U.S. Attorney MacBride Speaks at Financial & Securities Fraud Enforcement Conference
ALEXANDRIA, Va. – U.S. Attorney Neil H. MacBride today spoke before the Directors Roundtable Institute Program discussing the future of financial and securities fraud enforcement. He was joined by Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (SIGTARP) at an event held in Washington, D.C.
U.S. Attorney MacBride’s prepared remarks follow:
Today’s focus on financial fraud is very important, and it’s one that has been a significant focus of mine since I became U.S. Attorney.
We are now almost two years in to the worst financial crisis since the Great Depression. Mortgage, securities, and corporate fraud schemes have eroded the public’s confidence in the nation’s financial markets. These criminals have targeted the pocketbooks and retirement accounts of middle class Americans, and in many cases, devastated entire families’ futures.
Given that – and the hundreds of billions of dollars the government has committed to shore up the economy – it should be no surprise that financial and securities fraud is an area of great interest to the regulators and to the Department of Justice.
Today, I’d like to give you a sense of some of the policy and enforcement priorities that the Department of Justice and my Office are focused on and share some of my thoughts on how you can best position your clients when interacting with the Department.
Many times since I’ve become U.S. Attorney, I’ve been asked to highlight the recent trends in financial fraud enforcement. The best answer I have is that the trend is up. By that I mean that it is up in the number of cases, up in the number of defendants, up in the size of the frauds we are prosecuting, and up in the length of sentences defendants are receiving.
What we have found is that these are not simple crimes; they are widespread and are among the most complex we’ve faced, requiring concentration and collaboration.
That is why in November of last year, the President established the Financial Fraud Enforcement Task Force by executive order. This is composed of senior level representatives of more than 20 federal agencies, regulators, and inspectors general, as well as state and local partners.
Never before have such government resources been brought together to provide coordinated fraud enforcement.
The group’s membership is broad because the challenges we face and the scope of the President’s mandate is equally broad. The Task Force – which is chaired by the Attorney General – is directed to address every kind of financial fraud imaginable: bank, mortgage, and lending fraud; securities and commodities fraud; retirement plan fraud; mail and wire fraud; tax crimes; money laundering; False Claims Act violations; unfair competition; discrimination; and more.
The mission of the Task Force is to implement an interagency effort against financial fraud, using the full criminal and civil enforcement resources of the executive branch, as well as state and local partners, to investigate, prosecute, recover, coordinate, and communicate.
The goal is to not just hold those who committed fraud accountable, but to send a strong message of deterrence in an effort to prevent another financial meltdown from happening.
The Task Force has created several working groups, including rescue fraud, Recovery Act fraud, securities fraud, and mortgage fraud.
There are a number of U.S. Attorney’s offices that are members of these subgroups, and my office is part of both the securities fraud working group and the Recovery Act and rescue fraud working groups.
In addition to this broad national effort, earlier this year, my Office announced the creation of the Virginia Financial and Securities Fraud Task Force, which is designed to be an operational arm of the President’s Task Force.
This is an unprecedented partnership between criminal investigators and civil regulators with the shared mission to detect, deter and punish financial fraud in Virginia and beyond.
The task force builds on the great success of experienced agents from the FBI, Postal Inspection Service, and the IRS who worked together to prosecute complex financial fraud cases in the past. But we added civil and state partners, including the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Virginia Attorney General’s Office, and the Virginia State Corporation Commission.
We have worked with these civil and state partners before, but this is the first time we have formally joined together to share information and to coordinate our investigative resources.
Each of these agencies has different tools, expertise, and resources at their disposal that are being leveraged to assist each other – when permissible – in their investigations of large, complex cases.
As I mentioned, this task force is designed to be operational. It is staffed at the line level – line AUSAs, FBI Special Agents, Postal inspectors, IRS agents, and attorneys from SEC Division of Enforcement, for example. It is focused on facilitating the exchange of information on specific investigations.
The independent legal responsibilities of each task member may limit the ability to share information; however, the task force members are committed to conduct parallel investigations and share as much information as they are allowed so every member may benefit from the different tools and resources each agency can provide.
This task force – coupled with an increased effort by the U.S. Attorney’s Office to leverage resources by working with the Criminal Division’s Fraud Section at the Department – means that we will be bringing more cases more quickly, and in particular we anticipate seeing an increase in the number of complex, national impact corporate fraud cases brought in the Eastern District of Virginia.
Now, some of you may be wondering, why Virginia?
We have several venue options in our District that may not be available in others, which give us the ability to bring cases of national impact.
For instance, the SEC’s Electronic Data Gathering, Analysis and Retrieval System, or EDGAR, is based in Alexandria, Va. When a publicly traded company files reports with the SEC, it goes through that system. The Fourth Circuit, in a 2007 case, ruled that venue is appropriate in our District, even though the company in that case was based in Las Vegas, Nevada, because they filed their reports through EDGAR.
We believe that the ruling in this case gives us a similar ability to pursue these national cases as our colleagues in Manhattan, which uses the New York Stock Exchange to get venue on similarly situated cases. We are working closely with Rob Khuzami and the SEC’s Enforcement Division on bringing significant securities fraud cases to EDVA.
Similarly, all filings made through the Federal Reserve’s office in Richmond and filings made through the FDIC in Arlington, Va., for TARP money can also give us venue, following the same legal rationale. These and other options allow us to pursue national cases that other offices may not have the ability to pursue.
Finally, in addition to the TARP program, the Recovery Act has pushed out another stream of hundreds of billions of dollars from dozens of federal agencies to states, localities and the private sector. A large number of Recovery Act funds have and will be disbursed in the Eastern District of Virginia. We are working closely with Earl Devaney and the Recovery Accountability and Transparency Board, as well as dozens of Inspectors General, to identify potential Recovery Act fraud cases in EDVA.
Another aspect of our District is one that many of you know well: The Eastern District of Virginia is known as the Rocket Docket. And it’s called that for a reason – it’s efficient, which is especially important in these complex fraud cases that might take years in other jurisdictions. This dovetails with the goals of the Department to increase our efforts at quicker enforcement.
Add to all of that the fact that, historically, the judges in our District have not been shy about handing out tough white-collar sentences, and you can see why this District has become a major part of the Department’s efforts to pursue financial fraud. In fact, just last week one of our Alexandria judges sentenced Gregory Cronin to 151 months for a securities and mail fraud scheme.
One recent example of what you can expect to see from this Office is the indictment of Lee Farkas, the former chairman of Taylor, Bean & Whitaker Mortgage Corporation.
Mr. Farkas was charged in June with carrying out a massive fraud that resulted in losses of more than $1.9 billion and contributed to the failure of TBW, along with Colonial Bank, one of the 50 largest banks in the United States in 2009.
This indictment alleges a wide-ranging scheme with several different stages, which began as an effort to conceal significant TBW operating losses. I won’t go into those stages today, but I did want to highlight two aspects of this case for you.
First, when we announced this case, the Department said that this arrest and charges should send a strong message to corporations and corporate executives alike that financial fraud will be found, and it will be prosecuted.
We also stressed this: financial fraudsters will be pursued using every investigative tool at our disposal. The case against Mr. Farkas benefited from the use of covert techniques – a tactic that has been seen in other recent white collar criminal prosecutions and one that will continue to be employed wherever feasible and appropriate.
Financial and securities fraud are sophisticated crimes and our approach to investigating these types of crime can be no less sophisticated. That is why we are making efforts to use more covert investigative techniques to combat financial and securities fraud.
In my experience, nothing is as effective in quickly resolving a criminal investigation as when you can play back to a defendant his or her own voice in a conversation they did not know the authorities were listening to.
At the trial of Phillip Offill, a former SEC enforcement attorney recently convicted in a massive pump-and-dump scheme that involved tens of millions in losses, we played tapes of undercover recordings. Similar recordings were instrumental in the plea and conviction of another conspirator in that case, David Stoker, a former securities lawyer.
Undercover consensual recordings were also important in a $132 million fraud scheme we charged in Richmond involving the qualified intermediary industry in which we were able to shut down the defendant’s operations within 12 days and indict within 11 months of receiving a whistle blower complaint. Ultimately, four senior officers were convicted, and the man at the top, Edward Okun, was sentenced to 100 years in prison and ordered to forfeit $40 million.
The second point I’d like to make about the case against Lee Farkas is who announced the charges with us. That was Neil Barofsky, who has become a strong partner with my office in pursuing potential fraud in TARP. There are a number of key agencies located within our District, which, along with other venue options, gives us the ability to prosecute many of the potential rescue and fraud cases.
I’m sure Neil will address this in greater detail, but it’s clear that with the government pushing hundreds of billions of dollars into the economy – often at great pressure to get the money out quickly – regulators have to rely on the representations of those seeking the money. That provides many opportunities for fraud.
Congress passed and president signed Fraud Enforcement Recovery Act, or FERA, which allows the Justice Department to prosecute anyone who fraudulently obtains or uses money expended by the Government during the economic crisis, such as money from TARP. FERA also amended the federal securities fraud section (1348) to cover schemes involving commodities futures and options.
As Neil reported to Congress, as of July 21st of this year, his office had 104 ongoing criminal and civil investigations. This is an area in which we are actively seeing cases, and we currently have at least three ongoing investigations involving potential TARP related fraud.
I’ve spent a lot of time outlining what the Department and my Office are doing to fight financial fraud. Many of you are in-house counsel to or your firm is representing a financial corporation or executive. You may be wondering, after hearing what the Department is focused on, how can I make sure my clients stay as far away from it as possible?
For those of you in that position, let me share a few ideas.
First, if you are able to do so, you can make sure that your clients have robust, effective compliance programs and internal controls. A company’s compliance program continues to be one of the most important factors that the Department considers under the Principles of Federal Prosecution of Business Organizations. Compliance programs must be carried out and be effective – not exist only on paper.
Second, you can partner with us. The Department places a great deal of importance and emphasis on sharing information and partnering with the private sector in its anti-fraud efforts. The Department has been reaching out to private sector anti-fraud professionals to share information about fraud schemes and improvements in data analysis.
If you see new fraud schemes or ways in which we can prevent fraud, that is something we hope you’d share with the Department.
Third, you can advise your clients to make early, voluntary disclosure of misconduct. As you know, it is usually in your client’s best interest to cooperate with the government’s investigation through the disclosure of relevant facts, the production of documents and other evidence, and making witnesses available who have relevant information.
Not only is such voluntary disclosure in your client’s interest, but the failure to do so – the failure to make timely voluntary disclosure following the discovery of a criminal violation – in some circumstances can itself be an independent violation of law.
Fourth, you can guide your client’s decision to take meaningful remedial measures in response to criminal wrongdoing, including the payment of restitution and, if applicable, the disciplining or termination of culpable employees, officers, or directors.
As many of you know, among the charging factors that the Government uses to determine whether to charge corporations, there are only two factors that corporate counsel have any ability to control after the criminal conduct occurs:
1) self-reporting and cooperation, and 2) remedial action. This fact highlights the need to have robust compliance programs.
All of these steps will help your clients in several ways. They will deter criminal conduct from occurring in the first place. They will ensure that if and when misconduct does occur, it is detected early and can be rooted out before too much damage is done.
Your client will receive credit for such actions during the prosecutorial decision-making process. And, finally, such steps will make your clients stronger corporate citizens and will empower them to fulfill their fiduciary obligations to shareholders and their duty to deal honestly with the investing public.
In conclusion, it should be clear that pursuing financial fraud is one of the Justice Department’s top priorities. That has led U.S. Attorney’s Offices throughout the country – and mine in particular – to see how we can step up our efforts and meet the Attorney General’s call to aggressively pursue these types of cases.
We are focused and, in my view, have never been more coordinated. We are determined to act vigilantly, quickly, and aggressively to ensure that boardroom and back office fraudsters alike are brought to justice.
Thank you again for allowing me to join you today. I am looking forward to your questions following Mr. Barofsky’s remarks.