[Infowarrior] - F.B.I. Struggles to Handle Wave of Financial Fraud Cases

[Richard Forno]

October 19, 2008
F.B.I. Struggles to Handle Wave of Financial Fraud Cases
By ERIC LICHTBLAU, DAVID JOHNSTON and RON NIXON

http://www.nytimes.com/2008/10/19/washington/19fbi.html?_r=2&hp=&oref=slogin&pagewanted=print&oref=slogin

WASHINGTON — The Federal Bureau of Investigation is struggling to find  
enough agents and resources to investigate criminal wrongdoing tied to  
the country’s economic crisis, according to current and former bureau  
officials.

The bureau slashed its criminal investigative work force to expand its  
national security role after the Sept. 11 attacks, shifting more than  
1,800 agents, or nearly one-third of all agents in criminal programs,  
to terrorism and intelligence duties. Current and former officials say  
the cutbacks have left the bureau seriously exposed in investigating  
areas like white-collar crime, which has taken on urgent importance in  
recent weeks because of the nation’s economic woes.

The pressure on the F.B.I. has recently increased with the disclosure  
of criminal investigations into some of the largest players in the  
financial collapse, including Fannie Mae and Freddie Mac. The F.B.I.  
is planning to double the number of agents working financial crimes by  
reassigning several hundred agents amid a mood of national alarm. But  
some people inside and out of the Justice Department wonder where the  
agents will come from and whether they will be enough.

So depleted are the ranks of the F.B.I.’s white-collar investigators  
that executives in the private sector say they have had difficulty  
attracting the bureau’s attention in cases involving possible frauds  
of millions of dollars.

Since 2004, F.B.I. officials have warned that mortgage fraud posed a  
looming threat, and the bureau has repeatedly asked the Bush  
administration for more money to replenish the ranks of agents  
handling nonterrorism investigations, according to records and  
interviews. But each year, the requests have been denied, with no new  
agents approved for financial crimes, as policy makers focused on  
counterterrorism.

According to previously undisclosed internal F.B.I. data, the cutbacks  
have been particularly severe in staffing for investigations into  
white-collar crimes like mortgage fraud, with a loss of 625 agents, or  
36 percent of its 2001 levels.

Over all, the number of criminal cases that the F.B.I. has brought to  
federal prosecutors — including a wide range of crimes like drug  
trafficking and violent crime — dropped 26 percent in the last seven  
years, going from 11,029 cases to 8,187, Justice Department data showed.

“Clearly, we have felt the effects of moving resources from criminal  
investigations to national security,” said John Miller, an assistant  
director at the F.B.I. “In white-collar crime, while we initiated  
fewer cases over all, we targeted the areas where we could have the  
biggest impact. We focused on multimillion-dollar corporate fraud,  
where we could make arrests but also recover money for the fraud  
victims.”

But Justice Department data, which include cases from other agencies,  
like the Secret Service and Postal Service, illustrate the impact.  
Prosecutions of frauds against financial institutions dropped 48  
percent from 2000 to 2007, insurance fraud cases plummeted 75 percent,  
and securities fraud cases dropped 17 percent.

Statistics from a research group at Syracuse University, the  
Transactional Records Access Clearinghouse, using somewhat different  
methodology and looking only at the F.B.I., show an even steeper  
decline of nearly 50 percent in overall white-collar crime  
prosecutions in the same period.

In addition to the investigations into Fannie Mae and Freddie Mac, the  
F.B.I. is carrying out investigations of American International Group  
and Lehman Brothers, and it has opened more than 1,500 other mortgage- 
related investigations. Some F.B.I. officials worry privately that the  
trillion-dollar federal bailout of the financial industry may itself  
become a problem because it contains inadequate controls to deter fraud.

No one has suggested that a quicker response would have averted the  
mortgage meltdown, but some officials said a faster reaction might  
have deterred more of the early schemes that seized on loose federal  
lending regulations.

“They were very late to the game,” Representative Zoe Lofgren, a  
California Democrat who has quarreled with the F.B.I. over its  
financing priorities, said of the bureau’s response to the mortgage  
crisis. “They were not on top of this, and they’re just now starting  
to really do something.”

Republicans and Democrats in Congress are pushing for a more  
aggressive response by the F.B.I. Representatives Mark S. Kirk, an  
Illinois Republican who sits on the House appropriations committee,  
and Chris P. Carney, a Pennsylvania Democrat, called on Congress to  
triple the F.B.I.’s financing for financial crimes investigations.

“To fix our system and prevent a repeat of the events we now see,”  
they wrote in a letter this month to Robert S. Mueller III, the F.B.I.  
director, “we have got to set an example by bringing the full might of  
federal law enforcement against the people who illegally profited or  
destroyed companies at the expense of our country.”

In public, Mr. Mueller has said that the bureau is doing more with  
less, when it comes to criminal prosecutions. And Justice Department  
officials have repeatedly asserted the administration’s commitment to  
fight violent and white-collar crime even as they have not provided  
the bureau additional resources.

But current and former officials say Mr. Mueller has lost a behind-the- 
scenes battle with the Justice Department and the Office of Management  
and Budget to replenish the criminal ranks.

Interviews and internal records show that F.B.I. officials realized  
the growing danger posed by financial fraud in the housing market  
beginning in 2003 and 2004 but were rebuffed by the Justice Department  
and the budget office in their efforts to acquire more resources.

“The administration’s top priority since the 9/11 attacks has been  
counterterrorism,” Peter Carr, a Justice Department spokesman, said.  
“In part, that’s reflected by a significant investment of resources at  
the F.B.I. to answer the call from Congress and the American public to  
become a domestic intelligence agency in addition to a law enforcement  
agency.”

 From 2001 to 2007, the F.B.I. sought an increase of more than 1,100  
agents for criminal investigations apart from national security.  
Instead, it suffered a decrease of 132 agents, according to internal  
F.B.I. figures obtained by The New York Times. During these years, the  
bureau asked for an increase of $800 million, but received only $50  
million more. In the 2007 budget cycle, the F.B.I. obtained money for  
a total of one new agent for criminal investigations.

In 2004, one senior F.B.I. official, Chris Swecker, warned publicly  
that a flood of fraudulent mortgage deals had the potential to become  
“an epidemic.” Yet the next year, as public warnings about fraud in  
the subprime lending markets began to approach their height, the  
F.B.I. had the equivalent of only 15 full-time agents devoted to  
mortgage fraud out of a total of some 13,000 agents in the bureau.

That number has grown to 177 agents, who have opened 1,522 cases. But  
the staffing level is still hundreds of agents below the levels seen  
in the 1980s during the savings and loan crisis.

F.B.I. officials said they had had no choice but to make the cuts in  
the criminal division, which they said were necessary to expand the  
bureau’s national security effort, particularly in the wake of  
criticism of the bureau’s performance in failing to detect the Sept.  
11 plot.

In white-collar crime, they said the bureau has given up only lower- 
level cases of marginal significance that might have never been  
prosecuted anyway. They say they have focused the available criminal  
resources on public corruption and other difficult crime issues in  
which the F.B.I. can make a unique contribution.

“We only had a finite number of white-collar crime agents available to  
address the threat that mortgage fraud posed,” said Joseph Ford, who  
retired from the F.B.I. this year and once served as its chief  
financial officer.

The Justice Department is relying more than ever on the state and  
local authorities to pick up the slack through joint task forces. And  
private investigators say that companies victimized by fraud are  
turning to them in increasing numbers because they are unable to  
attract much attention from the F.B.I. anymore.

In some instances, private investigative and accounting firms are now  
collecting evidence, taking witness statements and even testifying  
before grand juries, in effect preparing courtroom-ready prosecutions  
they can take to the F.B.I. or local authorities.

“Anytime you bring to the F.B.I. a case that is thoroughly  
investigated and reduce the amount of work for investigators, the  
likelihood is that they will take the case and present it for  
prosecution,” said Alton Sizemore, a former F.B.I. agent who is a  
fraud examiner for Forensic Strategic Solutions in Birmingham, Ala.

One American company facing extortion demands last year from a  
computer hacker used private investigators from the Kroll firm to do  
much of the legwork in the case as the F.B.I. monitored and directed  
the situation behind the scenes, said Daniel Karson, executive  
managing director for Kroll. The private investigators even went  
undercover and set up a sting operation that led them to Germany,  
where the authorities made an arrest.

Mr. Karson said the F.B.I. no longer had the resources to take on such  
lower-level cases by itself. “When you come in with a garden variety,  
plain vanilla crime, you may have to stand in the queue,” he said.

Some critics question whether the shift indicates not just a lack of  
resources, but a lack of interest by the Bush administration.

After the collapse of Enron in 2002, the Justice Department moved  
aggressively against corporate fraud — too aggressively, in the view  
of some people within the administration. It set up a national task  
force to tackle the problem, garnered hundreds of convictions at  
companies like WorldCom, Adelphia and Enron, and forced the closure of  
Arthur Andersen, the accounting firm, for its role in the Enron  
collapse.

But several former law enforcement officials said in interviews that  
senior administration officials, particularly at the White House and  
the Treasury Department, had made clear to them that they were  
concerned the Justice Department and the F.B.I. were taking an  
antibusiness attitude that could chill corporate risk taking.

Justice Department officials said political pressures had never  
influenced the way prosecutors approached corporate cases. But the  
department’s approach has become noticeably more tempered in the last  
several years.

This spring and summer, as public concerns about the subprime mortgage  
crisis were growing, Attorney General Michael B. Mukasey rejected  
repeated calls for the creation of a national task force like the one  
used after the Enron collapse. The attorney general likened the  
problem to “white-collar street-crime” that could best be handled by  
individual United States attorneys’ offices.

In the last four years, the Justice Department has scored fewer of the  
big-name prosecutions that marked President Bush’s first term in  
office. Even when investigations have pointed to corporate wrongdoing,  
the Justice Department has agreed, in dozens of cases in the last four  
years, to “deferred prosecutions" that allowed companies to pay fines  
in order to avoid criminal prosecution.

Paul J. McNulty, who served as deputy attorney general under Alberto  
R. Gonzales, said the complexity of white-collar investigations and  
the shortage of investigators had driven a decline in high-profile  
cases.

“There’s no question that the department has been stretched thin when  
it comes to resources generally, and that has affected white-collar  
enforcement in a variety of areas,” Mr. McNulty said in an interview.

“What happened is that the first years after the Enron collapse, there  
were some very high profile, noticeable cases — the low-hanging fruit  
— that gave Justice the opportunity to rack up some very big wins,” he  
said. “Those cases played themselves out and it became tougher to find  
those big cases.”