Abacus Bank and the Power of Prosecutors' 'First Bite of the Apple'

I had the great honor to profile famed litigator Theodore “Ted” Wells Jr. for the 2009 edition of my book In The Court of Public Opinion (ABA Books) on the role of media and public perception in the criminal process:

" ‘Twenty five years ago, an indictment was a legal document. You read an indictment these days—that’s the prosecution’s press release right there,’ Wells said. ‘It has a huge negative impact on a defendant’s ability to get a fair trial.’ "

I was reminded of this passage in light of a case for which I am the chief spokesperson: the mortgage fraud prosecution of Abacus Federal Savings Bank, a minority and family-owned community bank based in Lower Manhattan’s Chinatown neighborhood. The case was featured in an in-depth story in Bloomberg Businessweek that raises serious questions about the indictment and the aggressive rhetoric prosecutors used in announcing it—and provides a good example of the public-relations environment many corporate counsel may find themselves in when dealing with high-profile, media-friendly litigation.

The background: with much hoopla, Manhattan District Attorney Cyrus Vance Jr. indicted tiny Abacus, with six branches and little more than $250 million in assets, for mortgage fraud in May 2012. Although no evidence has ever been offered to implicate senior executives or owners of the bank (who were not charged), Abacus was indicted as an institution—along a handful of former employees of the bank—earning the dubious distinction of being the only bank in the United States indicted for mortgage fraud in the aftermath of the 2008 financial crisis. This despite the fact that Abacus has had a very low mortgage-default rate: less than 0.5 percent, compared to a national average of more than 5 percent.

In his indictment [PDF] (with an accompanying press release and YouTube video, naturally), D.A. Vance took a victory lap, excoriating the bank as emblematic of all that caused the mortgage crisis. The press release stated the fraud resulted in the sale of “hundreds of millions of dollars worth of fraudulent loans” to Fannie Mae. The individual defendants were shackled and paraded in a public hallway outside the courtroom before arraignment—in front of a media corral set up specifically for the occasion—even though three of the eleven had been charged previously and were already out on bail. When asked at his press conference why Abacus had been indicted when the bank itself had uncovered the problem, fired employees, alerted the authorities, and undertaken an internal investigation, Vance responded that Abacus’s efforts had been “too little, too late.”

But the facts of the indictment didn’t exactly match the press event’s hype. Only 31 allegedly fraudulent loans were listed in the indictment, and four of those had already been paid off. Of the remaining 27, just one was delinquent. The kicker? According to court filings, the loans in question have earned at least $174 million for Fannie Mae and its investors in the time period in question. That’s right—in stark contrast to the Countrywides and Wachovias of the go-go mortgage run-up, little Abacus’s loan portfolio has consistently made Fannie Mae (and, indirectly, the American taxpayer) money.

Now to be clear: I am consulting on this case and will fiercely advocate for my client’s interests. But that doesn’t change the facts of the case or the curious nature of both the indictment and the media announcement that accompanied it.

Here is the broader lesson for corporate counsel, as well as their outside lawyers and public relations advisors: communications and public perception surrounding litigation unfolds over time. It ebbs and flows, just like activity in the case itself. Although a flurry of media coverage will follow an indictment or the filing of a criminal or civil complaint . . . it’s only the first inning.

And just as you don’t declare a winner of a baseball game after the first inning, you shouldn’t judge a case by the first day’s news coverage. Particularly if the facts and law are on your side, there will be many opportunities to ensure that the truth about your client and your case comes out. Too many defense lawyers throw their hands up in defeat after a dispiriting first day of media coverage, believing there is nothing they can do against an aggressive prosecutor who, given the nature of the adversarial process, usually gets the first bite of the informational apple.

You will, without a doubt, be hearing more about Abacus case in the months to come, as the court action heats up and more facts are brought to light. But with the current national focus on the inability and unwillingness of prosecutors to bring criminal cases against the peddlers of subprime mortgages and other high-risk financial products (read CorpCounsel.com’s recent article on the idea of “too big to jail”), the Abacus case says a lot about why prosecutors and regulators might see a PR advantage in chasing small fish and questionable cases.

In the meantime, in Abacus’s effort to ensure there is a balanced representation of the case and its issues as the case goes to trial, I am reminded of the opinion of Justice Anthony Kennedy in Gentile v State Bar of Nevada, a seminal U.S. Supreme Court case regarding a defendant’s right to protect himself publicly against prosecutorial statements that skew perceptions:

"An attorney’s duties do not begin inside the courtroom door. He or she cannot ignore the practical implications of a legal proceeding for the client. Just as an attorney may recommend a plea bargain or civil settlement to avoid the adverse consequences of a possible loss after trial, so too an attorney may take reasonable steps to defend a client’s reputation and reduce the adverse consequences of indictment, especially in the face of a prosecution deemed unjust or commenced with improper motives. A defense attorney may pursue lawful strategies to obtain dismissal of an indictment or reduction of charges, including an attempt to demonstrate in the court of public opinion that the client does not deserve to be tried."