Fraud 'Directly Related' to Financial Crisis Probed

FBI agents could be reassigned from national security due to booming caseload.

ByJason Ryan
February 11, 2009, 12:44 PM

Feb. 11, 2009— -- 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.

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.

More FBI Agents to Probe Financial Fraud?

Officials say the corporate greed continues. Neil Barofsky, the TARP special inspector general, testified that there are several criminal investigations of fraud related to TARP, which handed out $350 billion in the last days of the Bush administration to prevent the nation's economy from collapsing.

He made reference to one TARP probe that shut down "a securities fraud scam in Tennessee that reaped millions in ill-gotten gains by illegally trading on the TARP name."

In addition to major corporate fraud, Pistole testified that the number of mortgage fraud cases investigated by the FBI has risen from 881 in fiscal year 2006 to 1,600 in fiscal year 2008.

"The increasing mortgage, corporate fraud and financial institution failure case inventory is straining the FBI's limited white-collar crime resources," he said.

During the height of the S&L crisis in the 1980s, the FBI had 1,000 agents working on various task forces. With the focus on national security investigation after Sept. 11, the FBI today has only 240 agents working on mortgage-fraud related matters.

"The 240 agents now are working very hard…we are looking to see if the agents on national security could move over without jeopardizing national security," Pistole said.

Barofsky said extra measures will be needed as another $350 billion of TARP money is being released along with funds from an $800 billion economic stimulus package currently being hammered out in Congress.

"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… It is essential that the appropriate resources be dedicated to meet the challenges deterring and prosecuting fraud in connection with these programs," Barofsky said.

The hearing was held to review legislation sponsored by Sens.Leahy and Charles Grassley, R-Iowa, to give more resources to federal investigators. Barofsky currently only has around four FBI and IRS agents to oversee how $700 billion is tracked. The FBI Deputy Director, TARP IG Barofsky and the acting head of the Justice Department Criminal Division will be asking for more resources and authorities to hire fraud prosecutors and investigators at the Department of Justice and the FBI.

"We're going to see demand on federal law enforcement really increase," said Rita Glavin, acting head of the Justice Department's criminal division. Glavin said that the Justice Department is currently reviewing establishing a national mortgage fraud task force.

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