    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                         PROPOSALS TO FIGHT FRAUD AND
                               PROTECT TAXPAYERS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                       ON

                  H.R. 1748, H.R. 1292, H.R. 1667, H.R. 1788,
                       H.R. 1779, H.R. 1793, and H.R. 78

                                   __________

                                 APRIL 1, 2009

                                   __________

                               Serial No. 111-51

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
    MAXINE WATERS, California            DARRELL E. ISSA, California
    WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
    ROBERT WEXLER, Florida               STEVE KING, Iowa
    STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
    HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
      Georgia                            JIM JORDAN, Ohio
    PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
    LUIS V. GUTIERREZ, Illinois          JASON CHAFFETZ, Utah
    BRAD SHERMAN, California             TOM ROONEY, Florida
    TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
    CHARLES A. GONZALEZ, Texas
    ANTHONY D. WEINER, New York
    ADAM B. SCHIFF, California
    LINDA T. SANCHEZ, California
    DEBBIE WASSERMAN SCHULTZ, Florida
    DANIEL MAFFEI, New York
    [Vacant]

                Perry Apelbaum, Staff Director and Chief Counsel
          Sean McLaughlin, Minority Chief of Staff and General Counsel

                                C O N T E N T S

                                  ----------

                                 APRIL 1, 2009

                                                                       Page

                               OPENING STATEMENTS

    The Honorable John Conyers, Jr., a Representative in Congress
      from the State of Michigan, and Chairman, Committee on the
      Judiciary......................................................     1
    The Honorable Lamar Smith, a Representative in Congress from the
      State of Texas, and Ranking Member, Committee on the Judiciary.     2
    The Honorable Robert C. ``Bobby'' Scott, a Representative in
      Congress from the State of Virginia, and Member, Committee on
      the Judiciary..................................................     7
    The Honorable F. James Sensenbrenner, Jr., a Representative in
      Congress from the State of Wisconsin, and Member, Committee on
      the Judiciary..................................................     8
    The Honorable Daniel E. Lungren, a Representative in Congress
      from the State of California, and Member, Committee on the
      Judiciary......................................................     9
    The Honorable Darrell E. Issa, a Representative in Congress from
      the State of California, and Member, Committee on the Judiciary    10

                                   WITNESSES

    The Honorable Judy Biggert, a Representative in Congress from the
      State of Illinois
      Oral Testimony.................................................    10
      Prepared Statement.............................................    12
    The Honorable Neil Abercrombie, a Representative in Congress from
      the State of Hawaii
      Oral Testimony.................................................    13
      Prepared Statement.............................................    15
    The Honorable Elijah E. Cummings, a Representative in Congress
      from the State of Maryland
      Oral Testimony.................................................    16
      Prepared Statement.............................................    18
    Ms. Rita Glavin, Acting Assistant Attorney General, Criminal
      Division, Department of Justice
      Oral Testimony.................................................    19
      Prepared Statement.............................................    22
    Mr. John Pistole, Federal Bureau of Investigation
      Oral Testimony.................................................    55
      Prepared Statement.............................................    56
    Mr. Jonathan Mintz, New York City Department of Consumer Affairs
      Oral Testimony.................................................    44
      Prepared Statement.............................................    46
    Mr. Ira J. Rheingold, National Association of Consumer Advocates
      Oral Testimony.................................................    55
      Prepared Statement.............................................    56
    Mr. Barry J. Pollack, National Association of Criminal Defense
      Lawyers
      Oral Testimony.................................................    60
      Prepared Statement.............................................    62
    Ms. Marcia G. Madsen, Institute of Legal Reform, Chamber of
      Commerce
      Oral Testimony.................................................    70
      Prepared Statement.............................................    73
    Mr. Joseph E.B. White, Taxpayers Against Fraud
      Oral Testimony.................................................    86
      Prepared Statement.............................................    88

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable John Conyers, Jr., a
      Representative in Congress from the State of Michigan, and
      Chairman, Committee on the Judiciary...........................     2

                                    APPENDIX
                   Material Submitted for the Hearing Record

    H.R. 1748 , the ``Fight Fraud Act of 2009''......................   128
    H.R. 1292, ``To amend Title I of the Omnibus Crime Control and
      Safe Streets Act of 1968''.....................................   136
    H.R. 1667, the ``War Profiteering Prevention Act of 2009''.......   141
    H.R. 1788 , the ``False Claims Act Corrections Act of 2009''.....   144
    H.R. 1779, the ``Financial Crimes Resources Act of 2009''........   167
    H.R. 1793, the ``Money Laundering Correction Act of 2009''.......   175
    H.R. 78, the ``Stop Mortgage Fraud Act''.........................   177

                         PROPOSALS TO FIGHT FRAUD AND
                               PROTECT TAXPAYERS

                                  ----------

                            WEDNESDAY, APRIL 1, 2009

                              House of Representatives,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Committee met, pursuant to notice, at 10:09 a.m., in
    room 2141, Rayburn House Office Building, the Honorable John
    Conyers, Jr. (Chairman of the Committee) presiding.
        Present: Representatives Conyers, Berman, Scott, Jackson
    Lee, Delahunt, Johnson, Baldwin, Maffei, Smith, Sensenbrenner,
    Coble, Gallegly, Lungren, Issa, King, Franks, Jordan, and
    Chaffetz.
        Staff present: (Majority) Perry Apelbaum, Staff Director
    and Chief Counsel; Robert Reed, Counsel; Brandon Johns, Staff
    Assistant; and (Minority) Sean McLaughlin, Chief of Staff and
    General Counsel.
        Mr. Conyers. Good morning, ladies and gentlemen. Today's
    hearing concerns itself with how best to fight fraud and
    protect taxpayers.
        We have 7 bills in front of us and 13 different statutes
    already law that deal with the problem of when companies cross
    the line.
        So what are we trying to do? We are trying to separate in
    this global economic crisis accidents, bad judgment, errors,
    huge mistakes that have been committed from those strategies,
    tactics or intentions to cross the line into the criminal code.
        In this multitrillion-dollar meltdown, it is very hard,
    especially with as little regulation and inquiry that has gone
    on so far, to determine which is which. And so we are here to
    begin this discussion with the Committee that has this very
    enormous responsibility.
        And so I am pleased to start this off. I will put the rest
    of my statement in the record. And I will yield to my friend
    from Texas, Mr. Smith, the Ranking Member of this Committee.
        [The prepared statement of Chairman Conyers follows:]
    Prepared Statement of the Honorable John Conyers, Jr., a Representative
    in Congress from the State of Michigan, and Chairman, Committee on the
                                   Judiciary

                                   __________

        Mr. Smith. Thank you, Mr. Chairman.
        Mr. Chairman, I appreciate your holding this hearing today
    on legislative proposals to address mortgage fraud, securities
    fraud, and other financial crimes.
        Congress cannot prevent all crime, but Congress can ensure
    that tough penalties are in place to punish offenders and deter
    future wrongdoers. And we can provide law enforcement officials
    and prosecutors with the resources and tools they need to bring
    criminals to justice.
        In times of crisis, crime often flourishes. Following the
    9/11 terrorist attacks and Hurricane Katrina, unscrupulous
    people chose to exploit these tragedies to pad their pockets
    with funds intended to help the victims.
        Bringing to bear the heavy hand of government in too heavy
    a manner can be counterproductive. This could lead to a long-
    term reduction in credit, fewer bidders for government
    contracts, and higher costs for taxpayers. We must strike an
    appropriate balance in advancing anti-fraud legislation.
        Many of the bills on our agenda today strike that balance,
    though I am concerned with one or two others.
        I am pleased to join you, Mr. Chairman, as a sponsor of
    H.R. 1948, the Fight Fraud Act of 2009. This legislation amends
    Federal criminal laws to include fraud committed by mortgage-
    lending businesses or other entities that provide mortgage
    loans. The Fight Fraud Act also authorizes additional funds for
    Federal law enforcement agencies and prosecutors charged with
    combating these fraud schemes.
        I am also pleased to join my colleague from California, Mr.
    Lungren, as a sponsor of his legislation to address money-
    laundering, and Crime Subcommittee Chairman Scott, as a sponsor
    of his legislation to support the National White Collar Crime
    Center.
        I wish to commend the gentlelady from Illinois, Judy
    Biggert, for her legislation to provide additional resources to
    the FBI for its mortgage loan fraud investigations. And I thank
    Mr. Abercrombie for joining us today to speak about his war
    profiteering legislation, which I also support.
        Unfortunately, in addition to these bills that will help
    the government's effort to fight fraud, we are also considering
    the False Claims Corrections Act as part of the Committee's
    effort at addressing fraud. No one doubts the tremendous
    importance the False Claims Act has played in combating fraud
    in federally funded programs.
        Since 1986, when it was last amended, the Federal
    Government has recovered over $21 billion under the False
    Claims Act. However, as the act's success demonstrates, it is
    not in need of the substantial overhaul that the False Claims
    Act Corrections Act proposes.
        As currently drafted, this bill does not properly strike
    the balance between providing the government the tools it needs
    to fight fraud and ensuring that innocent recipients of Federal
    funds are not hauled into court to defend against lawsuits
    based on an overly broad law.
        I suspect that the provisions of this legislation will
    subject non-fraudulent conduct of too many organizations,
    including hospitals, universities, and non-profits to costly
    False Claims Act litigation, while at the same time taking away
    defenses against frivolous cases.
        Every Member of this Committee undoubtedly is concerned
    with combating fraudulent claims against the Federal
    Government. If there is identifiable fraud against the
    government that the False Claims Act is currently unable to
    address, we should amend the law to close the gaps, but I
    believe that, as currently drafted, the False Claims
    Corrections Act does go too far. In our haste to fix a few
    problems, we must be careful not to create new ones.
        Thank you, Mr. Chairman. I will yield back.
        Mr. Conyers. The Chairman of the Subcommittee on Crime,
    Bobby Scott of Virginia?
        Mr. Scott. Thank you, Mr. Chairman, for holding this
    hearing on fighting fraud and protecting taxpayers.
        As we explore ways to hold accountable unscrupulous
    mortgage brokers, Wall Street executives, government
    contractors, I hope this hearing will give us more insight on
    what is being done and particularly what is needed in the way
    of resources to investigate those suspected of serious crimes
    of fraud against the taxpayers.
        The underpinnings of the financial crisis began as banks
    and private mortgage companies relaxed their standards for
    loans, approving riskier mortgages with less scrutiny. This
    created an environment that some took as an invitation to
    fraud.
        In the last 3 years alone, the number of criminal mortgage
    fraud investigations opened by the FBI has more than doubled.
    The FBI has previously testified that it currently has more
    than 2,000 mortgage fraud investigations open, but only 250
    agents specifically assigned to those cases.
        I understand that, for the savings and loan debacle a few
    years ago, we had over 1,000 agents assigned to those cases.
    The amount of finances associated with this problem is
    approximately three times the size of the problem with the
    savings and loan debacle.
        So I support more resources for the Department of Justice
    to assist the FBI and the States in enforcing the fraud laws to
    recover the billions lost.
        I am not at this point persuaded that we need new criminal
    laws in this area. Many in this industry knew they were dealing
    with worthless paper. They even had names for the paper like
    ``NINJA loans.'' That is ``no income, no job or assets'' loans.
    And they were laughing as they put these things together.
        These loans were then passed off as AAA assets. And when
    somebody sells the garbage as AAA assets, somebody along the
    way has committed common law fraud. To suggest that we need new
    criminal laws may suggest that the behavior that got us into
    this mess was not already criminal.
        And, furthermore, new laws and penalties could not be
    applied retroactively and therefore would not apply to those
    who committed crimes that has got us in the mess we are in
    today.
        I believe that Federal mail and wire fraud statutes should
    be sufficient to address the problem on the Federal level.
    Penalties associated with these statues are substantial. Mail
    and wire fraud violations carry a maximum penalty of 20 years,
    and any mail or wire fraud that affects a financial institution
    increases the maximum sentence to 30 years.
        It is not just mail and wire fraud that is at the disposal
    of Federal prosecutors. The FBI has already identified nine
    applicable Federal criminal statutes which may be charged in
    connection with mortgage fraud.
        And in addition to the Federal criminal law, these
    financial crimes can be also prosecuted by State and local law
    enforcement officials under aggressive and very punitive State
    criminal laws, as well.
        So, Mr. Chairman, what we need to do is provide more
    resources to law enforcement to prosecute the fraud, whether it
    is consumer I.D. theft, contracting fraud in Iraq, or mortgage
    fraud that affects us all today.
        In this regard, I have introduced H.R. 1779, the Financial
    Crimes Resources Act, that provides an authorization for
    additional funding to various government agencies responsible
    for enforcing financial fraud and identify theft laws. For
    example, the bill authorizes $100 million to the FBI for fiscal
    years 2010 through 2012 and $50 million to U.S. attorneys'
    offices to investigate and prosecute identify theft, financial
    fraud, financial crimes, and other fraud.
        The bill also provides resources to cover the costs
    associated with providing Federal defense services for these
    fraud cases. More importantly, the bill addresses the lack of
    funding at the State level. We need to provide adequate
    resources to State authorities to battle fraud, and we need to
    ensure that Federal authorities are coordinating with their
    State counterparts to ensure an effective approach.
        H.R. 1779 aims that achieving this task by allocating $250
    million at the State and local level to attack the low-hanging
    fruit of identity theft and predatory lending practices that
    Federal prosecutors fail to go after today.
        And, Mr. Chairman, I think it is appropriate to note that,
    if we spend this money on prosecution today, it will not only
    have a deterrent effect, but there is significant potential for
    fines and forfeiture that will offset most of the cost of
    prosecution.
        I am supportive of other bills that have been introduced to
    provide more resources to combat fraud. This includes H.R.
    1292, a bill that introduced with you, Mr. Chairman, and the
    Ranking Member of the full Committee, which would authorize
    funds for States to work with the information-sharing and
    training programs, such as the National White Collar Crime
    Center.
        The center has over 30 years of experience, provides a
    nationwide support network for State and local enforcement
    agencies involved in prevention, investigation and prosecution
    of economic, high-tech, and terrorism-related crime.
        In addition, both the Chairman's Fight Fraud Act and the
    bill introduced by the gentlelady from Illinois, Mrs. Biggert,
    the Stop Mortgage Fraud Act, contained provisions allowing for
    additional Federal resources to combat fraud, and I support
    these provisions, as well.
        Now, Mr. Chairman, I look forward to hearing from our
    witnesses on the legislative approach that we are going to take
    in dealing with the mortgage fraud and other financial fraud,
    and look forward to their testimony and suggestions on what we
    need to do.
        Thank you, and I yield back.
        Mr. Conyers. Former Chairman of Judiciary Committee for 6
    years, Jim Sensenbrenner.
        Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
        The False Claims Act is the principal tool of law
    enforcement to combat fraud against Federal programs.
    Originally passed at the behest of President Lincoln during the
    Civil War for combat fraud against the Union Army, it has been
    amended several times, since then the most recent change in
    1986.
        Under the act, private parties or whistleblowers may bring
    a civil qui tam action for violations of the act for themselves
    and the U.S. government. The government has the primary
    responsibility for prosecuting the action when it opts to
    proceed with the matter. Any damage awards may be trebled and
    are apportioned among the whistleblower and the Treasury.
        I am sure no one here would argue that the False Claims Act
    has been anything but successful for the Federal Government. In
    the past 20-plus years, more than $20 billion in settlements
    and judgments have been achieved. A study found that the
    Federal Government is bringing back $15 for every dollar it
    spends pursuing FCA cases.
        Although the False Claims Act has been successful, there is
    always room for improvement. Several Federal courts have
    applied and interpreted provisions of the FCA in ways that have
    substantially weakened the law. For example, the False Claims
    Act Correction Act closes the loopholes that permit fraudsters
    from stealing with impunity and from allowing the government to
    fully recover stolen funds.
        Last year in Allison Engine, the courts stressed its hands
    were tied when it held that the Justice Department could only
    prosecute those who steal government funds from the government
    itself.
        With the U.S. government relying on private contractors to
    disburse funds for everything from our Medicare prescription
    drug program to our war efforts in Iraq, billions of Federal
    dollars are now in jeopardy. The bailouts that Congress is
    approving left and right, without the proper transparency or
    accountability, only adds to the government funds in jeopardy
    from the fraudsters.
        It is my hope that the House passes the proposed amendments
    this year and removes the debilitating qualification that fraud
    perpetrators use to hide behind judicially created
    qualifications and evade liability.
        I yield back the balance of my time.
        Mr. Conyers. Mr. Lungren or Mr. Issa, are you so inclined?
        Mr. Lungren?
        Mr. Lungren. Thank you very much, Mr. Chairman.
        As one who has supported the False Claims Act amendments in
    the past and voted basically for the restoration of this law or
    the effective restoration of this law during the Reagan
    administration, I might just mention that this does have a
    Republican heritage to it.
        It was asked for in its concept by Abraham Lincoln. The
    Congress passed it. It was signed by Abraham Lincoln. It was
    effective, fell into disuse for a period after World War II. It
    was not until the 1980's when the Reagan administration asked
    it be resurrected in an effective mode that we passed it out of
    this Committee.
        It was on the floor. It was passed in the House and the
    Senate, signed by President Reagan. Because of some court
    decisions which basically say, if you are not the direct
    contractor, you are a subcontractor, we cannot go after this,
    we need this change.
        It also clarifies some things, streamlines some procedures
    both for dismissal and for people bringing this forward. And
    for those who would suggest that this is not the place for
    private action, I would just suggest that the gentleman from
    Wisconsin's statement that the Federal Government manages to
    recover $15 for every dollar it expends suggests that this is a
    very effective means by which we ride herd on those who would
    defraud our country.
        This goes to the question of war profiteers. It also goes
    to the question of those who would receive the benefit of the
    humongous stimulus package that we have voted and other
    spending that appears to be on the horizon.
        I thank the Chairman for the time.
        Mr. Conyers. Darrell Issa?
        Mr. Issa. I thank the Chairman for holding this hearing,
    and I look forward to voting for most, if not all, of these
    bills.
        I do have some concern with the modifications in the False
    Claims Act, somewhat differently than my colleague. Although I
    appreciate the Republican nature of this, I believe that the
    inherent nature between a contractor and their subcontractors
    is an important one where, if the Federal Government using
    third-party specialists to sue receives money, in a sense, for
    the government, that is fine.
        One of the challenges is that it ultimately runs up the
    cost for the general contractor. So although I accept the fact
    that whistleblowers through my Committee next door are
    essential, I am not sure that the bill as proposed really
    brings about the kind of cost-benefit that it could.
        In a nutshell, it doesn't cost that much to get
    whistleblowers to blow the whistle on subcontractors either to
    the government to take action or, more properly, to the
    government to inform the general contractors so the general
    contractor can find better subcontractors and save the
    government more money overall.
        But I do look forward to the hearing today and yield back.
        Mr. Conyers. Steve King? Okay.
        Trent Franks? Okay.
        Ladies and gentlemen, we are pleased to receive these
    comments of our Members who are here. Judy Biggert is a lawyer
    from Illinois, a Member of three Committees, Financial
    Services, Education and Labor, Science and Technology, has
    worked with this Committee in helping us set up discussions
    with--informal discussions with members of the Supreme Court
    over the years.
        I am happy to have her with us. And we have your statements
    all that are in the record and allow you to proceed at this
    time.

     TESTIMONY OF THE HONORABLE JUDY BIGGERT, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF ILLINOIS

        Mrs. Biggert. Thank you very much, Mr. Chairman and thank
    you and the Ranking Member, Smith, and the Members of the
    Committee for extending to me the opportunity to join you
    today. Given your agenda, I will be brief.
        Some years ago, the Chicago Tribune published a series that
    revealed that gangs in the Chicago area increasingly were
    turning to mortgage fraud. They found it easier and more
    lucrative than selling drugs, believe it or not. But it turns
    out that the gangs were not alone. Everyone, it seems, was in
    on the act.
        Just last week, the U.S. attorney in Chicago, Patrick
    Fitzgerald, brought mortgage fraud indictments against two
    dozen players. They are brokers, accountants, loan officials,
    and processors, and attorneys.
        Mortgage fraud comes in all shapes and sizes. Scam artists
    inflate appraisals, flip properties, and lie about information,
    including income and identity, on loan applications. Some used
    the identity of deceased people to obtain mortgages, and other
    desperate thieves bilked out of their homes and home equity the
    most vulnerable homeowners and seniors in dire financial
    straits.
        Let's face it: This is just the tip of the iceberg. And we
    in Congress, as we work to get the economy back on track and
    credit flowing again, we have to address what was at the root
    of the mortgage meltdown in the first place, and that is
    mortgage fraud.
        Mortgage fraud continues to be on the rise in record
    numbers. The FBI has reported that, in 5 years, its mortgage
    fraud caseload increased by 237 percent and investigations more
    than doubled in 3 years.
        During a 12-month period ending in 2008, mortgage fraud
    reports increased by 44 percent, reaching over 63,000 reports,
    with predictions of up to $25 billion in losses. On refinanced
    FHA loans, defaults have more than quadrupled.
        For the fifth year in a row, my State of Illinois secured a
    spot on the Mortgage Asset Research Institute's top 10 list of
    States with the most severe and prevalent incidents of mortgage
    fraud. In 2009, the mortgage fraud case report, issued last
    week, Illinois ranked third in the Nation, behind Rhode Island
    and Florida.
        As a former real estate attorney and Member of the House
    Committee on Financial Services, I have seen firsthand the
    devastating effects of mortgage fraud. It has plagued our
    financial system and economy.
        Most tragically, it has cost millions of American families
    their homes and required taxpayers to commit trillions of
    dollars to prop up the financial industry. It is just not fair
    to the good actors in the industry and the 90 percent of
    homeowners who are paying their mortgages on time.
        That is why I was pleased to join you, Mr. Chairman and
    Ranking Member Smith, in introducing H.R. 1748, the Fight Fraud
    Act, and I introduced H.R. 78, the Stop Mortgage Fraud Act. I
    look forward to working with you and the Members of this
    Committee on these important bills.
        Last Congress, the House three times passed in some form my
    bill, the Stop Mortgage Fraud Act, only to see it removed or
    ignored by the Senate. But I haven't given up, and I won't give
    up.
        This Congress, I reintroduced the Stop Mortgage Fraud Act
    to provide additional funds to the FBI and the Department of
    Justice to investigate and prosecute mortgage fraud.
        By bolstering Federal law enforcement's efforts, Congress
    can help to inject certainty and fairness into the mortgage
    system to restore investor, homebuyer and public confidence in
    the American dream and our financial system.
        As we work to modernize financial laws and regulations, it
    is our duty to supply Federal law enforcement with the tools
    and resources it needs to rapidly tackle fraud, particularly
    mortgage fraud. Fighting fraud must be a central role in
    solving the underlying problems that have undermined the
    economic recovery.
        With that, I respectfully request that you support H.R. 78,
    and I offer my continued commitment to improve the bill and
    move it through the legislative process.
        Thank you again for your time and dedication to this
    matter.
        [The prepared statement of Mrs. Biggert follows:]
               Prepared Statement of the Honorable Judy Biggert,
            a Representative in Congress from the State of Illinois
        Chairman Conyers and Ranking Member Smith: thank you for extending
    to me the opportunity to join you today. Given your agenda, I'll be
    brief.
        Some years ago, the Chicago Tribune published a series that
    revealed that gangs in the Chicago area increasingly were turning to
    mortgage fraud. They found it easier and more lucrative than selling
    drugs. It turns out the gangs were not alone; everyone, it seems, was
    in on the act.
        Just last week, the U.S. Attorney in Chicago, Patrick Fitzgerald,
    brought mortgage fraud indictments against two dozen players. They are
    brokers, accountants, loan officers and processors, and attorneys.
        Mortgage fraud comes in all shapes and sizes. Scam artists inflate
    appraisals, flip properties, and lie about information, including
    income and identity, on loan applications. Some used the identity of
    deceased people to obtain mortgages. And other desperate thieves bilked
    out of their homes and home equity the most vulnerable homeowners and
    seniors in dire financial straits.
        Let's face it: this is just the tip of the iceberg. And as we in
    Congress work to get the economy back on track and credit flowing
    again, we have to address what was at the root of the mortgage melt-
    down in the first place and that is mortgage fraud.
        Mortgage fraud continues to rise in record numbers. The FBI has
    reported that in 5 years, its mortgage fraud caseload increased by 237
    percent, and investigations more than doubled in three years. During a
    12-month period ending in 2008, mortgage fraud reports increased by 44
    percent--reaching over 63,000 reports--with predictions of up to $25
    billion in losses. On refinanced FHA loans, defaults have more than
    quadrupled.
        For the 5th year in a row, Illinois secured a spot on the Mortgage
    Asset Research Institute's (MARI) top ten list of states with the most
    severe and prevalent incidents of mortgage fraud. In MARI's 2009
    Mortgage Fraud Case Report--issued last week, Illinois ranked third in
    the nation, behind Rhode Island and Florida.
        As a former real estate attorney and member of the House Committee
    on Financial Services, I've seen first-hand the devastating effects of
    mortgage fraud. It has plagued our financial system and economy. Most
    tragically, it has cost millions of American families their homes and
    required taxpayers to commit trillions of their hard-earned dollars to
    prop-up the financial industry. It's just not fair to the good actors
    in the industry and the 90 percent of homeowners who are paying their
    mortgage on time.
        That's why I was pleased to join with you, Chairman Conyers and
    Ranking Member Smith, in introducing H.R. 1748, the ``Fight Fraud
    Act,'' and I introduced H.R. 78, the ``Stop Mortgage Fraud Act.'' I
    look forward to working with you and Members of this Committee on these
    important bills.
        Last Congress, the House three times passed--in some form--my bill,
    the Stop Mortgage Fraud Act, only to see it removed or ignored by the
    Senate.
        But I haven't given up, and I won't give up. This Congress, I
    reintroduced the Stop Mortgage Fraud Act, now H.R. 78, to provide
    additional funds to the FBI and Department of Justice to investigate
    and prosecute mortgage fraud.
        By bolstering federal law enforcement's efforts, Congress can help
    to inject certainty and fairness into the mortgage system--to restore
    investor, homebuyer, and public confidence in the American Dream and
    our financial system. As we work to modernize financial laws and
    regulations, it's also our duty to supply federal law enforcement with
    the tools and resources it needs to rapidly tackle fraud, particularly
    mortgage fraud. Fighting fraud must play a central role in solving the
    underlying problems that have undermined economic recovery.
        With that, I respectfully request that you support H.R. 78, the
    Stop Mortgage Fraud Act. I offer my continued commitment to improve the
    bill and move it through the legislative process. Thank you, again, for
    your time and dedication to this matter.
                                   __________

        Mr. Conyers. Neil Abercrombie of Hawaii is a senior
    athlete, a jazz historian, and an unlicensed lawyer. So we are
    particularly happy to have him before us.
        Welcome, Neil.

     TESTIMONY OF THE HONORABLE NEIL ABERCROMBIE, A REPRESENTATIVE
                  IN CONGRESS FROM THE STATE OF HAWAII

        Mr. Abercrombie. Ah, there we are.
        Thank you very much, Mr. Chairman. Mahalo nui loa to you,
    and aloha to you and Mr. Smith and all the Members. Thank you
    very much for the opportunity to be with you.
        Mr. Chairman, before I begin, I want to express to you what
    I know is a shared feeling, I am sure by all the Members and
    the staff, that you will be losing Mr. Luis de Baca to the
    State Department, but I want to say that the Nation is all the
    more gaining from it and the world.
        He will be ambassador-at-large in the State Department in
    the area of trafficking in persons, particularly women and
    girls, throughout the world who are now suffering oppression,
    will find a great champion in Mr. de Baca. And I commend you
    and the Committee for having the foresight to have him with
    you. And I know we wish him all a bon voyage in his new role.
        Mr. Chairman and Members, I am very grateful to the
    Committee your hearing on H.R. 1667, and I want to thank Mr.
    Smith for his mentioning it in his remarks. This is a bill I
    believe that does not have an ideological equation or
    philosophical equation, a partisan equation, but one which is
    particularly American, going back, as was indicated by Mr.
    Lungren and others, something which the Members of Congress
    have had a shared obligation and responsibility for and about
    for decades.
        The War Profiteering Prevention Act of 2009 and other
    legislation which will begin to hold companies that accept and
    spend the public's money more accountable to the public.
        Mr. Chairman, as you know, this bill is part of a larger
    package of legislation intended to deter waste and abuse of
    public funds. It is absolutely essential to strengthen Federal
    law so that private-sector contractors who enter agreements
    with the government to provide goods and services will know
    that the misuse of public funds is a crime and that violators
    will be prosecuted and punished.
        It is also absolutely essential to strengthen Federal law
    so that the public knows that such behavior will no longer be
    tolerated.
        It is unfortunate that a relatively few American companies
    have wreaked complete havoc on our country's economy and
    provoked national outrage with their singular focus on profits
    at the expense of market stability, the long-term benefit of
    their customers, and any sense of business ethic.
        But it didn't just happen last year or just on Wall Street
    or just in our domestic housing and financial markets. The same
    corrupt atmosphere followed our military forces overseas and is
    the particular object of my bill.
        The last Administration privatized logistical support for
    combat and reconstruction operations in Iraq and Afghanistan to
    an extent unprecedented in our history.
        Wars have always been huge and highly profitable business,
    but never have we seen the pursuit of profit practiced with
    more cavalier disregard for the health and safety of our
    troops, the ultimate success of our reconstruction efforts, or
    the continuing support of the American public.
        In fact, some of our largest contractors have acted as if
    it was open season on the United States taxpayer. At least 10
    companies eventually have paid more than $300 million in
    penalties to resolve allegations of bid-rigging, fraud, gross
    overcharging, delivery of faulty military parts, and
    environmental damage in Iraq alone.
        Even more tragically, some of our soldiers have become
    casualties of shoddy work, simply because U.S. law has not
    fully brought these firms to account. There have been 16
    reported deaths of American soldiers and 2 civilians, not from
    combat, but from electrocution, as a result of shoddy work.
        Mr. Chairman, I wanted to add parenthetically that I am
    well aware of some of the commentary made about existing law
    with regard to fraud and misuse and abuse of public funds.
        Our difficulty here and the reason for this bill appearing
    before you is there is now some question as to the legal reach
    of these laws outside the Nation in warzones and combat zones,
    such as in Iraq and Afghanistan, and that is the object of the
    bill, not to reiterate what is already on the books, but rather
    to see to it that no legal obstacles might exist to be able to
    bring such perpetrators account.
        The United States has spent more than $50 billion to hire
    private contractors in Iraq to provide food, water, gasoline,
    and other supplies, guard bases, drive trucks, and many other
    activities in support of our troops or for reconstruction
    itself.
        Today, with an additional 21,000 troops planned for
    deployment to Afghanistan, along with billions of
    reconstruction dollars, contract accountability is an urgent
    need.
        Cleaning up this mess and preventing its recurrence has
    been hampered by the fact that anti-fraud laws that can protect
    against the waste or theft of U.S. tax dollars in the United
    States are not as clearly applicable overseas. There has been
    and is ambiguity in legal jurisdiction.
        An abundance of well-documented cases of contract fraud and
    abuse led to the introduction of the War Profiteering
    Prevention Act in 2007, to that bill's markup and hearing
    before this Committee, and to its passage in the full House in
    October 2007 by an overwhelming vote of 375-3.
        I am hoping that the three will re-read this bill and that
    we can prevail upon them to reconsider.
        However, the Bush Administration, through its testimony
    against the bill before your Committee and on the floor of the
    House, viewed this legislation as an example of burdensome
    regulation over the free enterprise system. As a result, action
    in the Senate was blocked.
        And as a result, we have worked the bill over in such a way
    as we hope and believe will meet the objections that existed
    previously.
        That bill was H.R. 400, has now been reintroduced in new
    form, which, as I say, I hope will address such questions as
    existed in 2007, introduced in the 111th Congress as H.R. 1667,
    which received, as I said, the favorable commentary of Ranking
    Member Smith.
        The War Profiteering Prevention Act of 2009, that is before
    you today. This measure is very brief and very direct. It
    defines contract fraud and specifies who will be covered by the
    law and where it will be in force. It does not have maybe some
    the general implications that found some objection previously.
        It establishes jurisdiction very clearly for the
    enforcement of the law and the prosecution under it. And it
    specifies the penalties for violation of the law in fines and
    possible imprisonment.
        It is profoundly distressing that such laws are necessary,
    but this bill is critical to our national security interests,
    both for the survival of our own economy and accountability to
    the taxpayer and the successful reconstruction in foreign
    nations gripped by extremism.
        We have seen what can happen without proper government
    oversight. We would be derelict in our responsibility to the
    public we serve if we did not take every step available to us
    to discourage such behavior in the future and punish those who
    violate the public trust.
        Therefore, Mr. Chairman and Mr. Smith, I appreciate today's
    hearing, certainly, and I appreciate the fact that you are
    having a hearing on the wider problems of fraud and corruption.
        And I certainly look forward to this Committee's markup and
    other pieces of reform legislation and their full consideration
    by the House and will do all I can to aid and assist you,
    should anyone still have any questions after we have gone
    through the House--after the House has worked its will.
        Thank you very much, Mr. Chairman. Mahalo nui loa.
        [The prepared statement of Mr. Abercrombie follows:]
             Prepared Statement of the Honorable Neil Abercrombie,
             a Representative in Congress from the State of Hawaii
        Chairman Conyers and Members of the Judiciary Committee:
        I am grateful to the Committee for today's hearing on H.R. 1667,
    the War Profiteering Prevention Act of 2009, and other legislation
    which will begin to hold companies that accept and spend the public's
    money accountable to the public. I appreciate the opportunity to
    address the Committee on this matter.
        Mr. Chairman, as you know, this bill is part of a larger package of
    legislation intended to deter the waste and abuse of public funds. It
    is absolutely essential to strengthen federal law so that private
    sector contractors who enter agreements with the government to provide
    goods and services will know that the misuse of public funds is a
    crime, and that violators will prosecuted and punished. It is also
    absolutely essential to strengthen federal law so the public knows that
    such behavior will no longer be tolerated.
        It is unfortunate that a relative few American companies have
    wreaked complete havoc on our country's economy and provoked national
    outrage with their singular focus on profits at the expense of market
    stability, the long-term benefit of their customers and any sense of
    business ethic.
        But it didn't just happen last year, or just on Wall Street, or
    just in our domestic housing and financial markets. The same corrupt
    atmosphere followed our military forces overseas. The last
    Administration privatized logistical support for combat and
    reconstruction operations in Iraq and Afghanistan to an extent
    unprecedented in our history.
        Wars have always been huge and highly profitable business, but
    never have we seen the pursuit of profit practiced with more cavalier
    disregard for the health and safety of our troops, the ultimate success
    of our reconstruction efforts or the continuing support the American
    public. In fact, some of our largest contactors have acted as if it was
    open season on the U.S. taxpayer.
        At least ten companies eventually paid more than $300 million in
    penalties to resolve allegations of bid rigging, fraud, gross
    overcharging, delivery of faulty military parts and environmental
    damage in Iraq.
        Even more tragically, some of our soldiers have become casualties
    of shoddy work, simply because U.S. law has not fully brought these
    firms to account. There have been 16 reported deaths of American
    soldiers and 2 civilians, not from combat, but from electrocution.
        The U.S. has spent more than $50 billion to hire private
    contractors in Iraq to provide food, water, gasoline and other
    supplies, guard bases, drive trucks and many other activities in
    support of our troops and for reconstruction. Today, with an additional
    21,000 troops planned for deployment to Afghanistan along with billions
    of reconstruction dollars, contractor accountability is an urgent need.
        Cleaning up this mess and preventing its recurrence has been
    hampered by the fact that anti-fraud laws that can protect against the
    waste or theft of U.S. tax dollars in the United States are not as
    clearly applicable overseas. There has been ambiguity in legal
    jurisdiction.
        An abundance of well-documented cases of contract fraud and abuse
    led to the introduction of the War Profiteering Prevention Act in 2007,
    to that bill's mark-up and hearing before this committee, and to its
    passage by the full House in October 2007 by a vote of 375-3.
        However, the Bush Administration, through its testimony against the
    bill before your committee and on the floor of the House, viewed this
    legislation as an example of burdensome regulation over the free
    enterprise system. As a result, action in the Senate was blocked.
        That bill--H.R. 400--has now been reintroduced in the 111th
    Congress as H.R. 1667, the War Profiteering Prevention Act of 2009, and
    it is before you today.
        The measure is very brief and very direct. It defines contract
    fraud; it specifies who will be covered by the law and where it will be
    in force; it establishes jurisdiction for the enforcement of the law
    and prosecution under it; and it specifies the penalties for violation
    of the law, in fines and possible imprisonment.
        It is profoundly distressing that such laws are necessary, but this
    bill is critical to our national security interests; both for the
    survival of our own economy and accountability to the taxpayer, and the
    successful reconstruction of foreign nations gripped by extremism. We
    have seen what can happen without proper government oversight. We would
    be derelict in our responsibility to the public we serve if we did not
    take every step available to us to discourage such behavior in the
    future, and to punish those who violate the public trust.
        Mr. Chairman, I appreciate today's House Judiciary Committee
    hearing on HR 1667, the War Profiteering Prevention Act of 2009, and on
    the wider problems of fraud and corruption. I look forward to the
    Committee's mark-up of this and other pieces of reform legislation, and
    their consideration by the full House.
        I am grateful for the opportunity to testify and will do anything I
    can to assist the Committee in its deliberations.
                                   __________

        Mr. Conyers. Elijah Cummings is the past Chairman of the
    Congressional Black Caucus, Member of the Transportation
    Committee, as well as the Armed Services Committee.
        Welcome this morning, Elijah.

    TESTIMONY OF THE HONORABLE ELIJAH E. CUMMINGS, A REPRESENTATIVE
                 IN CONGRESS FROM THE STATE OF MARYLAND

        Mr. Cummings. Thank you very much. Thank you very much, Mr.
    Chairman. I am also a Member of the Government Reform Committee
    also, where we have spent a lot of time looking at fraud and a
    lot of the fraud that Mr. Abercrombie just talked about within
    the military. And, of course, looking at AIG and what is going
    on right now with regard to these TARP funds.
        Chairman Conyers, I want to thank you and Mr. Smith for
    inviting us today. And I commend both of you and this entire
    Committee for your tireless efforts and your ongoing efforts to
    protect consumers and prevent fraud, and I also appreciate the
    work of this entire Committee in that regard.
        I have worked closely with the administration of Governor
    Martin O'Malley in my home State of Maryland to make my
    constituents aware of the consumer protections available to
    them, and I am pleased to be here.
        From the instant the decision was made to inject taxpayer
    dollars into the private capital markets, I have beaten a drum
    for the rights of our Nation's involuntary investors.
        From for-profit loan-modification firms in the housing
    sector to corporate bonuses and retention payments on Wall
    Street, we have seen too many examples of our hard-working
    constituents getting taken advantage of at a time when many are
    very--are in desperate straits themselves.
        At the State level, the Maryland General Assembly has
    passed the Maryland Mortgage Fraud Act, explicitly making
    mortgage fraud a specific crime, as well as creating an
    affirmative obligation for all mortgage brokers and lenders to
    report cases of fraud, theft or forgery.
        More recently, we have all seen the emergence of the so-
    called foreclosure or loan modification consultants. These scam
    artists charge high upfront fees to vulnerable consumers to
    supposedly help them obtain modifications of their loans.
        In reality, they are charging hard-working people for
    information that is available to them at no cost. Too often,
    these efforts result in both wasted money and wasted time. And
    that homebuyer is left with two bags in each hand, one bag
    says, ``Zero,'' and the other one says, ``Debt.''
        The bills to be considered by the Committee today would
    provide exactly the kind of tools we need to create stronger
    taxpayer protections. In the case of AIG, all taxpayers have
    been victimized.
        We have seen a pattern of less-than-full disclosure of
    AIG's uses of the TARP funds. First, we found out that they
    were attending conferences at lavish resorts, having their
    manicures, pedicures, and massages done at taxpayers' expense,
    after getting significant bailout money.
        Then we found out that they were issuing bonuses and
    retention payments even within the Financial Products division,
    whose actions brought AIG down and created the systemic turmoil
    that threatens our entire economy, not only of this country,
    but of the world.
        Mr. Liddy, the head of AIG, and his team at AIG have not
    convinced me that these bailout funds are always being used in
    the best interests of the taxpayer. And it is simply
    unacceptable that the taxpayers who provided these funds should
    have any doubts.
        I particularly commend you, Mr. Conyers, and Mr. Smith,
    Mrs. Biggert, Mr. Scott, Mr. Delahunt, and Ms. Jackson Lee for
    your sponsorship of this legislation, but let me say something
    else.
        As I listen to Mr. Scott and I listen to Mr. Issa and some
    others, I was thinking about, how do you address these issues?
    And as, frankly, I haven't practiced law for many years, I
    think there are two things, and I think Mr. Scott hit on it
    very--did a good job of pointing it out.
        You know, the question is, it is not just whether you have
    the laws on the books. The question is, is whether law
    enforcement make those laws a priority to prosecute and whether
    they have the resources to do it.
        Now, Mr. Abercrombie makes a good point. There are some
    loopholes. And we need to fill those loopholes. But we also,
    Mr. Chairman--and just commentary--we need to make sure that
    the U.S. attorney and our attorneys throughout--and his
    assistants throughout the country and our State folks know that
    this is a priority of this Congress.
        Now, I get tired of seeing my constituents after they have
    been defrauded and left with nothing. And the sad part about
    it, as I close, is that, you know, I have often said we have
    one life to live. This is no dress rehearsal, and this is that
    life.
        And it is so sad when I see people like I saw this morning,
    Mr. Chairman, getting up at 5 o'clock in the morning, going out
    there, working their butts off, and now they stand to lose
    their houses, their homes, their savings, and their health
    care.
        And then they see their tax dollars being used in a way
    that is to me fraudulent. And they also see something else
    happening: They also see that it becomes almost impossible for
    them to reclaim their dream and reclaim their hope.
        So I encourage this Committee to do what I know you are
    going to do. And thank you for being so vigilant.
        [The prepared statement of Mr. Cummings follows:]
            Prepared Statement of the Honorable Elijah E. Cummings,
            a Representative in Congress from the State of Maryland
        Thank you, Chairman Conyers, for inviting me to testify today.
        I commend Chairman Conyers and Ranking Member Smith for their
    tireless leadership of our ongoing efforts to protect consumers and
    prevent fraud, and I also appreciate the hard work of all Judiciary
    committee members.
        I have worked closely with the administration of Governor Martin
    O'Malley in my home state of Maryland to make my constituents aware of
    the consumer protections available to them, and I am pleased to be
    here.
        From the instant the decision was made to inject taxpayer dollars
    into the private capital markets, I have beaten a drum for the rights
    of our nation's ``involuntary investors.''
        From for-profit ``loan modification'' firms in the housing sector
    to corporate bonuses and retention payments on Wall Street, we've seen
    too many examples of our hard-working constituents getting taken
    advantage of at a time when many are truly desperate.
        At the State level, the Maryland General Assembly has passed the
    Maryland Mortgage Fraud Act, explicitly making mortgage fraud a
    specific crime, as well as creating an affirmative obligation for all
    mortgage brokers and lenders to report cases of fraud, theft, or
    forgery.
        More recently, we've all seen the emergence of these so-called
    foreclosure or loan modification consultants.
        These scam artists charge high up-front fees to vulnerable
    consumers to supposedly help them obtain modifications of their loans.
        In reality they are charging hard-working people for information
    that is available to them at no cost. Too often, these efforts result
    in both wasted money and wasted time.
        The bills to be considered by the committee today would provide
    exactly the kind of tools we need to create stronger taxpayer
    protections.
        In the case of AIG, all taxpayers have been victimized. We have
    seen a pattern of less-than-full disclosure of AIG's uses of the TARP
    money.
        First, we found out they were attending conferences at lavish
    resorts.
        Then we found out they were issuing bonuses and retention payments,
    even within the Financial Products division, whose actions brought AIG
    down and created the systemic turmoil that threatens our entire
    economy.
        Mr. Liddy and his team at AIG have not convinced me that these
    bailout funds are always being used in the best interests of the
    taxpayer--and it is simply inacceptable that the taxpayers who provided
    this funding should have any doubts.
        I particularly commend Chairman Conyers, Mr. Smith, Ms. Biggert,
    Mr. Delahunt, and Ms. Jackson Lee for their sponsorship of the Fight
    Fraud Act of 2009.
        Including the Troubled Assets Relief Program in the definition of
    ``major fraud against the government'' should help create transparency
    and increase accountability from the recipients of these taxpayer
    funds.
        Whether as a, quote, ``involuntary investor'' or as the holder of
    an underwater mortgage, the American taxpayer shouldn't have to keep
    absorbing these blows.
        The Fight Fraud Act and today's hearing are the counterpunches they
    need. Mr. Chairman, I commend you and the committee again on your
    efforts to root out fraud and abuse.
        Thank you for inviting me today, and with that, I yield back.
                                   __________

        Mr. Conyers. Well, we are indebted to all three of you and
    look forward to our continued working together on these bills,
    and laws like this, and how we enforce and supply the
    government with the resources to do what you have suggested.
        I thank you all for your attendance this morning.
        We will now call up our second panel of seven witnesses.
    And we are pleased to welcome the president and CEO of the
    Taxpayers Against Fraud, Jeb White; senior law partner Marcia
    Madsen; another law firm partner, Barry Pollack; the executive
    director and general counsel of the Association of Consumers,
    Ira Rheingold; the New York City commissioner for consumer
    affairs, Jonathan Mintz; the deputy director of the Federal
    Bureau of Investigation, John Pistole; and the acting assistant
    attorney general for the criminal division in the United States
    Department of Justice, Ms. Rita Glavin.
        Ms. Glavin has done some very excellent work. She will be
    our first witness. All the statements will be in the record, so
    we welcome you to begin.

     TESTIMONY OF RITA GLAVIN, ACTING ASSISTANT ATTORNEY GENERAL,
                CRIMINAL DIVISION, DEPARTMENT OF JUSTICE

        Ms. Glavin. As you all know, the Nation's current economic
    crisis has had devastating effects on mortgage markets, credit
    markets, the banking system, and all of our Nation's citizens.
        And while not all of the current economic ills are the
    result of criminal activity, the financial crisis has laid bare
    criminal activity, such as Ponzi schemes, that may have
    otherwise gone undetected for years.
        The Department of Justice is committed during these
    difficult times to redoubling our efforts to uncover abuses
    involving financial fraud schemes, mortgage lending and
    securitization frauds, foreclosure rescue scams, government
    program fraud, bankruptcy schemes, and securities and
    commodities fraud.
        Where there is evidence to criminal wrongdoing, including
    criminal activity that may have contributed to the current
    economic crisis or any attempt to criminally profit from the
    current crisis, the department will prosecute the wrongdoers,
    seek to put them in jail when appropriate, and work tirelessly
    to recover assets and criminally derived proceeds, and strive
    to make the victims whole.
        Historically, the department has had tremendous success in
    identifying, investigating and prosecuting massive financial
    fraud schemes. Last year, for example, the department obtained
    convictions of four executives, including a former AIG
    executive who engaged in corporate fraud by executing two false
    reinsurance transactions to conceal a $59 million decrease in
    the loss reserves of AIG.
        Similarly, last year, the department secured the conviction
    of five former executives, including the owner and president of
    National Century Financial Enterprises, one of the largest
    health care finance companies in the United States, until its
    2002 bankruptcy, on charges stemming from an investment fraud
    scheme resulting in $2.3 billion in investor losses.
        Last week, the former president of that company was
    sentenced to 30 years in prison, and a co-owner was sentenced
    to 25 years in prison. The defendants were also ordered to pay
    restitution of $2.3 billion and forfeit $1.7 billion.
        In just the last few weeks, the department has secured a
    guilty plea from Bernard Madoff for securities fraud and mail
    fraud violations. And we filed a criminal complaint against
    Laura Pendergest-Holt, the chief investment officer of Stanford
    Financial, alleging that she obstructed an SEC investigation
    into the activities of Stanford Financial.
        The department has approached the current financial problem
    with three primary goals, first, coordination. The department
    has sought to aid in the coordination among law enforcement
    agencies by working with our partner agencies in forming a
    variety of national and regional working groups. The
    coordination is important to share information and share ideas.
        Second, investigations and prosecutions. As always, the
    department focuses on those to investigate financial fraud and
    mortgage fraud. When people go to jail, when people incur stiff
    fines and have to pay restitution, we deter similar conduct by
    others.
        The department has over the last several years aggressively
    prosecuted fraud cases. We have done nationwide sweeps,
    resulting in hundreds of convictions.
        Third, in addition to coordination and investigating,
    prosecuting crimes, we look to fulfill our responsibilities to
    the victims, looking to make them whole, looking to identify
    them, looking to recover assets and provide the restitution to
    the victims.
        In addition to continue our efforts to prosecute financial
    crimes, like Ponzi schemes, mortgage fraud, securities fraud,
    the department knows that we have to ensure that the funds that
    Congress has authorized to rejuvenate our economy are used as
    intended.
        Where these taxpayer funds are used unlawfully and where
    misrepresentations are made in order to get those funds, we are
    committed to looking at the matter, investigating and
    prosecuting wrongdoers where we find them.
        Our past experience, including many prosecutions relating
    to the Hurricane Katrina recovery funds and the funds used as
    part of the Iraq reconstruction efforts, show that we know when
    large investments of taxpayer money go out over a short period
    of time, people will try and exploit the system and criminally
    profit.
        And we are aware of that. We are ready for that. And we are
    already starting to work with our other law enforcement
    agencies, including the SIGTARP, to prepare for what may come
    down the pike.
        So looking forward, the department believes it has the
    tools it needs to continue to vigorously combat financial
    fraud. We support certain legislative steps that could be used
    to close existing gaps that might exist in the law and
    strengthen some of the statutes that we already use to
    prosecute these financial fraud crimes.
        I appreciate the Committee's invitation to be here today,
    and I look forward to your questions.
        [The prepared statement of Ms. Glavin follows:]
                       Prepared Statement of Rita Glavin

                                   __________

        Mr. Conyers. Deputy Director John Pistole, Federal Bureau
    of Investigation?

                      TESTIMONY OF JOHN PISTOLE,
                    FEDERAL BUREAU OF INVESTIGATION

        Mr. Pistole. Thank you, Chairman Conyers and Ranking Member
    Smith, Members of the Committee. It is a pleasure to be here
    today.
        I would like to give you just a very brief overview of the
    law enforcement challenges facing us and describe the FBI's
    current efforts to address the growing economic fraud.
        First, in the area of mortgage fraud, our work focuses on
    schemes that rely on industry insiders, of course, those
    appraisers, accountants, mortgage brokers, and other
    professionals who override lender controls designed to prevent
    this type of crime from happening. To state the obvious, we
    have experienced a significant increase in mortgage-fraud-
    related cases since 2005.
        And we expect that upward trend to continue. Also, mortgage
    rescue schemes designed to prey on individuals facing the
    dramatic loss of their homes and who are therefore very
    vulnerable are of great concern to us. And we are now beginning
    to see the growth of this crime problem, as well.
        The FBI is also combating other types of economic crime,
    from securities fraud to health care fraud to frauds and
    corruption associated with our country's efforts to rebuild
    Iraq and Afghanistan, as we heard from the prior panel.
        Finally, the numerous Ponzi schemes that we have heard
    about, such as Madoff, and other investment frauds have been
    uncovered, which we are actively pursuing, we are responding in
    a number of specific ways. We have shifted resources and now
    have additional FBI agents and national analysts, as well as
    intelligence analysts, assigned to mortgage fraud and related
    investigations.
        We have another group of agents and analysts working
    corporate fraud and securities fraud matters. We augment our
    efforts with State and local law enforcement officers assigned
    to mortgage fraud task forces and working groups.
        And we have established at our headquarters a national
    mortgage fraud to team to coordinate and prioritize our efforts
    across the country with our partners and to provide tools that
    identify the most egregious fraud perpetrators and work even
    more effectively with our counterparts in law enforcement,
    regulatory, and industry leaders.
        For example, last June, we completed the initial phases of
    what we called Operation Malicious Mortgage, involving the
    arrest of more than 400 offenders nationwide believed to be
    responsible for over $1 billion in estimated losses. This
    initiative has focused on three types of mortgage fraud, that
    of lending, of course, mortgage rescue schemes, and mortgage-
    related bankruptcy schemes.
        And we continue our strong efforts within the international
    contract corruption task force in which we, with our other
    Federal partners, address fraud and corruption in U.S.-funded
    Iraq and Afghanistan construction projects.
        In closing, it is clear to us and the FBI and our law
    enforcement partners that more must be done to protect our
    country and our economy from those who tried to enrich
    themselves through illegal financial transactions. We are
    committed to doing so and very grateful for your support.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Pistole follows:]
                       Prepared Statement of John Pistole

                                   __________
        Mr. Conyers. New York City Commissioner for Consumer
    Affairs Jonathan Mintz, welcome.

       TESTIMONY OF JONATHAN MINTZ, NEW YORK CITY DEPARTMENT OF
                            CONSUMER AFFAIRS

        Mr. Mintz. Good morning. Thank you, Chairman Conyers,
    Ranking Member Smith, for the opportunity to testify on behalf
    of New York City Mayor Michael Bloomberg.
        Given the urgent nature of these hearings, I will skip the
    extensive background on my department's 40-year history of
    enforcing and litigating against deceptive and misleading
    practices in New York City. And I will also forego the in-depth
    stories about the damage that is inflicted on consumers by
    foreclosure scams.
        My brief testimony will diagnose from an on-the-ground,
    municipal, anti-fraud perspective why these scams are so
    virulent and suggest practical, immediate Federal outreach and
    enforcement interventions that must occur in the coming days
    and weeks.
        A combination of enforcement and education is just what is
    needed to disrupt the tide of foreclosure prevention and loan
    modification scams sweeping across our cities. The numbers are
    alarming: Nearly 5,000 homes in New York City were auctioned
    off last year, and nearly 14,000 homeowners had lis pendens
    filings.
        The national foreclosure crisis has created a formidable
    demand for rescue and refinancing. Unfortunately, a shadow
    industry aimed at profiteering from both the enormity of the
    crisis and the Federal resources is moving aggressively to
    respond to that demand.
        This shadow industry thrives for three reasons all too
    familiar to consumer protection agencies. First, the intense
    demand for loan modifications; second, a captive, vulnerable,
    and often unsophisticated population; and, third, the lack of a
    single, trustworthy and tamperproof source to which people can
    be directed for help.
        Many of the same people who were deceived by the marketing
    tactics used for subprime loans--people with limited experience
    with financial services--are the targets now. Adding fuel to
    this fire is that these easy targets can be precisely
    identified.
        Lis pendens lists are readily available for purchase
    online. Scam artists can access critical information, like
    servicers and payment histories, in order to employ disarming
    familiarity.
        The public hears daily about the Federal Government's
    efforts to help distressed mortgage holders, but information is
    channeled through multiple conduits, from every level of
    government and from nonprofit sector partners. It is this
    diffuse messaging and the multiple doorways which facilitates
    the swindles.
        Loan modifiers pose as messengers from government agencies,
    lenders or services. Advertisements take on official veneer,
    for example, using FHA seals or including legal citations.
        We believe that there are three feasible steps which can
    effectively intervene to protect people in foreclosure and get
    them to the right help.
        While so-called loan modifiers are located throughout the
    country, their targeting and their marketing is local in
    nature. In New York City, the neighborhoods that are most
    dramatically impacted by the foreclosure crisis are papered
    with flyers offering rescue.
        To combat this flood of marketing, the national response
    needs to be clear and simple in messaging, but local in
    delivery. Simplifying the conduit to well-trusted and
    tamperproof 311 or 211 information hotlines is an ideal
    intervening fix.
        More than 60 cities across the U.S., which cover close to
    80 percent of the American population, have these information
    hotlines. These referral systems available 24 hours a day, 7
    days a week, and in dozens and dozens of languages. Local
    governments have invested millions of dollars to popularize
    these free hotlines, and we stand ready to utilize them for the
    present emergency.
        The Federal Government has the unique power to mobilize
    civil leaders and community partners to carry a unified
    message: Don't talk to anyone about helping you avoid
    foreclosure unless you got to them through 311 or 211.
        Now let's talk about strengthening enforcement. We applaud
    the Chairman's proposed Fight Fraud Act and the additional
    resources intended to be directed to Federal law enforcement
    agencies.
        But given the local nature of these scams and the
    accompanying wealth of local information and leads, these
    Federal agencies will be most effective when they are
    meaningfully partnering with local enforcement and consumer
    protection agencies who have inspectors on the ground. We have
    the information; we just need to be able to get it into the
    right hands.
        We propose, therefore, the establishment of a national task
    force, which will coordinate this database and information.
        Finally, we propose a Federal ban on fee-for-service
    mortgage relief advocacy. There is no reason for distressed
    homeowners to pay unqualified, for-profit actors to negotiate
    with their lenders when instead they could work with qualified,
    not-for-profit HUD counselors.
        Just like banning fee-based debt counseling, as we have in
    New York, Congress has the power to enact a simple ban on fee-
    for-service foreclosure prevention businesses. Moreover, State
    and local governments must be empowered to enforce such
    legislation.
        Thank you.
        [The prepared statement of Mr. Mintz follows:]
                      Prepared Statement of Jonathan Mintz

                                   __________

        Mr. Conyers. Thank you very much.
        We now have a consumer representative, Ira Rheingold.

    TESTIMONY OF IRA J. RHEINGOLD, NATIONAL ASSOCIATION OF CONSUMER
                               ADVOCATES

        Mr. Rheingold. Good morning, Mr. Chairman.
        And thank you, Ranking Member Smith and Members of this
    Committee.
        I thought I would use my time to talk a little bit about my
    background, what I have seen over the course of a dozen years,
    and take a look at how, if we are going to stop fraud in this
    country, who we need to really target when we begin to tackle
    the gigantic problem that we have today in terms of our
    foreclosure crisis and the mortgage fraud that permeates our
    economic system.
        I was a legal services attorney since the mid-1990's
    working on foreclosure issues in Chicago. From the mid-1990's
    through around 2001, I worked in low-and moderate-income
    communities in Chicago and worked with others around the
    country who face the same issues.
        And what we saw in those communities was the mortgage fraud
    that we are seeing today across this whole country, in Atlanta,
    in Boston, in Hampton Roads, in California. And what we saw was
    a mortgage system that was system, a mortgage system that was
    broken that attracted people who were committed to committed
    crime.
        The tin men of the 1950's and 1960's, the home repair scam
    artists of the 1970's and 1980's became mortgage brokers and
    got engaged in the mortgage-lending industry. And what we saw
    in those communities were an enormous loss of wealth.
        In poor communities across this country, we have seen a
    redistribution of wealth that is shocking. Poor communities in
    my city, in other cities have lost enormous wealth, had that
    wealth stolen from them, stolen by Wall Street companies and by
    big mortgage-lenders who built a system that really encouraged
    fraud. And I think that is the important thing that we need to
    look at.
        When we talk about securitization and the complex mess that
    allowed these mortgage things to occur, we need to look at what
    those lenders did. In 1997, 1998, I worked with the Chicago
    attorney general's office when they pursued a company called
    FAMCO. They were joined by a number of attorneys general
    pursuing FAMCO.
        And the biggest funder of FAMCO was Lehman Brothers. So
    when Lehman Brothers failed last year because they were engaged
    in all sorts of nefarious practices, those of us who had been
    working on mortgage fraud since the mid-1990's knew that Lehman
    Brothers was a bad actor.
        In fact, a court in California found them liable for the
    behavior of FAMCO because they knew that mortgage fraud was
    occurring, they encouraged it, they funded it. They did nothing
    about it because profits were great. Profits were great.
        The mortgage lending industry, the investment banking
    industry made money when loans were closed, and they didn't
    care where they came from, they didn't care about who they came
    from.
        As investigators begin to look at the mortgage problem,
    when they start to talk to mortgage brokers and the scam people
    who they will be charging, what they will hear from them--and I
    can promise you they will hear this--is that, ``When we made a
    loan that was a no-doc loan that we knew was permeated with
    fraud, we knew what lender to sell it to. We knew that if we
    went to Countrywide, we knew that if we went to Ameriquest, we
    knew if we want to IndyMac or Option One, they would not
    look.''
        They didn't care, because we had a system that, when those
    mortgage lenders bought those loans, they turned it around, and
    turned them, and chopped them up, and spindled them, and
    mutated them, and turned them and sold them to investors, and
    they knew credit-rating agencies didn't care and weren't going
    to look at it and didn't do due diligence, and then investors
    were the same victims of the fraud that that homeowner was.
        So if we are going to look at fraud, if we are going to
    challenge--if we are actually going to stop the practices that
    have led us to this economic crisis that we sit in today, then
    we need to look carefully at investments. We need to look at
    our banks. We need to look at mortgage lending, look at
    Ameriquest and Countrywide, Angelo Mozilo.
        Instead of honoring somebody like Roland Arnall by making
    him the ambassador to the Netherlands, his company caused more
    harm to our Nation's community than anyone could have imagined.
    We need to look at those companies. We need to look at the
    investment banks, like that--that are still left. But in Bear
    Stearns, in Lehman Brothers, they enabled the fraud that is
    occurring today.
        We talk about--so investment banks. We need to look at the
    credit-rating agencies. Where were there? Did they not see that
    these loans were going to fail? Did they not look at all these
    things and rated these things as AAA and sold them to investors
    as good vehicles, that things were going to--that people's
    money was going to be safe? Did they, in fact, enable the fraud
    by their bad behavior?
        Finally, when we talk about mortgage rescue scams, and that
    is happening every single day--I talk to consumers across this
    country every single day. And they are being inundated by
    claims of people who are going to help them solve their
    foreclosure problem. There are scared and desperate people out
    there.
        We need to go after them, and we need to prosecute those
    people. But we also need to recognize that the reason those
    people are succeeding, the reason why they have such a
    successful business model is because the mortgage servicing
    system is broken.
        No normal human being in this country who has a mortgage
    and wants to get it fixed can find who their lender is, who
    their servicer is, contact that person, and actually get a
    decent loan modification.
        And until we fix the problem of people being able to
    independently handle their matters and solve those foreclosure
    problems by themselves, the scam artists and the mortgage
    rescue schemes are going to be out there. We can't stop it
    until we solve the problem of mortgage servicers not being
    accountable to the American people.
        Thank you.
        [The prepared statement of Mr. Rheingold follows:]
                     Prepared Statement of Ira J. Rheingold
        Mr. Chairman, Ranking Member Smith, and members of the
    Subcommittee, thank you for inviting me to testify before you today
    about the breakdown of the American home mortgage market and how we can
    better protect our nation's homeowners and communities.
        My name is Ira Rheingold, and I have been a public interest
    attorney for my entire adult career. I have worked in some of our
    nation's poorest urban and rural communities and I've witnessed the
    incredible resilience and optimism that mark the great strength of our
    nation's people. I have also seen the incredible fear and despair of
    Americans faced with the loss of their long-term home and its
    devastating impact on their families and on their communities.
        In the mid-1990's through 2001, I lived and worked in Chicago,
    where I ran the Legal Assistance Foundation's Homeownership
    Preservation Project. During those years, I watched (and worked
    against) the unfair and deceptive practices of all the actors in the
    mortgage industry, that slowly, but inexorably stripped away the wealth
    of my city's low and moderate income minority communities. Today, I am
    the Executive Director of the National Association of Consumer
    Advocates (NACA), an organization of attorneys and other advocates who
    represent those very same consumers and communities all across America.
    At NACA, I also manage the Institute for Foreclosure Legal Assistance,
    a project that provides funding and training to non-profit legal
    organizations that help homeowners negotiate alternatives to
    foreclosure. In my current roles, I speak to and assist our nation's
    consumer advocates who, on a daily basis, meet with and represent the
    consumers victimized by predatory and unsound lending practices and see
    the very real-life consequences of an out of control mortgage lending
    marketplace. What I see from them are the same unfair and deceptive
    practices that I personally witnessed in Chicago, except now, those
    behaviors have moved across all of our nation's communities. What I
    hear from their clients is the same fear and despair that I heard all
    too often on the streets of Chicago. At today's hearing, I hope that
    you will hear these voices through me, and that you will begin to see
    what we all need to do to build a rational, robust and well-regulated
    mortgage market that actually serves the needs and demands of consumers
    and communities across our nation.
                                  introduction
        To understand what it has been like to be a consumer attempting to
    buy their first home, a homeowner attempting to refinance their home
    for necessary home repairs or to help pay for their children's
    education or to lower their payment so they could remain in their life-
    long home on a fixed income, we must first understand how the mortgage
    market has been working. The mortgage market of the late 1990s and
    early 21st century, in no way resembled what most of us thought we
    understood about buying a home or getting a loan. I have talked to
    literally thousands of consumers, who, until recently, believed (or
    were led to believe) that the mortgage entity that originated their
    loan, would only profit when they timely made their monthly mortgage
    payment. While this may have been the case when our parents or even our
    grandparents bought their homes, this has not been the truth for over
    the past dozen years. Instead, because of the growth of securitization
    as the tool to fund both prime and subprime mortgages, with all its
    confusing layers, multiple actors and often perverse incentives, the
    nature of the consumer-mortgage originator relationship (unbeknownst to
    the consumer) had fundamentally changed. These changed relationships
    and backwards incentives have led us to the precipice that we stand at
    today.
                        securitization and the consumer
        For my purpose today, I'm going to keep this very simple.\1\ At its
    most basic level, securitization is a process, which involves the
    pooling and repackaging of cash-flow producing financial assets into
    securities that are then sold to investors. As securitization grew to
    be the dominant way that mortgage loans were funded, the role and
    purpose of mortgage originators (and all the other actors in the
    mortgage market) fundamentally changed. No longer were mortgage
    originators, ``lenders'' who expected (or really cared) about mortgage
    repayments. Instead, these originators became manufacturers of a
    commodity, the American mortgage borrower. This commodity was then sold
    to the capital markets, which in turn, chopped, spindled and mutated
    this new commodity into something that could be purchased by investors
    from around the world.
    ---------------------------------------------------------------------------
        \1\ For a much greater detailed discussion, please see Peterson,
    Christopher Lewis, ``Predatory Structured Finance.'' Cardozo Law
    Review, Vol. 28, No. 5, 2007
    ---------------------------------------------------------------------------
        While advocates of securitization have argued that the process
    produced additional capital and greater access to homeownership for
    some consumers, they fail to recognize the fundamental shift and
    potential dangers it created in the consumer marketplace. No longer was
    the borrower's best interest (or even their ability to repay the loan)
    part of the mortgage transaction calculation. Instead, the real
    transaction was between the mortgage originator and the investment
    bank, which not only set the standards for the borrower/product they
    wanted to buy (and then turn around and sell), but also provided the
    money for the originators' loans.
        Under these set of circumstances, what American consumers needed
    was the vigorous enforcement of existing consumer protections as well a
    new set of consumer protections to correspond with the very different
    mortgage world that had now been created. Unfortunately, what the
    federal government gave us was the exact opposite, not only diminishing
    its regulation and enforcement of the mortgage marketplace, but
    providing interference and protection (under the guise of preemption)
    for mortgage market players when states, recognizing the fundamental
    flaws in the system, attempted to protect their own citizens.
          the mortgage market, unfairness, deception and the consumer
        Understanding what originators and all of the actors in the
    mortgage process were attempting to do (creating commodities to sell)
    when they made a home loan helps us understand all the unfair and
    deceptive practices that have flourished in the mortgage marketplace
    over the last decade. I'd like to talk about some of those practices
    now, and explain why they were not caused by a few rogue actors, but
    were instead a product of the fundamentally flawed marketplace that
    securitization created and the federal government passively permitted
    to flourish.
    A. The Predatory Pitch
        As the demand for product to sell to Wall Street investment banks
    grew (ultimately exponentially), the pitch to vulnerable homeowners
    (and prospective homeowners) became more targeted and more predatory.
    Armed with financial and personal data and carefully conducted
    research, mortgage brokers and lenders (and their ``bird dogs'') used
    TV and radio advertising, mailings, telephone calls, and even home
    visits to reel in consumers who otherwise had no real reason to get a
    new home mortgage. With promises too good to be true (``refinance your
    home, fix your roof and lower your monthly payment'') consumers were
    later bait and switched to loans far more expensive than they thought
    they were promised. Because the mortgage ``originators'' received their
    full compensation when they manufactured the ``product/borrower'' to
    sell onward and upward, there was little concern whether the loan was
    best for the consumer or even affordable. As many of us knew, and most
    of us have now learned, many of those loans were completely
    unsustainable.
    B. The Over-Inflated Appraisal
        In a rational world, a consumer would not want to pay (or borrow)
    more for a home than what it was worth. In the securitization created
    ``bizarro'' mortgage world, an over-inflated house made perfect sense
    to the parties involved in the transaction (except for the unsuspecting
    consumer, of course, and maybe the ultimate investors left holding the
    bag). Let's look at the parties to the transaction. We have the
    mortgage originator (the broker or the lender or sometimes both) whose
    incentive is quite obvious. Simply put, the greater the house price,
    the larger the loan, the greater the fee they will receive from the
    transaction (the same can be said for the investment bank). Sometimes
    the incentives were a little more complicated. Take for instance a
    homeowner whose existing mortgage is already 100% of the actual value
    of the home. If the real house value was used, no loan could be made,
    no product could be created. So the house value was increased to meet
    the loan purchasing parameters (the underwriting guidelines) set by the
    investment bank and the loan gets made and everyone is happy (including
    the allegedly ``unknowing'' investment bank who had another product to
    slice and dice and sell to someone else).
        As for the appraiser who creates the fraudulent value for the home,
    we've seen time and again why they go along with this fraud. Simply, if
    they actually want to stay in business and continuing doing appraisals,
    they'll create the value the mortgage originator wants. What we have
    left, is a consumer who has a mortgage that is too often worth more
    than the real value of their home.
    C. Yield Spread Premiums and Prepayment Penalties
        Unfortunately (for me), I have been around long enough to hear
    multiple and ever-shifting explanations as to why yield-spread premiums
    (YSPs) are an acceptable practice and why they are ``good'' for
    consumers. I can safely state, that none of those arguments are true in
    the mortgage marketplace that actually exists in our country. I do
    however, fully understand why they work for every mortgage market actor
    except, again--of course--for the consumer.
        Here's how it works. Mortgage brokers get paid more if they produce
    mortgages with an interest rate higher than what a borrower qualifies
    for (that, in short is a YSP). Unless a mortgage broker actually lives
    up too their off-stated (but never written) commitment to serve in the
    best interest of their consumer client, their incentive--a more
    expensive loan means a bigger paycheck--is clear. This perverse
    incentive system also plays out with the mortgage lender and investment
    bank (irrespective of a borrower's ability to pay) because they too
    have a loan with a bigger interest rate to sell to investors.
        To make matters worse, almost any loan with a YSP is sure to have a
    prepayment penalty. In English, a prepayment penalty is a charge to a
    consumer who repays their loan ``too soon,'' typically during the first
    few years of the loan's existence. What makes this product so cynical,
    and so closely intertwined with a YSP, is that the very existence of
    the YSP means that the consumer has an interest rate that is higher
    than they actually qualify for. Therefore, if the consumer acts
    rationally and shops for a lower interest and enters into a new
    mortgage, they will be punished with a steep prepayment penalty.
        In all my years talking, interviewing, and representing consumers,
    I have yet to meet that one consumer who actually understood that they
    were charged a YSP or that the YSP led to a higher interest rate than
    they were otherwise qualified for. I simply cannot imagine how this
    practice is not deceptive or just plain unfair. Yet none of our
    nation's federal regulators have ever really done anything about it
    (except to find ways to allow its widespread use).
    D. The Disappearance of Escrow Accounts
        Because the borrower has become the product to be created and sold,
    mortgage originators have become experts at getting borrowers to take
    out loans that make little or no economic sense. A classic and
    pervasive practice in the mortgage market is the ``promise'' that a new
    loan will allow the borrower to pay a lower monthly mortgage payment.
    What the borrower is not told is that their new payment does not
    include their taxes and insurance (for escrow), so that their lower
    payment really is just a mathematical fiction (otherwise known as a
    lie). While the Federal Reserve now finally appears ready to take some
    action on this practice, it is ridiculous that this blatantly unfair
    and deceptive practice (which had been standard operating practice in
    the mortgage marketplace for over a decade), had never been outlawed or
    prosecuted by federal regulators.
    E. Reckless Underwriting and the Rise of Community Endangering Loan
            Products
        In place of an efficient market that provides real consumer choice
    and rewards consumers for smart credit decisions and rational
    aspirations, we have seen, in the past few years, a mortgage market
    that has recklessly created and sold ridiculously risky mortgage
    products that have excessively benefited all of the market players at
    the expense of the American consumer and our nation's communities. In a
    rational marketplace these loans made no sense. Looking at them however
    through the lens of our fundamentally flawed and unregulated mortgage
    marketplace, they unfortunately made perfect sense (at least at the
    time they were originated).
        In order to meet the product demand of voracious Wall Street
    investors, originators ignored basic, common-sense underwriting
    principles in order to boost their loan volume. No-doc or ``stated-
    income'' loans were great because loan originators made more money (it
    was less work and they could charge borrowers a higher interest rate)
    and they fed the beast that wanted high-risk products that would
    produce a higher return for investors. Underwriting adjustable rate
    mortgages only at the initial interest rate, without considering how
    homeowners would be able to pay their loans once the payment adjusted
    upward, was also quite profitable for mortgage originators and the
    investment banks that were fed by them. These fundamentally
    unsustainable loan products, in all their derivations (including 2-28s
    and option ARMs) were destined for failure and we are all now living
    with the consequences.
                                   conclusion
        The present foreclosure tsunami didn't have to happen. Many of us
    saw the current disaster coming, but our voices were ignored. Federal
    regulators and Congress could have chosen to protect consumers, but
    instead it sat on the sidelines as our mortgage market came to a
    predictable crash. My only hope is that we have all learned the right
    lessons from this current and ongoing crisis, and we move together to
    build a well-regulated mortgage market that meets the needs of all our
    nation's homeowners.
                                   __________

        Mr. Conyers. Attorney Barry Pollack is a lead official in
    the National Association of Criminal Defense Lawyers, works on
    white-collar crime issues.
        Welcome.

    TESTIMONY OF BARRY J. POLLACK, NATIONAL ASSOCIATION OF CRIMINAL
                            DEFENSE LAWYERS

        Mr. Pollack. Thank you, Mr. Chairman. And thank you for
    inviting me to testify on behalf of the National Association of
    Criminal Defense Lawyers on the important issues before the
    Committee today.
        NACDL is a professional bar association founded in 1958. It
    has 12,500 direct members and 80 State, local and international
    affiliate organizations with 35,000 members, including private
    criminal defense lawyers, public defenders, active-duty U.S.
    military defense counsel, law professors, and judges committing
    to preserving fairness within the American criminal justice
    system.
        As this Committee considers the various pieces of
    legislation before it, we ask it to consider the following.
    There are presently over 4,000 offenses that carry criminal
    penalties in the United States code. In addition, there are
    literally tens of thousands, if not hundreds of thousands, of
    regulations, Federal regulations that can be enforced
    criminally.
        The Federal arsenal to stop and punish financial fraud in
    every permutation already exists. Federal criminal laws that
    can be used to address criminal conduct in the financial and
    housing markets include among many others mail fraud, wire
    fraud, major fraud, securities fraud, bank fraud, and
    conspiracy to defraud.
        Bearing these facts in mind, NACDL opposes a knee-jerk
    response to the present financial crisis of creating more and
    more duplicative Federal criminal laws.
        Mr. Chairman, while the National Association of Criminal
    Defense Lawyers appreciates this Committee's efforts to make
    sure that our membership is fully and gainfully employed, as
    Ms. Glavin's comments have ably demonstrated, she already has
    the tools to do just that and has been prosecuting vigorously
    and meting out very stiff sentences to white-collar criminal
    offenders.
        Federal criminal laws are rightly reserved for egregious,
    intentional wrongdoing that falls well outside the mainstream
    of ordinary business conduct. If large members of honest
    businesspersons took advantage of an unregulated environment in
    making risky and ill-advised, but not illegal decisions, they
    should not now be treated as criminals.
        For those who went beyond that and engaged in intentional
    fraudulent conduct, there are ample criminal laws on the books
    already that will allow for them to be prosecuted, as they
    should be.
        Accordingly, NACDL does not oppose the various measures to
    fund the hiring of additional prosecutors, FBI agents, and
    other law enforcement personnel, many of whom have been pulled
    away to investigate and prosecute national security cases, to
    investigate and, where appropriate, prosecute white-collar
    criminal offenses.
        However, Congress must understand it cannot fund half of
    the equation. Current criminal forfeiture statutes allow for
    assets to be restrained from criminal defendants upon
    indictment. As a result, increasing numbers of defendants in
    white-collar cases cannot pay for their own defense.
        The defense in this case is paid for by taxpayers. This
    happens either through public defenders' offices or through
    court appointments under the Criminal Justice Act.
        Federal public defender offices are already overburdened,
    and many lack the resources and the expertise to defend complex
    white-collar criminal cases. If we are to expand such
    prosecutions, we must not only fund their investigation and
    prosecution, but we must also adequately fund the defense of
    these cases.
        Accordingly, if additional funding is to be included in the
    new legislation, NACDL applauds the Financial Crimes Resources
    Act as a provision of funding not just for the investigation
    and prosecution of these offenses, but also for the defense.
        Mr. Scott, I note the $50 million to U.S. attorneys'
    offices, the $100 million to the FBI, and $20 million to
    defense function. While we applaud the effort to fund the
    defense function, we believe that that more than 7-to-1
    disparity between two prosecutorial agencies alone is still out
    of balance.
        And as my time is limited, I would like to refer to my
    written statement with respect to NACDL's position regarding
    each of the various unnecessary measures presently contemplated
    to create new Federal statutes, such as mortgage lending fraud,
    derivatives fraud, and TARP fraud, to address conduct that can
    easily be prosecuted under existing law.
        I would like to speak, however, on what we believe is the
    proposed ill-advised effort to expand the reach of the money
    laundering statute and effectively reverse the recent Supreme
    Court decision in the Santos case.
        In that case, the Supreme Court held that the crime of
    money laundering is confined to transactions and the proceeds
    of unlawful criminal activity that is engaging in transactions
    involving illegal criminal profits. That decision is
    appropriate.
        The proposed legislative change would frequently, as it
    would have in the Santos case itself, provide an enhanced
    penalty based solely on the underlying conduct that is already
    unlawful. In essence, it allows the very same conduct to be
    punished twice, first as the underlying crime, and then again
    and more severely as money laundering.
        Thank you again, Mr. Chairman, for allowing NACDL the
    opportunity to be heard on these very important issues.
        [The prepared statement of Mr. Pollack follows:]
                     Prepared Statement of Barry J. Pollack

                                   __________

        Mr. Conyers. Attorney Marcia Madsen is with the Institute
    for Legal Reform, which is an affiliate of the United States
    Chamber of Commerce.

       TESTIMONY OF MARCIA G. MADSEN, INSTITUTE OF LEGAL REFORM,
                          CHAMBER OF COMMERCE

        Ms. Madsen. Good morning, Mr. Chairman, Ranking Member
    Smith, Members of the Committee.
        My name is Marcia Madsen. I am a partner in Mayer Brown,
    and I am here today representing the United States Chamber of
    Commerce and its Institute for Legal Reform.
        I noticed you referred to me as a senior partner, Mr.
    Chairman. I have--ladies always wonder when someone uses that
    expression--but since 1985, I have practiced in the area of
    public contract litigation and, among other things, have
    defended companies and individuals in connection with the False
    Claims Act, which is the subject of my testimony today, and
    working in the public procurement area.
        So on behalf of the Chamber, I am really here today to talk
    about H.R. 1788, the legislation that was introduced yesterday
    to amend the civil False Claims Act.
        As an initial matter, I want to emphasize that the Chamber
    supports the Department of Justice and the agency inspector
    general in their efforts and role to identify and eliminate
    fraud involving taxpayer funds. The Chamber recognizes that the
    False Claims Act is an important tool to fight fraud in Federal
    contracts and Federal programs.
        The $21.6 billion recovered since 1986 evidences that the
    statute is working, particularly when it is deployed by the
    government. The Chamber believes very strongly the proposed
    amendments to the statute, which largely are directed at
    encouraging qui tam plaintiffs to file and maintain meritless
    actions are unnecessary. Further, those amendments may actually
    disrupt the government's efforts to pursue fraud, waste and
    abuse in Federal contracts and programs and unjustly--
    plaintiffs who have--who do not deserve to be rewarded.
        Since this Committee last looked at the False Claims Act
    amendments last summer, there have been some pretty dramatic
    changes in the government's investigative and oversight
    mechanisms and resources. There are just a couple of points
    that I would like to summarize from my written testimony.
        The first is, I would like to draw in particular the
    Committee's attention to the new mandatory disclosure rule that
    became effective in December 2008 at the behest of the
    Department of Justice. This new regulation, which was described
    by the government itself as a sea change, requires Federal
    contractors to disclose potential violations of the False
    Claims Act, certain criminal laws related to procurement, and
    significant overpayment.
        While this rule was initially exhausted, an amendment to
    the Federal Acquisition Regulation, which I will undoubtedly
    refer to as the FAR here and confuse everyone, that amendment
    became applicable to other programs very quickly, as it is sort
    of become--mandatory disclosure has kind of become the latest
    thing in government programs.
        It was quickly picked up by the implementing guidance in
    the American Recovery and Reinvestment Act for grants and
    assistance agreements and in the TARP legislation for financial
    agreements under the TARP, as well as contracts.
        But the point I want to emphasize to the Committee today
    about this regulation is that, because the government's
    investigators have direct access to obtain information from
    contractors and grantees, there is really no need to enact
    changes to the False Claims Act to further encourage relaters.
        Just in summary, the rule has two main features. First,
    contractors with larger contracts as required to have a code of
    business ethics and conduct, a government-approved internal
    control system, and that control system has to be designed to
    detect improper conduct.
        The system is required to include timely, mandatory
    disclosure whenever the contractor has credible evidence of a
    potential violation of the False Claims Act.
        Subcontractors also are required to have such a program and
    to make disclosures. And I heard the comments and the questions
    of the Members of the Committee today about concerns about
    subcontractors. They are covered by the rule.
        Importantly, contractors and subcontractors must provide
    full cooperation with government investigators, which includes
    providing access to employees who have information about the
    potential violation.
        The second point I would like to note is that a contractor
    of any size is subject to debarment for a knowing failure to
    timely disclose credible evidence of a violation of the False
    Claims Act under designated criminal laws or significant
    overpayment.
        This obligation does not end until 3 years after final
    payment, and it requires a look-back at the time of final
    payment, even if contract performance has long been completed.
        When you consider that only 2 percent of False Claims Act
    recoveries come from--it is pretty obvious, I think, that the
    government investigators' access under the mandatory disclosure
    rule is going to be a more effective means for determining
    whether there is a meritorious case or a violation at an
    earlier stage.
        And, Mr. Chairman, you commented earlier, what is the best
    way to get at fraud? And I would submit to you that the
    mandatory disclosure rule is a better solution than using
    third-party relaters.
        I would like to comment just briefly about some of the
    problems that arise in the legislation--really, in the proposed
    legislation, as a result of the advent of the mandatory
    disclosure rule.
        The first relates to the public disclosure provision. With
    the change to the amendment proposed in the bill, a relater
    would actually be able to proceed with an action involving the
    same transaction or facts that have already been mandatorily
    disclosed.
        Just a couple of examples. Because of the exclusivity
    standard in the bill, a relater who has any additional
    information, no matter how small, would be able to proceed,
    because it would be new information.
        Also, the definition of public is not clear, and it is not
    clear with that definition whether a mandatory disclosure would
    qualify as an audit or an investigation sufficient to have
    these actions dismissed.
        So unless this language is revised, it is possible that a
    relater would be able to obtain a recovery, even though the
    proper government authorities had the information and were
    pursuing it.
        A similar problem exists with respect to the bill's 9(b)
    provision. If a relater is subject to a lower pleading
    standard, the relater will be allowed to proceed to obtain
    discovery and potentially to obtain a mandatory--or is able to
    obtain a recovery even though the mandatory disclosure has
    already been made to the government and the government already
    had the information.
        We have the same concern about sharing information under
    civil investigative demands.
        The second point I just wanted to make very briefly--and it
    is made at length in my written testimony--is that the
    government in--really, in the last few months has tremendous
    new assets and resources and capabilities to pursue fraud.
        The recovery act created a new Accountability and
    Transparency Board, the ability to use the I.G. powers, and
    additional authority to compel documents and to have hearings
    and compel testimony. It also authorized the Recovery
    Independent Advisory Panel, which also can take evidence and
    hold hearings.
        The recovery act added new powers for the I.G.s and the GAO
    to investigate and to subpoena testimony from recipients of
    recovery act funds. And that is new authority for them.
        The recovery act contains a separate whistleblower
    provision authorizing damages and a right of action in Federal
    court. And it contains a lot of money for the inspector
    general, over $220 million for new resources.
        The TARP also gets a special I.G., extensive audit rights,
    extensive supervision by the GAO, and there is mandatory
    disclosure for TARP.
        So, in sum, I would just like to note that there really is
    no need to give relaters and their lawyers more tools to pursue
    fraud. When you think about the best way, the best way here is
    if the government steps in to the get the information and where
    is the value--value for the government is to use its resources
    and the information, rather than basically outsourcing that
    function to the relaters.
        I would be happy to respond to any questions.
        [The prepared statement of Ms. Madsen follows:]
                     Prepared Statement of Marcia G. Madsen

                                   __________

        Mr. Conyers. Jeb White, president of a couple of
    organizations that deal with the public interests and in
    dedicating their attention to combating fraud through promotion
    of the False Claims Act and other provisions.

                    TESTIMONY OF JOSEPH E.B. WHITE,
                        TAXPAYERS AGAINST FRAUD

        Mr. White. Chairman Conyers, Ranking Member Smith, and
    Members of the Committee, thank you for inviting me to speak
    here today. I am here on behalf of Taxpayers Against Fraud to
    voice our strong support for this commonsense law enforcement
    legislation, the False Claims Act corrections act of 2009.
        Since 1986, over $20 billion stolen dollars have been
    recovered under the False Claims Act, which includes over $12
    billion from qui tam whistleblowers' suits. And it is now
    widely considered the government's primary fraud-fighting
    weapon.
        However, over the course of time, liability loopholes have
    been ripped into the act, and judge-created procedural
    roadblocks have emerged, greatly undermining the Justice
    Department's effort and permitting fraudsters to steal our tax
    dollars with impunity.
        Late last congressional term, you sought to correct these
    problems by passing this very legislation. Unfortunately, time
    was short, and the bill ran out of time. However, with our
    country in the midst of an economic crisis and nearly $1
    trillion stimulus dollars now vulnerable to fraud, it is now
    more important than ever to fix the problems that are holding
    back the False Claims Act.
        We fully support every provision of this bill, but I wanted
    to highlight four problems that this legislation would fix.
    Number one, the bill clarifies that the act protects government
    money disbursed by government contractors. This clarification
    is badly needed to ensure that the act remains fully effective
    in an era in which so many government functions are outsourced
    to government contractors.
        As we all know, we now rely largely on this outsourced
    government to award and oversee contracts, to disburse
    government funds, and to detect fraud in our government
    contracting system.
        However, after a recent Supreme Court decision, false
    claims submitted to this outsourced government are now largely
    out of the reach of the False Claims Act. In this decision, the
    court read the act to apply only to false claims that are
    potentially reviewable by ``the government itself.''
        This bill closes that loophole by focusing not on who
    actually inks the check, but on the nature of the funding.
        Number two, the bill attaches liability when someone
    wrongfully retains an overpayment of government funds. This
    ``finder's keepers'' scheme is perhaps the most pervasive fraud
    attacking our American tax dollar, but the act remarkably does
    not reach these funds.
        For example, the act currently does not apply when health
    care providers identify overpayment brought to them through
    mistaken billing and then makes the deliberate decision to keep
    those funds. This blatant dishonesty would run afoul to
    criminal law and, as Ms. Madsen said, would run afoul of the
    mandatory disclosure rule, but it would not violate the Federal
    False Claims Act.
        Number three, the bill clarifies that a qui tam
    whistleblower with detailed knowledge of fraudulent schemes may
    proceed with his case, even if he can't get his hands on the
    actual invoices. This provision, which explicitly defines how
    Federal Rule of Civil Procedure 9(b) applies to qui tam suits.
    It is needed to remove the judicial confusion that is currently
    undermining the country's fraud-fighting efforts.
        The simple fact is that our Justice Department needs
    whistleblowers to provide the inside information about
    fraudulent schemes. They already have the invoices. They can
    access those through their files. They need the whistleblowers
    to point out the fraudulent schemes.
        This is precisely why the Justice Department has repeatedly
    and consistently argued for the very standard codified in
    today's bill.
        Number four, the bill vests solely with the government the
    power to dismiss cases that are based on public allegations.
    The act's so-called public disclosure bar is designed
    specifically to protect the government's interest from qui tam
    pleadings that merely copy public allegations of fraud.
        Other provisions in the act are designed to protect the
    defendant's interests. But when it comes to the public
    disclosure bar, it is the government who should properly assess
    whether or not the whistleblower's pleading are parasitic on
    what is out in the public domain.
        Yet, time and time again, defendants have improperly filed
    these motions under this provision and, time and time again,
    have delayed adjudication on the merit to wear down their
    opposition.
        In many cases in which the defendants have filed these
    motions, there is no government investigation involving the
    public disclosure. If the government was concerned about it,
    they would and can and do file motions to dismiss these cases.
        The opponents of this corrective legislation argue that the
    False Claims Act is working ``well enough.'' They argue that we
    don't need the inside information of fraud provided by
    whistleblowers. They argue that the country should somehow be
    satisfied with recovering a portion of its stolen funds.
        They offer up the recent regulatory life preserver as
    somehow plugging the gaping liability loopholes imparting upon
    the fraud-fighting vessel of the False Claims Act. The problem,
    of course, is that the False Claims Act relies upon inside
    information to uncover fraud.
        I encourage you to recognize the realities of fraud, the
    realities of fraud prosecution, detection, and support this
    legislation to rectify the deficiencies of this act. For when
    it comes to fighting fraud, particularly in today's economic
    environment, it is not a matter about settling for well enough.
        Thank you so much.
        [The prepared statement of Mr. White follows:]
                    Prepared Statement of Joseph E.B. White

                                   __________
        Mr. Conyers. Crime Subcommittee Chairman Bobby Scott?
        Mr. Scott. Thank you. Thank you, Mr. Chairman.
        Mr. Pistole, could you remind me how many agents that you
    had on board during the savings and loan crisis?
        Mr. Pistole. Yes, Congressman. We had approximately 1,000
    FBI agents who were dedicated to the savings and loan crisis.
        Mr. Scott. And is this crisis significantly more
    complicated than the savings and loan crisis?
        Mr. Pistole. Absolutely.
        Mr. Scott. I remember the savings and loan crisis, a lot of
    the crisis was caused by just the fluctuation in interest rates
    or the long-term rates just put a lot of banks out of business,
    and it wasn't the fraud and the schemes.
        Is more crime involved in these cases today than back then?
        Mr. Pistole. We believe so. And, obviously, we are still
    assessing it on a case-by-case basis, in terms of the dollar
    losses. But based on the suspicious activity reports that have
    been filed and our ongoing investigations, yes, the losses here
    appear to be much more significant than in the S&L crisis.
        Mr. Scott. And you had 1,000 then. How many do you have
    dedicated to the problem today?
        Mr. Pistole. We have approximately 250 FBI agents dedicated
    to the mortgage fraud issue.
        Mr. Scott. Okay. We have heard discussions of some of these
    loans and people looking the other way. If somebody packages up
    a bunch of worthless documents and passes them off as
    mortgages--worthy securities, where are the crimes?
        Mr. Pistole. Well, clearly, there could be false statements
    that are made. There could be wire fraud, mail fraud, as you
    mentioned earlier, in the securitization of those--the
    packaging of those mortgages and other financial instruments.
        So there is any number of fraud that may have been
    committed just depending on the actual fact of the
    investigation.
        Mr. Scott. Ms. Glavin, you indicated that there are
    hundreds of convictions. Can you give us an idea of the
    disposition of some of those cases, including the fines and
    forfeitures that you were able to get?
        Ms. Glavin. There have been hundreds of convictions since--
    between 2004 up until now for the many nationwide sweeps that
    the Justice Department has been involved in, in mortgage fraud
    cases.
        I can get you, you know, some more specifics on the exact
    sentences, but what I can say is, during the hundreds of people
    that have been arrested, convicted and sentenced, people have
    gotten jail time. There is restitution that is required to be
    ordered by statute in those cases, and I would refer you also
    to some of the specific examples I gave in my testimony on some
    of the sentences and the fines.
        Mr. Scott. Forfeitures?
        Ms. Glavin. Forfeitures, as well, yes.
        Mr. Scott. If billions and trillions of dollars have been
    lost in this mess, then trillions--billions and trillions have
    been made by somebody. Are we anywhere close to recovering a
    lot of what has been stolen?
        Ms. Glavin. I probably should separate out the two
    concepts. Millions of dollars can be lost, but, speaking from
    the perspective of the criminal division, we can't necessarily
    go after that unless it is related to a crime.
        So to the extent there is a crime involved, the criminal
    division and U.S. attorney's office will go after it, prosecute
    it, and we will seek restitution and forfeiture to the extent
    we can.
        Separately, if there is not a crime and money lost, you can
    certainly look at that from the department's civil division and
    see what civil enforcement remedies are available and if it
    meets the statute.
        But there is no question that the department will look,
    when appropriate, and seek restitution, forfeiture, and action,
    whether it be civil or criminal, to retain lost funding.
        Mr. Scott. Are you using RICO and conspiracy statutes?
        Ms. Glavin. I don't want to address this specifically using
    the RICO and conspiracy statutes unless they are appropriate
    and unless--I don't want to get out of--speak hypothetically,
    but we used what tools we have statutorily in fraud cases to go
    after--to go after these crimes.
        Mr. Scott. Do you know whether or not your forfeitures are
    more or less than the cost of the prosecutions?
        Ms. Glavin. I don't know that. I know, though, that each
    year--forfeitures in the last couple of years totaled hundreds
    of millions of dollars. I can't make an assessment based on
    what the cost would be of prosecuting a comparison to
    forfeitures.
        Mr. Scott. Iraqi contractor fraud, do we have a problem
    with jurisdiction?
        Ms. Glavin. We have been able to prosecute procurement
    fraud with respect to reconstruction in Iraq and Afghanistan.
    We have a procurement fraud task force that has been focusing
    on that. And there have been dozens of convictions as a result
    of our efforts.
        So I know that we are able to have jurisdiction in a number
    of instances, and we have had successful prosecutions. As to
    the specifics of whether there have been problems encountered
    on jurisdiction, I am happy to speak with my people about that
    and get back to you. But I know we have had success in that
    area.
        Mr. Conyers. Lamar Smith?
        Mr. Smith. Thank you, Mr. Chairman.
        Mr. Chairman, my first question is to Mr. Pistole. This
    follows up just a little bit on the first question that Mr.
    Scott asked you, about the number of agents, but I want to
    bring it current. Would you go into a little bit more detail
    about the FBI's agents that combat mortgage fraud, number of
    agents assigned to mortgage fraud, number of task forces that
    exist that combat it, as well, maybe something about law, local
    and State law enforcement efforts, and then any other
    initiatives that the FBI is taking?
        Mr. Pistole. Gladly, Congressman Smith. Thank you.
        Going from 2005, just to put it in context, we had about
    720 mortgage fraud investigations. We now have over 2,000
    investigations. And then in fiscal year 2007, we had about 120
    agents working. And as you have heard, we have more than
    doubled that to 250.
        We also have approximately 50 financial analysts,
    intelligence analysts who help work--just from the FBI--who
    work on this. And then there is an additional approximately 250
    State and local and other Federal agents and officers who work
    on the mortgage fraud matter.
        So that is a broad brush on it. We also have people working
    securities fraud and in corporate fraud.
        But in terms of the working groups and task forces, we have
    18 regional mortgage fraud task forces and 47 working groups,
    so a total of 65 regional task forces or working groups
    addressed to mortgage fraud. The other corporate and securities
    fraud address things such as the Ponzi schemes, such as Madoff,
    and then other issues. But that is just a brief overview on the
    mortgage fraud.
        Mr. Smith. Thank you, Mr. Pistole.
        Ms. Glavin, if I could ask you in regard to Federal
    criminal laws whether there are any gaps or whether there are
    any changes that you would like for us to make that will
    enhance the prosecution of mortgage fraud?
        Ms. Glavin. Yes, Congressman, the department has already
    expressed its support for the bill--the Fraud Enforcement and
    Recovery Act, which just passed--came out of Senate Judiciary
    Committee, and it contains what we would call enhancements to
    some of our fraud statutes. Some of the enhancements in those
    statutes mirror a piece of legislation I know is in draft form
    here in the House, the Fight Fraud Act.
        Those enhancements would be that we would support expanding
    the definition of financial institutions----
        Mr. Smith. Okay.
        Ms. Glavin [continuing]. In fraud crimes, such that they
    would include mortgage-lending businesses. That would make it
    easier for us to bring prosecutions.
        In addition, we would propose amending the major fraud
    statute, 18 USC 1031, it is focused on procurement fraud right
    now. And we would ask that it be amended such that it would
    include funds relating to TARP or economic stimulus.
        So those are some of the revision that we would support.
        Mr. Smith. Those are good suggestions. Thank you. And I
    hope we take them under advisement, as well.
        Ms. Madsen, let direct my next and final question to you.
    And let me mention some statistics in regard to the False
    Claims Act and ask you to respond.
        More than 90 percent of the amounts recovered in the false
    claims cases brought by private plaintiffs have come from the
    20 percent of the cases in which the Federal Government has
    intervened. That means that only 10 percent of recoveries have
    come from the 80 percent of the cases where the Justice
    Department has declined to pursue them.
        Could these numbers be evidence of the lack of merit to the
    majority of the False Claims Act cases brought by private
    plaintiffs?
        Ms. Madsen. Congressman Smith, I think there is probably
    some truth in that statement. I don't know that it is an
    absolute truth.
        Mr. Smith. I am just looking at it for a possibility here.
        Ms. Madsen. Possibility. I think--I mean, we know that
    the----
        Mr. Smith. Absolute truths are hard to find.
        Ms. Madsen. Right, right, especially--never mind.
    [Laughter.]
        The Justice Department reviews qui tam complaints very
    carefully, investigates them, and makes very thoughtful
    decisions typically about whether to intervene or not
    intervene. So I think you can safely say that, when the Justice
    Department decides not to intervene, they have made a
    conclusion that the case isn't probably worth--doesn't have the
    merit to be worth their time.
        Mr. Smith. And it seems that that is the case most of the
    time, is the point.
        Ms. Madsen. My friend, Mr. White, here would say, but, you
    know, in those additional cases, the relater should be allowed
    to proceed because there may be another in there somewhere and
    the Justice Department might get back in and there might be a
    recovery.
        I think the point here really is that, is that the most
    efficient really way to do this? Is that the right way to
    expend funds, particularly now that we have this mandatory
    disclosure rule, where the information is available to the
    government at an early stage to make its decisions about
    whether to proceed? Is that really the most efficient way to
    spend the money?
        Mr. Smith. Okay. Thank you, Ms. Madsen.
        I yield back, Mr. Chairman.
        Mr. Conyers. Hank Johnson?
        Mr. Johnson. Thank you, Mr. Chairman.
        You know, we live in a country where most of us are proud
    of the system that we live under. And we make certain
    assumptions about our system. And one the aspects of the
    criminal justice system is that, you know, it is an adversary
    system, both civilly and criminally. You have two sides. You
    have a judge to rule on the law. You have a jury on occasion
    or--and you have a right to a jury trial.
        And citizens, or peers, make the decisions on the substance
    of the allegations against you. And both--in order for that
    adversary system to work, one of those parties should not have
    their hands tied behind their back and the other one is free
    and big and healthy.
        And, you know, it is predictable what is going to happen in
    that kind of a situation. And regardless of whether or not the
    accused is innocent or guilty, the fact is that justice in this
    country comes when there is a fair trial.
        And so I support all measures that get at criminal
    misconduct. And also, you know, not to be left out of the
    consideration is the criminal defense bar.
        I know a lot of--under these measures that are being
    proposed, they bulk up the prosecution's ability to get at
    various crime, but I see nothing that would actually assist the
    criminal defense bar in terms of having the resources to defend
    these cases for people who will need public defenders.
        Of course, there is a group of--we certainly need to change
    our focus and concentrate more on the white-collar--I mean,
    upper echelon of the fraudulent activity, while at the same
    time dealing with those who perhaps may not have the funds to
    have an attorney, so they need a public defender.
        Would Ms. Glavin and Mr. Pistole, would you all support
    additional funding for the public defender's office federally,
    as well as grants, Federal grants to States to beef up their
    public defender programs?
        Ms. Glavin. I have not seen any type of proposed
    legislation on this. And I am sure that the department would be
    happy to take a look at this.
        Certainly, the department agrees that, in every case in
    which you have a vigorous prosecution, you are entitled to very
    competent defense counsel to defend against the prosecution. So
    I am sure that the department would be happy to look at any
    proposal that you might have.
        I am just not as familiar with what the funding levels are,
    so I can't speak to that.
        Mr. Pistole. Yes, Congressman, obviously, fundamental
    fairness and the rule of law assume that there is an adequate
    defense. And that is critically important to our system.
        I would be glad to work, obviously, with the department and
    the Committee to further explore that.
        Mr. Johnson. Okay, Mr. Pollack--Pollack or Pollack?
        Mr. Pollack. Pollack, Congressman.
        Mr. Johnson. I am sorry. Can you comment on that specific
    issue, as well?
        Mr. Pollack. Yes, Congressman. I think you have hit on a
    vitally important issue, and that is, as we beef up the Federal
    prosecution and investigation of these cases, we equally have
    to beef up the defense function. It is the only way that you
    are going to make sure that innocent people are not convicted
    along with the guilty.
        I talked with Congressman Scott about the vast disparity
    between the resources that are being allocated to the
    prosecution function and the defense function. And I think that
    disparity has to be lessened.
        I would also note that your point about public defenders is
    an apt one. And that line in terms of where the higher echelon
    is that can still afford the private bar versus the increasing
    numbers that are turning to public defenders keeps moving, and
    that is largely a function of the forfeiture laws that allow,
    at the time that a person is charged, while they are still
    presumed innocent and have been found guilty of no wrongdoing,
    to have their assets restrained and not available even for the
    use of their own defense, so that individuals who had had
    substantial resources nonetheless are turning to the taxpayer
    to fund their defense.
        And as long as that continues to be true, it is all the
    more important there are public resources available to defend
    these cases, which are necessarily complex cases that require a
    lot of resources to defend.
        Mr. Johnson. Anyone else want to comment?
        If I may, Mr. Chairman--okay, all right, thank you all very
    much.
        Mr. Conyers. Dan Lungren?
        Mr. Lungren. Thank you very much, Mr. Chairman.
        Mrs. Madsen, thank you for your testimony. I appreciate the
    fact that you have stated that Chamber's traditional position
    in supporting DOJ and the inspectors general, working to
    detect, investigate and prosecute fraud involving taxpayer
    funds.
        However, as one of the sponsors of the False Claims Act
    amendment, I am a little disappointed in the Chamber's position
    here. And I am trying to find out exactly what the position is,
    because you said two things. They both may be true and
    compatible, or they may be neither/or.
        You said, number one, I thought, that the False Claims Act
    has not been effective. And you gave the numbers of the
    relatively small amount of recoveries. And then, on the other
    hand, you said you don't support strengthening it.
        So what I am trying to find out is, are you saying the
    Chamber's position is you don't support the false--an effective
    False Claims Act or are you saying that you would support it if
    it were effective?
        Ms. Madsen. Mr. Lungren, you may have misconstrued my
    testimony. The statistics that the Department of Justice
    publishes show that in the cases in which the Department of
    Justice chooses to intervene, which is about 20 percent of the
    cases, are responsible for the lion's share----
        Mr. Lungren. I understand that. I heard that. You said
    that. What I would like to know is, do you support
    strengthening the False Claims Act to make it effective? Or do
    you believe it is inherently ineffective?
        Ms. Madsen. We believe the False Claims Act is effective as
    it sits and does not need these changes.
        Mr. Lungren. Okay, so it is effective, even though you have
    said that the results are paltry. I mean, that is what I can't
    quite understand.
        Again, I am biased in favor of it. People should know that
    it was originally called Lincoln's Law. It wasn't just Abraham
    Lincoln signed it, he thought it was so important. You read the
    language of the original act, it says it is to reward to the
    informer who comes into court and betrays his co-conspirator,
    indicating that there was a specific purpose to try and attract
    individuals who had knowledge to come forward.
        The second observation I have is that we have heard that
    the Department of Justice has a lot of work to do, has a lot of
    other things to do. Perhaps they can't get everything.
        And perhaps even if a smaller amount is gotten by these
    individual relaters, as opposed to the--as opposed to the
    Justice Department, the fact that they recovery means that that
    money was falsely obtained by the people against whom it was
    directed.
        The other question I would have is that, in 1986, we
    revived this law under President Reagan. As a matter of fact,
    the Reagan administration at that time sent us letters talking
    about how it was necessary for us to strengthen it. And as I
    recall at that time, some business groups supported the
    strengthening of the act so that it could be utilized.
        And do you know--I don't think you were there in 1986. I
    happened to be here in 1986. But do you know what the Chamber's
    position was back in 1986 when we improved the law?
        Ms. Madsen. You are correct that I was not here. But my
    recollection is that there were concerns about it. I think what
    has become visible, though, in the 20, what, 22 years since the
    law has been effective----
        Mr. Lungren. I was a mere child when I was here. I just----
        Ms. Madsen. Yes, I would have been a mere child, as well.
    The--is that when--when the statute is used by the Justice
    Department and when the Justice Department gets involved in a
    case that is--the law is very effective.
        The question is, for those non-intervening cases, whether
    that really is the best use of the government's money for those
    very, very small number of recoveries.
        And the reason I mentioned the mandatory disclosure rule is
    because the way the rule operates is that the contractors and
    grantees--and the rule also applies to Medicare
    intermediaries--has to disclose.
        Mr. Lungren. Right, no, I understand what you are saying.
        Ms. Madsen. They have to disclose.
        Mr. Lungren. You are supportive of those new improvements
    on those laws. I guess the question would be whether we need a
    multiplicity of laws to go against the fraud that might be
    there.
        I would just say that in 1986, the Business Executives for
    National Security, which is a group of executives basically in
    the ``military industrial complex,'' came forward testifying,
    saying they supported strengthening the law at that time,
    because, and these are their words, ``It is supportive of
    improved integrity to military contracting. The bill adds no
    new layers of bureaucracy, new regulations, or new Federal
    police powers. Instead, the bill takes a sensible approach of
    increasing penalties for wrongdoing and rewarding those private
    individuals who take significant personal risk to bring such
    wrongdoing to light.''
        And all I would say is, I think that testimony of that
    business organization, Business Executives for National
    Security, in 1986 is as valid today as it was then.
        Mr. Berman. Would the gentleman yield? I would ask for
    unanimous consent for one additional minute.
        Mr. Lungren. Of course I would be happy to yield to the
    gentleman who is going to agree with me.
        Mr. Berman. It is the only reason I asked.
        The gentlelady raises this issue, which I will pursue on my
    own time, of cases where the qui tam plaintiff brings the case,
    the Justice Department decides not to join in, but isn't it--
    but I would just--this bill has nothing to do with changing
    that particular issue.
        This is a bill that strengthens the law and deals with some
    unfortunate court decisions that apply whether it is a qui tam
    plaintiff without Justice Department intervention or the
    Justice Department taking over the lead role in pursuing the
    case brought by the qui tam plaintiff.
        In other words, the testimony regarding non-intervention by
    the Justice Department and the merits of those suits really has
    nothing to do with the bill that is now in front of us. That is
    the only point I wanted to make.
        The bill we are dealing with deals with the substantive
    law, not the issue of what happens to a case where the Justice
    Department decides not to intervene.
        Mr. Lungren. I thank the gentleman. And before returning to
    my time, I would just say, Mr. Chairman, we went through a
    period of time in World War II where Secretary Biddle at that
    time thought that, for some reason, the approach that underlies
    the essence of the False Claims Act somehow interfered with the
    government's opportunity to investigate and the government's
    opportunity to contract for needed services.
        And that led to the emasculation, essentially, of the law.
    And it was--again, I would just reiterate, during the Reagan
    administration, that there was a reconsideration of the
    question of whether or not you could just rely on the Justice
    Department to utilize its resources in these circumstances
    where we needed again to resurrect this law.
        And all I would say is that what we are attempting to do
    with our amendments is to correct some specific legal decisions
    that seem to call into question whether or not you can go after
    subcontractors for fraud. And we also facilitate the ease with
    which the plaintiff's case can be dismissed by the plaintiff
    and the interaction of the Justice Department and the original
    bringer of the action.
        So it really goes to the question of whether you are going
    to continue to have an effective False Claims Act.
        And thank you very much, Mr. Chairman, for the time.
        Mr. Conyers. Howard Berman?
        Mr. Berman. Thank you, Mr. Chairman. I just wanted to make
    a couple of comments and then ask a couple of questions.
        It has already been mentioned that this law has brought in
    $22 billion to the taxpayers of recoveries from fraudulent
    actors, by people who have contracted with the government. In
    recent months, we have taken extraordinary steps to revive our
    economy. We have used government funds to shore up private
    entities. We have made a massive investment of taxpayer dollars
    to stimulate the economy.
        We can have a debate about the merits of any of those bills
    and policies, but the one thing we know is that, in the context
    of all these different programs, there will be some bad actors
    who will try to defraud the government through these programs.
    And that makes it even more important that we at this point
    strengthen what has proven to be an enormously successful tool
    against fraud.
        So there is a particular logic to the timing of doing this
    now, given what we have done in terms of public investments and
    private sector or the use of contractors, these kinds of
    things.
        I was amused to hear the opponents' primary argument
    against a bill which seemed to be that the False Claims Act
    doesn't need any fixing because it worked well enough or, as
    Ms. Madsen, said it is even more than sufficient. I don't agree
    with that conclusion.
        And, by the way, I do have a vivid memory of 1986,
    because--as young as I was--that and the Chamber--had more than
    concerns about the bill. They were in outright opposition to
    the bill and spent the next several years after the bill
    passed--the bill that was signed by President Reagan--trying to
    repeal or dilute a variety of its provisions. That was the
    Chamber's position at that time.
        What we have here is several judicial decisions that have
    weakened key provisions of the False Claims Act, narrowed its
    application, misconstrued congressional intent, and I think, in
    many cases, the clear language in the law and the legislative
    history, leaving entire categories of fraud outside the reach
    of the law.
        Mr. White has talked about a number of those issues in his
    testimony, but I would like to ask Mr. White two questions.
        First, the Chamber asserts that only 2 percent of the
    recoveries under the False Claims Act have come from qui tam
    suits that the government declined to join, putting aside that
    a huge amount of the $22 billion comes from cases that, because
    qui tam plaintiffs filed them, the Justice Department had to go
    through a process, which in many cases caused them to join that
    lawsuit and doesn't speak to those monies.
        But that 2 percent figure, it seems low to me. And does
    that accurately reflect the contributions of these cases? Give
    us some examples of why that number doesn't tell the whole
    story.
        Mr. White. Mr. Berman, first off, I wanted to thank you for
    having the foreclosure back in 1986 to resurrect this bill.
        The second thing is, you know, during my tenure at
    Taxpayers Against Fraud, I have worked with a lot of good
    Federal and State government attorneys who are as zealous
    advocates of protecting the public--but I can assure you--and
    they would tell you firsthand--that they need the help of
    whistleblowers to uncover what is going on inside of that
    company. Putting aside the mandatory disclosure rule, where the
    company gives you what they say is going on, that inside
    information from whistleblowers is key.
        To provide you one example of why that number isn't
    accurate and doesn't reflect truly what happens, in 1989, a
    case was filed by two Northrop Grumman employees against the
    contractors involving radar-jamming devices. And what the
    employees were saying was that they were ripping off the
    government, the fact that they were over-billing, they were
    doing a whole host of fraud that happened.
        The government looked at the case and, 3 years later,
    decided to decline to intervene in that case. The relaters and
    their counsel, convinced that there was something wrong going
    on, proceeding forward for the next 9 years on their own,
    investigating, spending hundreds of thousands of dollars,
    investigating what was going on there.
        Finally, in 2002, 12 years after initially filing that
    case, the government intervened and the case settled in 2006
    for over $160 million. That case, in the Department of Justice
    statistics, is listed as an intervening case, but I posit that,
    for 9 years, the government wasn't there. It was because of the
    efforts of that relater's counsel.
        So that 2 percent number doesn't reflect the billions--and
    the number is well into the billions, and I can give you a more
    accurate count--of the times where the government declined, the
    relaters and their counsel moved forward, and the government
    subsequently intervened. Those cases happen time and time again
    to the tune of well over $1 billion.
        Mr. Conyers. Bob Goodlatte?
        Mr. Goodlatte. Well, thank you, Mr. Chairman.
        And I thank all these panelists for their contribution
    today.
        I would like to start by asking a question of Acting
    Assistant Attorney General Glavin.
        Welcome. You mentioned that the Department of Justice is
    working with the inspector general of the TARP to find ways to
    avoid fraud and abuse of the stimulus package fund. And I
    wondered if you could tell us in what ways you are acting
    together to accomplish this.
        And do you plan on harnessing technological tools, like
    tracking software, to track where the funds from TARP and the
    stimulus bill are going and how they are being used?
        I recently introduced legislation along with Congresswoman
    Maloney from New York that would require the use of software to
    aggregate all the government reports to get a full picture of
    how the recipients of the TARP money are using it. And I wonder
    if you are familiar with that technology and if you are
    planning on deploying it.
        Ms. Glavin. I am not as familiar with the technology just
    mentioned. What I can say about the department's relationship
    with the TARP is that, one, it is a natural relationship,
    because the TARP is going to be doing investigations. And, of
    course, the department would handle prosecutions or referrals.
    And we have already, you know, had discussions with the office
    of the SIGTARP about anticipating that and about how to do it.
        Secondly, I know there is coordination with the SIGTARP, in
    terms of I know that they are--that office has met a number of
    times with the FBI to sort of talk about coordinating and
    leveraging resources.
        I know the SIGTARP has also formed a task force with a
    number of different investigative agencies to talk about how to
    share information, leverage resources, do the necessary
    training, with a bill that includes a lot of sub-provisions to
    it and can sometimes be complex to understand how the monies go
    out and what to look for in terms of fraud.
        I know that the department also has had discussions with
    the SIGTARP, specifically about our experience with the False
    Claims Act and whistleblowers. SIGTARP has a hotline, and there
    would be a natural partnership there.
        So it is--we have an ongoing dialogue with the SIGTARP, as
    well as we do with most of the inspector general community.
        Mr. Goodlatte. In your communication with them, would you
    look into this technology, as well, and have conversations with
    them about the possibility of utilizing it?
        Ms. Glavin. I would be happy to follow up on that once I
    get a little more familiarity with it, sir.
        Mr. Goodlatte. Great. Thank you.
        And a follow-up question on a separate subject. What
    statutes is the department using in bringing charges against
    those who engage in predatory lending or mortgage companies
    that defrauded their customers?
        Ms. Glavin. I mean, the department uses its traditional
    statutes, such as the mail fraud, wire fraud statute. The
    amendments to the major fraud statutes, as well as the bank
    fraud statutes, that would expand the definition of a financial
    institution to include mortgage-lending businesses would give
    us another tool in which to prosecute people who defrauded
    mortgage-lending businesses, such that we don't always have to
    look for mails and wires and see that they are further into the
    scheme.
        One of the reasons that we support the amendments in the
    FERA legislation is because it would certainly make some of the
    crimes easier to explain and present, in terms of our grand
    juries and to juries.
        Mr. Goodlatte. Thank you.
        Mr. Pistole, it is my understanding the FBI has currently
    18 regional mortgage fraud task forces. And I wonder if you
    could explain that to us. Why were these task forces set up on
    a regional basis like that?
        Mr. Pistole. Yes, Congressman. The idea was to leverage the
    resources beyond the FBI with the other--both Federal, State
    and local investigators to approach the issue from a broader
    perspective.
        So in addition to those 18 task forces, we had the 47
    working groups. And we also have the national mortgage fraud
    team at headquarters to try to use intelligence, such as you
    were talking about with software, to drive those
    investigations, rather than sitting back and waiting for
    referrals, whether it is from SIGTARP or somebody else.
        So we have members from other, for example, HUD or Federal
    Reserve or State or local police, perhaps, that receive
    referrals trying to work in a unified way to bring a broader
    perspective, rather than just this specific, discrete area that
    would limit our information.
        The whole idea is to push as much information as we can to
    our partners, obviously, while protecting privacy and all those
    issues, but making sure that we have the best available
    information across the country. And we believe these regional
    task forces and working groups are the best way to accomplish
    that.
        Mr. Goodlatte. Are you getting results?
        Mr. Pistole. We are. We have had a number of successful
    matters. You heard about one earlier in Chicago, dealing with a
    recent takedown of an undercover operation, where we had some
    very good successes. And that is all part of this effort to
    leverage our resources with other agencies.
        Mr. Goodlatte. One more question, if I might, Mr. Chairman,
    to Mr. Mintz. Are you seeing results from your public awareness
    campaign to educate consumers about these various fraud
    schemes?
        Mr. Mintz. Thank you for asking.
        Frankly, no. And the reason is, as I said in my testimony,
    I think that there are so many multiple conduits from which
    people are hearing about help and so many multiple conduits to
    which they would go for help that the ability of swindlers to
    step in and interpose themselves as part of the help is very
    difficult to stem on a local level.
        It is why I have suggested that this Committee should
    consider using the 311 systems and the 211 systems across the
    country as the one tamperproof, already-trusted source through
    which people would be able to get information.
        From a local perspective, when I step up in front of a
    camera and tell the public, ``Be careful of X,'' you need to
    tell them where to go and where it is safe. And so if you all
    could leverage the resources and the regulations to make sure
    that, for example, only through 311s and 211s could you access
    HUD-certified counselors and add in a ban on the fee-for-
    service in this industry, you would effectively shift the tide,
    and people would be able to turn to the one number that they
    already know, the one number that nobody can pretend is them,
    and access those services.
        Without that, the truth is, it is a very complicated
    message, and it is much easier to be swayed by the swindling
    messages.
        Mr. Goodlatte. Thank you.
        And thank you for your forbearance, Mr. Chairman.
        Mr. Conyers. Sheila Jackson Lee?
        Ms. Jackson Lee. Mr. Chairman, thank you for holding this
    hearing. And it is both needed and maybe sad, a sad commentary
    on where we are with respect to the basic commitment to legal
    structures that will protect consumers.
        We have seen an enormous amount of challenges to the
    system. And I would suggest to my good friend, who is
    representing the criminal defense lawyers, that it is not
    expanded as much as it is fixing and restructuring, because
    apparently we have some glaring loopholes that large trucks
    have been able to go through both in the metaphoric manner, as
    well as literally.
        And I go to you, Assistant Attorney General Glavin, on why
    we are where we are. Let me just pose to you the fact that we
    have seen AIG prosecution, at least some malfeasance. We have
    seen it from a former hometown company of mine that had great
    respect previously, Enron. We have seen it from WorldCom,
    Adelphia. We have seen it from another native Texan, Stanford.
        We have seen these actions. We have seen a proliferation of
    major corporate fraud cases when we have also seen over the
    years, as our good friend from the criminal defense lawyers
    have indicated, maybe increase in penalties.
        Can you tell us what we are doing wrong that we are still
    seemingly having the atmosphere that creates or seems to grow
    these failures?
        Ms. Glavin. Congresswoman, where there is a lot of money
    involved--and this is an age-old problem--when money goes out
    the door, lots of money involved, greed is involved. It is not
    something that you could probably ever stop to the end of time.
        And what we do at the department is, when we see problems
    form, such as we saw with big corporate fraud in the last 10
    years, we put something out there to address the problem, like
    the corporate fraud task force, do what we can to get in front
    of it and prosecute those crimes, educate prosecutors as to the
    new schemes that develop.
        We see it again. The Hurricane Katrina fraud task force
    formed a few years ago. As soon as we recognized there would be
    a big outlay of funds in connection with that, we knew there
    would be fraud.
        Ms. Jackson Lee. So you are saying that the climate
    generates bad behavior in many instances sometimes. Let me just
    ask--give me one major new legal tool that you would want as
    part of the DOJ.
        Ms. Glavin. I have to pick one?
        Ms. Jackson Lee. Just one.
        Ms. Glavin. We support the passing of the Fraud Enforcement
    Recovery Act, so I would say that is one, even though it is got
    several legal tools in it. But at this time, we would support
    the passage of that, and it went through Senate Judiciary
    Committee.
        Ms. Jackson Lee. All right.
        Let me move quickly to Mr. Rheingold and ask the question,
    do you think we should add language in--either through
    legislation, a freestanding bill, and otherwise? There are some
    fine lines between how the CEO of corporations seems to emerge
    undercover.
        We know that our good friend from Countrywide is still
    moving about and certainly has quite a bit of freedom here in
    the United States. But we are trying to craft language that
    suggests that malfeasance, inappropriate behavior bars you from
    ever doing business with the United States, whether you come
    back as a turtle or you come back as a dove, which is what many
    of the corporations do.
        What do you think about that added enhancement, though, you
    know, barring doing business, obviously, means that if
    Countrywide, for example, had Freddie Mac and Fannie Mae loans
    and tragically so many people were hurt, that they just can't
    be in the business, no matter how they come back? What do you
    think about that?
        Mr. Rheingold. I think fundamentally it is a good idea. I
    think one of the questions, when we turn about all this money
    out there, we had all this money that wasn't being regulated.
    We had all of this money that was being pushed out there, and
    it was the wild, wild west. All sorts of bad behavior could go
    on because nobody was being responsible for it and nobody was
    being held accountable.
        So if you begin to hold the CEOs of these major companies
    accountable for the culture and the behavior of their
    companies, maybe that cost-benefit analysis will work in the
    future.
        So that next time lots of money is out there and lots of
    money can be made, they might think twice about creating a
    corporate culture that engages in systematic fraud.
        Ms. Jackson Lee. And let me quickly ask--and I would like
    to ask the FBI director if he would follow up on a question
    that I am going to ask, in terms of any tools that you need,
    and particularly on these whistleblower cases, which I think
    are very crucial. People need protection in the workplace.
        But, again, Mr. Rheingold, if, for example, you suffer--
    this is your consumer hat now, not necessarily your legal hat--
    suffered in your credit score because you were a victim to
    predatory lending, should you have an ability to seek an appeal
    or reprieve on a score that went down because of your
    victimizing through that predatory lending process?
        Mr. Rheingold. That is a whole other issue, but, yes, there
    are significant issues around consumers' ability to fix their
    credit score. Credit reporting and people's financial
    information is being ruined on a daily basis based on loans
    they should not have gotten, loans they didn't get.
        And, in fact, one of the things that we need to do to
    improve the Fair Credit Reporting Act is that people have more
    control over their financial information and correct errors in
    that. And right now, we have a fair credit reporting system
    that simply doesn't work properly to protect consumers.
        Ms. Jackson Lee. But if you would conclude--I just need you
    to tell me about the two that you may need on the whistleblower
    aspect. The FBI usually is investigating on the basis of
    whistleblower claims under some of the bills that have been
    here, but what do you need further to provide an enhancement
    and protection of that process?
        Mr. Pistole. Well, I agree with Ms. Glavin's comments. Our
    issue is more simply the number of resources, rather than the
    legal tools, other than what she has mentioned. So where the
    Committee and the Congress can be most helpful for the FBI and
    others is--are in the amount of resources that we have to
    address this critical issue.
        Ms. Jackson Lee. And you investigate both Federal employees
    and outside people who are whistleblowers?
        Mr. Pistole. Sure.
        Ms. Jackson Lee. All right.
        I yield back. Thank you.
        Mr. Conyers. Bill Delahunt?
        Mr. Delahunt. Thank you, Mr. Chairman. I want to pose a
    question.
        I mean, the economic crisis that we are in the midst of,
    the cause, if you will, of that crisis is not necessarily
    fraud, but it is the lack of a regulatory scheme--as I think
    you suggested, it was the wild west.
        If we had the tools and the resources had been allocated,
    would it have prevented the economic--or the financial crisis
    that we are experiencing?
        Mr. Rheingold. I think the answer is absolutely yes. I
    talked----
        Mr. Delahunt. It would have?
        Mr. Rheingold. It absolutely would have. I talked about
    what we saw----
        Mr. Delahunt. Without having a regulatory regime that----
        Mr. Rheingold. Oh, no. No, we need an--absolutely, we need
    to have a restructured regulatory market where accountability
    is in place.
        What we saw in the 1990's in communities like Roxbury, and
    Jamaica Plain, and Mattapan, and communities in Chicago and
    Atlanta, were the same fraud that now permeates the whole
    country. And we knew it was going to happen because there was
    no accountability and there was no regulatory structure that
    actually protected the consumer from the bad behavior of banks.
        And when States attempted to address those problems, most
    notably Georgia, the Federal regulators not only stopped those
    consumer--they not only did not support those consumer
    protections, but they pre-empted those consumer----
        Mr. Delahunt. Right. And I understand that. But I guess
    what I am saying is, is that--was there violations of a
    criminal statutory scheme that led to the crisis that we find
    ourselves in now?
        Mr. Rheingold. I am----
        Mr. Delahunt. Or is it lack of regulation?
        Mr. Rheingold. I am not a criminal attorney.
        Mr. Delahunt. Okay.
        Mr. Rheingold. But do I think that fraud permeated the
    mortgage lending industry for the last dozen years? Absolutely.
        Mr. Delahunt. But your understanding of fraud and my
    understanding of fraud might very well be the same, but it
    might be a behavior that currently is not criminalized.
        Mr. Rheingold. That could quite be possible. Again--yes.
        Mr. Delahunt. Let me ask the acting--the assistant attorney
    general, Ms. Glavin, her opinion on that.
        Ms. Glavin. I am not in a position to say what caused the
    current economic crisis.
        Mr. Delahunt. Okay.
        Ms. Glavin. What I do know is, looking back in retrospect,
    we have now seen a lot of schemes, such as Ponzi schemes, that
    could have gone on otherwise undetected that were exposed
    because people wanted to get their money out, it wasn't there--
    --
        Mr. Delahunt. The collapse itself----
        Ms. Glavin. Yes.
        Mr. Delahunt [continuing]. You know, revealed what was
    going on.
        Ms. Glavin. Yes.
        Mr. Delahunt. But we don't know or it is subject to
    debate--my own opinion is it did not precipitate the collapse,
    but the lack of regulation and a lack of transparency. And I am
    not suggesting that we don't need more resources and we don't
    need to review and provide more tools.
        If it comes down to tools or resources--and I will direct
    this to the government witnesses, what is more important?
        Mr. Pistole. If I could start off with that, Congressman,
    going back to your first part of your question, the issue is
    partially--from an audit standpoint, for example, you look at
    fraud, waste or abuse, obviously.
        Mr. Delahunt. Right.
        Mr. Pistole. Some of the activity may have been fraud,
    obviously was fraud. Some may have been waste or abuse, which
    may not be--rise to a level of criminal violation.
        Again, from our perspective, we are looking at resources,
    because we are trying to do a lot of different things and
    trying to be proactive, rather than just reactive. We wouldn't
    need additional resources to do that. So that is our--from the
    FBI's perspective, it is a resource issue as much it is legal
    regimen issue.
        Mr. Delahunt. Ms. Glavin?
        Ms. Glavin. They are both pretty important.
        Mr. Delahunt. Okay.
        You referenced the TARP and I think it was the inspector
    general. And yet what I found particularly disturbing recently
    was a comment by the chair of the congressional oversight panel
    expressing frustration in the--with the Treasury Department not
    providing answers to the oversight panel.
        You are seeing--at least from what I am hearing, you
    represent that you are working in a collaborative way with
    Treasury? And if so, what is your secret, that somehow you are
    doing a--you seem to be getting more cooperation than Congress.
        Ms. Glavin. Speaking from the criminal division, as a
    criminal prosecutor----
        Mr. Delahunt. Right.
        Ms. Glavin [continuing]. We are working with the SIGTARP.
        Mr. Delahunt. Give me--what does that mean, that acronym?
        Ms. Glavin. Well, I mean, when it happens is what we do
    when we work with any inspector general's office.
        Mr. Delahunt. So it is the inspector general's office?
        Ms. Glavin. Yes, when I refer to the SIGTARP, I am
    referring to Mr. Barofsky, Neil Barofsky.
        Mr. Delahunt. And his team?
        Ms. Glavin. Yes.
        Mr. Delahunt. And does he have the resources?
        Ms. Glavin. You are going to have to ask him a little bit
    more. But what I can say is that there have been--I know he has
    had discussions with other investigative entities about how to
    leverage the resources.
        He has a certain amount of money in his budget. He wants to
    see if he is doing things that may perhaps overlap or he can
    work with FBI on so that they can pool their resources.
        Mr. Delahunt. I would hope that you and the FBI would
    coordinate with the inspector general and provide answers to
    the congressional oversight panel when they are proffered.
        Mr. Pistole. Right. We are, Congressman. And he is building
    his staff--I think he is up to 50 now--from where he was a
    couple months ago when he had just a handful.
        We actually had a meeting with him and his staff in New
    York yesterday. We meet regularly here. We have agents and
    analysts embedded with him to make sure that we can de-conflict
    and use those resources in the best possible way. And I would
    defer to him on the response to the oversight.
        Mr. Delahunt. That is all I have, Mr. Chairman.
        Mr. Conyers. Thank you.
        Mr. Delahunt. I thank the panel.
        Mr. Conyers. I thank them, too.
        This has been an extremely polite discussion about some
    matters that I don't think have been covered adequately. To be
    honest with you, the failures of the Federal justice system are
    so enormous that to rationalize them with a few bills that will
    be taken up, and everybody will agree with, does not uncover
    the failure to anticipate.
        You know, we all have talked about--we know that when huge
    amounts of money go out that there are going to be problems
    that follow it. But there is nothing in the Department of
    Justice annals that show that anybody did anything about what
    they already know would happen.
        It is always after the fact. And this hearing only sets a
    predicate for us to begin to try to get in front of the curve
    and not come rushing in with these homilies about the--we know
    people do wrong, will do wrong when the large amounts of money
    are flowing around. So if I don't feel happy about what I have
    heard, it is because it is correct.
        So I thank you very much. And the Committee is adjourned.
        [Whereupon, at 12:22 p.m., the Committee was adjourned.]
                                A P P E N D I X

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                   Material Submitted for the Hearing Record