• Senate Judiciary Committee Holds Hearing on Financial Fraud
  • September 24, 2010 | Author: Stephen G. Racioppi
  • Law Firm: Alston & Bird LLP - Atlanta Office
  • On Wednesday, the Senate Judiciary Committee held a hearing entitled “Investigating and Prosecuting Financial Fraud after the Fraud Enforcement and Recovery Act.” The hearing focused on the role of the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI), and the Securities and Exchange Commission (SEC) in prosecuting those responsible for the financial fraud that exacerbated the financial crisis.  Senator Edward Kaufman (D-DE), who chaired the hearing, lauded the DOJ, the FBI, and the SEC for their hard work, but stated “we have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin. Why is that?”

    Witnesses testifying before the committee were:

    • Lanny A. Breuer, Assistant Attorney General, U.S. Department of Justice
    • Robert S. Khuzami, Director, Division of Enforcement, Securities and Exchange Commission
    • Kevin L. Perkins, Assistant Director, Federal Bureau of Investigation

    Mr. Breuer focused on the Financial Fraud Enforcement Task Force, which was created in November 2009 to find and prosecute financial fraud.  Mr. Breuer credited the Task Force for bringing together prosecutors, investigators, and others from across the law enforcement and regulatory spectrum to conduct parallel investigations and charge defendants in criminal and other proceedings.  Mr. Breuer highlighted the Task Force’s investigation and prosecution of those involved with mortgage fraud.  Specifically, Operation Stolen Dreams was successfully completed in June 2010 and was the largest mortgage-fraud sweep in the history of the DOJ, resulting in more than 525 arrests and involving 1,517 defendants in criminal mortgage fraud schemes, with estimated losses of over $3 billion. Of those arrested, 391 have already been convicted and nearly 250 have been sentenced. For civil actions, Operation Stolen Dreams has resulted in 191 enforcement actions involving another 395 defendants, and the recovery of almost $200 million.

    Mr. Khuzami noted that “although there is much more work to be done, during the nine months since I last testified, we have achieved significant results in our efforts to enforce the securities laws, particularly in areas relating to the recent financial crisis.”  In 2010, the SEC has filed 634 enforcement actions, obtained orders requiring disgorgement of $1.53 billion in improper gains, obtained orders requiring payment of penalties of $968 million, obtained 45 emergency temporary restraining orders to halt ongoing misconduct and prevent imminent investor harm, obtained 56 asset freezes to preserve funds for the benefit of investors, and distributed nearly $2.0 billion to injured investors. Mr. Khuzami also focused on the following ways that the Dodd-Frank Wall Street Reform and Consumer Protection Act has improved the SEC’s ability to protect investors and deter wrongdoing:

    • Whistleblower program - enables the SEC to provide substantial rewards to persons providing original information leading to certain successful securities enforcement actions;

    • Establishing nationwide service of process - provides a number of significant benefits, including requiring live witnesses to appear at trial;

    • Secondary actors - expands and clarifies the SEC’s authority to enforce securities law violations by secondary actors;

    • Remedies - expands and clarifies the SEC’s remedies, including the ability to seek civil penalties in cease-and-desist proceedings, the ability to seek penalties against aiders and abettors under the Investment Advisers Act of 1940, and the ability to impose collateral bars; an

    • Coordination with other authorities - enhances the ability of the SEC to share certain privileged information with other regulatory authorities by providing that sharing such information does not waive applicable privileges.

    Mr. Perkins focused on mortgage fraud.  He noted that “in the last three years alone, the FBI has seen the number of mortgage fraud cases steadily climb from 1,200 in 2007 to over 3,000 in 2010. Nearly 70 percent of these pending cases represent losses to financial institutions and other victims exceeding $1 million. In many of these cases the loss far exceeds $1 million.” Mr. Perkins also echoed Mr. Breuer’s testimony regarding the effectiveness of Operation Stolen Dreams.