Fraud Investigations

This page will explore Fraud Investigations.

An excellent blog resource is FORENSIC ACCOUNTING TODAY


The SEC has the latest information was to what is going on during this financial crisis. This site provides links to Edgar filings.

SEC Protecting Investors, Markets During Credit Crisis

During the current turmoil in the credit markets, the SEC has worked closely with other regulators in the U.S. and around the world to protect investors and the markets.

Other News:

SEC Chairman Mary L. Schapiro

SEC Chairman Mary Schapiro addressed PLI’s “SEC Speaks in 2009” conference and outlined a framework for restoring investor confidence.


Let’s start with our own National Fraud-Our corporate leaders and banks.


FBI Agents Could be Reassigned from National Security Due to Booming Caseload

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The FBI has opened investigations into more than 500 cases of alleged corporate fraud, including 38 that involve major firms and are “directly related” to the national economic crisis, FBI Deputy Director John Pistole told Congress today.

FBI - and Housing Crisis
FBI Says 38 Firms Directly Involved in Current Financial Crisis Could Expand to Over 100 firms Currently Over 500 Ongoing Corporate Fraud Investigations; TARP IG Warns of Fraud

(ABC News Photo Illustration)

The surge in white-collar investigations is putting such a strain on the FBI that Pistole said the bureau is considering reassigning agents from national security, which has been the bureau’s priority since the 9/11 attacks.

“The FBI has more than 530 open corporate fraud investigations, including 38 corporate fraud and financial institution matters directly related to the current financial crisis,” Pistole told the Senate Judiciary Committee today.

The 38 companies, he said, “are significantly large companies, businesses everyone knows about but I cannot comment publicly.”

Pistole’s comments suggested widespread criminal activity among many of the nation’s corporate giants.

“These are significantly large, similar to Enron,” Pistole said. The number of firms under scrutiny could eventually top 100, as the investigations widen, he said.

Only one major criminal case has come from the FBI’s investigation of the major subprime lending outfits, when two Bear Stearns hedge fund managers were indicted in May 2008 on fraud, conspiracy and insider trading charges. They were the first executives to be charged as a result of the FBI probe.

The two hedge funds in question were heavily invested in subprime lending and debt obligations connected to risky subprime mortgages that lost $1.8 billion in 2007.

“These corporate- and financial institution-failure investigations involve financial statement manipulation, accounting fraud and insider trading,” Pistole said.

Large firms such as AIG, Countrywide Financial, Washington Mutual, Bear Stearns, Lehman Brothers, UBS AG, New Century Financial, Freddie Mac and Fannie Mae have been targets of FBI and Justice Department investigations, according to federal law enforcement officials and Security and Exchange Commission filings reviewed by ABC News.

The amount of corporate fraud “dwarfs” the Savings and Loan scandal of the 1980s, Pistole told the committee.

“I don’t think we’ve paid enough attention to the mortgage and financial fraud that have so dramatically contributed to the economic downturn,” Senate Judiciary Chairman Patrick Leahy, D-Vt., said. “It is now becoming clear that unscrupulous mortgage brokers and Wall Street financiers were among the principal contributors to this economic collapse.”

“I want to see people prosecuted…Frankly, I want to see people go to jail,” Leahy said of suspects in mortgage fraud schemes.

To read the complete story, click here.


2 responses to “Fraud Investigations

  1. Senators Propose to Expand Financial Fraud Laws
    by Chisun Lee, ProPublica – February 11, 2009 11:36 am EST

    Their little-noticed announcement [2] last week of a multipronged anti-fraud bill [3] made some sobering claims about how investigators and prosecutors have been hampered by inadequate resources and laws, particularly in the area of mortgage fraud. But some who have followed the feds’ response to the financial meltdown warned that increasing criminal penalties will not solve the day-to-day dangers facing consumers and that expansion of federal criminal laws carries its own risks.

    The FBI, the senators said, has 250 agents handling fraud caseloads that have doubled since 2005 as well as a ten-fold increase in mortgage-fraud allegations referred by the Treasury Department — from 5,400 in 2002 to 60,000 in 2008. At present the FBI “cannot even begin to investigate” all the possible frauds it hears about, said [4] Sen. Leahy in a press release.

    Statutes criminalizing certain types of lending fraud — including bribery, false statements and conspiracies — currently don’t apply to private mortgage companies that are not affiliated with federally regulated banks, the senators said. “These companies,” such as the scandal-plagued [5] Countrywide Financial before its July 2008 acquisition by Bank of America, and GMAC Mortgage, “were responsible for nearly half the residential mortgage market before the economic collapse, yet they remain largely unregulated and outside the scope of traditional federal fraud statutes,” Leahy said.

    The proposed Fraud Enforcement and Recovery Act [3] would provide some $500 million over the next two years for expanding anti-fraud personnel, mainly at the Justice Department. It would expand federal criminal statutes dealing with lending and securities fraud to cover more mortgage brokers and companies and mortgage-backed securities. Another provision would make a crime of frauds against the government worth over $1 million of “federal assistance” funds from the bank bailout [6] and pending stimulus package [7].

    Asked for examples of frauds that could not be prosecuted by the feds without the proposed changes, Leahy’s Judiciary Committee spokeperson, Erica Chabot, said she couldn’t offer any specifics. Justice Department spokesperson Ian McCaleb said he couldn’t comment on whether legal limitations have hamstrung fraud prosecutions, nor would he provide numbers on existing cases.

    An October analysis by the Transactional Records Access Clearinghouse at Syracuse University counted 151 federal criminal mortgage fraud prosecutions in the first ten months of fiscal year 2008. Comparing the number to drug possession and wildlife protection cases over the same period, the TRAC report found the “relatively small number [8]” of mortgage fraud cases to be “somewhat surprising.”

    Chabot said generally that the proposed measures would “help facilitate prosecution,” for instance of “some of those brokers that give fraudulent information to lenders.”

    In January, the Mortgage Asset Research Institute, a mortgage-industry consulting firm, said fraud by loan officers and brokers — usually misrepresenting borrowers’ income or employment — had risen [9] 45 percent from 2007 to 2008.

    Such conduct is already well covered by federal and state statutes, said Jack King, communications director for the National Association of Criminal Defense Lawyers. If the Leahy-Grassley proposal means to impose federal criminal penalties for strictly local conduct, he said, that is the federal government overstepping its constitutional bounds.

    He warned against more efforts to “throw people in prison,” where the aim is to restore money to victims or prevent public harms to begin with. “There is a difference between bad business practices and criminal conduct,” he said. The lawyers’ group is preparing a letter to Leahy and Grassley opposing their proposed expansion of the federal criminal code.

    Ellen Podgor, a white-collar crime specialist at Stetson University College of Law, said existing laws enabled more than adequate punishments. She has blogged about the 30-year federal sentence, which she calls “appalling,” [10] for one first-time mortgage-fraud offender.

    She said increasing criminal penalties is “using a hammer to hit the wrong nail. Front-end deterrence is needed, but this is back-end deterrence.”

    Kirsten Keefe, a consumer-law expert with Empire Justice Center in upstate New York and advisor to the Federal Reserve Board, said that “most of the practices the subprime mortgages world has engaged in are not necessarily illegal.” She said that reforms to guarantee fair lending practices from the outset — such as prohibiting broker incentives to sell unnecessarily high-interest loans and limiting risky adjustable-rate mortgages — would most effectively protect the public.

    No one disagreed that greater investigative resources would be a plus. William Carter, a spokesperson for the FBI, agreed with Leahy’s estimate that some 250 agents currently work on mortgage fraud. He said that, in addition, the agency participates with state and local law enforcement in 42 mortgage fraud task forces around the country. He said some fraud allegations go unaddressed, with U.S. attorney thresholds for big-money cases driving priorities.

    He didn’t dispute reports, for instance by the Seattle Post-Intelligencer, that FBI resources had been diverted to other causes [11] during the time that mortgage fraud became widespread. “We had a little incident back in 2001, which caused a big change in allocation of resources. We needed financial investigation resources for counterterrorism operations.”

    He said policy priorities seemed to be shifting, and that there was a new focus on preventing fraudulent use of bailout and stimulus funds. “Best estimates are, close to 20 percent of any stimulus package may involve fraudulent activity,” he said.

  2. From the New York Times

    Report Sketches Crime Costing Billions: Theft From Charities

    Published: March 29, 2008

    The volunteer treasurer of the Madison County Humane Society in Indiana was charged this month with using $65,000 of the charity’s money to buy jewelry and makeup. In San Francisco, the chief financial officer of the Music Concourse Community Partnership was fired after he was accused of taking $3.6 million of the organization’s money to play the stock market.
    Skip to next paragraph

    Nonprofit leaders tend to shrug off such cases as evidence of “just a few bad apples.” But a new report, trying to identify the scope of such thefts for the first time, suggests otherwise.

    The report, by four professors who specialize in nonprofit accounting, found that the typical theft from a charity was committed by a female employee with no criminal record who earned less than $50,000 a year and had worked for the nonprofit at least three years. The amount she stole was less than $40,000.

    The most costly cases, the study found, involved male executives earning $100,000 to $149,000 a year. The thieves in such cases had typically been with the organization the longest.

    But what is getting the attention of nonprofit leaders is the report’s estimate of the overall cost, which the authors put at $40 billion for 2006, or some 13 percent of the roughly $300 billion given to charity that year.

    “It’s a surprisingly large number,” said Paul C. Light, a professor of public service at New York University who does surveys of public confidence in charities. “We really need to take a good hard look at what’s going on in these organizations.”

    The new report is based on data from the Association of Certified Fraud Examiners, which, the report said, found that “all organizations,” whether government, for-profit or nonprofit, “lose on average 6 percent of their revenue to fraud every year.” Applying that percentage to nonprofits’ total 2006 revenue of $665 billion — donations, government payments and other income — the authors came up with the $40 billion estimate.

    “Determining how much theft and embezzlement takes place has been the holy grail of the sector,” said Jack B. Siegel, a tax lawyer who specializes in nonprofit matters.

    If the $40 billion figure is accurate, then the money lost to fraud equaled the combined giving by corporations and foundations in 2006, said Diana Aviv, president and chief executive of the Independent Sector, which represents nonprofit groups.

    But Ms. Aviv expressed skepticism about the report, noting that it relied on the fraud examiners association’s estimate of overall fraud across all sectors, including government and corporate.

    “They’re lumping all those sectors together, and it could be that the for-profit sector experiences a higher level of fraud, while the nonprofit sector and government experience lower levels,” Ms. Aviv said.

    Nonetheless, she said, “even if the figure is $20 billion, that’s still a huge amount and needs to be addressed.”

    The report, published in the December 2007 issue of Nonprofit and Voluntary Sector Quarterly, found that losses to fraud among the 58 cases reported to the fraud examiners association in a random survey of nonprofits ranged from $200 to $17 million, with the median fraud costing $100,000.

    “Most of these things are not caught by routine audits,” said Gary Snyder, who tracks nonprofit fraud in his newsletter, Nonprofit Imperative. “They’re usually done by someone in the financial area — the treasurer, the bookkeeper, the signer of checks — who knows how to avoid getting caught.”

    Almost 95 percent of the reported frauds entailed loss of cash, and a majority of those involved false or inflated invoices, billing for expenses that were never incurred and check tampering.

    “I gave a talk to a group of nonprofit executives a few weeks ago, and every single one of them had a fraud story to tell,” said one of the report’s authors, Janet S. Greenlee, an associate professor of accounting at the University of Dayton. “This has been going on for years, but there’s a feeling that it shouldn’t be discussed,” because of the effect it might have on donations.

    Professor Greenlee — joined in the report by Mary Fischer of the University of Texas at Tyler, Teresa P. Gordon of the University of Idaho and Elizabeth K. Keating of Boston College — said the failure of organizations to punish those who steal from them was perhaps one of the biggest reasons for fraud in the sector. She said she had worked at organizations that refused to dismiss employees caught stealing.

    Professor Light, at N.Y.U., said some 70 percent of respondents to a new survey among the general public thought charities wasted “a great deal” or “a fair amount.”

    “Donors have already indicated,” he added, “that they don’t have a great deal of faith in the way these groups handle money.”

    But it will now be harder for charities to hide fraud, because beginning with tax forms they must file for 2008, the Internal Revenue Service has added a question requiring them to disclose whether they have experienced theft, embezzlement or other fraud during the year.

    “Not only will that eventually give us a much better idea of how widespread fraud is with these groups, it also gives them an incentive to have better financial controls,” said Mr. Siegel, the tax lawyer, who is credited with the idea of adding the question to the tax forms.

    Mr. Siegel used to track cases of fraud among charities but “got bored,” he said, because there were so many of them.

    Newspapers routinely report incidents of nonprofit fraud in their communities, but the amounts tend to be small and thus go unnoticed at a national level.

    Mr. Snyder, the tracker of nonprofit fraud in his newsletter, said that through use of databases and other searches, he had stumbled across more than $700 million in fraud already this year among government agencies and nonprofits, including church-related organizations.

    Asked about his favorite example of nonprofit fraud, Mr. Snyder was initially stumped.

    “There are so many,” he said.

    He eventually settled on the embezzlement of some $25 million from Goodwill Industries of Santa Clara County in California.

    It started in the 1970s and continued until one of the participants blew the whistle in 1998. Merchandise donated to the organization was sold outside the Goodwill shops by the perpetrators, who kept the proceeds. One of the embezzlers committed suicide before arrest, and six others, all related, pleaded guilty, were fined and, in some cases, were sent to prison.

    The thieves had given more than $800,000 to the organization’s president and chief executive, who parked the money in accounts in Switzerland, in Austria and on the Isle of Man and then escaped to Guatemala as investigators closed in, according to the authorities. Guatemala sent him home in 2003, but he ultimately pleaded guilty to only one charge — of tax evasion unrelated to the scandal at Santa Clara Goodwill — and walked out of the courtroom.

    “I like that one,” Mr. Snyder said, “because it’s an extreme example of something typical: that no one gets in trouble for this.”

    Professor Greenlee said she saw signs that charities were now trying harder to deal with fraud.

    “They’re creating audit committees and adopting the provisions of Sarbanes-Oxley as best practices,” she said of the 2002 law that imposed stricter accountability on corporate governing, though not on charities.

    “Boards are becoming tougher,” she said, “because they know that as fiduciaries, they are at risk of, at the very least, embarrassment.”

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