New Obama ‘Financial Crimes Unit’ seeks to parlay federal, state resources and laws

The Obama administration launches a new “financial crimes unit” that brings broadened resources, state partners and a sharpened focus to bear on investigating and prosecuting financial crimes related to mortgage securities fraud.

The Obama administration’s latest effort at attacking financial crime comes under an innocuous name: The Residential Mortgage-Backed Securities Working Group. Beyond the bureaucratic title, however, lies an initiative that significantly re-thinks the federal government’s approach to mortgage fraud cases, which fall under the larger and well-populated rubric of “financial crime.”

First announced as a new “financial crimes unit” in President Obama’s State of the Union address on January 24, the Working Group may signal a re-boot of government efforts to bring civil and criminal suits against major financial institutions involved in the packaging and selling of mortgage-backed securities.

Two factors make the Working Group stand out from the swarm of other inter-agency financial crime task forces: its concentrated focus, and its new emphasis on state-level agencies as key partners. They may be a harbinger of things to come in the counter-financial crime arena.

The Working Group “brings a focus on a particular aspect of fraud,” says Alma Angotti, formerly a senior enforcement official at the Securities and Exchange Commision and the Treasury’s Financial Crimes Enforcement Network, and now a director at Navigant, in Washington, DC.

“The other group [the Financial Fraud Enforcement Task Force, launched in 2009] was pretty broad,” Angotti adds, “and this one recognizes that this is a particular discreet issue that needs discreet resources.”

Multiple federal agencies and a notable state agency

The details and structure of the new “Financial Crimes” Working Group were revealed on Jan. 27 at a press conference by Attorney General Eric Holder, who was flanked by Housing and Urban Development Secretary Shaun Donovan, Securities and Exchange Director of Enforcement Robert Khuzami, and New York Attorney General Eric Schneiderman.

Holder announced the Working Group will seek to “streamline and strengthen current and future efforts to identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities.”

That could entail a number of financial crimes that can be handily prosecuted under broad federal laws prohibiting mail fraud, wire fraud, conspiracy, money laundering, racketeering influenced and corrupt organizations and other federal counter-financial crime weapons.

The mortgage-backed securities in question are bonds composed of residential debt, including home mortgages, home-equity loans and subprime mortgages. They began as relatively straightforward, government-guaranteed financial instruments. Private financial institutions began issuing their own mortgage-backed securities in the early ‘80s, eventually transforming them into massive, exotic investment vehicles.

The financial crimes that brought a nation to its knees

Many securities, including multi-trillion dollar quantities held and sold by major banks, were stuffed with subprime and other risky debt. These securities were exposed as being massively overvalued in the financial crisis of 2008, and were a primary culprit in the collapse of the housing market and the bailout packages for many financial giants. Almost all of the nation’s largest banks, from JPMorgan Chase to Bank of America to Citibank, were involved in the creation, sale and trade of mortgage-backed securities, and they and their officials may now be in the government’s sights.

The Working Group brings together a powerful array of financial crime enforcement entities, including the Justice Department, Federal Bureau of investigation, IRS Criminal Investigation, Consumer Financial Protection Bureau, Financial Crimes Enforcement Network, Securities and Exchange Commission, Department of Housing and Urban Development, and the Office of Inspector General of the Federal Housing Finance Agency.

The group will be housed under the wider umbrella of the Financial Fraud Enforcement Task Force. Holder and the SEC’s Khuzami will co-chair the group, along with Lanny Breuer, Assistant Attorney General of the Criminal Division. Also c-chairing are Tony West, Assistant Attorney General for the DOJ’s Civil Division, and John Walsh, U.S. Attorney for the District of Colorado.

States will play key role in Group’s operations

The Attorney General of New York, Eric Schneiderman, who has been given a big share of the limelight in the launch of the new unit, will also co-chair and lead state-level enforcement efforts.

Perhaps counter-intuitively, it is not increased federal resources but a stronger involvement by state-level agencies that may be the Working Group’s greatest asset. “Given the local nature of mortgage issues, the Working Group is a great idea because it brings in a lot of state agencies for the first time,” says Angotti.

State attorneys general have recently racked up high-profile victories in mortgage fraud cases. On February 8, all 50 state AGs announced a $26 billion settlement with five major mortgage providers in a civil fraud suit. The next day, Nevada Attorney General Catherine Matzo announced a separate $750 million settlement with Bank of America.

Schneiderman has waged battles against big banks

Since his election in 2010, Schneiderman has led a highly-publicized crusade against Wall Street banks and major financial institutions, most recently filing suits against JPMorgan Chase, Wells Fargo, and Bank of America for alleged “deceptive and fraudulent foreclosure filings.”

Schneiderman has been a leading and outspoken proponent of sweeping investigation into the role financial crime played in the nation’s historic economic collapse, calling for “a full inquiry into the financial irregularities and misconduct that brought down the American economy.”

Many state agencies have an advantage over federal enforcement agencies in investigating fraud: they play by laws of their state, which are often more flexible than federal law. Schneiderman has already indicated that New York’s Martin Act, which grants the state’s attorney general vast investigative powers in cases of financial crime, may give him new avenues to bring suits related to mortgage fraud.

“States have always had that flexibility,” says Angotti, “now this group allows them to take advantage of greater intelligence information and economies of scale” that come with working alongside federal agencies.

Pooling of agency resources and state participation is key to success

Agencies involved in the Group also point to the pooling of information and efforts as a critical advantage, allowing for the convergence of resources across state and federal lines.

“The real value of the Working Group is in its ability to leverage resources and expertise across agencies, which will enable us to aggressively investigate fraud in the securitization process,” says Troy Gravitt, spokesperson for the Special Inspector General of the Troubled Asset Relief Program, a participant in the Group.

Holder himself emphasized a “focus on collaboration” when announcing the Group, and the Justice Department’s said “enhancing coordination and cooperation among federal, state and local authorities” is a Working Group priority.

Holder announced that “civil subpoenas” had been issued to “11… financial institutions – and you can expect more to follow.” He and the Justice Department declined to name the institutions subpoenaed.

Doubts remain that the Working Group will bring anything new to the prosecution of mortgage-related financial crimes, despite pledges of increased cooperation and resources by its many participating agencies.

Being named to the team and activating players are two different things

“Designated to be part of the Group and actually putting bodies on the ground are different things. It all goes back to resources,” says Michael McDonald, a pioneer in counter-financial crime and money laundering enforcement, who served on several inter-agency financial crime task forces before his retirement as Special Agent of the IRS Criminal Investigation.

“If agents are devoted to investigations right now, these are complex processes, and it’s going to be slow pulling them off what they’re doing now and aligning them with something new,” adds McDonald, now president of an anti-money laundering consulting firm, Michael McDonald and Associates, in Miami.

Holder said the Group will eventually include 65 of the 93 U.S. Attorneys in the nation, as well as an unspecified number of FBI agents and support staff. Presently, 15 U.S. Attorneys and 10 FBI agents, along with analysts, have been detailed to the Working Group.

The new “financial crimes unit” is operating at a fast pace and, in an election year, is probably anxious to achieve the first indictments against high-ranked individuals and entities to fend off accusations that it amounts to little more than political posturing.

However, given the complexity of assembling a fraud case against a major corporation and its officials, tangible results from the Working Group may be months or even years away.