"Financial Crisis Fallout 2010: Emerging Enforcement Trends"
"Financial Crisis Fallout 2010: Emerging Enforcement Trends"
Bob, thank you for that kind introduction. I’m absolutely delighted to be with you all today. To tell you the truth, this was an invitation I literally couldn’t refuse: my mother lives in Queens, and my good friend David Krakoff, who invited me to this event and who, by the way, knows my mother, would have gotten me in plenty of trouble if I had claimed that I couldn’t make the trip to New York. And I just can’t take those kinds of risks. Putting aside David’s tactics, though, I really am so pleased to be here and to participate in this important seminar.
David asked me to come and speak with you today about a subject that is very important to me and to the Justice Department – the reinvigoration of the Department’s criminal enforcement program. There is a lot to say on this topic.
I have been privileged, during my 18 months as Assistant Attorney General of the Criminal Division, to see the Justice Department make significant strides in the area of criminal law enforcement. This morning, I want to speak with you about how we have stepped up our white collar investigations and prosecutions in the last year and a half, and I also want to give you a sense of where we are headed in the months and years ahead.
Since January of last year, the Administration has made clear that the investigation and prosecution of financial crimes is a top priority. Four months after taking office, President Obama signed into law the Fraud Enforcement and Recovery Act (or FERA), which significantly strengthened our criminal fraud statutes. Since it was signed into law, FERA has become an important tool for federal prosecutors. Among other things, FERA expanded the definition of "financial institution" in the federal criminal code to include private mortgage lending businesses, thereby increasing the Justice Department’s authority to prosecute private mortgage institutions under a variety of federal fraud statutes. FERA also amended the securities fraud statute – 18 U.S.C. § 1348 – to include commodities fraud, thus expanding that statute to, for the first time, cover fraud schemes involving commodities futures and options. And, FERA expanded the so-called "major fraud" statute – 18 U.S.C. § 1031 – to protect funds expended under TARP and the economic stimulus package.
In addition to providing our prosecutors with these new tools, FERA also provided needed and targeted funds for the FBI, the Criminal Division, the U.S. Attorneys’ Offices, and the SEC, giving us important resources to step up the pace and reach of our collective enforcement response. All of you have seen the results of our heightened enforcement response since then.
In another significant early measure, in November of last year, the President established by Executive Order the Financial Fraud Enforcement Task Force. Chaired by the Attorney General, the Task Force includes senior-level officials from more than 20 federal departments, agencies, and offices, and it has an express mandate to "investigate and prosecute significant financial crimes and other violations relating to the . . . financial crisis."
One concrete and very direct result of the Justice Department’s participation in the Task Force is that we have forged and fostered strong relationships with our partners in the fight against financial fraud. My good friend Rob Khuzami and I have been working together very closely over the last year and a half, and we are in regular contact with one another to ensure that the Justice Department and SEC are operating in full tandem. My team and I have similarly developed strong working relationships with Rob’s deputy, Lorin Reisner, Steve Obie from the CFTC, and the TARP Special Inspector General Neil Barofsky. Now that Steve has returned to New York, I look forward to doing the same with his newly-announced successor, David Meister. Just as important as these leadership-level relationships, strong bonds have also been cemented at the line working level. As just one example, two CFTC attorneys are currently detailed to the Criminal Division’s Fraud Section, working side by side with our prosecutors.
These partnerships have yielded results. One prominent example is our prosecution of Lee Bentley Farkas, the former chairman of Taylor, Bean & Whitaker Mortgage Corporation. Mr. Farkas, who was indicted in June, has been charged with perpetrating a massive fraud scheme that resulted in losses exceeding $1.9 billion; the collapse of TBW, which was one of the largest private mortgage lending companies in the United States; and the failure of Colonial Bank, which was one of the country’s 50 largest banks. The case is being jointly prosecuted by the Criminal Division’s Fraud Section and the U.S. Attorney’s Office in the Eastern District of Virginia, and the investigation was the direct result of a cooperative partnership among various Task Force members, including the FBI, SIGTARP, the FDIC’s Office of Inspector General, HUD’s Office of Inspector General, and the IRS.
I often cite the Farkas investigation as an example of our close partnerships and aggressive efforts to prosecute financial crime because I know it’s a case that the white collar bar is familiar with. But there are literally dozens of other cases in which we have been equally relentless and have capitalized on our close partnerships with other law enforcement and regulatory agencies. Just last week, we captured Rebecca Parrett, a former high-ranking executive at National Century Financial Enterprises who had fled the United States in 2008 after being convicted at trial for her role in a $2.8 billion fraud scheme. While a fugitive, Ms. Parrett was sentenced in absentia to 25 years in prison and ordered to forfeit $1.7 billion and pay $2.3 billion in restitution. Though more than two years had elapsed since she fled, the Justice Department never gave up. Because of the persistence of prosecutors in the Criminal Division’s Fraud Section and the U.S. Attorney’s Office in the Southern District of Ohio, and the extraordinarily tenacious investigators from the U.S. Marshals Service who tracked her down in Mexico last week, Ms. Parrett will now spend the next decades of her life behind bars.
In another example from last week, a securities lawyer and a former stock broker were sentenced in the Northern District of Oklahoma to prison terms of over 15 years and over 12 years, respectively, for devising an extensive pump-and-dump stock manipulation scheme that yielded them over $40 million in proceeds. This case, too, was prosecuted by the Fraud Section and the local U.S. Attorney’s Office.
The week before last, in Miami, we charged two health care companies and four individuals with concocting a wide-ranging Medicare fraud scheme in which the defendants billed Medicare $200 million. The defendants are charged with, among other things, billing for medically unnecessary or simply non-existent mental health services. This case, which is being prosecuted by the Fraud Section and the U.S. Attorney’s Office in Miami, marked the first time that the joint Justice Department/Health and Human Services Medicare Fraud Strike Force had indicted a corporate entity for Medicare fraud, and the charges represent the largest fraudulent billing scheme ever prosecuted by the Strike Force. We never take lightly the decision to indict a corporation, but when the facts and the law convince us that doing so is appropriate, we will not shy away from it.
On the same day that we charged this Medicare fraud scheme, Eric Kurz, a Texas businessman, pleaded guilty, in a prosecution by the Fraud Section and the U.S. Attorney’s Office in the Eastern District of Virginia, for his role in a $100 million fraud scheme perpetrated by employees of A&O, a group of businesses that acquired and marketed life settlements to investors. In pleading guilty, Mr. Kurz admitted that he and his co-conspirators bilked investors in 38 states and in Canada out of their savings.
The fraud schemes alleged or proven in all these cases are enormous in scope. But even more impressive is that the prosecutions I just mentioned are all from just the last two weeks.
There are some who, despite this track record, have expressed disappointment that we have not yet criminally prosecuted the leading financial institutions or their principals for conduct that may have helped lead to the financial crisis. Though I can certainly understand the impulse and desire to hold someone accountable, I also want to stress an equally important principle – that we can, and will, only bring charges when the facts and the law convince us that we can prove a crime beyond a reasonable doubt. We simply can’t, and won’t, indict people based on outrage or suspicion alone.
As the few examples I’ve given you make clear, however, it would be a serious mistake to conclude that just because certain marquee firms have not yet been indicted, we are not aggressively pursuing financial crime. Financial crime takes many forms and reaches all over the country – and as you can see from our results, we are vigorously investigating and prosecuting these cases. Moreover, make no mistake: If we find credible evidence of criminal conduct – by Wall Street financiers or the lawyers and accountants who advise them – we will not hesitate to charge it.
Now, as I’m sure you know, financial criminals can be extraordinarily innovative, and they are often expert at covering their tracks. So we are always looking for creative ways to gather the evidence we need to bring financial criminals to justice. To that end, we have begun increasingly to rely, in white collar cases, on undercover investigative techniques that have perhaps been more commonly associated with the investigation of organized and violent crime. As part of this effort, we have significantly strengthened the Criminal Division’s Office of Enforcement Operations (known as OEO), which is the office in the Justice Department that reviews and approves all applications for federal wiretaps from across the country. We have a dynamic new OEO Director, Paul O’Brien, and we’ve substantially increased the number of attorneys at OEO who review these wiretap applications, adding to their ranks experienced prosecutors and recent graduates who have completed federal clerkships. As a result, the number of wiretaps we authorize – in all types of cases – has gone up.
Let me give you just two examples of white collar cases in which we have used undercover techniques, both of which also highlight areas in which we have stepped up our white collar enforcement efforts more generally.
The first example is the case of Trevor Cook, which was prosecuted by the U.S. Attorney’s Office in Minneapolis. Mr. Cook is just one of dozens of individuals whom we’ve prosecuted in recent months for participating in investment fraud schemes. Over the course of several years, Mr. Cook schemed to defraud at least 1,000 people out of approximately $190 million by pretending to sell them investments in a foreign currency trading program. In reality, he was pocketing the money or using it to pay off other investors. As was recently reported in the New York Times, we gathered evidence against Mr. Cook by using an undercover informant to record his transactions and conversations. He pleaded guilty earlier this year and was recently sentenced to 25 years in prison.
Trevor Cook is one of literally hundreds of financial criminals who have preyed upon vulnerable, individual investors and bilked them out of their savings using investment fraud schemes. And as with Mr. Cook, we have been prosecuting these people aggressively, all over the country – from New Jersey and Connecticut to Texas and California, and everywhere in between.
The second example comes from our enhanced efforts in the area of FCPA enforcement. Earlier this year, as I’m sure many of you know, we indicted 22 defendants in the military and law enforcement products industry for their participation in widespread schemes to bribe foreign government officials. These indictments resulted from the Department’s most extensive use ever of undercover law enforcement techniques in an FCPA investigation, and they represent the single largest prosecution of individuals in the history of our FCPA enforcement efforts. In September, one of the defendants in the case, Richard Bistrong, pleaded guilty.
The raw numbers reflect what our 22-defendant prosecution and others have already shown: the Department’s enforcement of the FCPA is aggressive, and it’s on the rise. To give you some perspective: in 2004, in FCPA cases, we collected from companies around $11 million in criminal fines and penalties. In 2005, we collected around $16½ million. This year alone, we’ve collected well over $1 billion already. In 2004, we charged two individuals under the FCPA. In 2005, we charged five individuals. By contrast, last year and this year combined, we’ve charged over 50 individuals. Moreover, last year we tried three FCPA cases successfully to verdict – in California, New York, and Virginia – and approximately 35 individuals currently await trial on FCPA charges in the United States. In all, our message to companies and individuals who would bribe foreign officials is clear: foreign bribery is not an acceptable way of doing business, and we won’t tolerate it.
The revitalization of our financial fraud enforcement efforts hasn’t happened on its own, of course. Over the last 18 months, we’ve devoted significant additional resources to the Criminal Division’s Fraud Section. We’ve recruited talent not only from white shoe law firms, but also from a deep pool of prosecutors around the country who bring with them extensive experience in prosecuting everyone from violent mobsters to dangerous terrorists. We are now bringing that extraordinary talent and experience to bear on prosecuting financial fraudsters.
Last January, Denis McInerney, who you will be hearing from later this morning, took over as Fraud Section Chief. As many of you know, Denis was a deputy chief of the criminal division in the Southern District of New York, served as an associate independent counsel under Bob Fiske, and was for many years a partner at Davis Polk. Shortly before Denis came on board, Greg Andres, who was the Chief of the Criminal Division in the Eastern District of New York and has led the charge against organized crime figures in Brooklyn, began as the Deputy Assistant Attorney General overseeing the Fraud Section. In fact, as you may have seen on the front page of the New York Times last week, Greg just finished prosecuting Sal Vitale, a notorious Brooklyn mobster. In addition, out of the more than 1,000 applications to the Fraud Section in the last year and a half, we’ve hired over 30 new prosecutors already, including experienced prosecutors from the U.S. Attorneys’ Offices in Manhattan, Brooklyn, Philadelphia, New Jersey, D.C., Texas, and the Eastern District of Virginia, as well as lawyers who have excelled in private practice – at top law firms like Latham & Watkins, Steptoe & Johnson, Davis Polk, and others.
In another good example of how we are bringing non-traditional methods of investigation to bear on white collar crime, we recently hired the former terrorism chief in the U.S. Attorney’s Office in Brooklyn, Jeff Knox, as a prosecutor in our FCPA group. If you are conducting business abroad, I can tell you that you don’t want to be in his sights. And Kim Berger, who was the Co-Chief of Major Crimes in the U.S. Attorney’s Office in Manhattan, Deputy Commissioner of New York City’s Department of Investigation and, most recently, Senior Vice President and Chief Compliance Officer for the NBA, also just joined the Fraud Section. Kim, along with Derek Cohen, an experienced AUSA from Philadelphia, are now serving as co-deputy chiefs in our newly constituted Financial Institutions and Public Sector Fraud Unit; that unit will handle, among other things, our mortgage fraud, bank fraud, and government procurement fraud cases. In addition, just this week, Chuck LaBella joined the Fraud Section as a deputy chief who will assist the Section in supervising cases being investigated and prosecuted on the West Coast. Chuck is very well known, certainly to everyone in the Department, where he worked as a prosecutor for over 16 years. In addition to having been the United States Attorney in San Diego, Chuck was also Chief of the Criminal Division in the San Diego U.S. Attorney’s Office, the Supervising Attorney for the Department of Justice Campaign Financing Task Force, and the Chief of several Units in the Southern District of New York, including the Public Corruption Unit, the Narcotics Unit, and the Organized Crime Unit.
The Fraud Section is, of course, central in our fight against financial fraud and foreign corruption. But outside the Fraud Section, we are taking equally aggressive steps to combat financial crime. In particular, in recent months, we have significantly ramped up our Asset Forfeiture and Money Laundering Section (also known as AFMLS). In July of this year, we hired a new Chief of the Section, Jen Shasky. Jen is a career prosecutor with a deep background in international organized crime who joined the Department through the Honors Program. We have also brought on Jai Ramaswamy, another Southern District alum and a prosecutor in the Criminal Division’s Computer Crimes Section, to serve as Jen’s principal deputy. In the months ahead, AFMLS will devote substantial additional resources to enforcing bank compliance and anti-money laundering laws.
As I told a gathering of over 500 bank compliance officers and lawyers in Washington last month, we recently established a new unit within AFMLS that will focus on prosecuting financial criminals. The "Money Laundering and Bank Integrity Unit" will target financial institutions and their managers who violate the Bank Secrecy Act and other laws; professional money launderers and gatekeepers who provide their services to criminal organizations, such as the Mexican drug cartels; and individuals using the newest and most sophisticated money laundering techniques, such as virtual currency. Money laundering is a serious crime, and one that facilitates drug trafficking, organized crime, sophisticated frauds, and many other types of illicit activity. When banks and individuals allow dirty money to be laundered through our financial system, or launder it themselves, we will prosecute them vigorously.
Before I conclude, I want to turn briefly to another area where we have focused our energies: public corruption. Public corruption is white collar crime of a different sort, and is a critical part of our revitalized enforcement efforts.
The lawyers in the Criminal Division’s Public Integrity Section are a remarkably dedicated group of prosecutors, and I am extremely proud of their work. Now, it’s no secret that early last year, the Section hit a very public bump in the road. But over the last 18 months, we have made the Section, and the entire Division, stronger. In May, after a nationwide search, we hired an exceptionally talented new Chief of the Public Integrity Section, Jack Smith. Jack was a prodigious prosecutor in the Manhattan DA’s Office and the U.S. Attorney’s Office in Brooklyn for nearly 15 years, and he rose to serve as Chief of Criminal Litigation in the Eastern District of New York. Additionally, just prior to joining as Chief of the Public Integrity Section, Jack was in charge of all investigations of alleged war crimes at the International Criminal Court in The Hague. Jack brings with him enormous experience and energy.
In addition to hiring a new Chief, we also promoted a brilliant career prosecutor, Ray Hulser, to be Jack’s principal deputy. And out of more than 400 applications, we have hired around nine new corruption prosecutors so far, and are in the process of hiring more. And just recently, I announced the selection of Mary Pat Brown as the Deputy Assistant Attorney General who will oversee the Public Integrity Section, as well as the Office of Enforcement Operations that I mentioned earlier. Mary Pat was a star prosecutor in the U.S. Attorney’s Office in Washington, D.C. for over 20 years, where she ultimately became Chief of the Criminal Division. As Chief, she oversaw five critical Sections: National Security, Fraud and Public Corruption, Organized Crime and Narcotics Trafficking, Asset Forfeiture, and Major Crimes. With her decades of experience as a prosecutor and supervisor, Mary Pat is extraordinarily well qualified for her new position.
Throughout this period of transition, the Public Integrity Section has continued to do what it does best: hold accountable those who corrupt our democratic institutions. We’ve done so vigorously in recent months, using the same kinds of aggressive investigation techniques that we’ve been using to prosecute financial fraud and other crimes. Last month, for example, in an investigation that involved the use of undercover methods, we indicted 11 defendants, including four Alabama state legislators and several businessmen and lobbyists for their roles in an alleged conspiracy to buy and sell votes on a piece of legislation. And, earlier this fall, Paul Magliocchetti, the founder and president of PMA Group Inc., a lobbying firm, pleaded guilty to making hundreds of thousands of dollars in illegal campaign contributions through conduit contributors.
Public corruption cases are among the most difficult that we undertake. The stakes are always high, and the prosecutions inevitably attract great scrutiny. But when we find corruption – at any level of government – it’s our responsibility to go after it. The American people expect that of us, and we are committed to doing it.
I have had no greater honor in my professional life than to serve as Assistant Attorney General and to lead the remarkable lawyers in the Criminal Division. I wake up every day feeling privileged to do this job. And I think we are so incredibly lucky to have been able to hire such talented new people into the Division. Whether they are the top law school graduates who are hired into our Honors Program or former United States Attorneys, every single person that comes to the Division is motivated by a similar desire to serve, and it is a privilege for me to work with them all.
I want to thank you very much for having me here. You have a terrific seminar ahead of you, with many great panelists. I know we have some questions first from Bob, and then I’ll be delighted to take questions from the audience.