White Collar Crime Prof Blog

Government's Exhibit List in U.S. v. Manafort

For all of you Manafort trial junkies, here is the Government Exhibit List, recently filed in U.S. v. Paul J. Manafort, Jr., set to start soon in U.S. District Judge T.S. Ellis, III's Alexandria courtroom.

Here also is Judge Ellis's Order Denying Paul Manafort's Motion for Change of Venue.  Judge Ellis ruled last week that Manafort is not entitled to a presumption that any Alexandria federal trial jury would be partial to the government. If Manafort can establish actual prejudicial partiality through voir dire, a herculean task under current federal criminal law, Judge Ellis will revisit the issue.

(wisenberg)

Judge Rakoff Wades In

In the current New York Review of Books, Judge Jed Rakoff presents the most thoughtful, balanced analysis I have seen to date regarding DOJ's failure to prosecute high-level executives at elite financial institutions in connection with the recent financial crisis. Appropriately entitled, The Financial Crisis: Why Have No High Level Executives Been Prosecuted?, Judge Rakoff is careful not to point fingers, rush to judgment, or even allege that fraud has definitively been established. And that's a big part of the DOJ's problem. How can you establish fraud if the effort to investigate it has been haphazard and understaffed from the outset? Rakoff is someone worth listening to. An unusually thoughtful federal district judge, he has presided over many significant securities and bank fraud cases, served as chief of the Securities Fraud Unit in the SDNY U.S. Attorney's Office,  and worked as a defense attorney. Oh yeah. He also hates the Sentencing Guidelines. 

Among the many theories Rakoff posits for the failure to prosecute what, it bears repeating, only may have been fraud, are two that I take issue with. These investigations were apparently parceled out to to various OUSA districts, rather than being concentrated in the SDNY. Judge Rakoff believes that the SDNY would have been the more logical choice, as it has more experience in sophisticated fraud investigations. This may be true as a general proposition. But the most plausible historical fraud model for the mortgage meltdown-fueled financial crisis is the Savings & Loan Scandal of the late 1980s, so successfully prosecuted by DOJ into the mid-1990s. The SDNY had very little of that action.

Judge Rakoff also notes the government's role in creating the conditions that led to the current crisis as a potential prosecution pitfall. But this did not stop the S&L prosecutors from forging ahead in their cases. Back then, virtually every S&L criminal defendant claimed that the government had created that crisis by establishing, and then abandoning, Regulatory Accounting Principles, aka RAP. (One marked difference between the two scandals is that the S&L Scandal was immediately met with public outrage and a sustained Executive Branch commitment to investigate and prosecute where warranted. The sustained Executive Branch commitment has not happened this time around, for whatever reason.)

But these are minor quibbles and Judge Rakoff is spot on in most of his observations.

Judge Rakoff is right to reject the "revolving door" theory of non-prosecution. Any prosecutor worth his salt would love to make a name for himself, and would definitely enhance his private sector marketability, by winning one of these cases. Judge Rakoff also correctly notes that these cases are hard and time-consuming to investigate.

The judge's most salient point has nothing to do with the various theories for DOJ's failure to prosecute. Instead, it is his observation that there is no substitute for holding financial elites responsible for their major criminal misdeeds. The compliance and deferred prosecution agreements favored today are simply a cost of doing business for most big corporations. What's worse, in the current environment, DOJ is giving a walk to elite financial actors and simultaneously prosecuting middle-class pikers with a vengeance that is sickening to behold. The elite financial actors may not have committed criminal fraud, but many of them bear heavy responsibility for the ensuing mess. It is so much easier for DOJ to rack up the stats by picking the low hanging fruit.

The one thing Judge Rakoff cannot do, and does not try to do, is answer the question of whether criminal fraud occurred in the highest sectors of our financial world. The answer to that question can only be supplied, at least as an initial matter, by the AUSA in charge of each investigation. And if no prosecution occurs, you and I are unlikely to ever know the reason why.

(wisenberg)

Jury Finds Against BOA, Based on Countrywide Unit's Pre-Acquisition Sales to Fannie and Freddie

This just in from the WSJ (subscription required). The WSJ headline is misleading, as the unit in question was located within Countrywide Financial Corporation, and the actions at the heart of the case occurred prior to Countrywide's acquisition by BOA. The Forbes story is here.
(wisenberg)

18 U.S.C. Section 1014: Dick and Frank (Posner and Easterbrook to you) Duke it Out.

Yesterday the Seventh Circuit, sitting en banc, reversed and remanded (7-2) a Section 1014 (and Section 317) conviction connected to the mortgage meltdown crisis. Judge Posner wrote the majority opinion. Chief Judge Easterbrook (joined by Judge Bauer) dissented. The opinion is United States v. Lacey Phillips and Erin Hall.

Section 1014 prohibits making any false statement or report for the purpose of influencing in any way a federally insured bank. Longstanding case law requires the government to prove that the defendant knew the statement was false at the time it was made. Phillips and Hall were an unmarried couple who applied for a home loan and were rejected. Hall then contacted his friend Bowling, a mortgage broker, who began advising Hall and Phillips and ultimately led them to a different bank, Fremont Investment & Loan, which granted a home loan to Phillips. Hall was not listed as a borrower. This was a stated income loan, also known in the industry as a liar's loan.

Phillips and Hall could not keep up with the payments and lost their home. A prosecution ensued. There were several false statements on the loan application, but Phillips and Hall testified that they only were aware of one of the statements, which was as follows. Under the Borrower's Income line, Phillips put down the couple's combined income.

Phillips and Hall wanted to testify that Bowling told them: 1) Phillips should be the only applicant for the stated-income loan, because her credit history was good while Hall's was bad because of the recent bankruptcy; 2) Hall's income should be added to Phillips' on the line that asked for borrower's gross monthly income; and 3) adding the incomes together was proper in the case of a stated income loan, because the bank was actually asking for the total income from which the loan would be repaid, rather than just the borrower's income.

The government wanted to keep this testimony from the jury and U.S. District Court Barbara Crabb (I kid you not) agreed. The Seventh Circuit, per Posner, reversed, in an unnecessarily complicated opinion, but one that is nevertheless fun and instructive to read.

I see it this way. According to Phillips and Hall, Bowling told them that, to Fremont Investment & Loan, Borrower's Income meant the total income from which the loan would be repaid. They were in essence informed that Borrower's Income was a term of art for Fremont. If Phillips and Hall believed that Borrower's Income meant (to Fremont) Combined Income of the People Repaying the Loan, then Phillips and Hall were not making a statement to Fremont that they knew was false. Their state of mind on this point was directly at issue. Theirs may have been be an implausible story, but the jury was allowed to hear it. Judge Posner's opinion has some important things to say about terms of art and interpretation of seemingly simple terms.

 This case reminds me of a home loan I took out while I was an AUSA. The bulk of the down payment was being paid through my Thrift Savings Plan. That is, I was loaning myself money out of my government retirement fund. At the time, all of the standard loan applications required the borrower to state that no part of the down payment was coming from a loan. I asked my real estate agent and the mortgage broker whether that language applied to a Thrift Savings Plan Loan. They assured me that it did not. So, when I wrote down on the application that no part of my down payment came from a loan, I knew that in one sense this might be considered false, but to the bank, and presumably to any bank, it would be considered true, because the bank did not consider a Thrift Savings Plan Loan to be a loan. Had I defaulted and been prosecuted, I would have liked to present this as a defense, and it is hard to believe that any competent judge would have prevented me from doing so. But Judge Crabb did not allow this kind of evidence in, and Judge Easterbrook cheers her on.

Judge Easterbrook points out that the jury, in finding Phillips and Hall guilty, already determined that the couple knew several statements on the loan application were false. This is back-asswards and misses the point. This is not a sufficiency of the evidence case. If the jurors had heard the excluded testimony, they may well have been more likely to believe Phillips' and Halls' testimony that the rest of the false statements were made and submitted by Bowling without their knowledge. According to Posner, there was evidence to the effect that Phillips and Hall were naive, while Bowling (who pled guilty and cooperated) and Fremont (a bank that Posner deems disreputable) were sophisticated.

Of course, it is appalling and embarrassing that any self-respecting U.S. Attorney's Office would prosecute a case like this, but it is all part of DOJ's Piker Mortgage Fraud Initiative. Even more embarrassing was the government's contention on appeal that the excluded statements were hearsay. Posner called this a "surprising mistake for a Justice Department lawyer." I'm not so sure. Maybe it wasn't a mistake.

(wisenberg)

Criminal Prosecutions Apparently Not Prohibited By Historic Mortgage Settlement Agreement

From the Department of Justice Press Release:

"The agreement resolves certain violations of civil law based on mortgage loan servicing activities.  The agreement does not prevent state and federal authorities from pursuing criminal enforcement actions related to this or other conduct by the servicers.  The agreement does not prevent the government from punishing wrongful securitization conduct that will be the focus of the new Residential Mortgage-Backed Securities Working Group.  The United States also retains its full authority to recover losses and penalties caused to the federal government when a bank failed to satisfy underwriting standards on a government-insured or government-guaranteed loan.  The agreement does not prevent any action by individual borrowers who wish to bring their own lawsuits.  State attorneys general also preserved, among other things, all claims against the Mortgage Electronic Registration Systems (MERS), and all claims brought by borrowers." 

This does not resolve the question of whether any federal robo-signing fraud prosecutions will occur or why none have been brought to date.

(wisenberg)    

Mismarking CDO Case Not Earth-Shattering

Last week, after President Obama announced a purportedly new initiative, see here and here, to combat fraud, government law enforcement officials, criticized for their lack of activity, promised action in the very near future. It is not clear whether the indictment returned Wednesday in the Southern District of New York for crimes committed four years ago is the action referred to. It certainly is not an earth-shattering case.

On Wednesday, three former Credit Suisse traders were indicted for inflating the worth of collateralized debt obligations (CDOs) to avoid recognition of market losses and thereby increase their bonuses. See here.

The CDOs consisted of pooled, presumably at least in part subprime, mortgages that were sold to investors in packages by presumably reputable institutions with high ratings provided by presumably reputable credit agencies. The presence of large amounts of overvalued CDOs in firm inventories is considered by some a major cause of the financial crisis.

Unlike securities such as listed stocks, there was no liquid market for these mortgage securities and therefore no easily ascertainable market value. Some financial firms were hesitant to mark down these failing obligations because it would considerably decrease reported earnings. Here, it is alleged -- and two of the three indicted have pleaded guilty -- that the traders knowingly concealed the loss in value and secured a bogus evaluation from a friendly small investment bank in order to support the inflated value of the securities. The overvaluation -- or failure to recognize the loss -- resulted in increased compensation for the traders, whose year-end bonuses were based considerably on the profits of their groups.

This case is interesting for several reasons. It is one of the relatively few brought so far that concern alleged criminal wrongdoing after the financial crisis arose. Most previous criminal prosecutions involving failed mortgages have focused on the origination of mortgages and comparatively small-time people such as aggressive mortgage brokers, perjurious buyers and conniving lawyers, and not their securitization.

It is also one of the few instances in which employees of a major financial institution have been prosecuted criminally in a case related to the financial crisis. Nonetheless, it would be a stretch to say that this overvaluation, discovered and corrected by Credit Suisse in days, had a major impact.

This is one of the rare criminal accusations, to my knowledge, involving mismarking or deliberately overvaluing illiquid assets in order to inflate profits. These valuations have a major effect on the profit and loss statements of financial institutions, including hedge funds, and the consequent bonuses or incentive compensation of traders and managers. False marking, often using evaluations by supposed experts or comparable institutions of the worth of securities with no easily-defined market value, is an area which deserves more governmental scrutiny and probably more governmental legal action.

Of course, care must be taken to distinguish deliberate falsity from good faith but erroneous evaluation in this uncertain area.

(goldman)

New Financial Unit Raises Questions

Virtually every presidential State of the Union speech, or its gubernatorial equivalent, calls for tougher criminal laws and/or new investigative resources.  President Obama's address last week was no exception.  The President called for the establishment of a new unit "to crack down on large scale fraud and protect people's investments."  As blog editor Ellen S. Podgor wondered, see here, it was unclear how this unit would differ from the Financial Fraud Enforcement Task Force established in 2009.  I too asked whether this purportedly new unit was anything other than a repackaged version.

The announcement of a new prosecutorial unit also was perhaps an unintended implicit admission that existing federal law enforcement agencies had been less than successful in dealing with serious alleged crimes which some believed had caused the financial crisis.  Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law.  Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.

The principal apparent structural difference between this unit, entitled the Unit on Mortgage Origination and Security Abuses ("UMOSA"), and the prior one is, besides its more focused jurisdiction, that this is a joint task force of both federal and state officials.  One of its co-chairs -- albeit one of five, four being DOJ or SEC officials -- is New York State Attorney General Eric Schneiderman, who has shown his independence and aggressiveness toward Wall Street by pushing for stronger sanctions against financial institutions for robo-signing and other improprieties committed after the crisis arose.

Generally, joint federal-state task forces are a one-way street.  The feds take the best criminal cases and leave the dregs to the state.  One purported justification for such selection is that federal laws and rules of evidence make it easier for federal prosecutors to bring cases and win convictions.  Schneiderman has indicated somewhat to the contrary -- that New York and other state laws give state attorneys general greater means to bring both civil and criminal prosecutions.

The idea of combining federal and state resources is generally a good one.  Too often law enforcement agencies refuse to share information with other agencies, if at all, until they have determined the information was insufficient for them to act on, often too late for use by the other agencies.  On the other hand, I fear that some task force constituents might attempt to make an end run around constitutional and statutory laws and rules, specificially Fed.R.Crim.Pro. 6(e), which, generally, as relevant here, prohibits disclosure of grand jury information to non-federal officials.  Of particular concern is whether information secured by federal grand juries, much of which is through immunized testimony, will be provided for use by the states.  Both Attorneys General Holder and Schneiderman seem aware of this restriction, but both appear to view it as an obstacle to overcome rather than a right to ensure.  How scrupulous they will be in upholding the rule and spirit of grand jury secrecy will be seen.

(goldman)

Eleventh Circuit - Mortgage Fraud Judgment Vacated and Remanded for Re-Sentencing

In United Staets v. Singletary, the Eleventh Circuit looked at issues of loss amount in a mortgage fraud decision. The Federal Defender's Office for the Middle District of Florida (with special thanks to Steven Kruer, chief paralegal) writes:

"Anyone with a mortgage fraud case presenting issues of loss amount or restitution payable should read this published decision from Monday, August 15, 2001, in which the Eleventh Circuit vacated the judgment and remanded for re-sentencing.

"In reversing, the Court noted that the government had the burden of proving, with respect to each of the mortgages for which it sought restitution, that the mortgage was the product of a fraudulent misrepresentation, and that it had not met this burden.  The district court’s statement in the restitution order that “restitution of at least $1,000,000 has been established by the Government” did not identify the mortgages that had been fraudulently obtained and caused losses totaling that sum.  To enable meaningful appellate review, the Court wrote, a district court’s calculation of restitution must be supported by specific factual findings. The district court failed to carry out this task, the Court held, and thus vacated the restitution provisions of the Singletarys’ judgments and remanded the case so that the court could perform this task.

In remanding, the Court wrote: 

We do so with this caveat: the Government is not receiving another bite of the apple. The district court shall render the necessary findings of fact and conclusions of law with respect to each of the 56 mortgages at issue on the basis of the evidentiary record as it now exists.

(esp)(reprinted with permission of the PD's Office MD Fl.)

Bill Black Sounds The Toscin: Whatever Happened To Prosecuting Real Fraud?

Okay, let me take off my white collar defense attorney hat and put on my former prosecutor hat for a minute. Call it my citizenship hat. Don't most of us want real, unadulterated big-time crooks to be investigated and, where appropriate, charged? Where are all the investigations and prosecutions of the accounting control fraud that caused one of the greatest recessions in U.S. history? You know, the current recession. 

Back in the late 1980s, when the S&L Crisis hit and the Dallas-based S&L Task Force was formed, federal law enforcement officials quickly realized that, in many instances, colossal fraud had been committed by the very players who controlled the S&Ls. The S&L fraud was overwhelmingly based on sham transactions and sham accounting for those transactions. Massive resources were committed to investigating and prosecuting the S&L fraud. It was understood that the crooked players had hijacked their S&Ls and defrauded depositors and/or the FSLIC. This rather elementary distinction between the savings and loan as an institution and the fraudsters who controlled it was grasped by AUSAs and effectively conveyed to juries across the land.

Nothing like this is happening today with respect to the federal government’s investigation of the housing bubble, liars’ loans, and Wall Street's subprime lending scandal. The overwhelming number of investigations and prosecutions seem to be focused on piker fraudsters—corrupt individual borrowers or mortgage brokers. These cases are easy pickings, but do not get to the massive fraud that clearly permeated the entire financial system.

Professor William Black, of Keating Five fame, has written a scathing piece all about this for the Huffington Post. Here it is. Among Black's revelations? "During the current crisis the OCC and the OTS - combined - made zero criminal referrals." Astounding. These two agencies accounted for thousands of criminal referrals per year during the S&L Task Force years. More fundamentally, Black argues that today's federal prosecutorial authorities do not comprehend that individuals in control of an institution can have an incentive to engage in short-term fraud that enriches them individually while destroying the long-term prospects of the institution and the larger economy.

Nobody should be charged with a white collar crime unless the crime is serious and the prosecution believes in good faith that a jury will find guilt beyond a reasonable doubt. But how about a substantive investigative effort, including commitment of appropriate resources? Why are such huge resources being spent on dubious endeavors like insider trading and FCPA enforcement, while elite financial control fraud goes largely unaddressed? Professor Black's piece is highly recommended reading.

(wisenberg)

The Ninth Circuit Rejects Reach of 18 USC 1344 in Case

Guest Blogger - Linda Friedman Ramirez -

The Ninth Circuit rejects reach of 18 USC 1344 to Bank of America’s mortgage subsidiary, Equicredit Corporation, in a case brought prior to the amendment of 18 USC 20.       

USA v Bennett, (9th Cir. 2010) -

Federal law provides that  it is a federal crime knowingly to execute, or attempt to execute, a scheme or artifice “(1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. § 1344. 

According to the Court, the defendant James Bennett operated a sophisticated property flipping scheme in Southern California. He provided cash to straw purchasers, improperly appraised the properties at inflated prices, provided false information about the buyers and falsified documents for closing.  

One of the defendant’s victims was Equicredit, a subsidiary of Bank of America. The Government conceded that in this case, Equicredit did not meet the statutory definition of “Financial institution.”  The definition of “financial institution” was later expanded in May 2009. See Fraud Enforcement and Recovery Act of 2009, Pub.L. No. 111-21, § 2(a)(3) (2009).¹

In order to try and save the convictions the Government argued that Bennett fraudulently obtained funds “owned by” a financial institution for purposes of § 1344(2).

The government argued that, as a matter of law, a parent corporation “owns” the assets of its wholly-owned subsidiary, and therefore that Bennett fraudulently obtained assets “owned by” BOA, a financial institution, when he obtained mortgages from Equicredit..

 The Court rejected this argument. ”More than a century of corporate law says otherwise.” The Court reviewed jurisprudence in this area. “As early as 1926, the Supreme Court recognized that “[t]he owner of the shares of stock in a company is not the owner of the corporation’s property.” R.I. Hosp. Trust Co. v. Doughton, 270 U.S. 69, 81 (1926). While the shareholder has a right to share in corporate dividends, “he does not own the corporate property.’”   “Today, it almost goes without saying that a parent corporation does not own the assets of its wholly-owned subsidiary by virtue of that relationship alone.”  The Ninth Circuit thereafter vacated conviction of the relevant counts.

__________________

¹“Financial institution” now encompasses “a mortgage lending business ... or any person or entity that makes in whole or in part a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974.” 18 U.S.C.A. § 20(10)  A “mortgage lending business” is in turn defined as “an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affect interstate or foreign commerce.” 18 U.S.C.A. § 27

 

(lfr)

Farkas Indictment

GUEST BLOGGER-SOLOMON L. WISENBERG

Here is the Lee Bentley Farkas Indictment, unsealed this week in the EDVA. Farkas is charged with conspiracy, bank fraud, wire fraud, and securities fraud. I'm surprised they didn't throw in dancing with a mailman or impersonating Smoky the Bear. The government alleged securities fraud under 18 U.S.C. Section 1348, which, surprisingly, has seen very limited use since it was enacted as part of Sarbanes-Oxley. It will be interesting to see if this is part of a new trend. There are three securities fraud counts (Counts 14-16) based upon three separate reports (10-K, 8-K, and 10-Q) filed with the SEC, each one charged as an execution of the securities fraud scheme.

(slw)

Senate Judiciary Hearing on Financial Crisis

Yesterday, the Senate Judiciary Committee held a full committee hearing on "Mortgage Fraud, Securities Fraud, and the Financial Meltdown: Prosecuting Those Responsible."  Testifying at the hearing were: Assistant AG Lanny Breuer, Director Enforcement Division SEC Robert Khuzami, and FBI Assistant Director Kevin Perkins.  One can listen to the hearing here.  The opening speaker, Lanny Breuer (see written testimony here) spoke about the new Financial Fraud Enforcement Task Force (see here for background).  In his written statement he says that "Since 2002, the Department has obtained approximately 1,300 corporate fraud convictions, including convictions of more than 200 corporate chief executives or presidents, more than 120 vice presidents, and more than 50 chief financial officers." He also gave examples of the coordinated efforts of mortgage fraud prosecutions stating: 

"Operation "Malicious Mortgage," conducted last year, included charges against more than 400 defendants in cases across the nation. Operation "Quick Flip" in 2005 featured a nationwide takedown of mortgage fraud cases charging a total of approximately 155 defendants. Operation "Continued Action" in 2004 targeted mortgage fraud and other schemes in more than 150 cases in more than 35 states."

Robert Khuzami, speaking next outlined some of the recent initiatives at the SEC.  The final speaker from the FBI, Kevin Perkins, spoke about a wide array of conduct talking about matters related to Madoff,  Petters, and others. (see written testimony here) He spoke about a new proactive approach being taken to financial fraud. The approach he spoke about highlighted  investigation.

See also David Ingram, National LJ, law.com, Senators Impatient With Fraud Prosecutions

(esp)

Corporate Fraud Task Force Moves Into the Financial Fraud Task Force

In a recent press release, President Barak Obama announced that he was establishing an interagency Financial Fraud Enforcement Task Force. The executive order (13519) lists a long list of individuals offices that will be represented on this task force (e.g. Homeland Security, FTC, SBA). Yes, TARP is also at the table. At the head of the task force is the Attorney General with the Deputy AG directing the work of the task force. The task force clearly has a mission of coordinating efforts for financial fraud prosecutions. Perhaps the most interesting aspect of the task force is found near the end of the executive order - "The Task Force shall replace, and continue the work of, the Corporate Fraud Task Force" which had been created by a 2002 Executive Order.  The use of a task force is not new for DOJ.  In addition to the Corporate Fraud Task Force, we have seen task forces like the Katrina Hurricane Task Force that focused on fraud. (see here). 

One aspect that is particularly good to see as an aspect of this task force is its "Outreach" section.  It states:

Outreach. Consistent with the law enforcement objectives set out in this order, the Task Force, in accordance with applicable law, in addition to regular meetings, shall conduct outreach with representatives of financial institutions, corporate entities, nonprofit organizations, State, local, tribal, and territorial governments and agencies, and other interested persons to foster greater coordination and participation in the detection and prosecution of financial fraud and financial crimes, and in the enforcement of antitrust and antidiscrimination laws.

 AG Holder comments on this new task force here.

(esp)

Finding TARP

The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) emphasizes transparency, but it did take me some time to find the website that told me what was going on in this office. It is easy if you put SIGTARP into Google, but not so easy - at least for me - if you try and find it within the Treasury Department website.  For those who are looking, you'll find it here.  The office issued its Quarterly Report here.  It states in part:

SIGTARP’s Investigations Division has developed into a sophisticated whitecollar investigative agency. Through September 30, 2009, SIGTARP has opened 61 and has 54 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations. While the vast majority of SIGTARP’s investigative activity remains confidential, developments in several of SIGTARP’s investigations have become public over the past quarter . . .

I am not impressed with the statement that resulted in Huffington's Post headline that TARP Fraud Probes Have Tripled Since April, Says Watchdog.  The numbers should be increasing enormously - after all this is a relatively new office. But it is good to see that this office is getting off the ground, being staffed, and now moving to stop fraud occurring in the use of TARP funds.

(esp) 

NACDL's 5th Annual Defending the White Collar Case Seminar - "Keynote Address: Lanny A. Breuer, Assistant Attorney General, Criminal Division, U.S. Department of Justice," Thursday, October 1, 2009

Guest Blogger:  Ivan J. Dominguez, Assistant Director of Public Affairs & Communications, National Association of Criminal Defense Lawyers

Keynote Address:  Lanny A. Breuer, Assistant Attorney General, Criminal Division, U.S. Department of Justice*

Assistant Attorney General of the Criminal Division Lanny A. Breuer traveled from Washington, D.C., to deliver a lunchtime address to NACDL’s 5th Annual White Collar Seminar at Fordham Law School in New York City.

Breuer, who was confirmed almost six months ago, repeatedly emphasized his admiration for the professionalism and commitment of career prosecutors. He shared his perspective that, as a general proposition, career law enforcement officials have an “abiding commitment to the highest standards of ethical conduct.” He also told of how he recently returned from Mexico City where he met with a U.S. resident legal adviser and said that it is his goal to meet all resident legal adviserss around the world. 

The focus of his talk was an overview of some of the DOJ’s, and specifically the Criminal Division’s, law enforcement priorities, stating that “the risks we face from white collar criminals have never been greater.” This is so, he said, because of the ever-growing sophistication of white collar criminals combined with a financial intervention by the government “on a massive scale…unparalleled in our history.”  “We’ve already seen egregious instances of fraud and abuse on the road to [economic] recovery,” he said.

Breuer specifically identified the “unprecedented amounts” that Congress has made available to facilitate recovery as giving rise to the government’s focus here. Indeed, he further explained that Congress has expressed its concern that government be vigilant as it guards against those who would take advantage of the $787 billion American Recovery and Reinvestment Act. In order to accomplish its goals in the face of these challenges, Breuer explained that his mantra is that the Department be “smart, nimble and focused” in fighting white collar crime. Specifically, throughout his speech he emphasized (i) the importance of interagency cooperation and collaboration and (ii) the value of using vast storehouses of data to drive the Department’s work.

Breuer also individually explored the following “white collar crime priorities”: health care fraud, financial fraud (including mortgage fraud) and public corruption.

On the topic of health care fraud, which he called “particularly severe,” Breuer said that much of the $800 billion dollars per annum that the government spends on Medicare and Medicaid is lost to “waste, fraud and abuse,” which he estimated at a minimum of 3% of those expenditures. In this context, interagency efforts are being pursued in what he characterized as an “innovative, data driven approach.” For example, pointing to multiple recent indictments in Detroit, Mich., he said that government investigation is driven by data such as information about which geographic areas have higher Medicare billing. He promised that such enforcement action will be spreading to new cities, explaining that government data shows that Medicare billings go down after the strike force goes into cities.

“Nowhere do you see [interagency] collaboration as much as in [financial fraud] arena,” Breuer said. In the area of mortgage fraud, he said that the Department is focused on those exploiting the most vulnerable homeowners among us.” He pointed to the National Mortgage Fraud team’s access to a “warehouse” of FBI data to aid in their work, explaining that the team at the FBI has developed sophisticated techniques with the data and that law enforcement is using this intelligence to combat mortgage fraud in “a very targeted” way.

Continue reading

In the News & Around the Blogosphere

Cary O’Reilly and Linda Sandler, Bloomberg, Judges Punish Wall Street as Regulators Just Talk About Reform

Florida AG Press Release, Jensen Beach Pastor, Wife Sentenced to Prison for Mortgage Fraud Scheme(sentences of 20 and 10 years and restitution to banks of $700,000.)

Edmund H. Mahony, Hartford Courant,Names Of 4 Finalists For U.S. Attorney For Connecticut Sent To Obama

Michael Pollick, DIAMOND' - Bail denied for currency trader Beau Diamond

Terrie Morgan-Besecker,Timesleader.com, Judges Facing More Jail Time - Racketeering Charge Added to List

Daily Business Review, law.com, Former Miami DEA Chief Indicted in Stanford Probe

Jenna Greene, National LJ, SEC Attacked for 'Colossal Failure' Over Madoff

Lynne Marek, law.com, National LJ, Judge wants to make federal sentences easier to calculate 

(esp)

Financial Fraud is a DOJ Priority

In assessing the first 100 days of the Obama Administration, AG Holder discussed policy initiatives.  One of these was "Targeting Financial Fraud."  The press release states that "[a]nticipating a renewed focus on financial crimes, the President’s FY 2010 budget provides resources for additional FBI agents to investigate mortgage fraud and white collar crime, and for additional Federal prosecutors, civil litigators and bankruptcy attorneys to protect investors, the market, and the Federal Government’s investment of resources."

In discussing what DOJ is doing now, the release states:

"the Department has devoted significant attention to preventing, investigating, and prosecuting mortgage fraud. The Federal Bureau of Investigation is currently investigating more than 2,100 mortgage fraud cases, up almost 400 percent from five years ago. The Bureau also has more than doubled the number of agents investigating mortgage scams, has created a National Mortgage Fraud Team at headquarters in Washington, and is working hand-in-hand with our partners at other agencies. The Department also has brought indictments and obtained convictions against perpetrators of rescue schemes in the past months. In one case, the Department recently indicted 24 individuals for alleged activity related to an extensive mortgage fraud scheme based in San Diego, which involved 220 properties with a total sales price of more than $100 million dollars."

In looking at future reforms, the release states that "[t]he Department of Justice is committed to an open, transparent, and accountable government. Attorney General Holder has repeatedly stressed that our nation has a 'fundamental commitment to open government' and the 'American people have the right to information about their government’s activities.' These values are central to our revitalization of the basic traditions of the Department, and are key features of the reform that the Obama Administration has brought to the Department of Justice in the past 100 days."

(esp)

This Is the Subprime Mortgage Smackdown?

Guest Blogger Professor Peter Henning (Wayne State Law School & Blog Editor Emeritus):

Two former Bear Stearns hedge fund managers were paraded in handcuffs through Brooklyn while the FBI touted charges against 406 defendants for mortgage fraud. This must mean that those to blame for all the problems caused by declining home prices and mortgage foreclosures are finally being called to account – right? Unfortunately, it is only a crime to lie to the government, so don’t believe everything you hear about efforts to find a few scapegoats for the current economic problems in the housing market.

On June 19, Ralph Cioffi and Matthew Tannin were arrested at their homes and brought to Brooklyn to take part in an unseemly perp walk before a media throng hungry to give a picture for all that is wrong with the economy. At the same time, an FBI press release linked those charges to the inartfully named Operation Malicious Mortgage that has resulted in 144 mortgage fraud cases since March 1. These two events have absolutely nothing to do with one another, other than the fact that the government chose to announce them together, but it provides an opportunity for prosecutors to tout the "cop on the beat."

The indictment of Cioffi and Tannin at best is only coincidentally related problems in the mortgage market. The two hedge funds they manages into oblivion were heavily invested in securities tied to the subprime mortgage market, but that just happened to be the vehicle they chose – the could just as easily have invested in junk bonds or natural gas futures (think Amaranth Advisors and its $6 billion meltdown). The charges against them allege conspiracy, securities and wire fraud for what they told their customers, not what was done with the underlying securities.

The charges under Rule 10b-5 and the wire fraud statute (18 U.S.C. § 1343) require the government to prove more than just dissembling. Fraud is a type of larceny, so the defendants have to make misstatements or omit to disclose information to gain something from their victims. A false hope that the hedge funds would pull through, no matter how misguided, can be a defense to a fraud charge. Showing that Cioffi and Tannin were of two minds, or conflicted about where the market was headed, does not mean that their statements to investors were part of a fraudulent scheme.

As a Wall Street fraud case, the charges seem a bit thin to me. Hedge fund managers are essentially salesmen, touting their wares in much the same way that the man on the used car lot has a great deal for you. Tannin is accused of telling investors that he was investing more in the hedge funds when in fact he did not. When the car salesman tells you his daughter drives the same car and he wouldn’t put her in a shoddy vehicle, do you actually believe him? Perhaps credulity among the so-called sophisticated investors in hedge funds is higher than the caveat emptor every used car buyer must possess.

The indictment brings us interesting tidbits, like the vodka toast before Cioffi warned Tannin and others not to discuss the funds’ difficulties. Speaking of toast, Tannin wrote in an e-mail that "the subprime market is toast" yet only three days later said nothing of the sort to investors on a conference call. The fact that Wall Street salesmen talked out of both sides of their mouths is nothing new. Didn’t former Bear Stearns CEO Alan Schwartz go on CNBC a few days before the firm’s collapse and say he was not aware of any imminent threat to its liquidity?(see here) Whether Cioffi and Tannin are guilty of fraud remains to be seen.

Cioffi’s withdrawal of $2 million from one of the funds gives an economic motive that is otherwise missing from the alleged scheme. However, withdrawing your own money is not the type of theft one expects to see in a fraud case. The case against Cioffi and Tannin essentially charges them with crossing the line between aggressive salesmanship and fraud, but where is that line? Hedge fund managers whose assets are struggling had better be careful about what the do – and don’t – say lest they too be accused of defrauding investors who lose money. And, of course, be careful what you write in an e-mail.

Operation Malicious Mortgage, on the other hand, involves the classic type of fraud we’re used to seeing. [Personal aside: Who thinks up these stupid names? I’ve never heard of a mortgage being malicious, even if it does come back to bite you one day.] But the victims are not, for the most part, those who are suffering from foreclosures or underwater mortgages with ballooning principal balances. Instead, they are the banks, commercial lenders, and other creditors who got taken in scams involving false documentation and inflated appraisals for the most part.

There is an old adage that every generation thinks they discovered sex, and the same seems to be the case in the current mortgage fraud crackdown – this not a new type of crime. Does anyone remember the Savings & Loan Crisis, when the collapse of the real estate market brought to the surface any number of lending abuses? The fact that scam artists took advantage of the housing price bubble should not come as a startling revelation, and charging 406 defendants in a three-month period is a nice start but nothing to trumpet from the rooftops.

Mortgage-related fraud is a serious problem, in much the same way that insurance fraud and shoplifting causes all of us to pay higher prices. The FBI’s assertion in a press release that Operation Malicious Mortgage will help "to combat the threat mortgage fraud poses to the U.S. housing industry and worldwide credit markets" is more than a bit overblown. Even the billion dollar loss caused by the alleged mortgage frauds is surely just a drop in the bucket in the international credit markets.

Cioffi and Tannin risk becoming the poster children for a perceived crackdown on abuses in the mortgage markets, but the charges against them have virtually nothing to do with increased foreclosures and declining economic prospects for a number of Americans. Operation Malicious Mortgage shows the government’s concern with a type of fraud that raises the cost of home mortgages, but it will not make the lives of people who are losing their homes any better. But maybe we can all sleep a bit better at night knowing the cop is on the beat, ready to arrest corporate executives and parade them in handcuffs. Maybe.

(ph)

Mortgage Fraud/Subprime Lending - Will Mukasey Appoint A Task Force

Will AG Mukasey appoint a task force to investigate and prosecute cases related to subprime and mortgage fraud? For right now it looks like Attorney General Mukasey has not made up his mind. (see Bloomberg here)

On one hand you see the practices used by foreclosure mills (NYTimes here) and you also see some mortgage fraud cases being brought throughout the United States. (see, e.g., here, here, and here).  And the Wall Street Jrl has an article today titled, HUD Secretary Expected to Resign. One has to wonder if this change might influence DOJ to create a task force.

Shouldn't there be a Mortgage Fraud Task Force?  After all, when the corporate scandals hit the news, we saw the Corporate Fraud Task Force, and when there was fraud after Hurricane Katrina there was the formation of the Katrina Fraud Task Force, and just this week Mukasey announced the formation of a "Safe Streets Task Force to combat gang violence in communities north of Los Angeles." (see here)  Individual jurisdictions are reacting to the mortgage crisis.(See Cleveland PlainDealer describing mortgage fraud task force in Cleveland here; Miami-Dade Mortgage Fraud Task Force; US Attorneys Office in the Western District of Pennsylvania here).  And the FBI is already in the loop (See FBI Launches Mortgage Fraud Task Force in the Nation's Capital)

So will we be seeing a DOJ Mortgage Fraud Task Force pretty soon?

(esp)