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

Deloitte report studying link between bankruptcy and fraud available

The Deloitte Forensic Center and its Reorganization Services Group has produced the findings of a report that studied the correlation between bankruptcy and fraud.  The primary question examined was whether the increased scrutiny that follows a company's bankruptcy filing leads to more incidents of fraud claims as compared to companies that have not filed bankruptcy.    The report is available here.

Among its findings:

·         Companies filing for bankruptcy protection are three times more likely than non-bankrupt companies to face enforcement action by the SEC relating to alleged financial statement fraud.

·         Companies that were issued financial statement fraud-related SEC Enforcement Releases were more than twice as likely to file bankruptcy protection as those not issued one.

·         Approximately one in seven financial statement fraud SEC Enforcement Releases issued to companies that filed for bankruptcy protection were issued prior to their bankruptcy filings. These situations may provide a warning signal of potential bankruptcy filing.

·         Bankrupt companies receiving SEC Enforcement Releases were twice as likely as non-bankrupt companies to have more than 10 alleged financial statement fraud schemes – and at least 1.5 times more likely to have six to 10 alleged fraud schemes than non-bankrupt companies.

New monthly publication offers national coverage of bankruptcy fraud

The Bankruptcy Fraud Resource Center is pleased to announce the inaugural issue of The Bankruptcy Fraud Reporter, a monthly national publication covering news and developments on all matters of bankruptcy fraud and insolvency crimes.  In each issue you will find feature articles on developments in the civil and criminal law of bankruptcy fraud, receive news of indictments, dispositions and sentences, read about trends in bankruptcy fraud methods, prosecutions and penalties and receive analysis of recent cases in the district and circuit courts.  In addition, each month you will receive new feature articles discussing cutting edge issues of importance to you from an experienced legal professional who literally wrote the book on the subject of bankruptcy crimes.  Offering critical information you need to be successful, The Bankruptcy Fraud Reporter serves the informational needs of bankruptcy attorneys, trustees, examiners, judges, creditors, committees, debtors, lenders, factors, debt traders, government agencies, criminal prosecutors and defenders. 

 

Click here for a free sample, description and subscription information. 

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.

"Operation Truth or Consequences" case summaries available

The Justice Department has produced a tidy little report entitled "Operation Truth or Consequences: Case Summaries by State and Judicial District," which I believe I made available some time ago.  The report contains a summary of the charges brought against each of the individuals indicted (or otherwise formally charged) in the well-publicized bankruptcy fraud sweep last fall.  I have reported on each case as developments since then warrant, but several folks have written asking for a copy of the report so I am making it available again here.

Office of Inspector General's Audit of U.S. Trustee's Program's Efforts to Prevent Bankruptcy Fraud Now Available

As I mentioned in several previous posts, The Department of Justice, Office of Inspector General (OIG) several years ago conducted an audit of the U.S. Trustee Program - specifically an audit of the UST Program's Efforts to Combat Fraud and Abuse (Audit Report 03-17).  The Audit includes findings and recommendations regarding management controls and performance measurements, including tracking and reporting criminal referrals, as well as many other interesting and informative items on on the subject of bankruptcy fraud.  For interested readers, I have made available an electronic version of the full audit report here.  As always, comments and questions are welcome.