February 12, 2009
On Wednesday, February 11, the Senate Judiciary Committee held a hearing on a subject of concern to many taxpayers: “The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn”. With trillions of dollars being expended in bailouts while the corporate beneficiaries of this government largesse allow their executives to line their pockets with those very dollars, the outrage felt by the working (or unemployed) public has found its way to Capitol Hill. What we learned from this hearing is that there is plenty of fraud taking place while the FBI and other branches of law enforcement are understaffed to cope with the immense rise in reported fraud cases.
The Committee heard testimony from John Pistole, Deputy Director of the FBI. Pistole explained how the current economic crisis resulted in numerous areas of FBI scrutiny, only one of which is the overwhelming subject of mortgage fraud:
For example, current market conditions have helped reveal numerous mortgage fraud, Ponzi schemes and investment frauds, such as the Bernard Madoff alleged scam. These schemes highlight the need for law enforcement and regulatory agencies to be ever vigilant of White Collar Crime both in boom and bust years.
The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations. The number of open FBI mortgage fraud investigations has risen from 881 in fiscal year 2006 to more than 1,600 in fiscal year 2008. In addition, 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. These corporate and financial institution failure investigations involve financial statement manipulation, accounting fraud and insider trading. The increasing mortgage, corporate fraud, and financial institution failure case inventory is straining the FBI’s limited White Collar Crime resources.
The most disgusting activity covered during this hearing concerned fraud related to the ongoing $700 billion TARP bailout. Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (SIGTARP) provided testimony concerning his plans to establish a mechanism for bringing TARP thieves to justice:
The SIGTARP Hotline is operational and can be accessed through the SIGTARP website at www.SIGTARP.gov by telephone at (877) SIG-2009, as well as through email. Plans are being formulated to develop a “fraud awareness program” with the objective of informing potential whistleblowers of the many ways available to them to provide key information to SIGTARP on fraud, waste and abuse involving TARP operations and funds, and explaining how they will be protected.
Mr. Barofsky’s testimony was largely a plea for passage of the Fraud Enforcement and Recovery Act, sponsored by Senators Patrick Leahy (D., Vt.) and Senator Chuck Grassley (R., Iowa) as well as the SAFE Markets Act, sponsored by Senators Charles Schumer (D., N.Y.) and Richard Shelby (R., Ala.). The latter bill would authorize hiring of the following personnel to investigate and prosecute “fraud relating to the financial markets”: 500 FBI agents, 50 Assistant United States Attorneys and 100 additional Securities and Exchange Commission enforcement staff members. Mr. Barofsky’s explanation of the need for this legislation was an illustration of using “experience as our guide”:
Now, with $700 billion going out the door under TARP, additional hundreds of billions (if not trillions) of credit being provided through the Federal Reserve, and additional hundreds of billions through the proposed stimulus bill, we stand on the precipice of the largest infusion of Government funds over the shortest period of time in our Nation’s history. Unfortunately, history teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally. One need not look further than the recent outlay for Hurricane relief, Iraq reconstruction, or the not-so-distant efforts of the RTC as important lessons.
The Fraud Enforcement and Recovery Act (S 386) addresses TARP fraud, fraud related to economic stimulus funds, mortgage fraud and fraudulent activities in the commodities markets. The measure will:
- Amend the definition of “financial institution” to extend federal fraud laws to mortgage lending business not directly regulated or insured by the Federal government.
- Amend the major fraud statute to protect funds expended under the Troubled Asset Relief Program (TARP) and the economic stimulus package.
- Authorize funding to hire fraud prosecutors and investigators at the Department of Justice, the FBI, and other law enforcement agencies, and authorize funding for U.S. Attorneys’ Offices to help staff FBI mortgage fraud task forces.
- Amend the federal securities statute to cover fraud schemes involving commodities futures and options.
- Amend the criminal money laundering statute to make clear that the proceeds of specified unlawful activity include the gross receipts of the illegal activity, and not just the profits of the activity.
- Improve the False Claims Act to clarify that the Act was intended to extend to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, whether or not the government has physical custody of the money, and whether or not the defendant specifically intended to defraud the government.
Once these new measures are implemented, I would love to see the Feds bust those miscreants whom I (and others) suspect were manipulating the equities markets with TARP money in the month after Thanksgiving. During that time, we saw an almost-daily spate of “late day rallies” when stock prices would be run up during the last fifteen minutes of the trading day, before those numbers could have a chance to settle back down to the level where the market would normally have them. The inflated “closing prices” for the day were then perceived as the market value of the stocks. This process was taking place despite the constant flow of dire news reports, which would normally have sent stock prices tumbling. News services covering the action on Wall Street were using the same three words to start each day’s headline: “Stocks rally despite …” This pattern ceased as legislators and commentators demanded to know what was being done with the first $360 billion of TARP money. Hmmm . . .
At this point, we can only speculate as to who has been pilfering TARP money and what could have been done with a few billion here and a few billion there. Perhaps in the not-too-distant future, we will be watching movies about the sleazoids who stole money intended to save the world economic system from ruin.
The SEC Is Out To Lunch
August 27, 2009
Back on January 5, I wrote a piece entitled: “Clean-Up Time On Wall Street” in which I pondered whether our new President-elect and his administration would really “crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis”. I quoted from a December 15 article by Stephen Labaton of The New York Times, examining the failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitated such breakdowns. Some of the highlights from the Times piece included these points:
I then questioned the wisdom of Barack Obama’s appointment of Mary Schapiro as the new Chair of the Securities and Exchange Commission, quoting from an article by Randall Smith and Kara Scannell of The Wall Street Journal concerning Schapiro’s track record as chair of the Financial Industry Regulatory Authority (FINRA):
I also quoted from a two-part op-ed piece for the January 3 New York Times, written by Michael Lewis, author of Liar’s Poker, and David Einhorn. Here’s what they had to say about the SEC:
Keeping all of this in mind, let’s have a look at the current lawsuit brought by the SEC against Bank of America, pending before Judge Jed S. Rakoff of The United States District Court for the Southern District of New York. The matter was succinctly described by Louise Story of The New York Times:
To make a long story short, Bank of America agreed to settle the case for a mere $33 million, despite its insistence that it properly disclosed to its shareholders, the bonuses it authorized for Merrill Lynch & Co employees. The mis-handling of this case by the SEC was best described by Rolfe Winkler of Reuters. The moral outrage over this entire matter was best expressed by Karl Denninger of The Market Ticker. Denninger’s bottom line was this:
On a similarly disappointing note, there is the not-so-small matter of: “Where did all the TARP money go?” You may have read about Elizabeth Warren and you may have seen her on television, discussing her role as chair of the Congressional Oversight Panel, tasked with scrutinizing the TARP bank bailouts. Neil Barofsky was appointed Special Investigator General of TARP (SIGTARP). Why did all of this become necessary? Let’s take another look back to last January. At that time, a number of Democratic Senators, including: Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington) voted to oppose the immediate distribution of the second $350 billion in TARP funds. The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds. Barack Obama had threatened to veto this resolution if it passed. The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it). At that time, Obama was engaged in a game of “trust me”, assuring those in doubt that the second $350 billion would not be squandered in the same undocumented manner as the first $350 billion. As Jeremy Pelofsky reported for Reuters on January 15:
Although it was a nice-sounding pledge, the new President never lived up to it. Worse yet, we now have to rely on Congress, to insist on getting to the bottom of where all the money went. Although Elizabeth Warren was able to pressure “Turbo” Tim Geithner into providing some measure of disclosure, there are still lots of questions that remain unanswered. I’m sure many people, including Turbo Tim, are uncomfortable with the fact that Neil Barofsky is doing “too good” of a job as SIGTARP. This is probably why Congress has now thrown a “human monkey wrench” into the works, with its addition of former SEC commissioner Paul Atkins to the Congressional Oversight Panel. Expressing his disgust over this development, David Reilly wrote a piece for Bloomberg News, entitled: “Wall Street Fox Beds Down in Taxpayer Henhouse”. He discussed the cynical appointment of Atkins with this explanation:
Regulated by whom?