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.
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)
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), applicable law (e.g., 31 U.S.C. § 5318(g)),
or both, and shall notify the OTS.
31 U.S.C. § 5318(g), the enabling legislation for the regulations,
Reporting of suspicious transactions. —
(1) In general — The Secretary may require any
financial institution, and any director, officer,
employee, or agent of any financial institution, to
report any suspicious transaction relevant to a
possible violation of law or regulation.
(2) Notification prohibited — Any financial
institution, and any director, officer, employee, or
agent of any financial institution, who voluntarily
reports a suspicious transaction, or that reports a
suspicious transaction pursuant to this section or any
other authority, may not notify any person involved in
the transaction that the transaction has been
(Bold in original).
Confidentiality Requirements of 12 C.F.R. § 563.180(d)(12):
The defendants argue that the terms of the regulation and the enabling
statute, along with their analysis in Lee, require denial of the motion
to compel. Although Lee focused on the safe harbor provision of the
statute (see 31 U.S.C. § 5318(g)(3)), and not on the confidentiality
section (see 31 U.S.C. § 5318(g)(2)), in assessing the "safe harbor
provision's place within the Act," the court clearly acknowledged the
regulation's broad prohibition against a financial institution's
disclosure of the fact that an SAR was filed or the information contained
therein. Lee, 166 F.3d at 544; see also Nevin, 107 F. Supp.2d at 342
(interpreting holding in Lee to mean that "not only the plain language of
the statute but also sound public policy dictate that anything
contained in an SAR enjoy[s] an unqualified privilege.")
The plaintiffs argue that, despite what the regulation may say,
administrative agencies do not have "the power to promulgate regulations
in direct contravention of the Federal Rules of Civil Procedure." Edwards
Letter at 2 (quoting In re Bankers Trust Co., 61 F.3d 465, 470 (6th Cir.
1995); Golden Pacific Bank Corp. v. FDIC, 1999 WL 1332312 at *3 (D.N.J.
1999)). In other words, under the plaintiffs' argument, Rule 34 trumps
12 C.F.R. § 563.180(d)(12). This issue was not addressed in Lee.
At issue in Bankers Trust, the Sixth Circuit case relied on by the
plaintiffs, was a discovery demand that the bank "produce all documents
submitted to or received from the Federal Reserve, including `any and all
documents relating to any and all regulatory reports of examination and
inspection which relate to or refer to" the facts underlying the
lawsuit. 61 F.3d at 467. The relevant regulation in Bankers Trust was not
12 C.F.R. § 563.180(d)(12), but 12 C.F.R. § 261, which embodies
the "bank examination privilege," and provides that the documents in
question remain the property of the Federal Reserve Board, that a party
seeking their production must request them directly from the Federal
Reserve, and that any organization or institution in possession of such
documents, if called upon to produce them, shall decline to do so
pursuant to the regulations. See 61 F.3d at 467, 469. In Bankers Trust,
the Sixth Circuit observed that it was confronted with a situation "in
which the Board's regulations conflict with the Federal Rules of Civil
Procedure with respect to a district court's authority, under the Federal
Rules, to control discovery," specifically Rule 34, the same general
issue now before this court. Id. at 469.
The Sixth Circuit recognized that "federal regulations should be
adhered to and given full force and effect of law whenever possible."
That is, "[a]s long as the federal agency's regulation is based upon a
permissible construction of the enabling statute, the regulation should be
enforced." Id. at 470 (citing Chevron U.S.A., Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837 (1984)). It noted, however, that
broad, general grants of authority, such as those relied on by the
Federal Reserve in regard to 12 C.F.R. § 261, simply do not confer
"the power to promulgate regulations in direct contravention of the
Federal Rules of Civil Procedure." Id. The court found that the
statutory authorities before the court were merely "housekeeping"
statutes granting the Federal Reserve general authority to issue
necessary regulations, including regulations regarding "the use and
preservation of its records, paper and property." Id. (quoting
5 U.S.C. § 301). This, the court found, was not enough. "To allow a
federal regulation issued by an agency to effectively override the
application of the Federal Rules of Civil Procedure and, in essence,
divest a court of jurisdiction over discovery, the enabling
statute must be more specific than a general grant of authority." 61
F.3d at 470.
Applying the reasoning of Banker's Trust to this case, the issue thus
becomes whether 31 U.S.C. § 5318 (g), the enabling legislation for
the confidentiality regulation, is specific enough to justify its
intrusion into the federal rules governing discovery. As noted supra,
U.S.C. § 5318(g)(2) specifically prohibits any financial institution
that reports a suspicious transaction from notifying any person involved
in the transaction that the transaction has been reported. There is,
however, no mention of whether the institution can reveal the SAR
information to persons other than those involved in the reported
transaction, and an argument can be made that the statute is thus
insufficiently specific in that regard. A similar argument was made, and
rejected, in In re Mezvinsky, 2000 Bankr. LEXIS 1067 (Bankr.E.D.Pa.
Sept. 7, 2000). In that case, a party made a motion to compel the
production of certain SARs and related documents. The bank objected, on
the ground that their production was barred by 12 C.F.R. § 21.11(k),
now numbered 12 C.F.R. § 563.180(d)(12), the same regulation at issue
on this motion. The movant in Mezvinsky argued that "
31 U.S.C. § 5318(g)(2) provides only that banks which file SARs `may
not notify any person involved in the transaction that the transaction
has been reported,'"and that "under the language of the statute, as
opposed to the regulation, [the bank] is not prohibited from producing any
relevant SARs to [the movant] because he was not a `person involved in
the transaction.'" 2000 Bankr. LEXIS 1067 at *5.