Obama orders financial fraud task force beefed up

McClatchy NewspapersNovember 17, 2009 

WASHINGTON — Citing a wide belief that "Wall Street does not play by the same rules as Main Street," Attorney General Eric Holder announced Tuesday the creation of a sweeping state-federal task force to uncover crimes contributing to the recent financial crisis or threatening to cause one in the future.

President Barack Obama issued an executive order directing Holder to lead the new Financial Fraud Enforcement Task Force, a broader version of a corporate fraud task force launched in the Bush administration.

The new initiative aims for more than two dozen federal agencies to coordinate efforts with state attorneys general and county district attorneys. So far, however, the task force's federal agencies will have little additional manpower.

Flanked at a news conference by Treasury Secretary Timothy Geithner, Secretary Shaun Donovan of the Department of Housing and Urban Development and Robert Khuzami, the Securities and Exchange Commission's enforcement chief, Holder said that the new effort would be distinguished by its breadth. He said that 2,400 FBI investigations into alleged mortgage fraud already were under way and that about 38 ongoing financial inquiries into major corporations would continue.

"Unscrupulous executives, Ponzi scheme operators and common criminals alike have targeted the pocketbooks and retirement accounts of middle-class Americans, and in many cases, devastated entire families' futures," Holder said. "We will not allow these actions to go unpunished."

The announcement, however, came a week after a federal court jury in New York acquitted two former Bear Stearns hedge fund managers of fraud charges stemming from the collapse of their $1.6 billion fund tied to risky home mortgages. That left federal prosecutors with no convictions of Wall Street executives since last year's meltdown, which occurred after big investment banks sold $2 trillion in securities tied to dicey mortgages, fueling a housing bubble that finally burst. The conviction of Ponzi scheme operator Bernie Madoff was for fraud unrelated to the financial crisis.

Holder said that Justice Department officials would analyze the Bear Stearns verdict and try to determine what mistakes were made in the prosecutions.

One reason for the lackluster prosecution figures to date was the shift of some 500 FBI agents from white-collar crime to counter-terrorism after the terrorist attacks of Sept. 11, 2001. The FBI has restored some, but nowhere near all, of those resources. Legislation to provide $100 million for financial fraud investigations went nowhere.

Holder said that 50 additional employees in U.S. attorneys' offices across the country were being assigned to financial fraud, and that the White House was seeking more resources in its 2010 budget.

Geithner said that a big lesson of the financial crisis was that "you need much more effective deterrence through the careful, more active mobilization of (law) enforcement resources" at earlier stages.

"That's very hard to do," he said. "That requires connecting the dots more clearly and making sure you bring all the resources of the federal government together to try to identify these practices before they become pervasive and can do a lot of damage."

Holder said that the task force's focus would be on mortgage fraud; securities frauds including insider trading, Ponzi schemes that paid returns to investors with their own money and misrepresentations to investors; thefts from the government's massive rescue programs; and financial discrimination based on race, religion or other protected classes.

Khuzami, the SEC enforcement chief, said that his office was launching "national, specialized units," including three focusing on derivatives and securitized products, market manipulation, and fraud in hedge and investment funds.

Donovan said that the Federal Housing Administration, whose loan volume has risen during the economic recovery, was seeking an additional $37 billion in fiscal 2010 to combat mortgage fraud and predatory lending. He said that the FHA recently suspended seven lenders and was proposing to ban Financial Mortgage USA permanently for "heartless and shameless" conduct: steering an 88-year-old woman "into an annuity that would not mature until her 104th birthday."

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McClatchy Newspapers 2009

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