities." Id. (citing 12 C.F.R. § 208.20(j) & (g)). Moreover, the court found, "Financial institutions are required by law to file SARs, but are prohibited from disclosing whether an SAR has been filed or the information contained therein." Id. (citing 12 C.F.R. § 208.20(k) (1998)).

The confidentiality regulation referred to in Lee as 12 C.F.R. § 208.20(k) is now numbered 12 C.F.R. § 563.180(d)(12) (2001), and states:

(12) Confidentiality of SARs. SARs are confidential. Any institution or person subpoenaed or otherwise requested to disclose a SAR or the information contained in a SAR shall decline to produce the SAR or to provide any information that would disclose that a SAR has been prepared or filed, citing this paragraph (d), ...

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