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Home / News / Prosecution drop may embolden bankruptcy fraud as filings surge

Prosecution drop may embolden bankruptcy fraud as filings surge

U.S. authorities prosecuted the fewest number of people and companies for criminal bankruptcy fraud this year since at least 1986, even as filings rose amid the worst economic crisis since the Great Depression.

The FBI, which is the primary agency that probes such cases, says it is putting more emphasis on other white-collar crimes, including securities and mortgage fraud. The bureau had reassigned agents handling white-collar crimes to national security after the Sept. 11 attacks.

Fewer prosecutions have emboldened criminals, said Juval Aviv, the president and chief executive officer of Interfor, a New York-based investigation and security firm that helps find money hidden from creditors, in an interview.

“It’s open season for fraudsters,” said Aviv. “You’re really not taking a chance committing a bankruptcy fraud.”

Aviv said his company, which has worked with victims of Bernard Madoff’s $65 billion Ponzi scheme, investigates 100 to 150 cases of bankruptcy-related frauds each year and alerts authorities to possible crimes. By his estimate, law enforcement doesn’t follow up in about half the cases.

Speaking on condition of anonymity, a former U.S. attorney who left office this year echoed Aviv’s assessment and said the reduction in FBI white-collar investigators meant fewer cases could be investigated.

Credible allegations that people are hiding money in bankruptcies aren’t always examined because of a lack of investigators, said a U.S. law-enforcement official who also spoke on condition of anonymity.

Federal prosecutors classified cases involving 82 companies or individuals as bankruptcy fraud in the fiscal year ended Sept. 30, the fewest since at least 1986, according to the Justice Department. Data from before 1986 weren’t immediately available. The tally may exclude cases of bankruptcy fraud that are secondary to investigations of mortgage fraud, money laundering and other crimes, said Melissa Schwartz, a Justice Department spokeswoman.

Bankruptcy frauds involve concealing money or property from creditors, falsely claiming bankruptcy, or hiding documents. Individuals and corporations filing for bankruptcy must provide lists of assets so they can be sold and apportioned to creditors. Cases that raise suspicion of fraud often are referred to law enforcement by creditors, judges or trustees who administer the bankruptcies.

There were 1.4 million bankruptcy filings in the year ended Sept. 30, up 35 percent from the previous year, according to the Administrative Office of the U.S. Courts. Bankruptcy filings dropped in the 2006 and 2007 fiscal years after Congress passed a law making it harder for consumers to wipe out their debts through bankruptcy.

In recent years, the Federal Bureau of Investigation says it added agents to investigate crimes associated with mortgage fraud and the financial crisis as caseloads increased. Bankruptcy fraud isn’t among the top five white-collar crime threats, said Sharon Ormsby, the FBI’s financial-crimes section chief in Washington.

“We have a finite number of resources and we go after the threat,” Ormsby said in an interview. “We put our resources to the most egregious threat.”

Even so, she said the FBI pursues bankruptcy fraud “aggressively.” Other agencies also may investigate.

Schwartz, the Justice Department spokeswoman, said in an e-mail that “people who are thinking of committing bankruptcy fraud need to think twice and understand that the department will investigate and prosecute bankruptcy fraud.”

According to a 2003 Justice Department inspector general report, the FBI estimated that about 10 percent of bankruptcy filings involve fraud. Ormsby said she didn’t know if that estimate is still valid.

Bankruptcy judges sometimes seek criminal investigations, though they can’t force law enforcement to act. In an Oklahoma City bankruptcy courtroom in July, federal Judge Richard Bohanon said he was “extremely suspicious” that a medical-supply company may have committed a crime by hiding assets.

He implored a court-appointed trustee, attorney Robert Garrett, to get the FBI or U.S. attorney to look into the case of Medical Technologies, a closely held company in Duncan, Okla., that sold medical supplies. Garrett said he tried to spur an FBI investigation.

“Go see them, talk to them, tell them I want you to do something about it, because this smells of criminal activity and trying to hide assets,” Bohanon told Garrett in court, according to a transcript.

In an interview, Garrett said the FBI took down the information he provided, though he was told the agents “were now having to concentrate on national-security issues.”

The president of now-defunct Medical Technologies, identified in court papers as Robert Dale Rochell, said in an interview that he never committed fraud and hasn’t been contacted by federal investigators. The FBI’s Ormsby declined to comment on the case.

Bankruptcy lawyers and consultants also said they have trouble getting federal investigators’ attention.

“After 9/11, there was a sea change related to the FBI in investigating bankruptcy fraud or fraud leading up to the bankruptcy,” said Craig Graff, a partner with Silverman Consulting, a Chicago-based firm that works with financially troubled companies. “Their caseload versus resources just got overwhelmed.”

-With assistance from David Voreacos in Newark, N.J.