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53–928 PDF 2009

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 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

RON WYDEN, Oregon 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

NICHOLAS A. ROSSI, Republican Chief Counsel 

(III) 

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 

(1) 

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 

2 

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 

3 

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 preVerDate Nov 24 2008 11:25 Dec 29, 2009 Jkt 053928 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\53928.TXT SJUD1 PsN: CMORC
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vent 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 pros- ecutions 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, 

5 

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. 

6 

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 

7 

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, 

8 

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— 

9 

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. 

10 

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. 

11 

[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 

12 

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 enforceVerDate Nov 24 2008 11:25 Dec 29, 2009 Jkt 053928 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\53928.TXT SJUD1 PsN: CMORC
13 

ment 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? 

14 

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. 

15 

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 whitecollar 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 whitecollar 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 

16 

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 frauduVerDate Nov 24 2008 11:25 Dec 29, 2009 Jkt 053928 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\53928.TXT SJUD1 PsN: CMORC
17 

lently, 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 intelligencebased 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. 

18 

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 

19 

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 

20 

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, tollfree, 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 

21 

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 Governmentsponsored 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 

22 

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 

23 

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. 

24 

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 

25 

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. . .,’’ 

26 

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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