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Each year, millions of Americans depend upon a transparent, efficient, and effective bankruptcy system. Besides about 400,000 debtors who seek a fresh start annually, millions of creditors rely on the bankruptcy process to obtain at least some repayment of money they are owed. Add to that the impact the bankruptcy system has on preserving value, saving jobs, and providing the opportunity for individual debtors to become productive members of the economy again, and it is no wonder that the Founders made enactment of a uniform system of bankruptcy laws one of the enumerated powers granted to Congress in the United States Constitution.    

As debtors and creditors are well-aware, the bankruptcy system involves a lot of financial disclosure and compliance with rules. Failure to play by the rules may result in debtors losing their discharge of debts and creditors forfeiting their ability to receive a distribution. Beyond these and other civil consequences, certain egregious and fraudulent acts also may subject violators to criminal penalties, including incarceration.

The honesty and integrity of the bankruptcy system is so core to the general welfare and prosperity of the nation that Congress has enacted six sections in the Criminal Code identifying 18 crimes that apply specifically to bankruptcy. Those provisions are in addition to many other laws that bring certain bankruptcy-related conduct into the realm of criminal enforcement.  

Department of Justice

Each year, the Justice Department’s United States Trustee Program (USTP) makes more than 2,000 referrals of suspected criminal conduct to United States Attorneys who may prosecute these cases. By law, the USTP must make referrals and assist in the prosecution. In addition to assigning about 25 of its attorneys to help prosecute bankruptcy crimes, the USTP also directs USTP lawyers and financial analysts to work with prosecutors on investigations, grand jury proceedings, and criminal trials.

To further enhance bankruptcy enforcement, the Justice Department has organized about 60 local bankruptcy fraud and related working groups consisting of multiple federal law enforcement agencies. The most prominent participants generally include the United States Attorneys, USTP, FBI, IRS, U.S. Postal Inspection Service, Social Security Administration, and the Department of Housing and Urban Development. These groups discuss local challenges (e.g., mortgage scams), enforcement strategies, and targets of investigation (subject to prescribed limitations on information-sharing).  

By law, the USTP publishes an Annual Report of its criminal enforcement activities. The breakdown of referrals consistently shows that most crimes pertain to debtor misconduct, but far from all. The Annual Report compiles referrals into nearly 50 categories. The top five areas are tax fraud, false statements, bankruptcy fraud (e.g., continuing a fraudulent scheme by use of the bankruptcy process), concealment, and identity theft (e.g., use of false social security numbers).  

Examples of Prosecutions

The following are examples of some recent prosecutions based upon USTP referrals:

• A payday loan servicer used personal information provided by customers to create false loan portfolios. The defendant then sold the portfolios to debt buyers who filed illegitimate proofs of claim in bankruptcy cases. The defendant collected more than $7 million from the sale of the false debts, lied to a bankruptcy court about the scheme, and ultimately pleaded guilty to several bankruptcy and non-bankruptcy crimes.
• The head of a New York-based private equity fund threatened economic harm to a potential competing buyer of bankruptcy estate assets. The misconduct was revealed by the competing bidder. The USTP conducted an immediate investigation and filed a comprehensive report in bankruptcy court that was the basis for the indictment and conviction. The defendant struck a quick plea agreement that included incarceration. On a positive note, the defendant has lectured at prominent law schools about the temptations to commit unethical acts in the heat of high-stakes financial and bankruptcy transactions.
• A debtor falsified bankruptcy documents by creating false liabilities in an attempt to show an inability to repay creditors and also concealed more than a million dollars in assets, including gold coins and bank deposits. Concealment cases are all too prevalent and have included hiding valuable assets ranging from jewelry to a Maserati to a chateau in France.   
• A fraudster offered mortgage relief to homeowners facing foreclosure, received mortgage payments without trying to negotiate with the lender, and improperly filed a bankruptcy petition in the homeowner's name. The defendant defrauded more than 70 homeowners and was sentenced to 12 years in prison. Credit repair and mortgage relief schemes continue to be far too commonplace, harm lenders, and devastate families trying to save their homes. It has long been a focus on federal and state civil and criminal enforcement efforts.
• A consumer bankruptcy lawyer embezzled client funds, never performed services for which he was paid, and filed false documents in bankruptcy court. There was a large number of victimized clients, and not all of them could be identified because the lawyers destroyed client files. The bankruptcy lawyer was sentenced to 18 months in prison.

Conclusion

While it may seem that creditors are always in the regulatory crosshairs, most bankruptcy prosecutions involve debtor misconduct, and those convicted of bankruptcy crimes include wrongdoers from all walks of life. Bankruptcy criminals include not only debtors facing desperate financial circumstances but also many fraudsters who prey upon the financially vulnerable, attorneys and financial professionals, and even celebrities from the worlds of sports and entertainment. The victims of bankruptcy crimes often include both the debtor and creditors. And the list of victims always includes the integrity of the bankruptcy system on which the whole country depends.

If you have information about a possible bankruptcy crime, contact the USTP’s Bankruptcy Fraud Hotline at: USTP.Bankruptcy.Fraud@usdoj.gov.

Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.