    [Senate Hearing 111-191]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-191

     THE NEED FOR INCREASED FRAUD ENFORCEMENT IN THE WAKE OF THE ECONOMIC
                                    DOWNTURN

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

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 11, 2009

                                   __________

                               Serial No. J-111-5

                                   __________

             Printed for the use of the Committee on the Judiciary

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                           COMMITTEE ON THE JUDICIARY

                      PATRICK J. LEAHY, Vermont, Chairman
    HERB KOHL, Wisconsin                 ARLEN SPECTER, Pennsylvania
    DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
    RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
    CHARLES E. SCHUMER, New York         JON KYL, Arizona
    RICHARD J. DURBIN, Illinois          JEFF SESSIONS, Alabama
    BENJAMIN L. CARDIN, Maryland         LINDSEY O. GRAHAM, South Carolina
    SHELDON WHITEHOUSE, Rhode Island     JOHN CORNYN, Texas
    RON WYDEN, Oregon                    TOM COBURN, Oklahoma
    AMY KLOBUCHAR, Minnesota
    EDWARD E. KAUFMAN, Delaware
                Bruce A. Cohen, Chief Counsel and Staff Director
                  Nicholas A. Rossi, Republican Chief Counsel

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     1
        prepared statement...........................................    89
    Kaufman, Hon. Edward E., a U.S. Senator from the State of
      Delaware.......................................................     4
    Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
        prepared statement...........................................    99

                                   WITNESSES

    Barofsky, Neil M., Special Inspector General, Office of the
      Special Inspector General for the Troubled Assets Relief
      Program, Washington, D.C.......................................     7
    Glavin, Rita M., Acting Assistant Attorney General, Criminal
      Division, Department of Justice, Washington, D.C...............     9
    Pistole, John S., Deputy Director, Federal Bureau of
      Investigation, Washington, D.C.................................     5

                             QUESTIONS AND ANSWERS

    Responses of Neil Barofsky to questions submitted by Senators
      Grassley and Kaufman...........................................    27
    Responses of Rita Glavin to questions submitted by Senator
      Grassley.......................................................    34
    Responses of John Pistole to questions submitted by Senator
      Grassley.......................................................    41

                           SUBMISSIONS FOR THE RECORD

    Barofsky, Neil M., Special Inspector General, Office of the
      Special Inspector General for the Troubled Assets Relief
      Program, Washington, D.C., statement...........................    46
    Donohue, Kenneth M., Inspector General, Department of Housing and
      Urban Development, Washington, D.C., statement.................    51
    Gilligan, William R., Jr., Acting Chief Postal Inspector, United
      States Postal Service, Washington, D.C., letter................    68
    Glavin, Rita M., Acting Assistant Attorney General, Criminal
      Division, Department of Justice, Washington, D.C., statement...    70
    O'Dowd, Kyle, Associate Executive Director for Policy, National
      Association of Criminal Defense Lawyers and Brian W. Walsh,
      Senior Legal Research Fellow, Center for Legal and Judicial
      Studies, The Heritage Foundation, Washington, D.C., joint
      statement......................................................    91
    Pistole, John S., Deputy Director, Federal Bureau of
      Investigation, Washington, D.C., statement.....................   101

     THE NEED FOR INCREASED FRAUD ENFORCEMENT IN THE WAKE OF THE ECONOMIC
                                    DOWNTURN

                                  ----------

                   WEDNESDAY, FEBRUARY 11, 2009
                                           U.S. Senate,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:07 a.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
    Leahy, Chairman of the Committee, presiding.
        Present: Senators Leahy, Whitehouse, Klobuchar, Kaufman,
    and Grassley.

    OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
                          THE STATE OF VERMONT

        Chairman Leahy. As we all know, we are in the middle of
    trying to put together the stimulus package. We have everybody
    being pulled five different ways.
        Senator Grassley is the Ranking Member of the Finance
    Committee, and the Finance Committee, of course, is an integral
    part of this. I am one of the senior members of the
    Appropriations Committee and may have to go, but I know you
    have to go to a meeting with the Majority Leader, Chuck. Why
    don't I yield to you so you can give your opening statement.
    You are going to be acting as Ranking on this thing, anyway.
    You are one of the cosponsors of the bill. Why don't you go
    ahead and then come back whenever you can.

    STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR FROM THE STATE
                                OF IOWA

        Senator Grassley. It is my intention coming back, although
    I do not have any idea ahead of time how much Senator Reid
    wants of our time. But I should give him all the time he wants.
    So thank you very much, Mr. Chairman, for that courtesy. Thank
    you very much for holding this important hearing. It is very
    timely, particularly given the economic downturn, particularly
    the unprecedented amount of money from the Treasury that is
    going to be expended to shore up the banking system, retail
    lending institutions, and efforts to stabilize housing. In
    these times of Federal financial intervention in the
    marketplace, we need heightened awareness about how taxpayer
    dollars are being spent and what controls are in place to
    ensure that they are effectively used.
        Today's hearing is an opportunity to discuss the important
    work done by auditors, Federal agents, prosecutors, and others
    in their efforts to investigate and prosecute particularly
    mortgage fraud. The economic crisis that the country is
    experiencing began with problems that were related to the
    overleveraged, overpriced, and unsustainable housing bubble.
    Simply put, the housing market got too big, too fast, and there
    were not enough controls.
        With so much money in the housing market, unscrupulous
    individuals found a marketplace that was lax in regulation and
    enforcement, making it easy to commit fraud. I refer to a chart
    here that my staff will put up that is based upon information
    collected by FinCEN, the Financial Crimes Enforcement Network,
    in Treasury. This chart shows the number of ``suspicious
    activity reports'' filed by banks related to mortgage
    transactions.
        As you can see, the number of these SARs increased very
    dramatically between 1996 to 2007, with over 52,000 reports
    filed in 2007. While suspicious activity reports do not in
    themselves represent criminal wrongdoing, they are an indicator
    of potential criminal acts such as mortgage fraud, money
    laundering, identity theft, or even tax evasion.
        This hearing is not limited to mortgage fraud, and we have
    an opportunity to examine the impact that fraud and abuse are
    having on our entire economy. As I stated earlier, the problems
    in our housing market are the root. Each and every American has
    been impacted whether they have lost a job, whether they owe
    more on their home than it is worth, or even if they try to
    purchase a new car. The financial markets have experienced the
    most dramatic decline, and so have manufacturers, consumers,
    and small businesses.
        When Congress passed the TARP legislation, I pushed to
    ensure that we had a strong, independent Inspector General, and
    that led to the creation of the Special Inspector General for
    TARP. So I am pleased that that person is here, getting that
    office up and running, and helping us account for the
    taxpayers' money.
        Today I am interested in examining the prevention and
    recovery side of the TARP program and all efforts to stabilize
    the economy. Mainly, I want to know what we can do with our
    criminal laws to deter and prevent wrongdoing. I also want to
    focus on how our civil fraud laws can be used to recover
    taxpayers' money if it is fraudulently gotten.
        I think today's panel will help shed some light on
    potential criminal activity that has occurred in the housing
    market and things involved with the TARP program if it not used
    appropriately. They will also be able to discuss the danger
    that unscrupulous individuals pose to a successful recovery.
        Finally, this hearing provides an opportunity to discuss
    the important legislation that you, Chairman, and I have
    introduced under your leadership to provide important fraud-
    fighting resources, and particularly an area I am interested
    in, strengthening the Federal False Claims Act. So I thank you
    for that and the courtesy in cooperating with me in that
    effort.
        Thank you very much, Mr. Chairman. I did not read my whole
    statement. I would like to put the whole statement in the
    record.
        Chairman Leahy. Of course, we will, and I appreciate your
    being here, and I know you are going to come back as soon as
    you can. I joined with you and Senator Kaufman to put this
    legislation. I think on the question of increased fraud
    enforcement, this is not a partisan issue. This is something
    that Republicans and Democrats should certainly agree on. More
    importantly, the American people agree on it.
        Senator Grassley. Absolutely.
        Chairman Leahy. We have to find out how you protect the
    money that is being spent on the road to recovery in this
    economy.
        We have already spent hundreds of billions of dollars to
    stabilize our banking system. We are going to spend hundreds of
    billions of dollars more. Staggering amounts of money. We toss
    the figures around, but it is a staggering, staggering amount
    of money. We finally approved the American Recovery and
    Reinvestment Act in the Senate to boost the economy and create
    jobs.
        I do not think we have paid enough attention to the
    mortgage and financial fraud that has so dramatically
    contributed to the economic downturn. I was here a couple
    decades ago when we had the savings and loan crisis. Just like
    then, we have to rebuild and strengthen the Justice
    Department's ability to enforce Federal fraud laws, partly to
    recover the billions of dollars lost in real estate and
    securities schemes, but also to set a deterrent factor so it
    does not happen again. We have to ensure against the diversion
    of money, especially the huge amounts of money that are going
    to be necessary to rebuild our economy and provide jobs.
        So many Americans have lost their jobs and subsequently
    lost their homes. They expect us to at least find out what
    happened. And we know that there have been unscrupulous
    mortgage brokers and some Wall Street financiers who
    contributed to this.
        As the crisis worsened last fall, I called upon Federal law
    enforcement to track down and punish those responsible for the
    financial and mortgage frauds. So we are going to learn more
    about what tools we actually need to do that and more about
    what the Justice Department might be able to do.
        As I said, this is not a partisan issue. Senator Grassley,
    who just spoke; Senator Kaufman is here; the three of us
    introduced the Fraud Enforcement and Recovery Act. We want to
    strengthen fraud enforcement at the Justice Department, the
    FBI, the Office of Inspector General at the Department of
    Housing and Urban Development, and even the Postal Inspection
    Service.
        One thing I learned as a prosecutor in an earlier career,
    you can all have the laws in the world on the books, but if you
    are unable to enforce them, if you do not have the resource to
    enforce the laws and actually go after people who have broken
    the laws, they are meaningless. Our bill would actually give
    new tools for prosecutors to use in their fight against fraud.
    Senators Schumer and Shelby introduced a complementary bill
    calling for additional FBI agents, Assistant U.S. Attorneys,
    and staff at the Securities and Exchange Commission.
        We do know that banks and mortgage companies relaxed their
    standards for loans, approving ever riskier mortgages with less
    and less due diligence. It is almost like opening the door and
    saying, ``Hey, come on in. Fraud is welcome.'' Private mortgage
    brokers and lending businesses came to dominate the home
    housing market. These companies did not have the same kind of
    banking oversight and internal regulations that had always been
    in place to help prevent fraud. Now we see what happened with
    this lax supervision, and we have problems that are rippling
    not only through our country but around the world.
        In the last 2 weeks, the Justice Department has announced
    prosecutions involving more than $100 million lost to mortgage
    and real estate frauds. The FBI estimates there may be as much
    as $2 billion lost to these frauds each year. In my own State
    of Vermont, we saw a crooked mortgage broker who was convicted
    of defrauding homeowners and banks of over $1 million in deals
    related to more than 200 homes in Vermont and rural upstate New
    York. A million dollars does not seem like a lot with all the
    things we are talking about. In a small area like mine, it is a
    huge amount of money, and 200 homes, it is a huge amount.
        It is not just mortgage fraud. We had home mortgages
    packaged together, and they were turned into securities that
    were bought and sold in largely unregulated markets on Wall
    Street. Of course, as the value of the mortgages started to
    decline with falling housing prices, these securities
    unraveled. Some on Wall Street were not honest about these
    securities; that led to more fraud and victimizing investors
    nationwide--I might say, in some instances worldwide.
        So we have an unprecedented collapse in the mortgage-
    backed securities market. In the past year, banks and financial
    institutions in the United States alone have suffered more than
    $500 billion in losses associated with the subprime mortgage
    industry. Some of our Nation's largest financial institutions
    collapsed as a result. And that is not even going to things
    like the Madoff scandal, a $50 billion Ponzi scheme. If you
    were writing a book about something like this, everybody would
    say it would be too far-fetched to be real.
        So let us give our law enforcement agencies the tools and
    resources they need. After all, ordinary Americans who have
    suffered the brunt of this want to know that we are doing
    everything possible to find those who committed the fraud.
        Our witnesses this morning are Deputy FBI Director John
    Pistole, and Rita Glavin, the Acting Head of the Justice
    Department's Criminal Division. Neil Barofsky is the new
    Special Inspector General for the Troubled Assets Relief
    Program. You are going to be a busy person.
        Senator Kaufman, did you want to add anything to this
    before we start?
        Senator Kaufman. Yes, I just have a longer statement I will
    ask to be put in the record, but----
        Chairman Leahy. And I will put my full statement in the
    record, too.
        [The prepared statement of Senator Leahy appears as a
    submission for the record.]

     STATEMENT OF HON. EDWARD E. KAUFMAN, A U.S. SENATOR FROM THE
                           STATE OF DELAWARE

        Senator Kaufman. Mr. Chairman, the behavior of Wall Street
    executives, investment bankers, the credit agencies, mortgage
    brokers, and other players in the recent financial meltdown was
    complicated, tangled, a confluence of many factors--and in the
    end, devastating to the financial and economic well-being of
    millions of Americans.
        For the purpose of the hearing, I just have really one
    overriding question, and that is, was any of this behavior
    illegal? The question itself has a complicated answer, so I
    think one of the things we really want to work on is to ensure
    that the Justice Department, the FBI, and the regulatory
    agencies have all the resources and tools they need.
        As Attorney General Holder said at his swearing-in, ``Only
    by drilling down can Federal law enforcement understand the
    various transactions that took place, investigate the actions
    and behaviors of persons and firms who engaged in suspected
    illegal activity, and prosecute those whom the Justice
    Department or regulatory agents believe to have engaged in
    criminal activity.''
        I hope this hearing and I am convinced this hearing will
    help move the ball forward in trying to answer the question,
    and that is, during this time was any of this behavior illegal?
        Thank you. I am looking forward to your testimony.
        [The prepared statement of Senator Kaufman appears as a
    submission for the record.]
        Chairman Leahy. Thank you.
        Our first witness will be John Pistole, who began working
    with the FBI as a Special Agent in 1983. He served in
    Minneapolis, New York, and FBI hearing before becoming a Field
    Supervisor of the White-Collar Crime and Civil Rights Squad in
    Indianapolis, Indiana. There he created a Health Care Fraud
    Task Force and a Public Corruption Task Force. He then served
    as Assistant Special Agent in Charge in Boston where he had
    oversight of all white-collar crime investigations in
    Massachusetts, Maine, New Hampshire, and Rhode Island. He also
    helped lead the Information Security Working Group following
    the Robert Hannsen espionage case, something that I recall
    being fully briefed both in open aspects of it and the
    classified aspects of an intriguing case. After 9/11, he served
    in various leadership capacities in the FBI's Counterterrorism
    Division, including Executive Assistant Director. He was
    promoted to be Deputy Director of the FBI in October 2004. He
    got his undergraduate degree from Anderson University, his J.D.
    from the Indiana University School of Law in Indianapolis.
        Please go ahead, Mr. Pistole.

     STATEMENT OF JOHN S. PISTOLE, DEPUTY DIRECTOR, FEDERAL BUREAU
                   OF INVESTIGATION, WASHINGTON, D.C.

        Mr. Pistole. Thank you, Chairman Leahy, Senator Kaufman,
    other members of the Committee that may be here. I appreciate
    the invitation to be here today to talk on these critical
    issues of mortgage fraud and other economic crimes. Today, what
    I would like to do is just give a very brief overview of the
    law enforcement challenge facing us and describe the FBI's
    current efforts in this regard.
        Since 2005, we have addressed a significant increase in
    mortgage fraud and related cases. In fact, we had 721
    investigations in that year, and now we have over 1,800
    investigations currently. Of course, we expect an upward trend
    to continue.
        Our work in mortgage fraud and related crimes generally
    appear in two distinct areas, the first being fraud for profit,
    of course, which Senator Kaufman and, Chairman, you were
    referring to. These are individuals who false inflate the value
    of the property or issue loans relating to fictitious
    properties. These schemes rely, of course, on ``industry
    insiders,'' those appraisers, accountants, mortgage brokers,
    and other professionals who override lender controls designed
    to prevent this type of crime from happening.
        The second area we refer to is fraud for housing, which an
    individual borrower, typically with the assistance of a real
    estate professionals, acquires a house under false pretenses.
    This usually involves a borrower who misrepresented his or her
    income or employment history to qualify for a loan, which they
    would not normally obtain. Obviously, many of these loans end
    up in default, and there is a resulting financial loss,
    sometimes substantial, to the institutions involved and, as we
    have seen, ultimately the taxpayer.
        The FBI is currently working to address this environment in
    several ways. First, we have shifted resources such that over
    240 FBI agents are currently assigned to mortgage fraud and
    related investigations, and another 100-plus agents working
    corporate fraud matters. We sponsor 55 mortgage task forces or
    working groups to further leverage available resources in our
    communities. We established an FBI headquarters-based National
    Mortgage Fraud Team to coordinate and prioritize the FBI
    efforts across the country, and to provide tools to identify
    the most egregious fraud perpetrators, and to work even more
    effectively with our counterparts in law enforcement,
    regulatory, and industry leaders. Even before the creation of
    this national initiative, we received results from our
    increased focus in this area.
        For example, last June, completed the initial phases of
    what we called ``Operation Malicious Mortgage'' involving the
    arrest of more than 400 defendants nationwide believed to be
    responsible for over $1 billion in estimated losses. This
    initiative has focused on three types of mortgage fraud:
    lending, of course; mortgage rescue schemes; and mortgage-
    related bankruptcy schemes. To date, there have been 164
    convictions and forfeitures or seizures of more than $60
    million in assets. Our work in that initiative, and others,
    continues.
        In closing, it is clear to Director Mueller and me and our
    law enforcement partners that more must be done to protect our
    country and our economy from those who try to enrich themselves
    through illegal financial transactions. We are committed to
    doing so, and thank you for your support.
        [The prepared statement of Mr. Pistole appears as a
    submission for the record.]
        Chairman Leahy. Thank you very much, Deputy Director.
        Neil Barofsky is the Special Inspector General for the
    Troubled Assets Relief Program at the Treasury Department. He
    was confirmed by the Senate at the beginning of last December,
    I believe unanimously. Prior to his position as Special
    Inspector General, he worked as a Federal prosecutor in the
    United States Attorney's Office for the Southern District of
    New York. While in New York, Mr. Barofsky was a senior trial
    counsel heading the office's Mortgage Fraud Group. He had
    extensive experience as a line prosecutor in the office's
    Securities and Commodities Fraud Unit where his successful
    prosecution of the president and CEO of Refco earned him the
    Attorney General's John Marshall Award. He graduated magna cum
    laude from New York University School of Law.
        Mr. Barofsky, we are glad to have you here. Please go
    ahead, sir.

       STATEMENT OF NEIL M. BAROFSKY, SPECIAL INSPECTOR GENERAL,
    OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSETS
                    RELIEF PROGRAM, WASHINGTON, D.C.

        Mr. Barofsky. Thank you, Chairman, and thank you for that
    kind introduction. Chairman Leahy, Senator Kaufman, it is an
    honor to appear before you today.
        My office, the Office of the Special Inspector General for
    the Troubled Asset Relief Program--or, as we call it,
    ``SIGTARP''--began operations on December 15, 2008, the day I
    was sworn into office. And as we indicated in our initial
    report, which we delivered to each of you and each Member of
    Congress earlier this week, nearly $300 billion has already
    gone out the door on TARP. And yesterday, Secretary Geithner
    outlined Treasury's plans for the remaining balance of the $700
    billion in TARP funds. The total amount of Government money at
    risk in this program, as well as the other programs operated by
    the Federal Reserve, will total in the trillions. These huge
    investments of taxpayer money, made over a relatively short
    period of time, will require close oversight and will
    invariably provide an incentive to those seeking to criminally
    profit.
        Responding to these challenges has been and will continue
    to be a focus of my office. Of the four primary oversight
    bodies born from the Economic Recovery Act, we stand alone as
    the sole TARP oversight body charged with criminal law
    enforcement authority--the cop on the beat--and this is one of
    our most important functions.
        As we expand our Investigations Division, we have focused
    on building essential relationships with law enforcement and
    prosecutorial agencies. For example, I have joined the
    President's Corporate Fraud Task Force, and we have initiated
    relationships and cases with the FBI, the IRS, the Criminal
    Division of the Department of Justice, the New York State
    Attorney General's Office, and numerous U.S. Attorney's Offices
    around the country. Through the TARP-IG Council which I have
    formed and chair, we coordinate with the other Inspectors
    General whose responsibilities include oversight of TARP-
    related matters. We have already opened several criminal
    investigations, and we have teamed up with the SEC, recently
    helping them to shut down a securities fraud scam in Tennessee,
    where someone was illegally trading on the TARP name and reaped
    millions of dollars of ill-gotten profits.
        We have begun outreach to potential whistleblowers and
    those who may have tips about ongoing fraud, waste, and abuse.
    Our hotline and website are up and running, and plans are being
    formulated to help develop a ``fraud awareness program'' to let
    potential whistleblowers know who we are, how they can reach
    us, and how we can protect them. This proactive cooperation and
    coordination that is the heart of our investigative strategy is
    resource intensive, and we cannot shoulder this burden alone.
    We must work closely with our law enforcement partners.
        Based on my experience as an Assistant United States
    Attorney in the Southern District of New York from 2000 to
    2008, where I prosecuted securities fraud cases and founded and
    built our district's Mortgage Fraud Group, I saw firsthand the
    understandable shift, since September 11, 2001, in law
    enforcement resources away from white-collar crimes to
    terrorism. We saw areas of coverage shrink and prosecutorial
    thresholds rise. The Department of Justice's recent shift of
    focus to resource-intensive mortgage fraud investigation has
    further left other white-collar investigative efforts
    underfunded and underprosecuted.
        Now, with trillions of dollars going out the door under
    TARP, associated Federal Reserve facilities, and potentially
    more through the proposed stimulus bill, we stand on the
    precipice of the largest infusion of Government funds over the
    shortest period of time in our Nation's history. And,
    unfortunately, our history teaches us that spending so much
    money in such a short period of time will inevitably draw those
    who seek to profit criminally. One need not look any further
    than the recent outlay for Hurricane relief, Iraq
    reconstruction, or the savings and loan meltdown to learn
    important lessons. To fully address this potential criminal
    vulnerability, it is essential that the appropriate resources
    be dedicated to meet the challenges of both deterring and
    prosecuting fraud. As a taxpayer who is heavily invested in
    these programs, as a former Federal prosecutor who got a
    firsthand look at corporate greed, and in my current position,
    I applaud the efforts of this Committee to introduce bipartisan
    legislation, such as the Chairman and Senator Kaufman's Fraud
    Enforcement Recovery Act and Senator Schumer and Senator
    Shelby's Safe Markets Act. These will help ensure that law
    enforcement has the necessary resources to meet the daunting
    challenges that lay ahead. Such measures will greatly assist us
    and our partners as we engage in this historic effort to deter
    and prosecute those who would seek to criminally profit from a
    national crisis.
        Chairman Leahy, members of the Committee, this concludes my
    statement, and I would be happy and look forward to answering
    any questions that you may have.
        [The prepared statement of Mr. Barofsky appears as a
    submission for the record.]
        Chairman Leahy. Well, thank you very much.
        Our next witness will be Rita Glavin, who is currently the
    Acting Assistant Attorney General for the Criminal Division at
    the Department of Justice. She joined the Criminal Division as
    Acting Principal Deputy Assistant Attorney General in June of
    last year. She began her tenure with the Department in 1998 as
    a trial attorney in the Public Integrity Section, where she
    prosecuted public corruption cases for 5 years. She then became
    an Assistant United States Attorney in the Southern District of
    New York where she conducted complex white-collar
    investigations, trials, and appeals. Ms. Glavin received her
    Bachelor of Arts degree from Middlebury College, which, of
    course, is in Middlebury, Vermont, one of our finest
    institutions--my daughter-in-law graduated from there, too--and
    her J.D. from Fordham University School of Law, where she
    served as editor in chief of the Fordham Law Review.
        Ms. Glavin, glad to have you here. Please go ahead.

    STATEMENT OF RITA M. GLAVIN, ACTING ASSISTANT ATTORNEY GENERAL,
    CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

        Ms. Glavin. Good morning, Mr. Chairman, Senator Kaufman,
    and other members of the Committee. Thank you for your
    invitation to address the Committee today. The Justice
    Department welcomes this opportunity to testify on fraud
    enforcement and in support of the Fraud Enforcement and
    Recovery Act of 2009, which I will be referring to as ``FERA''
    or ``the Act.'' It is also a pleasure for me to be here
    testifying with FBI Deputy Director John Pistole and alongside
    my good friend and former colleague from New York, Neil
    Barofsky.
        This Nation's economic crisis, as you know, has had
    devastating effects on mortgage markets, credit markets,
    commodities and securities markets, and the banking system. The
    financial crisis demands an aggressive and comprehensive law
    enforcement response, including vigorous fraud investigations
    and prosecutions of any entities and individuals that have
    defrauded their customers and the American taxpayer or
    otherwise placed billions of dollars of private and public
    money at risk. Furthermore, a strategic and proactive approach
    for detecting and preventing fraud is needed.
        The Department, through its Criminal Division, the FBI, the
    U.S. Attorney community, and other components, has been
    investigating and prosecuting financial crimes aggressively. As
    the Attorney General has stated, we still must reinvigorate the
    traditional missions of the Department, and we must embrace the
    Department's historic role in fighting crime and ensuring
    fairness in the marketplace.
        This proposed FERA legislation gives us some of the tools
    we need to aggressively fight fraud in the current economic
    climate, and the Department thanks this Committee and Senators
    Leahy and Grassley for their leadership on this bill. The
    proposed legislation will provide key statutory enhancements
    that will assist in ensuring that those who have committed
    fraud are held accountable. FERA will also provide needed
    resources to investigate and prosecute those responsible for
    such misdeeds.
        It is clear that, along with widespread mortgage
    delinquencies and foreclosures, lender failures, massive losses
    by investors in mortgage-backed securities, and turbulence in
    the credit markets, there has been an alarming increase in
    mortgage fraud. Yet even before this current crisis, the
    Department was responding to such fraud. For years, we have
    been waging an aggressive campaign against mortgage fraudsters
    through vigorous investigation and prosecution, and we have
    deployed a broad array of enforcement strategies that ensured
    optimal use of our investigative and prosecutorial resources to
    maximize deterrence. We have conducted nationwide sweeps in
    mortgage fraud cases, formed local and regional task forces and
    working groups, and engaged in major undercover operations. We
    are also working to uncover rescue scams that target desperate
    homeowners trying to avoid foreclosure.
        As just one example, which Deputy Director Pistole just
    mentioned, in partnership with the FBI and numerous other law
    enforcement agencies, last year the Department conducted a
    nationwide sweep, ``Operation Malicious Mortgage,'' that
    resulted in charges against more than 400 defendants across the
    country, and it was brought by many of the more than 45 local
    and regional task forces and working groups currently targeting
    mortgage fraud. By fully utilizing these task forces and
    working groups, we have leveraged our limited resources by
    joining forces with Federal, State, and local law enforcement
    and regulatory partners, and we have ensured a coordinated and
    comprehensive response.
        Because of the complexity and creativity of these criminal
    schemes, the Department has embraced a collaborative approach.
    We work closely with many different law enforcement agencies to
    bring these prosecutions. For example, in a case investigated
    by the Secret Service and the FBI and prosecuted by the U.S.
    Attorney's Office for the Northern District of Georgia, a
    defendant agreed to purchase properties from true owners,
    assumed their identities, obtained further mortgages on the
    properties, used the identities of the homeowners and others to
    purchase vehicles, open bank accounts, and obtain passports
    which he then used to travel to Jamaica, Italy, and Greece
    while a Federal fugitive. His crimes resulted in clouded
    property titles in several States, a trail of over 100 victims,
    and millions of dollars in losses. That defendant was sentenced
    to 26 years in prison, ordered to pay restitution of almost $6
    million, and the Government obtained a forfeiture judgment of
    $6 million, access to the defendant's book and movie rights,
    and the right to sell the defendant's paintings on eBay in
    order to restore money to the victims.
        In a very recent example of the Department's collaborative
    efforts, just last week my colleagues in the Southern District
    of New York, working with the FBI, the New York City Police
    Department, and the U.S. Department of Homeland Security's
    Office of Immigration and Customs Enforcement, obtained a
    conviction of an attorney involved in a multi-million-dollar
    mortgage fraud scam that used the kind of fraudulent property-
    flipping practices that have become common with mortgage fraud.
    Twenty-five other people have pleaded guilty in connection with
    that same massive mortgage fraud scheme.
        But not just the criminal prosecutions did the Justice
    Department focus on. The Department is also addressing fraud
    through vigorous civil enforcement, including under the False
    Claims Act. The Department's recoveries under the FCA, with the
    assistance of private whistleblowers, have reached record
    levels. In 8 of the last 9 years, the Department's recoveries
    have exceeded $1 billion. Moreover, since 1986, the Department,
    working with Government agencies and private citizens, has
    returned more than $21 billion in public monies to Government
    programs and the Treasury.
        The Department has always been committed to fighting fraud,
    and as we suffer through the current economic crisis, we are
    committed to redoubling our efforts. This Act is an important
    and timely step in the process, and we applaud the initiative
    of this Committee in proposing this Act.
        I would be happy to answer any questions from the
    Committee.
        [The prepared statement of Ms. Glavin appears as a
    submission for the record.]
        Chairman Leahy. Thank you. I found interesting the idea of
    selling the paintings of the defendant on eBay.
        Ms. Glavin. We get creative.
        Chairman Leahy. Well, we did not have such things back when
    I was prosecuting cases. I may want to talk to you privately
    more about that.
        Deputy Director Pistole, we have seen, obviously, this wave
    of mortgage and securities fraud. It makes the whole method of
    recovery that much more difficult. I understand the number of
    suspicious activity reports filed by banks alleging mortgage
    and other fraud has climbed considerably. The notes I have is
    that in 2002 there were fewer than 6,000 reports alleging
    mortgage fraud; in 2008, there were 60,000 such reports--a
    tenfold increase; and since the collapse of some of the large
    Wall Street investment banks, a spike in securities fraud as
    well.
        You were involved in investigating the savings and loan
    crisis of the 1980s. How serious is the crisis today to put
    that in perspective?
        Mr. Pistole. Thank you, Mr. Chairman. The savings and loan
    crisis obviously went on for a number of years, from roughly
    1986 to 1995, depending on who you talk to, and obviously
    involved hundreds of millions of dollars of losses in a number
    of institutions. This obviously dwarfs that in terms of
    potential fraud, and that is what we are trying to identify in
    the stages we are right now.
        What we have seen is that the potential that has been
    referenced to in terms of the billions, the tens of billions,
    the hundreds of billions of dollars that is already out there
    under TARP, the $300 billion and additional money that is being
    made available, makes it a significant challenge.
        To give you some kind of context, during the height of the
    S&L crisis, the FBI had approximately 1,000 agents and
    analysts, financial analysts and others, working on the S&L
    crisis through a series of 27 strike forces around the country,
    as you are familiar with. Today, as I mentioned, we have about
    240 agents, and then there is another equivalent number of task
    force officers from other agencies, such as the others have
    mentioned, so probably around 500. But in terms of the FBI,
    around 240-plus agents just on the mortgage fraud-related
    matters.
        When we add in the additional financial analysts, the
    intelligence analysts, and things, it is a higher number, but
    you can see the challenge that we have.
        Chairman Leahy. It is only a fraction of what you had
    before.
        Mr. Pistole. It is a fraction. That is right.
        Chairman Leahy. What do you think is being lost to mortgage
    and security fraud annually?
        Mr. Pistole. In terms of a dollar amount?
        Chairman Leahy. Yes.
        Mr. Pistole. It is really impossible for us to say. The
    SARs that you mentioned obviously only represent a small
    portion of the overall potential fraud out there. It is just
    those institutions, financial institutions, that have
    depository requirements and obligations that are required to
    file the SARs. So there is a number of other institutions that
    are not required to file, and, of course, when they file, many
    times they do not know either the exact amount of fraud or the
    potential fraud involved.
        So it is very difficult to give you any type of number in
    terms of potential, other than to say the larger the dollar
    amount that is being funneled in through, for example, the $300
    billion, the higher the potential there.
        Chairman Leahy. It certainly dwarfs the savings and loan.
        Mr. Pistole. It certainly does.
        Chairman Leahy. In fact, Inspector General Barofsky, you
    work on these mortgage fraud cases. Did the fraud itself
    contribute to the instability and near collapse of some of our
    markets and banking system?
        Mr. Barofsky. I think that is a difficult question to
    answer. Certainly a lot of the----
        Chairman Leahy. That is why I asked it.
        [Laughter.]
        Mr. Barofsky. I am getting used to difficult questions. But
    I think that if you look at the collapse of mortgage-backed
    securities, obviously the collateral underlying those
    securities are mortgages. And the extent of mortgage fraud, I
    think it is difficult to put a number on it, but then you have
    to take that number and multiply it, because whatever the
    actual dollar amount of pure fraud, the bigger impact that it
    has on communities and surrounding areas, dealing with victims
    when I was head of the Southern District Mortgage Fraud Group,
    you would see that when a fraud hit a neighborhood, if it took
    out eight or nine properties that ended up getting foreclosed
    because of a foreclosure rescue scam where they steal the
    houses out from under homeowners, the ripple effect it has on
    the community is tremendous. It is a cyclical effect. It is a
    chain reaction of foreclosures because properties get
    overvalued in the community, then they are abandoned and
    foreclosed, and you have abandoned houses, squatters,
    neighborhoods deteriorate. All of this contributed to the
    financial crisis and a reduction in the value of those
    securities and ultimately the housing crisis.
        So, Mr. Chairman, I am not an economist and just really do
    not have the scope and breadth that my colleagues do here. But,
    yes, I think it has contributed.
        Chairman Leahy. Well, last--my time is up--I do want to ask
    this one question of Ms. Glavin. We are talking about the
    legislation that Senator Grassley, Senator Kaufman, and I have
    introduced, and I realize the Justice Department is still
    studying it. It does authorize additional resources for Justice
    and the FBI and the Inspector General at the Department of
    Housing and Urban Development, Postal Inspection Service, and
    so on. Do you have any preliminary views on it? And I will at
    least ask you this part, I do not want to get you ahead of your
    own Department, but do we need these additional resources?
    Senator Schumer and Senator Shelby have also proposed
    additional resources.
        Ms. Glavin. Senator, we are going to see the demands on law
    enforcement over the next few years really increase when you
    see $700 billion outlaid through the TARP program and you see
    the economic stimulus package. The demands are going to
    increase, and with the demands that are going to increase on
    law enforcement and the Justice Department to follow up and
    investigate, we are going to need resources.
        And so, to the extent this Committee is wanting to give
    resources to law enforcement, we are always appreciative of
    those efforts and welcome those efforts and support those
    efforts.
        Chairman Leahy. I am going to be discussing the legislation
    with Attorney General Holder, also, but I just--most people are
    honest. The ones who are not honest in this field are creating
    economic havoc. And I want to make sure that we are able to go
    after them, and I want to make sure that, one, we can recover
    whatever assets we can; but I want to see people prosecuted,
    and I want to see people who have committed such fraud and the
    havoc it has caused to this country--frankly, I want to see
    them go to jail.
        Senator Kaufman.
        Senator Kaufman. Mr. Pistole, clearly you do not have
    enough FBI agents. Can you tell me a little bit about the fact
    that this is a very different kind of a crime than what most of
    the FBI is? What is your capability and how do you see ramping
    up to get the FBI to have sufficient knowledge of financial
    markets and these kinds of things?
        Mr. Pistole. Thank you, Senator. I think I would respond in
    two ways.
        One is we have had a long history, obviously, of financial
    institution frauds, bank frauds, and things like that. The
    Enron type investigations also helped hone and refine our
    investigative abilities, along with our partner agencies and,
    obviously, the U.S. Attorney's Offices, in terms of
    investigating and prosecuting complex financial frauds, a
    number of other corporate frauds involved also. So I think our
    cadre of people are well prepared in dealing with some of these
    complex investigations. It is really a scope and breadth of
    really trying to manage expectations of the American people of
    what we can do with what we are currently addressing.
        Now, we have done a scrub of all our criminal investigative
    resources, and as you know, after 9/11, we moved almost 2,000
    criminal investigative resources over to national security
    matters, particularly counterterrorism. We have been gradually
    moving those back and have done that in terms of priority areas
    such as this mortgage fraud and the corporate fraud area, which
    is potential as significant in terms of the long-term complex
    investigations.
        We are taking a slightly different approach than we did,
    for example, on Enron, which involved trying to decipher every
    potential illegal transaction, and looking at it more, for
    example, like a traditional organized crime or even a drug
    investigation. We were trying to identify people in different
    levels and eliciting their cooperation and then moving along,
    as opposed to trying to prove every single transaction that may
    be illegal.
        Senator Kaufman. Great.
        Mr. Barofsky, let me go back and not in your present
    position but kind of when you were a prosecutor. It seems to me
    you believe that there was fraud that went on. If you were
    starting to prosecute cases, what is kind of the low-hanging
    fruit, what do you think are the most obvious cases that you
    would move on quickly to try to get the most number of
    prosecutions and put most of the bad people away?
        Mr. Barofsky. Well, when I started up the Mortgage Fraud
    Group in the Southern District, we focused to have--what I
    believe would have the greatest and quickest impact not only on
    putting people in jail but, as importantly, creating deterrence
    was going after the licensed professionals. For most of your
    fraud-for-profit schemes, which because of limited resources we
    focused on exclusively, the gatekeepers--the lawyers, the
    appraisers, the licensed mortgage brokers--the trial conviction
    that Ms. Glavin just referred to was a case that came out of
    our group, and the person who was convicted was an attorney.
    And making examples of those and letting their colleagues know
    that criminal behavior in these types of mortgage frauds is
    unacceptable, because they have the most to lose. Your run-of-
    the-mill fraudster will go from fraud to fraud. We see
    securities fraud defendants who are convicted and did their
    time, they are all over the mortgage fraud markets, and
    especially the unregulated side.
        But where you could have, I think, the biggest impact is
    focusing on those licensed professionals. They have the most to
    lose, they are the most likely to flip, and they make the best
    examples.
        Senator Kaufman. Thank you.
        Ms. Glavin, there are people that say--I have talked to a
    number of people that say, look, this is very complex, and, you
    know, really we should leave it to the regulatory agencies; you
    know, the criminal justice is kind of a blunt instrument to use
    in these kinds of cases. There are going to be opportunities
    that people are going to get hurt and the rest of that.
        Would you comment on that kind of a thought in terms of how
    we should be proceeding and dealing with this whole area?
        Ms. Glavin. The criminal justice system has been out in the
    forefront on white-collar crimes and financial fraud since the
    early part of this decade. In 2002, you had the Corporate Fraud
    Task Force. In 2003, we had the Enron Fraud Task Force. We have
    the prosecutions coming out of the WorldCom collapse,
    accounting fraud, corporate fraud. We saw it in Refco, which my
    colleague Mr. Barofsky prosecuted.
        Regulation works to one extent, but criminal law
    enforcement sends a very, very powerful message, and it also
    has tools that regulatory agents do not have. And I want to
    refer back to what Chairman Leahy said a few moments ago. One
    of the big deterrent effects is people go to jail, and in the
    criminal justice system, when you steal and when you leave
    people penniless and there are thousands of victims from a
    crime that you committed with criminal intent, prosecutors are
    in the best place to handle that. And we have been equipped to
    do that and have been doing that for the last 10 years when we
    have seen some of these major frauds happen.
        I also want to point out we were there at the forefront
    with Hurricane Katrina. We had our task force ready to go
    because we knew the fraud that was going to happen. The
    National Procurement Fraud Task Force was also ready to go.
    When we saw Government money going out, we were ready to
    prosecute the people that were going to misuse it.
        Senator Kaufman. Thank you. I totally agree with you.
        Chairman Leahy. Senator Klobuchar.
        Senator Klobuchar. Thank you very much, Mr. Chairman.
        Thank you to all of you. As I was getting ready for this
    hearing, I pulled out testimony that I had given to our State
    legislature many years ago when I was a local prosecutor and we
    were seeing some increase in white-collar crime. I used this
    John Kenneth Galbraith quote that I think is so--from the book
    ``The Great Crash of 1929,'' which is so applicable. He said,
    ``In good times, people are relaxed, trusting, and money is
    plentiful. But even though money is plentiful, there are always
    many people who need more. Under these circumstances, the rate
    of embezzlement grows, and the rate of discovery falls off. In
    depression, all this is reversed. Money is watched with a
    narrow, suspicious eye. The man who handles it is assumed to be
    dishonest until he proves himself otherwise. Audits are
    penetrating and meticulous. Commercial morality is enormously
    improved.''
        So you have a big job, to improve all of commercial
    morality.
        My question, first, I was reading your testimony, Mr.
    Barofsky, and you talked about--which I experienced after
    September 11th--this great shift which was necessary to the
    U.S. Attorney's Office working on terrorism, and it actually
    shifted down to the local units. Our Hennepin County Attorney's
    Office doubled our white-collar group, and it was actually a
    great experience, and we did a good job. But as the cases got
    more complicated, as we got into the mortgage fraud areas and
    some of these complicated computer crimes and frauds, I found
    that we did not have the resources in law enforcement on the
    local level to really do a good job of investigating those.
        So I thought maybe you could talk about this as you look at
    these partnerships. We never really got the Federal resources
    we needed for the computer analysis and the kinds of things as
    local prosecutors to handle those cases. How are we going to
    fix that?
        Mr. Barofsky. Resources, resources, resources. I mean, it
    is a real problem. And we saw in our district--and we are
    fortunate. The New York field office is, I assume, one of the
    largest field offices for the FBI. We have two districts in New
    York City, Southern and Eastern District, and we had,
    comparatively speaking, an abundance of resources compared to a
    lot of my colleagues I worked with in other districts. But even
    then, once the--you know, before the mortgage fraud focus,
    after 9/11, you just saw a drop-off of the number of cases that
    we were able to do across the board on white-collar fraud. And
    the focus on mortgage fraud--and we had, I think, 20--when I
    left, there were 20-something agents who were working with us
    in the Eastern District on our Mortgage Fraud Group and their
    Mortgage Fraud Task Force. But that necessarily drew down on
    other types of white-collar criminal activity--types of bank
    fraud, computer crime, intellectual property crime. And that is
    just on the Federal level.
        I am not really an expert on the local level, but from our
    task force and working group relationships, there is a need for
    these types of combined and leveraging of resources to address
    these problems because they are severe.
        Senator Klobuchar. And maybe, Mr. Pistole and Ms. Glavin,
    you want to comment. But one of these ideas was to have these
    computer centers where we could use the expertise of the FBI
    and forensic analysis that we did not have on the local level,
    because as your threshold levels went up, we were handling more
    and more complicated cases.
        Mr. Pistole. Yes, Senator. And, obviously, in the FBI we
    look at the State and local task forces as that force
    multiplier, not just for the Federal Government but for State
    and local task forces and law enforcement across the board. For
    example, in Minnesota, there are some Indian reservations, so
    we have Safe Trails Task Forces to deal with some of the crimes
    on Indian reservations, and Safe Streets Task Forces in
    Minneapolis and St. Paul.
        In the same fashion, these mortgage fraud task forces and
    working groups are designed to leverage the collaborative
    efforts of everybody in a way that brings more than the sum of
    the individual parts.
        In terms of the computer forensic lab, we have 16 of those
    across the U.S. and try to really use those in a fashion that
    does enhance the greatest needs across the country, not just
    the Federal or State or local, but looking collectively. And it
    is our goal to have many more of those as we progress and get
    funding.
        Senator Klobuchar. Very good. How about international
    crimes, which we started to see a lot of when I was leaving,
    and are there plans to address that in a better way, where we
    have these schemes that go across internationally and it is
    very hard to track those people?
        Mr. Pistole. Yes, many of our investigations, both on the
    criminal side but also in cyber, of course, involve
    international partners because many of the crimes are committed
    by people overseas. There is recent publicity about a $10
    million fraud being committed by a group of individuals in
    Russia against a particular bank, where people are just using
    the ATM as their personal wallet, just going up and getting
    money out and just draining them there, $10 million across the
    world.
        So we have 61 offices around the world, plus 15 sub-
    offices, 76 offices that act as that liaison with a host of law
    enforcement and intelligence services to make sure that we have
    quick exchange of information, chain of custody issues, if we
    are trying to prosecute back here, to work with the host
    governments to try to prosecute there if that is appropriate.
    So we have really had an expanded international focus,
    particularly since 9/11.
        Senator Klobuchar. Thank you.
        Senator Whitehouse. A couple of different questions. John,
    good to see you again. Pleased to be with you, sir.
        Mr. Pistole. Good to see you, sir.
        Senator Whitehouse. You referenced that the FBI has around
    1,600 mortgage fraud investigations that are currently open. I
    would like you to--obviously, you are not going to be able to
    be very specific about it, but characterize those to some
    degree, because you can have everything from the one-off
    fraudster who comes in and files his disclosure sheet
    improperly in order to get a mortgage, to somebody who is kind
    of a repeat offender and is a known fraudster and is going to
    do this over and over again to somebody who is involved in an
    organized criminal effort to defraud. And a number like this
    can look good, but if it is 1,600 ordinary folks who do not
    lead professional lives of crime but did violate the law on
    their application by filling out the form fraudulently, that is
    a very different response than 1,600 investigations that are
    really targeting people who are systemic wrongdoers.
        How would you characterize those 1,600 prosecutions along
    that spectrum?
        Mr. Pistole. Thank you, Senator. And good to see you again,
    sir. Actually, the updated figures are over 1,800
    investigations now, and they are largely based on the systemic
    fraud that we have seen at the professional level that Neil
    made reference to. There is a small number of those who the
    individual who was trying to obtain housing and commit fraud to
    obtain that, that is very small because we just do not have the
    resources to address that.
        But, for example, in Rhode Island, it is a matter of
    looking at those professionals, whether lawyers or mortgage
    brokers or real estate professionals, appraisers and others,
    that are systemically trying to defraud the system and getting
    up not only in the millions, but the tens of millions, perhaps
    hundreds of millions of fraud. So the majority of our 1,800-
    plus current investigations are focused on that, to look at
    that systemic fraud and try to take out those rings, if you
    will.
        We do see some limited involvement, if you want to call
    organized crime--there is almost any ethnic group, of course,
    you can put that name in front of it, whether it is Italian or
    Sicilian or Russian or Albanian or whatever. And we have seen
    some instances of that in terms of an enterprise, if you want
    to look at it for purposes of the RICO statute, a group of
    individuals associated, in fact, who are perpetrated these
    types of frauds. That is where we are trying to focus our
    resources right now as we try to leverage those resources
    through the various task forces and working groups we have. The
    key is using some fairly sophisticated software tools and
    working with HUD and others to try to use--to be an
    intelligence-based and an intelligence-driven approach rather
    than just reacting to SARs coming in and saying, OK, here is a
    fraud, potential fraud.
        So we are really trying to leverage that information that
    FinCEN puts out through the SARs, taking that, crunching the
    numbers, doing the analysis to say what is going on. And going
    back to Minneapolis, there has actually been a very focused
    effort in that regard looking at a small group of individuals,
    really, who have purchased hundreds of properties and used
    fraudulent documentation and a number of individuals involved
    in that to perpetrate a significant fraud. And so the same
    thing we are trying to do across the country to work smarter,
    more efficiently with what resources we have.
        Senator Whitehouse. And you mentioned 38 matters that are
    open directly related to the current financial crisis. That
    sounds like a number that would be small even for the Southern
    District of New York alone by the time this all shakes itself
    out. Where do you expect that number to go in the next year or
    two? And where would you like to see it? And what resources are
    needed to meet that demand? I mean, I would assume that number
    will be in the hundreds before very long.
        Mr. Pistole. It very likely could, Senator. And the numbers
    can be misleading, and, of course, as--who was it, Disraeli who
    said, the thing with numbers you have to watch out, ``There's
    lies, damn lies, and statistics.'' In terms of context, those
    38 are significant. These are companies, businesses that
    everybody knows about. I just cannot comment on them publicly,
    but these are significantly large, complex investigations, not
    dissimilar to the Enron investigation. We just use a different
    approach.
        But to specifically answer your question, we see that
    number potentially rising into the hundreds, and as the number
    of bank failures--there have been nine thus far this year--as
    those increase, the potential for fraud involved in some of
    those increases. So it is an exponential potential there.
        Senator Whitehouse. Mr. Barofsky, you have to deal with an
    awful lot of agencies. Coordinating with the Inspector General
    might not be their highest priority. Do you feel you have all
    the authorities that you need by statute in order to generate
    the cooperation, the support, and the information that you need
    to do your job?
        Mr. Barofsky. Yes, Senator. I think we do have the
    appropriate authorities, and the response and reaction has been
    very positive and favorable, from other Inspectors General,
    from--the FBI has been tremendously supportive, and we thank
    them especially as we are building up. I want to thank all of
    you for supporting the Special Inspector General Act for the
    TARP of 2009, which passed the Senate unanimously. And I look
    forward to the House also approving that bill, which will help
    us meet some of our immediate hiring needs and apply some of
    our authorities. But so far the reaction has been tremendous
    from other law enforcement agencies.
        Senator Whitehouse. Good. Mr. Chairman, my time has
    expired. If we are going to do a second round, I do have one
    more question.
        Chairman Leahy. Go ahead and ask the question.
        Senator Whitehouse. Ms. Glavin, I just wanted to ask how
    the Department is structuring itself to meet this need. Is
    there a task force model, a working group? Are there any--from
    a structure point of view, are you setting anything up to meet
    this anticipated bulge of effort?
        Ms. Glavin. There are a couple of things that we are doing
    right now. I think one of the most important things that we are
    doing is that the Department has been actively engaged in
    discussions with Mr. Barofsky about the best ways that we can
    help in terms of getting referrals from Mr. Barofsky through
    the investigations and what he is uncovering and then how we go
    about prosecuting. So the first thing we are doing is we are
    talking with the SIGTARP.
        The second thing is that within the last year or so, we
    have had--the Fraud Section of the Criminal Division has led a
    Mortgage Fraud Working Group which is a collection of
    representatives from various investigative agencies. They speak
    with U.S. Attorney's Offices. They find out what is going on in
    those offices. They talk about best practices. They look at
    mortgage fraud takedowns. They see what can we learn from that,
    what can we do better the next time.
        I know that there has been some discussion about whether to
    create a national mortgage fraud task force, and what I can say
    about that is that the Department is studying it. No decisions
    have been made with respect to that. And it is just something
    that is still under discussion in the Department as to what we
    want to do and the best way to coordinate.
        Senator Whitehouse. And the same with respect to corporate
    fraud?
        Ms. Glavin. Yes. In fact, we still have the standing
    Corporate Fraud Task Force, which met most recently with our
    newest member, Mr. Barofsky.
        Senator Whitehouse. Thank you.
        Chairman Leahy. Thank you.
        Senator Grassley is back, and before I turn to him, I just
    want to note we have written testimony of the Inspector General
    for the Department of Housing and Urban Development, Kenneth
    Donohue. Inspector General Donohue warns also that key Federal
    programs such as the Housing and Economic Recovery Act, passed
    last year to help homebuyers to avoid foreclosure, are also at
    risk of being exploited by fraud. Ten years ago, his office had
    more than 130 investigators dedicated to housing fraud. The
    last administration made cuts, and now there are none dedicated
    to housing fraud. Again, I think most people are honest, but we
    know some people are not. And with the amount of money we are
    pouring out, we have got to have people who can investigate
    fraud and then prosecute people for fraud and try to recover
    assets.
        I will put, without objection, Inspector General Donohue's
    whole statement in the record.
        [The prepared statement of Mr. Donohue appears as a
    submission for the record.]
        Chairman Leahy. Senator Grassley, again, is a cosponsor of
    this legislation. We are glad to have you back. Please go
    ahead.
        Senator Grassley. Thank you, and once again thank you for
    allowing me to work with you on that bill, and particularly the
    part that you put in about the False Claims Act.
        I am going to ask some questions to each of you, the first
    question at least for each of you. I have worked with
    whistleblowers a lot in my life in Congress. I consider them
    very courageous people. They bring forth a lot of valuable
    information. I think Enron in the private sector would be an
    example of it. This latest Madoff case of Wall Street would be
    another example.
        Usually, whistleblowers have a rough time, whether it is in
    the private sector or in the public sector. They are about as
    welcome in an organization as skunks are at a picnic. So I
    believe that as more Government money is pumped into the
    system, be it housing, financial institutions, any private
    business, we are going to have more whistleblowers come forth
    with information of fraud and abuse. So I want to ask both
    questions and have you answer each of them.
        How do you envision working with whistleblowers that come
    forward with good-faith allegations of fraud and abuse of
    taxpayers' money? And will you work cooperatively with
    whistleblowers and their counsel, if they have it, to ensure
    that they are protected from retaliation consistent with
    Federal law? Whoever wants to start out, I would like to have
    each of you give short answers, because I have two more
    questions I want to ask.
        Mr. Pistole. I will start off, Senator. Obviously, anybody
    who has credible information that can help either predicate or
    enhance an investigation, we look forward to working with, and
    their counsel, so no issues there from our perspective.
        Mr. Barofsky. Senator Grassley, first of all, I just want
    to thank you for your continued support of our office. Its
    creation and continued support have been invaluable. And
    whistleblowers are obviously one of the most important things
    we have for finding cases in the TARP. Our website is up and
    running. It has a link for whistleblowers to lodge complaints.
    We have a telephone number, toll-free, 877-SIG-2009. We are
    going to promote that with training and awareness programs to
    encourage whistleblowers to reach out to us with any
    information they have on any TARP program, whether they are
    within Government or without. And we are 100 percent committed
    to protecting whistleblowers. The IG Act makes it very clear
    that any whistleblower's information will remain confidential,
    but there are other certain circumstances where--there may be
    some circumstances where it has to be disclosed. But we will
    work vigilantly to protect the identity of whistleblowers to
    the extent they seek that protection. And we will make sure
    that they are not retaliated against.
        Ms. Glavin. Senator, as you know, the Department has
    enjoyed tremendous success in working with whistleblowers under
    the False Claims Act. We have obtained approximately $10
    billion in the past 8 years under the qui tam statute, and we
    have paid whistleblowers, who are also called relaters, a
    substantial amount of those recoveries--$1.6 billion in rewards
    under the statute for their laudable efforts.
        The Department believes that whistleblowers, often
    insiders, can serve a vital function in our law enforcement
    efforts in exposing potential fraud in connection with
    Government programs, and we expect that we are going to see
    some of that with the TARP, and whistleblowers will be treated
    the same way for their laudable efforts that the Department has
    historically treated them and have had a successful
    relationship.
        Senator Grassley. OK. Thank you.
        Now, Mr. Barofsky, as you know, the bailouts of Bear
    Stearns and AIG took place outside of the TARP. In fact, they
    were orchestrated through special purpose vehicles, which in
    these cases were limited to liability companies Maiden Lane,
    Maiden Lane II, and Maiden Lane III. Secretary Geithner
    announced yesterday that the revised approach for dissemination
    of TARP funds includes the use of Financial Stability Trusts as
    well as Public-Private Investment Funds. That may sound like
    Bear Stearns. I have this concern about the use of such
    vehicles because they seem to result in less transparency.
    Enron used an SPV to hide many of its assets. While my Finance
    Committee staff still has some documents to review from the AIG
    and Bear Stearns bailouts, much of the information is not
    public. I think it makes sense to fold oversight of the Bear
    Stearns and AIG bailouts into your office.
        Do you have any thoughts or concerns about taking on that
    responsibility? Do you believe that all special purpose
    vehicles, including those that the Treasury Secretary may
    implement, should be subject to the same filing and disclosure
    requirements of SEC companies? And, last, what other ways do
    you propose to bring transparency to Maiden Lane SPVs and
    similar things that taxpayers' money simply is not part?
        Mr. Barofsky. We will, of course, follow the lead of
    Congress in our jurisdiction of the coverage of areas.
    Obviously, right now under the existing statute, we are limited
    to TARP-related--tracing basically TARP-related funds. If this
    Congress wants us to look into and have jurisdiction over other
    areas, we will follow this Congress' lead, of course.
        With regard to the special purpose vehicles and
    transparency, I think that is a very serious concern. We
    addressed it just yesterday. We have initiated discussions with
    both the Federal Reserve and with Treasury to get a handle on
    what their plans are for transparency on the SPV with the TALF
    program, which are announced now may be as large as a $1
    trillion program. And we look forward to having those
    discussions, and we are going to make recommendations based on
    once we have a better sense of exactly what their plans are.
        A lot of these programs are still works under construction,
    and we plan on having a role in giving recommendations in their
    formation, as we have to date.
        Senator Grassley. Could I put the rest of my questions----
        Chairman Leahy. You can continue if you want. If the
    Senator from Iowa needs additional time, feel free.
        Senator Grassley. Then I might ask one more question. But
    by unanimous consent may I have exhibits put in?
        Chairman Leahy. Without objection.
        [The exhibits appears as a submission for the record.]
        Senator Grassley. Okay. Then this will be my last question.
        To Mr. Pistole, resources at the FBI have been reallocated
    as a core mission of FBI shifting its focus to
    counterterrorism. At the same time, we have had a dramatic
    increase in the amount of Federal Government resources into the
    private sector to shore up financial institutions, private
    businesses, and other Government-sponsored enterprises. Given
    these significant outlays of Federal taxpayer dollars, it would
    seem wise to make sure that adequate resources are available to
    investigate fraud. However, the FBI cannot simply let up on
    counterterrorism.
        Now, I am not known around here to be one to simply, you
    know, hand out money, but it seems to me that if we do not
    address this head on, we will have a hard time chasing
    taxpayers' money.
        Two questions, and then answer both of them at the same
    time. If Congress decides that the FBI needs more resources and
    agrees to fund them, what sort of controls can we expect to
    prevent the FBI from simply retasking those agents to different
    areas once they get the money? Would you adhere to any
    restrictions on the use of funding by Congress? I guess that is
    two questions, so then one more. If Congress does provide
    additional funding, will you pledge to comply with any
    reporting requirements that we include with those resources?
        Mr. Pistole. Senator, we currently have in place similar
    situations, for example, on our health care fraud investigators
    and in our Organized Crime and Drug Enforcement Task Force,
    OCDETF investigators, reimbursable positions that have much
    greater accountability and oversight than the other positions.
    But in response to your two-part first question, absolutely if
    we are given additional resources to apply to the mortgage
    fraud problem, that is what we would put them on. We need the
    bodies there. It is a huge problem that we look forward to
    addressing as robustly and as aggressively as we can. The 240
    agents working now are working very hard, and we have actually
    looked at our national security resources to see can we
    incrementally move some of those over without jeopardizing
    national security.
        So we are doing a complete scrub of all available resources
    to make sure that we are putting those resources where they are
    needed.
        Senator Grassley. Thank you, Mr. Chairman, for your
    kindness.
        Chairman Leahy. Thank you very much, and, of course----
        Senator Grassley. And also a letter, we have something that
    Senator Specter asked us to put in, too.
        Chairman Leahy. And I will keep the record open for
    anything that any member wishes to add to the record.
        [The letter appears as a submission for the record.]
        Chairman Leahy. Senator Kaufman.
        Senator Kaufman. Ms. Glavin, in those areas of finance that
    have gone unregulated, like derivatives and hedge funds, can
    you talk about how that makes trying to prosecute fraud cases
    more difficult?
        Ms. Glavin. Well, one of the--it does and it does not. In
    the areas that have gone unregulated, we still have at our
    disposal the same tools we have always had in fraud cases--mail
    fraud, wire fraud. You tell a lie to get money and you use the
    mails or the wires to do it, we can prosecute you.
        So, to the extent that some areas of the financial industry
    have gone unregulated, it does not mean that we cannot
    prosecute them, and it does not mean that we do not, you know,
    have the same tools at our disposal. We are still going to use,
    you know, the basics--you know, we can use wiretaps. We can use
    grand jury subpoenas. We still have all of our investigative
    tools at our disposal.
        And so I do not think that we are particularly hindered
    just because it is unregulated. I think the unregulated aspect
    to it could make it more ripe for fraud and heavier use of our
    statutes. But I think we can still go after those sectors.
        Senator Kaufman. All right. Mr. Barofsky, what are some of
    the telltale signs on Wall Street--now we are talking about
    financial fraud here--that fraud has been committed? In your
    old days a prosecutor now, what kind of things do you look at
    that just scream out that something has gone wrong here?
        Mr. Barofsky. Restatements are always good to see, any type
    of audit qualified opinions, you know, relying on auditors.
    Jumps and shifts that are unexplained or do not make sense. You
    know, for insider trading, there is a whole bunch of tell tales
    that we look for.
        The list is a long one, and we are going to be looking at
    those very closely, especially with respect to potential frauds
    in procuring TARP funds from financial institutions.
        Senator Kaufman. Mr. Pistole, can you kind of go through--
    clearly, there is going to have to be some training done here
    for FBI agents. Can you talk a little bit about how that is
    going to happen--you are talking about a rather massive scale
    up--how that would happen and what kind of funds are going to
    be required for that?
        Mr. Pistole. Yes, Senator. There are two aspects to that:
    the training of our current employees who are both the agents
    and financial and intelligence analysts who are investigating
    those. Again, many of those have the experience from the Enron
    type, or other investigations, in terms of the complex
    corporate fraud. And it is as much a practical issue that my
    colleagues Neil and Rita know about in terms of trying to take
    a very complex financial fraud and then making it presentable
    to a jury in a way that it makes sense. So that is just one of
    the practical challenges.
        The other aspect is the training of new agents and analysts
    who we are hiring. We actually have a fairly targeted
    recruiting effort trying to identify those people with the
    financial skills backgrounds that could be beneficial.
    Obviously, that is a longer-term proposal, but we look forward,
    believing this is going to be a long-term process for us, to
    having those people on board, whether 6 months, 9 months, a
    year from now, to complement those with the current experience.
    So it is really that twofold process.
        Senator Kaufman. Ms. Glavin, you start--at least I am
    starting to hear the old story, look, there are a few bad
    apples on Wall Street that did this, and, you know, they are
    just bad people, and, you know, why go to criminal
    investigations because it really is not a deterrent for these
    kind of folks. Could you just talk about that a little bit, how
    you see criminal investigations and criminal prosecutions as
    deterrent to the kind of folks that behaved in the bad behavior
    in the recent financial crisis?
        Ms. Glavin. I think that you can see historically through
    some of the prosecutions that have happened in corporate fraud
    over the last 10 years. Adelphia, you saw the people running
    the company were convicted after embezzling money from the
    company. It makes your corporate heads aware that they are
    responsible and that they cannot use money for their personal
    use. I think you saw with the Bernie Ebbers/WorldCom
    prosecution, that had an incredible deterrent effect on what
    CEOs do with money, what they are supposed to know about what
    they do with their money. And so criminal law enforcement, it
    is--a few bad apples, I cannot really speak to that. What I can
    say is historically when corporate leaders have been
    prosecuted, such as you saw with Skilling and Lay in Enron, it
    makes a difference and you see the way corporations operate,
    how they structure themselves, and how the boards want to pay
    more attention to what is going on in the company. It is
    effective because when you have a corporate head who is
    stealing or lying to the stockholders or participating in
    falsification of accounting records or reports to the SEC, the
    stockholders get victimized. And when it is prosecuted
    criminally, that is what makes a real difference, and that is
    what can make changes. And I think changes were already made
    because of some of those prosecutions.
        Senator Kaufman. Thank you. You three have a real challenge
    in front of you. I am glad you are doing this. Thanks.
        Chairman Leahy. Thank you.
        Senator Klobuchar.
        Senator Klobuchar. Thank you, Mr. Chairman.
        Do you say your name ``Gla-vin'' or ``Glay-vin''? Sheldon
    and I were having a senatorial debate over this fact.
        Ms. Glavin. It is ``Glay-vin.''
        Senator Klobuchar. Okay, good. I completely agree with what
    you have been saying. I saw it in our own cases. We once
    prosecuted nine pilots for not paying their taxes, and the
    Minnesota Revenue Department got millions of extra dollars in
    because people saw it in the news and they got very worried.
    And I think it has a positive effect going forward, but a
    deterrent effect. And one of the things that I am concerned
    about is that there has not been enough of this, some
    legitimately because of the transfer of resources over, and
    some because some of the regulatory agencies having basically
    been asleep at the wheel. And what comes to, I think,
    everyone's mind when they think about this is the Madoff case
    and how this could have happened when a whistleblower came
    forward. And while I do not expect you to go into the details
    of that, if you could just give some of your impressions of how
    that could have gone wrong, why that happened, and how we could
    not have that happen again?
        Ms. Glavin. I cannot really speak to all the particulars of
    the Madoff case because I am not in the weeds on that. What I
    can say is that I think what we may be starting to see is that
    as the economy went south, you see these sort of Ponzi schemes
    that were able to go along for a little while, and then all of
    a sudden, you know, there is a rush by the victims of the
    schemes who do not know they are victims yet. And then the
    money is not there when they go to get the money out.
        Just last week, our Fraud Section in the District of
    Minnesota----
        Senator Klobuchar. That was so nice how you brought that
    up. Very, very smooth.
        [Laughter.]
        Senator Klobuchar. Go on.
        Ms. Glavin. It took down a Ponzi scheme involving
    commodities that were supposed to be pooled into a trading
    account, and the charges in that case alleged that they were
    not really pooled at all, they just ran off with the money.
        So I think that for some of the frauds that we are going to
    see is that people are going to be exposed because they are
    going to need their money more now than when they invested, and
    then all of a sudden, that is going to expose that maybe some
    lies were told to them to get the money in the first place or
    that the money just is not there and was misused.
        Senator Klobuchar. That is why I used that quote at the
    beginning. They discover it when the times are bad.
        Mr. Barofsky, any thoughts on the Madoff case, and just
    your impressions of it and, I am sure, your frustrations when
    you found out what happened.
        Mr. Barofsky. Well, I am certainly proud of my former
    district for prosecuting the case. But I think the lesson is
    that--you know, we just started our hotline, and we are dealing
    with whistleblowers. But I think everyone is going to pay very,
    very careful attention to whistleblowers and tips, and I think
    that will be the one positive result of everything that
    happened with Madoff, is I think everyone will necessarily take
    a very careful--pay careful attention. And we are considering--
    as we are designing our hotline program, one of the things that
    I have done is I have hired a lawyer to be in charge of all
    things related to the hotline and review every single case, and
    we are going to have senior executive review, because we do not
    want to miss the next----
        Senator Klobuchar. Sometimes don't people get overwhelmed
    with these tips? I mean, we saw that after 9/11. There were,
    you know, many sightings of Osama bin Laden at the Mall of
    America in Minnesota and things like that. Sometimes you get
    overwhelmed with these tips, and how are you going to handle
    that?
        Mr. Barofsky. We are dedicating a significant portion of
    our modest resources to dealing with the hotline because we do
    think it is so important and it is such a potential area for
    significant investigations. But I think that really is the
    answer, that we are going to have to take some of our precious
    resources, which we have already done, and address this,
    because even if there is--you know, if there are 99 that are
    not necessarily valid tips, we do not want to miss that one.
        Senator Klobuchar. And one last thing. I think both of you
    referenced the experience after the hurricanes and some of the
    prosecutions, that you were ready to go and did that. Are there
    things you learned from that that will be helpful with this big
    influx for the TARP funds and the stimulus funds?
        Mr. Barofsky. I think what we are trying to do is get out
    in front as much as we can. One of the areas of our focus as an
    office in our oversight function is trying to make the right
    recommendations for funds before they go out the door, because
    I think that is going to make fraud prevention easier. It is
    going to raise deterrent levels. Obviously, we did not come
    into existence until most of the first tranche was committed or
    out the door, but we have had an impact on how the money since
    we have been there has gone out and some of the more
    significant programs, the Citigroup and Bank of America and the
    auto industry, and I look forward to working with Treasury to
    put the right conditions and fraud prevention into these
    programs before the money goes out the door.
        Senator Klobuchar. Thank you.
        Ms. Glavin, do you want to add anything?
        Ms. Glavin. The best response is what we want to do is
    coordination, coordination, coordination. You have got to have
    the law enforcement bodies working together and sharing
    information, and that is going to make the biggest impact. We
    have been doing that, and we are going to continue to do that.
        Senator Klobuchar. OK. Well, I just want to thank you as
    well, and I think these resources are going to be well spent.
    The public is crying out for accountability. This is a lot of
    money, and as Senator Kaufman said, you have a big job. But I
    know you are up to it, and we just have to be there to help
    you.
        Thank you.
        Chairman Leahy. Thank you. Whatever other questions I have,
    I am going to place in the record, and we will leave the record
    open, as I mentioned, to all of you. We are trying to learn as
    much as possible, especially with this new legislation. If
    after you see the transcript of your testimony you think, ``I
    should have added. . .,'' please feel free to do so. Or if you
    find any numbers in there that, as you look at it, on
    reflection you feel they are wrong, just note that so that it
    can be corrected. This is not a ``gotcha'' hearing. This is a
    hearing where we are trying to move a significant piece of
    legislation backed by Democrats and Republicans--a trend the
    Congress should return to. You do not have to respond to that.
    That is my own feeling.
        So I thank you all very much, and we stand in recess.
        [Whereupon, at 11:27 a.m., the Committee was adjourned.]
        [Questions and answers and submissions follow.]

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