A Loan Fraud War That’s Short on Combat
By GRETCHEN MORGENSON
March 15, 2014
In the years since the financial crisis of
2008, the Justice Department has been regularly questioned about a lack
of criminal prosecutions related to the mortgage mess.
Its responses have just about always been the same, whether in public speeches by Eric H. Holder Jr., the attorney general, or in interviews with Lanny A. Breuer, its former criminal division chief. Believe us, they would say, we’ve been working overtime on these matters; if there had been cases to make, we would have made them.
Mr. Breuer was especially vocal with these talking points. But last week, a report from the inspector general of the Justice Department, Michael E. Horowitz, set the record straight. Sure enough, the report told us how hard the nation’s law enforcement officials had been investigating these cases. That is, hardly at all.
The report, called “Audit of the Department of Justice’s Efforts to Address Mortgage Fraud,” covers the period from 2009 to 2011. It vindicates anyone who ever questioned the government’s claim that the reason there weren’t more mortgage-related fraud cases is because the cases just weren’t there to be made.
Most of all, the report is depressing because it indicates that the Justice Department, our nation’s top law enforcement agency, is simply unequipped — or unwilling — to combat complex financial frauds.
Here is one of the report’s conclusions: “We found that, despite public statements by the Financial Fraud Enforcement Task Force and the department about the importance of pursuing financial fraud cases, including mortgage fraud, the F.B.I. Criminal Investigative Division ranked complex financial crimes as the lowest of the six ranked criminal threats within its area of responsibility, and ranked mortgage fraud as the lowest subcategory threat within the complex financial crimes category. Additionally, we found mortgage fraud to be a low priority, or not listed as a priority, for F.B.I. field offices in the locations we visited, including Baltimore, Los Angeles, Miami, and New York.”
Got that? Complex financial crimes were the lowest priority for the criminal investigative division.
Even when investigators decided to pursue cases, they wound up closing many of them after doing little work. In fiscal 2011, for example, F.B.I. field offices closed 747 mortgage fraud cases without prosecution, the report found. Most were shuttered “with minimal or no investigation conducted.”
Here’s another troubling data point: While the Justice Department assigned staffers to become mortgage fraud coordinators, these people were not dedicated solely to mortgage cases. They had to work on other matters as well.
Ellen Canale, a Justice Department spokeswoman, contended that the report actually showed the mortgage fraud task force to have been a success.
“In the time period in question, the number of mortgage fraud indictments nearly doubled, and the number of convictions rose by more than 100 percent,” she said in a statement. “As the report itself notes, even at a time of constrained budget resources, the department has dedicated significant manpower and funding to combating mortgage fraud.”
Ms. Canale declined, however, to comment on the report’s description of how the Justice Department hyped claims of success by its task force in October 2012. In a news conference, Mr. Holder trumpeted the results of “a groundbreaking, yearlong mortgage fraud enforcement effort — the first ever to focus exclusively on crimes targeting homeowners.” (Remember, the administration was desperate to convince people that it was helping troubled borrowers, not just big banks.)
Calling this program “a model success,” Mr. Holder went on to claim that 530 criminal defendants had been charged, including 172 executives, in the previous 12 months. The cases involved more than 73,000 victims and losses of more than $1 billion, he said.
After some news organizations, notably Bloomberg News, asked for more specifics on these matters, the Justice Department determined that the facts relating to a sample of the cases could not be verified. A closer review found significant problems with the numbers.
Those 530 defendants charged? Well, it was more like 107. The losses of more than $1 billion? In actuality, $95 million.
And how about all those executives? The report found that 98 of the 172 executives in the department’s news release were apparently listed in error; they were labeled “Other,” “Unknown” or “N” for “no” on the F.B.I.’s spreadsheet.
It was not until last August that the department finally corrected these wildly overblown figures. In a blinding acknowledgment of the obvious, the inspector general concluded: “We believe the department should have been more forthright at a much earlier date about this flawed information.”
Adam J. Levitin, a professor at the Georgetown University Law School, said the report was troubling not only because of what it revealed about past cases, but also because it suggests that there will be few consequences for those who commit financial fraud in the future.
“The I.G. report confirmed what’s been clear for quite a while — that the D.O.J. has never taken mortgage fraud seriously,” Professor Levitin said. “There is going to be no comeuppance for crimes committed during the financial crisis. This sets a really bad precedent for future crises because we’re seeing that there is going to be no deterrent effect of criminal law.”
After reading the report, I asked Mr. Breuer, now the vice chairman of the law firm Covington & Burling in Washington, to square his public comments about the agency’s aggressive pursuit of cases with the conclusions in the inspector general report. A spokeswoman said he declined to comment.
Then I called Edward E. Kaufman, the former senator from Delaware who had tried unsuccessfully to get the Justice Department to move aggressively on financial-crisis cases. He convened two sets of congressional hearings on financial fraud cases in 2009 and 2010 and repeatedly questioned department officials about their efforts.
Mr. Kaufman, a Democrat who retired from the Senate in 2010, is now a visiting professor at the Duke University School of Law and a weekly columnist for The News Journal, a newspaper in Wilmington, Del. He said he was discouraged but not surprised by the report. “There was a lot of talk at the time, but fraud enforcement was never a priority in the Justice Department,” Mr. Kaufman said. “Not only was this not their top priority, it was their last priority.”
Oddly, the report gives the Justice Department a pass on its failure to prosecute Wall Street banks and other entities for securities fraud related to the mortgage debacle. “The F.B.I. considers this type of misconduct to be a form of securities fraud and not mortgage fraud; therefore, we did not include as part of the scope of this audit,” it said.
This is a strange exclusion, given that the executive order creating the Financial Fraud Enforcement Task Force specifically identifies the prosecution of securities fraud as one of its missions.
Then again, the American people probably don’t need an inspector general’s audit to tell them how ineffectual the Justice Department was when it came to criminal prosecutions of the large, complex financial crimes that led to the crisis.
As Mr. Kaufman said: “The report fits a pattern that is scary for a democracy, that there really are two levels of justice in this country, one for the people with power and money and one for everyone else. And that eats at the heart of what I think makes this country great.”
http://www.nytimes.com/2014/03/16/business/a-loan-fraud-war-thats-short-on-combat.html?smid=tw-share&_r=1
Its responses have just about always been the same, whether in public speeches by Eric H. Holder Jr., the attorney general, or in interviews with Lanny A. Breuer, its former criminal division chief. Believe us, they would say, we’ve been working overtime on these matters; if there had been cases to make, we would have made them.
Mr. Breuer was especially vocal with these talking points. But last week, a report from the inspector general of the Justice Department, Michael E. Horowitz, set the record straight. Sure enough, the report told us how hard the nation’s law enforcement officials had been investigating these cases. That is, hardly at all.
The report, called “Audit of the Department of Justice’s Efforts to Address Mortgage Fraud,” covers the period from 2009 to 2011. It vindicates anyone who ever questioned the government’s claim that the reason there weren’t more mortgage-related fraud cases is because the cases just weren’t there to be made.
Most of all, the report is depressing because it indicates that the Justice Department, our nation’s top law enforcement agency, is simply unequipped — or unwilling — to combat complex financial frauds.
Here is one of the report’s conclusions: “We found that, despite public statements by the Financial Fraud Enforcement Task Force and the department about the importance of pursuing financial fraud cases, including mortgage fraud, the F.B.I. Criminal Investigative Division ranked complex financial crimes as the lowest of the six ranked criminal threats within its area of responsibility, and ranked mortgage fraud as the lowest subcategory threat within the complex financial crimes category. Additionally, we found mortgage fraud to be a low priority, or not listed as a priority, for F.B.I. field offices in the locations we visited, including Baltimore, Los Angeles, Miami, and New York.”
Got that? Complex financial crimes were the lowest priority for the criminal investigative division.
Even when investigators decided to pursue cases, they wound up closing many of them after doing little work. In fiscal 2011, for example, F.B.I. field offices closed 747 mortgage fraud cases without prosecution, the report found. Most were shuttered “with minimal or no investigation conducted.”
Here’s another troubling data point: While the Justice Department assigned staffers to become mortgage fraud coordinators, these people were not dedicated solely to mortgage cases. They had to work on other matters as well.
Ellen Canale, a Justice Department spokeswoman, contended that the report actually showed the mortgage fraud task force to have been a success.
“In the time period in question, the number of mortgage fraud indictments nearly doubled, and the number of convictions rose by more than 100 percent,” she said in a statement. “As the report itself notes, even at a time of constrained budget resources, the department has dedicated significant manpower and funding to combating mortgage fraud.”
Ms. Canale declined, however, to comment on the report’s description of how the Justice Department hyped claims of success by its task force in October 2012. In a news conference, Mr. Holder trumpeted the results of “a groundbreaking, yearlong mortgage fraud enforcement effort — the first ever to focus exclusively on crimes targeting homeowners.” (Remember, the administration was desperate to convince people that it was helping troubled borrowers, not just big banks.)
Calling this program “a model success,” Mr. Holder went on to claim that 530 criminal defendants had been charged, including 172 executives, in the previous 12 months. The cases involved more than 73,000 victims and losses of more than $1 billion, he said.
After some news organizations, notably Bloomberg News, asked for more specifics on these matters, the Justice Department determined that the facts relating to a sample of the cases could not be verified. A closer review found significant problems with the numbers.
Those 530 defendants charged? Well, it was more like 107. The losses of more than $1 billion? In actuality, $95 million.
And how about all those executives? The report found that 98 of the 172 executives in the department’s news release were apparently listed in error; they were labeled “Other,” “Unknown” or “N” for “no” on the F.B.I.’s spreadsheet.
It was not until last August that the department finally corrected these wildly overblown figures. In a blinding acknowledgment of the obvious, the inspector general concluded: “We believe the department should have been more forthright at a much earlier date about this flawed information.”
Adam J. Levitin, a professor at the Georgetown University Law School, said the report was troubling not only because of what it revealed about past cases, but also because it suggests that there will be few consequences for those who commit financial fraud in the future.
“The I.G. report confirmed what’s been clear for quite a while — that the D.O.J. has never taken mortgage fraud seriously,” Professor Levitin said. “There is going to be no comeuppance for crimes committed during the financial crisis. This sets a really bad precedent for future crises because we’re seeing that there is going to be no deterrent effect of criminal law.”
After reading the report, I asked Mr. Breuer, now the vice chairman of the law firm Covington & Burling in Washington, to square his public comments about the agency’s aggressive pursuit of cases with the conclusions in the inspector general report. A spokeswoman said he declined to comment.
Then I called Edward E. Kaufman, the former senator from Delaware who had tried unsuccessfully to get the Justice Department to move aggressively on financial-crisis cases. He convened two sets of congressional hearings on financial fraud cases in 2009 and 2010 and repeatedly questioned department officials about their efforts.
Mr. Kaufman, a Democrat who retired from the Senate in 2010, is now a visiting professor at the Duke University School of Law and a weekly columnist for The News Journal, a newspaper in Wilmington, Del. He said he was discouraged but not surprised by the report. “There was a lot of talk at the time, but fraud enforcement was never a priority in the Justice Department,” Mr. Kaufman said. “Not only was this not their top priority, it was their last priority.”
Oddly, the report gives the Justice Department a pass on its failure to prosecute Wall Street banks and other entities for securities fraud related to the mortgage debacle. “The F.B.I. considers this type of misconduct to be a form of securities fraud and not mortgage fraud; therefore, we did not include as part of the scope of this audit,” it said.
This is a strange exclusion, given that the executive order creating the Financial Fraud Enforcement Task Force specifically identifies the prosecution of securities fraud as one of its missions.
Then again, the American people probably don’t need an inspector general’s audit to tell them how ineffectual the Justice Department was when it came to criminal prosecutions of the large, complex financial crimes that led to the crisis.
As Mr. Kaufman said: “The report fits a pattern that is scary for a democracy, that there really are two levels of justice in this country, one for the people with power and money and one for everyone else. And that eats at the heart of what I think makes this country great.”
http://www.nytimes.com/2014/03/16/business/a-loan-fraud-war-thats-short-on-combat.html?smid=tw-share&_r=1
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