Bankruptcy Fraud Resource Center | Wayne D. Holly, P.C.

Bankruptcy Judge Makes Criminal Referral of Serial Filer Who Duped Counsel into Filing Case in Ex-Wife's Name

A serial bankruptcy filer was criminally referred to the U.S. Attorney's Office in the Northern District of Texas in connection with an alleged and convoluted series of bankruptcy filings in his own and his ex-wife's name in order to stay pending foreclosure proceedings.  U.S. Bankruptcy Judge Gernigan's memorandum opinion sorting out the facts and making the criminal referral is available here.

According to the court, Gabriel Santos, who had filed bankruptcy three times, was barred from filing bankruptcy for 180 days after having his most recent chapter 13 case dismissed with prejudice. To work around the bar, Santos sought to file bankruptcy in his ex-wife's name, without a power of attorney or any other form of authorization, to prevent imminent foreclosure on his house. He falsified emails purportedly from his ex-wife authorizing the bankruptcy and sent them to his attorney the day before the scheduled foreclosure.  Santos also brought to counsel $3,500 cash.  Counsel filed a chapter 13 petition, schedules, and statement of financial affairs using Mrs. Ramos's name and social security number without obtaining a single wet signature.  Santos said his ex-wife was out-of-town and unavailable to talk to counsel on the telephone—yet, somehow, she was supposedly able to take credit counseling from a remote location and email counsel a purported profit and loss statement for a business. The attorney decided to forge Mrs. Ramos's electronic signature at least six times on documents filed with the court—allegedly assuming, in good faith (according to the court), that he had her permission—via her ex-husband—to do so.

Eventually, the chapter 13 trustee filed a motion to dismiss the case and counsel, in an attempt to undo his mistake, filed a motion to expunge on behalf of Mrs. Ramos.  After a hearing, the bankruptcy court declined to expunge the case, lest evidence of potential bankruptcy fraud might be eliminated.  Instead, the court directed the chapter 13 trustee to submit an order of dismissal.  The bankruptcy court determined that Santos not only abused the bankruptcy system but also manipulated counsel assisting Santos in what appeared to be a scheme to commit bankruptcy fraud and identity theft against his ex-wife.  As a result, Judge Gernigan referred the matter to the U.S. Attorney for further inquiry.

Bankruptcy criminal referrals increase again; false oaths are most referred bankruptcy crime

The United States Trustee Program (the “Program”) increased its bankruptcy criminal referrals by more than 25 percent in fiscal year 2007.  According to the Executive Office for United States Trustees’ annual report to Congress, the Program made 1,163 bankruptcy and bankruptcy related criminal referrals in FY 2007 compared to 925 made in FY 2006. 

 

Ninety percent of the 10 most referred crimes in FY 2006 remained in the top 10 for FY 2007.  A sharp increase in bank fraud (18 U.S.C. 1344) referrals (related to bankruptcy cases) pushed embezzlement offenses (18 U.S.C. 153) out of the top ten.  For FY 2007, the top 10 most referred bankruptcy or bankruptcy related crimes (with the number of referrals in parentheses) were as follows:

 

1. False Oath/False Declaration (545)

2. Concealment of Assets (483)

3. Bankruptcy Fraud (18 U.S.C. 157) (275)

4. Perjury/False Statement (271)

5. ID Theft/Use of False SSN (195)

6. Tax Fraud (147)

7. Mortgage/Real Estate Fraud (86)

8. Concealment/Destruction of Documents (67)

9. Bank Fraud (18 U.S.C. 1344) (60)

10. Forged Documents (57)

 

Debtor audits by the United States Trustee Program FY 2007

In April of this year, the Department of Justice, Executive Office for United States Trustees released its public report of information concerning the results of debtor audits.  The report, entitled, Debtor Audits by the United States Trustee Program Fiscal Year 2007, is available here. 

While the report does not identify the number or percentage (if any) of cases in which a debtor audit resulted in a criminal referral, it does report that in FY 2007, 4,095 cases were designated for audit; 3,582 of those cases (87%) resulted in a filed report of audit; and in 1,061 of those cases (30%), there was found at least one material misstatement.  According to the report, "[t]he specific criteria for reporting a material misstatement are not released to the public to preserve the integrity of the audit process."  Not suprisingly, material misstatements are more often identified by target or exception audits (38%) than by random audits (27%), apparently lending some credibility to the selection process used to identify cases selected for a target audit.

As I continue to review the data - together with FY 2006 and 2007 Criminal Referrals - more observations (and conlusions?) will follow.

Debtor audits: are they an effective means of detecting bankruptcy fraud? Rand report on fraud and abuse available.

Did you know that the United States Trustee Program initiated an independent study on the nature and prevalence of fraud, abuse and error in the bankruptcy system?  The final report, by the RAND Corp. entitled, Identifying Fraud, Abuse, and Error in Personal Bankruptcy Filings (authored by Noreen Clancy and Stephen J. Carroll) was completed in June 2007 and is now available here and here.

Among the procedures used to identify fraud, abuse and error in bankruptcy cases, the report identifies: (1) private trustees' case reviews, (2) field office case reviews, (3) tips, and (4) debtor audits as significant.  While case reviews and tips historically have been the only (significant) means of discovering bankruptcy frauds and abuse (civil and criminal), the BAPCPA's debtor audit requirements may have added an additional method.  I say may because experience under BAPCPA is still in its infancy and because the number of debtor audits being conducted is substantially less than originally conceived. 

Beginning October 20, 2006, 1 out of every 250 randomly selected chapter 7 and chapter 13 cases were selected for audit, together with certain other cases targeted for their deviation from a statistical norm.  In January, 2008, however, the United States Trustee Program suspended its designation of cases subject to audit for budgetary reasons.  While the Program's designation of cases for audit resumed in May, "random" audits (as opposed to "targeted" audits) now are conducted in only 1 out of 1,000 cases filed in a judicial district, causing me to wonder whether debtor audits really are a significant means of discovering bankruptcy fraud and abuse and further to wonder (as I did here and here) whether they will increase the number and quality of bankruptcy fraud criminal referrals.  Time will tell - and reader comments welcomed.

Florida marina auction leads to allegations of bankruptcy fraud

According to this article in the South Florida Sun-Sentinel, the conduct of a last minute bidder who appeared at the bankruptcy auction of Fort Lauderdale's New River Marina, has been referred to the U.S. Trustee's Office in Miami for criminal investigation.  The day after the auction, which ended without a sale, the marina's primary secured creditor alleged in a bankruptcy court filing that the bidder was "not a bona fide bidder and was not properly qualified" to bid at the auction.  Allegations of fraudulent bid rigging in bankruptcy auctions rarely result in criminal prosecutions, though we will continue to report on this case as developments warrant.  Neither the U.S. Trustee's Office nor the Justice Department would confirm or deny any pending investigation. 

Office of Inspector General Audit reveals historical bankruptcy fraud referral data

The Office of Inspector General's (OIG) audit of the U.S. Trustee Programs Efforts to Prevent Fraud and Abuse (Audit Report 03-17) reveals some very interesting historical bankruptcy criminal referral data.  In particular, from January 1988 (when tracking criminal referrals began) through September, 2001, U.S. Trustees made 7,564 bankruptcy criminal referrals to law enforcement.  The referrals resulted in 1,038 indictments and 837 convictions.  Potential losses from the criminal conduct referred was estimated at approximately $11 billion.  Additional data on the referrals, convictions and potential losses by regional office, together with the limitations of the data, is available in this excerpt of the OIG Audit.

Effective in FY 2005, all 95 U.S. Trustee Program offices began reporting criminal referral data using a new Criminal Enforcement Tracking System.  This system provides criminal referral data that is more reliable and acccessible than in years past.   

OIG Audit reveals few (but costly) embezzlements by bankruptcy trustees

According to the Office of Inspector General's (OIG) 2003 audit of the U.S. Trustee Program's efforts to combat fraud in bankruptcy cases (Report No. 03-17), over the fifteen year period, 1986 through 2001, the U.S. Trustee Program made 71 out of 7,564 total criminal referrals to U.S. attorneys for embezzlement by bankruptcy trustees or their employees.  The estimated loss associated with the conduct criminally referred totaled $18.8 million.  The 71 individuals were convicted, sentenced and ordered to pay $6.9 million to the victmized estates.

The methods of detection for the 71 referrals were:  25 - discovered by the U.S. trustee; 16 - based on tips; 9 discovered by trustees; 5 discovered through audits; and 16 unknown.

OIG findings on bankruptcy fraud detection methods

Several years ago the The Office of Inspector General audited the UST Program's efforts to combat bankruptcy fraud and reported findings in March, 2003.  The audit is replete with interesting information and I plan to make it available here very soon and discuss some of the highlights. 

While examining the UST Program's methods of combatting fraud, the OIG examined existing sources of bankruptcy criminal referrals through a sampling of five regional UST offices (New York, Philadelphia, Chicago, Los Angeles and Atlanta).  According the sampling, most bankruptcy fraud reports originated from public tips - usually an ex-spouse or ex-business partner - and the fewest reports were developed from judicial proceedings (adversary proceedings and Rule 2004 examinations).  A summary of the OIG's findings is below.  Interestingly, the sampling results reflect nearly identically what has been my experience from practice.

Method	NY	PHL	CHG	LA	ATL	Total
Tips	23	24	18	44	36	145
Review of debtor's financial records (69 by trustees; 6 by USTs; 8 by hired professionals)	7	3	21	32	20	83
Unable to determine	8	9	1	3	11	32
Section 341 meeting of creditors	7	3	4	4	11	29
Reverse referrals (USAs or FBI to UST Program)	0	0	5	3	0	8
Judicial proceeding	3	2	0	0	0	5
Total	48	41	49	86	78	302

   

South Milwaukee mayoral race produces bankruptcy criminal referral

The Milwaukee Journal Sentinel is reporting here that an investigation commenced during a 2006 South Milwaukee mayoral race has spawned a bankruptcy criminal referral by the Wisconsin Department of Justice to the U.S. Attorney for the Southern District of California.  According to the Sentinel, days before the election, a local resident asked state and federal authorities to investigate whether one of the candidates - James Logic - had voted illegally by double voting in both Milwaukee and California or whether he had committed perjury in a 2001 bankruptcy petition when he claimed California residency.  The State Justice Department cleared Logic of double voting allegations but also determined that Logic appeared to have signed a sworn statement in his California bankruptcy petition claiming residency there when in fact he may have been a resident of Milwaukee.  We'll watch for and report on any further developments.  Logic lost the election by the way.

Suspicious Activity Reports (SARs) in bankruptcy fraud investigations

The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department recently announced here revisions to the Suspicious Activity Report (SAR) Forms for various industries, including financial institutions.  So it seems like an appropriate time to mention that SARs are an often overlooked tool available to investigators in bankruptcy criminal cases.  For the uninitiated, SARs are forms required by financial institutions (and other industries) that detect known or suspected violations of federal law.  The newly revised SAR Form for depository institutions is available here.

As detailed in this excerpt of an issue of The SAR Activity Review, FinCEN has identified several instances in which information reported in a SAR has lead to or assisted a bankruptcy criminal prosecution.  In the examples cited, one case involved numerous concealed assets while another case involved a large credit card bankruptcy bustout scheme.  To the extent SAR information may be made available to trustees (or U.S. trustees) in bankruptcy cases, SARs could be an important additional tool available to detect and combat the commission of bankruptcy crimes.