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FBI Corporate Fraud Overview

Corporate Fraud

General Overview

As the lead agency investigating corporate fraud, the FBI has focused its efforts on cases which involve accounting schemes, self-dealing by corporate executives, and obstruction of justice. The majority of corporate fraud cases pursued by the FBI involve accounting schemes designed to deceive investors, auditors, and analysts about the true financial condition of a corporation or business entity. Through the manipulation of financial data, the share price, or other valuation measurements of a corporation, financial performance may remain artificially inflated based on fictitious performance indicators provided to the investing public. In addition to significant financial losses to investors, corporate fraud has the potential to cause immeasurable damage to the U.S. economy and investor confidence.

While the number of cases involving the falsification of financial information remains relatively stable, the FBI has observed an increase in the number of insider trading cases. Insider trading has been a continuous threat to the fair and orderly operation of the U.S. financial markets and has robbed the investing public of some degree of trust that markets operate fairly. The dissemination of material, non-public information, commonly referred to as insider information, has also caused irreparable harm to victim institutions whose employees illegally pass privileged corporate information. The FBI has worked extensively with the U.S. Securities and Exchange Commission (SEC) to target the widespread problem of insider trading which has plagued the fair and orderly operation of the securities markets.

Additionally, corporate fraud matters involving self-dealing by corporate executives, particularly utilizing companies to perpetrate large-scale, high-yield fraud schemes, continue to be an issue of concern. Traditionally, Ponzi schemes were perpetrated by individuals or small groups within a community environment. However, the current financial crisis resulted in the exposure of several large Ponzi schemes (e.g. Petters Worldwide investigation) perpetrated not on an individual community level, but on a corporate national level by executives of what were once considered legitimate companies.

The FBI continues to address corporate fraud cases—specifically involving subprime lending institutions, brokerage houses, home-building firms, hedge funds, and financial institutions—as a result of the financial crisis partly caused by the collapse of the subprime mortgage market in the fall of 2007. As a result of the current financial crisis, trillions of dollars in shareholder value were lost, several prominent companies went out of business, several prominent banks failed, and the federal government provided over a trillion dollars in relief to keep other companies from failing.

A subprime mortgage lender is a business that lends to borrowers who do not qualify for loans from mainstream lenders. Once the subprime loans have been issued, they are bundled and sold as securities—a process known as securitization. Fraud has been identified throughout the loan process, which commences with the borrower providing false information to the mortgage broker and/or lender. The next layer of potential fraud— the corporate fraud—occurs with the banks, brokerage houses, and other financial institutions that package loans through the securitization process. As the housing market declined, subprime lenders have been forced to buy back a number of nonperforming loans. Many of these subprime lenders have relied on a continuous increase in real estate values to allow the borrowers to refinance or sell their properties before going into default. However, based on the sales slowdown in the housing market, loan defaults increased, the secondary market for subprime securities dwindled, and the securities lost value. As a result, publicly traded stocks dramatically decreased in value as financial institutions realized large losses due to the subprime securities they held or insured, resulting in financial difficulties and bankruptcies. After experiencing a dramatic rise in cases during FY 2009, the number of investigations pertaining to the subprime industry has remained relatively stable during the last two years.

As publicly traded companies suffered financial difficulties due to subprime market losses, analyses of company financials have identified instances of false accounting entries and fraudulently inflated assets and revenues. Investigations have determined that several of these companies manipulated their reported loan portfolio risks and used various accounting schemes to inflate their financial reports. Additionally, before these companies’ stocks rapidly declined in value, executives with insider information sold their equity positions and profited illegally. The FBI continues to coordinate with the U.S. Department of Justice (DOJ), the SEC, and other U.S. law enforcement and regulatory agencies to identify and address possible corporate fraud.

Corporate fraud remains one of the highest priorities in CID. At the end of FY 2011, 726 corporate fraud cases were being pursued by FBI field offices throughout the United States, several of which involved losses to public investors that individually exceed $1 billion.

Corporate fraud investigations involve the following activities:

  • Falsification of financial information of public and private corporations, including:
    • False accounting entries and/or misrepresentations of financial condition;
    • Fraudulent trades designed to inflate profit or hide losses; and
    • Illicit transactions designed to evade regulatory oversight.
  • Self-dealing by corporate insiders, including:
    • Insider trading—trading based on material, non-public information—including, but not limited to:
      • Corporate insiders leaking proprietary information;
      • Attorneys involved in merger and acquisition negotiations leaking info;
      • Matchmaking firms facilitating information leaks;
      • Traders profiting or avoiding losses through trading; and
      • Payoffs or bribes in exchange for leaked information.
    • Kickbacks;
    • Misuse of corporate property for personal gain; and
    • Individual tax violations related to self-dealing.
  • Obstruction of justice designed to conceal any of the above-noted types of criminal conduct, particularly when the obstruction impedes the inquiries of the SEC, other regulatory agencies, and/or law enforcement agencies.

The FBI has formed partnerships with numerous agencies to capitalize on its expertise in specific areas such as securities, tax, pensions, energy, and commodities. The FBI has placed greater emphasis on investigating allegations of these frauds by working closely with the SEC, Financial Industry Regulation Authority (FINRA), Internal Revenue Service (IRS), Department of Labor, Federal Energy Regulatory Commission, Commodity Futures Trading Commission (CFTC), U.S. Postal Inspection Service (USPIS), and Special Inspector General for the Troubled Asset Relief Program (SIGTARP), among others. In September 2010, the FBI executed a memorandum of understanding with the SEC and placed a supervisory special agent within the SEC’s Office of Market Intelligence in order to facilitate cooperation in a variety of financial investigations. This assignment has facilitated case referrals between both agencies. In addition, the FBI is an active member of the Financial Fraud Enforcement Task Force (FFETF) created by Presidential Executive Order in November 2009. As reflected in the statistical accomplishments of the FBI, the cooperative and multiagency investigative approach has resulted in highly successful prosecutions.

The FBI has also worked with numerous organizations in the private industry to increase public awareness about combating corporate fraud, including the Public Company Accounting Oversight Board, American Institute of Certified Public Accountants, Association of Certified Fraud Examiners, and the North American Securities Administrators Association, Inc. These organizations have been able to provide referrals for expert witnesses and other technical assistance regarding accounting and securities issues. In addition, the Financial Crimes Enforcement Network and Dun & Bradstreet have been able to provide significant background information on subject individuals and/or subject companies to further investigative efforts.

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