LITTLE ROCK — 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 during the recession.
The FBI, which is the primary agency that probes such cases, said 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.
The lack of prosecutions has emboldened criminals, said Juval Aviv, the president and chief executive officer of Interfor Inc., a New York-based investigation and security firm that helps find money hidden from creditors.
“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. lawenforcement 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 spokesman.
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 that 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 lawmaking it harder for consumers to wipe out their debts through bankruptcy.
In recent years, the FBI said, 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 spokesman, said in an e-mail message 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.
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.”
Business, Pages 19 on 12/22/2009