FBI Going Undercover at Financial Firms

March 20, 2009— -- The FBI has gone undercover to flush out corporate and financial fraud as it takes a "proactive" approach to working the growing number of cases, FBI Deputy Director John Pistole told lawmakers on Capitol Hill today.

"We have more than doubled our resources toward the mortgage fraud, corporate fraud investigations in the last two years trying to address the allegations that have been coming in," Pistole said.

"We have several ongoing undercover operations," he added, "for example, in the corporate fraud and financial fraud area, where we are being proactive about seeking out perpetrators of frauds on a wide-scale basis, not just sitting back waiting for referrals to come in."

In the past month, the number of ongoing corporate fraud cases has increased from 530 to 566 open cases, which also includes 43 major investigations into "corporate fraud and financial institution matters directly related to the current financial crisis," Pistole said.

"These corporate and financial institution failure investigations involve financial statement manipulation, accounting fraud and insider trading," Pistole told the committee.

The hearing before the House Financial Services Committee explored ways to propose legislation, increase resources and better coordinate oversight of financial institutions and root out fraud at all levels.

Rita Glavin, acting attorney general of the Justice Department's Criminal Division, told the committee, "The Department of Justice is committed to redoubling our efforts to uncover abuses involving financial fraud schemes, mortgage lending and securitization frauds, foreclosure rescue scams, government program fraud and bankruptcy schemes.

"Where there is evidence of criminal wrongdoing, including criminal activity that may have contributed to the current economic crisis or any attempt to criminally profit from the crisis, the department will prosecute those wrongdoers," Glavin said.

'A Justifiable Level of Anger'

Officials also discussed ways to possibly oversee hedge funds, exotic investments such as collateral debt obligations (debt pools of mortgage backed securities) and credit default swaps, which provided credit risk insurance on collateral debt obligations and other specialized investment vehicles.

U.S. Securities and Exchange Commissioner Elisse Walter said that the SEC does not have oversight on hedge funds except on anti-fraud authority.

"We specifically have no authority with respect to the credit default swap market," she said, "so there are a number of areas in which there are regulatory gaps that should be filled."

House Financial Services Committee Chairman Barney Frank, D-Mass., suggested such holes tie the hands of officials attempting to police financial misdeeds that contributed to the current economic crisis.

"There is, in America today, a justifiable level of anger at the fact that the great majority of Americans are suffering economically because of the mistakes of a relatively small number of people and of a system that was inadequate to the task," Frank said. "We cannot prosecute people for breaking rules when the rules didn't exist."

Members of the House Financial Services and House Judiciary Committees said they were committed to providing more resources to the Federal Reserve, SEC, FBI and Justice Department.

"Every one of you has some law enforcement activity -- both civil and criminal," Frank said. "We have to satisfy the American public that everything is being done that can be done legitimately to hold accountable the people that caused this problem."