FRAUD AND CORRUPTION: Stemming the Surge
The FBI is investigating 19 corporate fraud matters related to the sub-prime lending crisis, the Director told litigators in a speech on April 17. A day after warning the Senate about a “tremendous surge” in the FBI’s mortgage fraud investigations, Director Robert Mueller talked in more detailed terms about the growth in both corporate fraud and public corruption cases at the annual conference of the American Bar Association's Section of Litigation in Washington, D.C.
Despite limited resources, Mueller said that the FBI’s corporate fraud cases have grown more than 80 percent since 2003. Last year, we had more than 490 corporate and securities fraud convictions.
He predicted that the problem will only worsen because of the "ripple effect of the sub-prime crisis and its impact on the credit market.” The FBI, he said, has already “identified 19 corporate fraud matters related to the sub-prime lending crisis … targeting accounting fraud, insider trading, and deceptive sales practices.” And, we’re currently investigating more than 1,300 mortgage fraud matters.
Mueller believes part of the problem is “rampant conflicts of interest in the corporate suites.” He said that FBI investigations “further emphasize the need for independent board members, auditors, and outside counsel. Shareholders rely on the board of directors to serve as the corporate watchdog. ... [But] board members are often beholden to the executives they are expected to oversee.”
Acknowledging recent FBI missteps resulting from inadequate internal controls—and a new Office of Integrity and Compliance to identify risks before they become problems—Mueller said, “As we all understand, it is better for a company to self-report and remediate its own wrongdoing before the FBI and the Department of Justice become involved. Executives who let the situation escalate to the point of a sudden restatement—and a resulting loss of shareholder confidence—often do greater harm to the companies they are trying to protect than if they had exercised early intervention."
Mueller said that in his days as a defense counsel, he “met a number of executives who could rationalize every bad decision,” warning that “it is a slippery slope from behavior that skirts ethical or legal boundaries to behavior that crosses the line completely.”
The FBI also works to combat corruption in the public sector—our top criminal priority—because, as the Director pointed out in his remarks, “democracy and corruption cannot co-exist.” Currently, the FBI has more than 2,500 open public corruption cases, an increase of more than 50 percent since 2003. During the past two years alone, more than 18,000 public officials have been convicted.
“The FBI,” Mueller said, “is uniquely situated to address public corruption. We have the skills to conduct sophisticated investigations. But more than that, we are insulated from political pressure. We are able to go where the evidence leads us, without fear of reprisal or recrimination.” In the end, Mueller said, “it does not matter if the corruption is national or local … if it is millions of dollars or merely hundreds. There is no level of acceptable corruption.” We encourage you to read the full text of the Director’s speech. And learn more about our efforts to combat both corporate fraud and public corruption.
Robert S. Mueller, III, Director, Federal Bureau of Investigation
American Bar Association Litigation Section Annual Conference - Washington, D.C. - April 17, 2008
Good afternoon. It is a pleasure to be here among friends and colleagues. Anyone who follows the news these days, and sees repeated references to corporate fraud and public corruption, might think the nation is in the midst of a moral crisis. Have we, as a society, become more corrupt? Or have we in the FBI simply become more adept at rooting out fraud and corruption?
Corruption, in one form or another, is nothing new. The so-called “robber barons” of the Industrial Age cheated each other, their competitors, and their consumers. During Prohibition, public officials who decried the vices of liquor by day were bootlegging by night. Even the so-called Chicago “Black Sox” of the 1919 World Series played their part in American history.
As they say, the more things change, the more they stay the same. The robber barons of today have brought a laundry list of corporations to ruin. Billions of dollars lost, thousands of shareholders victimized, and pension funds destroyed. We have seen a similar laundry list of politicians who have violated the public trust for their own benefit, from the halls of Congress to the city councils of small-town America. It would seem that desire for the good life has become what Teddy Roosevelt once termed the “get-rich-quick theory of life.”
Today, I want to talk about the need for integrity—integrity in the marketplace, in the boardroom, and in government. I want to focus on the importance of integrity in the FBI’s mission as well. And I would like to touch on your role in this ethical calculus.
The FBI and Corporate Fraud
In the wake of September 11th, counterterrorism became the FBI’s top priority. Yet at the same time, we were confronted with a rash of corporate wrongdoing, including Enron, WorldCom, and Qwest. We needed to prioritize our resources to effectively combat both crime and terrorism. Today, we have more than 1,800 agents working nearly 17,000 white collar cases, from public corruption and financial fraud to health care and mortgage fraud. The number of corporate fraud cases we investigate has increased by more than 80 percent since 2003, despite the change in our priorities.
We obtained more than 490 corporate and securities fraud convictions in 2007. Thirty-three insider trading indictments were returned against employees of companies such as Goldman Sachs, Morgan Stanley, Credit Suisse, and UBS Securities. A number of you may be more familiar with these cases than I am.
Last month, five former executives of National Century Financial Enterprises were convicted of a $1.9 billion dollar fraud scheme. Last July, former Hollinger International CEO Conrad Black was convicted of racketeering, money laundering, and fraud. And in June, three former vice presidents at Countrywide Financial Corporation pled guilty to insider trading. As Wall Street analysts would say, business is booming for the FBI, and, by extension, for those of you who are defense counsel. The agents and analysts who work these cases do some of the most complex, tedious, and—ultimately—significant work we do for the American public.
But we do not hold the slightest pretense that we could do this without the larger team—the Securities and Exchange Commission, the Financial Crimes Enforcement Network, and our partners in the United States Attorneys Offices, among others. Our success depends on these partnerships. We likely will see more corporate fraud cases in the months to come, because of the ripple effect of the subprime crisis and its impact on the credit market.
And as housing prices continue to fall, more financial misdeeds will no doubt come to light. As financier Warren Buffett said in his annual letter to shareholders last month, “You only learn who has been swimming naked when the tide goes out—and what we are witnessing…is an ugly sight.” We are investigating more than 1,300 individual mortgage fraud matters. Perhaps more importantly, we have identified 19 corporate fraud matters related to the subprime lending crisis—cases that may have a substantial impact on the marketplace.
We are targeting accounting fraud, insider trading, and deceptive sales practices. These investigations may well lead to other instances of fraud, from investment banks and private equity firms to hedge funds. We do not take these investigations lightly, nor do we open corporate fraud cases without careful consideration. We do understand the impact that public disclosure of a criminal investigation may have on a company’s reputation and economic standing.
These investigations further emphasize the need for independent board members, auditors, and outside counsel. Shareholders rely on the board of directors to serve as the corporate watchdog. But often, we see conflicts of interest in the corporate suites. Board members may be beholden to the executives they are expected to oversee. Many directors may be current or former senior executives, with a mutual interest in maintaining the status quo.
They may be key shareholders who want to improve the value of their investment. And if anything goes wrong, they may start circling the wagons, rather than sounding the alarm. Hearing anyone say they are surprised by such behavior is like the police chief in the movie “Casablanca” announcing that he is “shocked…shocked” to find gambling going on under his nose in Rick’s Café…just moments before he collects his roulette winnings from the night before.
Many of you here today are those to whom business leaders turn for counsel. You are often one of the first lines of defense. You are the gatekeepers—the ones who must say, “This is the right thing to do.” I will say that we in the FBI have also had our share of missteps resulting from inadequate internal controls. And we understand that we need to do a better job of ensuring compliance in our own house. To that end, we have recently taken a page out of the private sector’s book.
Last year, we created a Bureau-wide compliance program. The Office of Integrity and Compliance will help ensure that we comply with both the letter and the spirit of the laws and policies by which we are bound. As we all understand, it is better for a company to self-report and remediate its own wrongdoing before the FBI and the Department of Justice become involved. Executives who let the situation escalate to the point of a sudden restatement—and a resulting loss of shareholder confidence—often do greater harm to the companies they are trying to protect than if they had exercised early intervention.
In my days as defense counsel with a firm representing corporate targets, I met a number of executives who could rationalize every bad decision. They would say it was “business as usual”—that they were acting in the best interests of the company, given financial constraints and the pressures of running a business. And I would think to myself, “You broke about 14 laws before breakfast. How could you fail to see you were doing anything wrong?”
I saw executives who did not start out intending to break the law. They would argue they were playing by the same rules as everyone else. They began to believe their own explanations. But it is a slippery slope from behavior that skirts ethical or legal boundaries to behavior that crosses the line completely. It calls to mind the saying: If you jump out of a window on the 100th floor, and you seem to be doing fine as you pass the 40th floor, that doesn’t mean you don’t have a big problem. Rationalization will not provide much padding when you hit the pavement.
The FBI and Public Corruption
I want to turn to public corruption for a moment. Unfortunately, the private sector has by no means cornered the market on greed. Public corruption is our top criminal priority, for the simple reason that it is different from other crimes. Corruption does not merely strike at the heart of good government. It may strike at the security of our communities.
The vast majority of public officials are honest in their work. They are committed to serving their fellow citizens. Unfortunately, some have abused the public trust. We have more than 2,500 pending public corruption investigations—an increase of more than 50 percent since 2003. In the past five years, the number of agents working public corruption cases also has increased by more than 50 percent. We have convicted more than 1,800 federal, state, and local officials in the past two years alone. For a nation built on the rule of law—and on faith in a government of the people, by the people, and for the people—we can and should do better. Ultimately, democracy and corruption cannot co-exist.
The FBI is uniquely situated to address public corruption. We have the skills to conduct sophisticated investigations. But more than that, we are insulated from political pressure. We are able to go where the evidence leads us, without fear of reprisal or recrimination. Many of our investigations are well known. Others may be familiar only to local residents, but they are no less important. For example, 22 individuals from the Robeson County Sheriff’s Office in North Carolina have pled guilty to drug conspiracy, racketeering, and fraud. A state legislator from Georgia pled guilty last month to laundering what he believed to be proceeds from the sale of cocaine.
And a long-term undercover operation in Arizona snared nearly 70 military and law enforcement personnel for accepting hundreds of thousands in bribes. These individuals conspired to smuggle cocaine, drug money, and illegal immigrants across our southern border. But if you would sell your oath and your honor for drug money, where does one draw the line? For the right price, would such individuals permit terrorist operatives to enter the country?
In the end, it does not matter if the corruption is national or local. It does not matter if it is millions of dollars, or merely hundreds. There is no level of acceptable corruption. The violation of trust is the same. The damage to the taxpayers is the same. We must continue to dedicate the resources necessary to investigate public corruption. For if we in the FBI do not handle such cases, no one will.
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Politicians who betray the trust of their constituents harm the integrity of our government. Executives who betray the trust of their employees and their shareholders harm the integrity of the marketplace. Left unchecked, corporate fraud and public corruption will rip the very fabric of our democracy. General George Patton once said that no good decision was ever made in a swivel chair. Integrity requires that we stay on course, that we stay true to principles of honesty, ethics, and transparency…without swinging back and forth to meet the demands of the day…without altering our position to suit the economic, political, or social climate.
At the turn of the 20th century, Teddy Roosevelt took on the robber barons. He targeted corporate fraud and corruption, and commissioned what later became the FBI to continue that mission. Roosevelt asserted that “Character, in the long run, is the decisive factor in the life of an individual, and of nations alike.” These words ring true today. Character will be our deciding factor. It is my hope that by working together, we can reduce corporate fraud and public corruption. We each have a role to play.
Together, we can bring to light the wrongdoing that threatens our economy, our security, and the welfare of our nation. Together, we can help create a culture of integrity. Thank you for having me here today, and God bless.