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Previous installments in the Borrower Beware Series highlighted how the CARES Act has allocated hundreds of billions of dollars in relief funding for businesses impacted by the COVID-19 pandemic, and reviewed the oversight and enforcement mechanisms under the CARES Act, which are designed to ensure that funds are properly obtained and spent. (Click here for prior coverage.) This installment draws lessons for CARES Act program participants from the criminal prosecutions of individuals and businesses relating to the Troubled Asset Relief Program (TARP), which was an economic stimulus program enacted by the government in response to the 2008 financial crisis.
TARP was established by the Emergency Economic Stabilization Act of 2008 as part of the US government’s response to the Great Recession. TARP allowed the Department of the Treasury to purchase illiquid "troubled assets" (e.g., collateralized debt obligations based on residential or commercial mortgage loans) from financial institutions in an effort to stabilize their balance sheets. In total, over $440 billion was disbursed under TARP, including more than $240 billion to some 800 different financial institutions, and more than $30 billion to individual homeowners, including more than 2.9 million individuals under the Making Home Affordable program.
The 2008 legislation also created the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), the federal law enforcement agency and independent audit watchdog that was established to monitor, audit, and investigate crime, fraud, waste, and abuse related to TARP. The position of special inspector general is appointed by the president and confirmed by the Senate, and SIGTARP is required to make quarterly reports to Congress. Although TARP itself sold off the last of its holdings in 2014, certain programs established under TARP, including Making Home Affordable, remain in effect and SIGTARP continues to monitor TARP activity. In fiscal year 2019, SIGTARP investigations resulted in $900 million recovered, criminal charges against 13 defendants, four arrests, 18 criminal convictions, 28 sentences imposed, and federal enforcement activity against three corporations; all on an annual budget of $23 million.
SIGTARP Enforcement Actions
SIGTARP investigators uncover fraud by reviewing documents, conducting interviews, and analyzing complex financial information, and they have the authority to search, seize, and arrest. Once SIGTARP has built a case against an individual or institution, it works with the Department of Justice and other prosecutors to pursue convictions or guilty pleas. SIGTARP's Financial Institution Crimes and Fines Database lists 380 defendants that have been convicted of a crime or received a fine for violations of civil laws as a result of SIGTARP investigations. This database includes 300 individual defendants who have been sentenced to prison for a variety of fraud-related offenses, including bank fraud, wire fraud, and conspiracy.
SIGTARP investigations have led to the direct recovery of over $11 billion, and have also resulted in 24 separate enforcement actions brought by the Department of Justice, Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Federal Reserve, the Consumer Financial Protection Bureau, and other regulators. For example, SIGTARP was part of the task force that led to a number of significant Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) settlements arising out of the Great Recession. Prosecutions initiated by SIGTARP investigations continue even to the present day and have targeted bankers and bank customers alike, uncovering fraudulent schemes that pre-dated TARP as well as schemes that targeted those seeking to participate in the TARP programs.
Bankers and Bank Customers
Nearly 100 individual bankers and bank employees and over 120 bank customers have been convicted of crimes as a result of SIGTARP enforcement efforts. Most of the banker defendants were bank executives, including CEOs, presidents, chairmen, and chief operating officers, but also convicted were in-house attorneys, loan officers, and branch managers, among others. Bank customer defendants were often the principals of significant banking clients.
SIGTARP enforcement efforts have resulted in five different bankers each receiving prison sentences of 10 years or more, another 15 each receiving sentences of at least five years, and more than 30 others receiving sentences of at least one year in prison. All told, 76 bankers have been sentenced to prison. In addition, 92 individual bank customers have been sentenced to prison, with eight receiving sentences of 10 years or more, another 12 receiving sentences of five years or more, and another 50 receiving sentences of at least one year in prison.
The most commonly-charged offenses were conspiracy to defraud the United States (18 U.S.C. § 371); conspiracy (18 U.S.C. § 1349); bank fraud (18 U.S.C. § 1344); wire fraud (18 U.S.C. § 1343); false bank entries, reports, and transactions (18 U.S.C. § 1005); theft, embezzlement, or misapplication by bank officer or employee (18 U.S.C. § 656); and false statements on loan and credit applications (18 U.S.C. § 1014).
Criminal liability typically arose when institutions that applied for TARP funds kept false books and records, made false securities filings, and lied to regulators. In many cases, banks had previously pursued aggressive and risky growth strategies, and then attempted to conceal the amount of past due loans. Investigations of individual bank customers focused on how they had defrauded financial institutions that later applied for TARP funding, sometimes with the assistance of co-conspirators at the bank itself. Often, the fraud was only uncovered after SIGTARP became involved.
The single-largest sentence for any target of a SIGTARP investigation was imposed on the chairman of a mortgage lender that had defrauded a bank of $2.9 billion over the course of a decade. The firm secretly overdrew its accounts with the bank, lied about securing funds from investors, and submitted materially false and misleading financial data. The fraud had gone undetected until the bank applied for TARP funding and SIGTARP discovered it. Seven other related defendants also received prison sentences, including multiple executives of the mortgage lender and a senior vice president at the bank.
Another scheme in the headlines involved the president and the executive vice president of a single bank in Virginia, which had pursued an aggressive growth strategy through risky loans that resulted in significant losses. The bank then applied for $28 million in TARP funds using false books and records that hid $800 million in past due loans, including by overdrawing accounts to make loan payments and extending new loans or changing the terms of existing loans in order to make them appear current. The president and executive vice president received severe sentences, 23 years and 17 years in prison, respectively, and two other executives of the bank were also convicted. All four were banned from participating in the affairs of financial institutions, and a fifth executive was ordered to pay a civil monetary penalty in a related SEC enforcement action. Critically, the bank never received the TARP funds for which it had applied, but it did draw the attention of SIGTARP investigators.
Similarly, another case involved bankers that conspired to make millions of dollars of excessive and illegal loans to a single real estate developer through the use of straw borrowers. The loans ultimately resulted in massive losses and caused the bank to fail. The scheme was discovered after the bank applied for $8 million in TARP funds. The CEO and the chief loan officer were later sentenced to more than eight years in prison, and an attorney co-conspirator was sentenced to more than six years. Prosecutors presented evidence that the CEO described TARP funding as a “jar of cookies” for the bank to take, underscoring the danger of carelessly treating federal stimulus funds like free money.
Homeowner Program Schemes
SIGTARP investigations have also resulted in over 120 individual convictions for fraud targeted at homeowner programs under TARP. The vast majority of those convictions arose out of the Making Home Affordable program, which was designed to help homeowners avoid foreclosure by modifying loans to make them more affordable through interest rate and principal reductions and term extensions. A smaller number of convictions arose out of the related Hardest Hit Program, which provided targeted aid to the states hit hardest by the subprime mortgage crisis. The longest sentence imposed was for 24 years in prison, with two others receiving sentences of 20 years, another 16 receiving sentences of at least 10 years, another 24 receiving sentences of at least five years, and more than 30 receiving sentences of at least one year.
Homeowner program prosecutions typically involved charges of conspiracy (18 U.S.C. § 1349), wire fraud (18 U.S.C. § 1343), mail fraud (18 U.S.C. § 1341), and conspiracy to defraud the United States (18 U.S.C. § 371). These prosecutions tended to involve the perpetrators of fraudulent schemes targeting individual homeowners that may have been eligible for homeowner programs.
For example, one company targeted distressed homeowners, claiming that it could reduce their outstanding mortgage debt by 75%. For a fee, the company purported to extinguish homeowners’ existing obligations, with homeowners instead owing new loans to the company for only 25% of the original amount. In reality, the company simply pocketed the “loan” payments. Over 1,000 homeowners were defrauded, with many losing their homes to foreclosure as a result. The principal was sentenced to 24 years in prison, with two others receiving sentences of five years and of three years, nine months, respectively.
The TARP prosecutions offer several lessons for CARES Act participants.
- Businesses applying for funds under the CARES Act could potentially be subjected to criminal or civil liability for the same types of misconduct that gave rise to prosecutions in connection with TARP. In particular, CARES Act applicants should ensure that their books and records are accurate, their compliance and audit processes are sufficiently rigorous to identify any discrepancies or improper conduct, and any application materials are reviewed and vetted by legal and compliance functions.
- The increased scrutiny that comes with applying for federal funding may uncover fraud or other misconduct that had previously been concealed or gone unnoticed. Perhaps at greatest risk are CARES Act applicants whose historical books and records have been carelessly prepared or were intentionally falsified for reasons entirely unrelated to the current economic crisis. Seeking relief under the CARES Act requires these applicants address the historical inaccuracies in their relevant books and records before making certifications to the government (or the banks acting for the government) that are intentionally or even inadvertently false.
- Management and owners of companies that participate in the CARES Act programs may face personal liability for fraud committed by their companies. In many prosecutions initiated by SIGTARP investigations, top executives at the applicant institutions themselves perpetrated the fraudulent schemes.
- Applicants for the CARES Act program may be victimized by unscrupulous third parties. During the TARP era prosecutions, charges were brought against defendants who victimized the applicants who sought relief under TARP. As a result, CARES Act applicants should also ensure that counterparties are properly vetted for fraud risk.
- The TARP prosecutions teach CARES Act participants that the best protection against these risks is for participants to foster a culture of compliance, rooted in the lessons learned from prior crisis-relief efforts, and with the assistance and guidance of knowledgeable counsel.
 FIRREA allows the Department of Justice to sue for civil penalties in fraud within federally-insured banks based on a preponderance of the evidence, a lower burden of proof than what is required under criminal fraud statutes. After the 2008 financial crisis, the government brought a number of FIRREA claims alleging that banks had misrepresented the quality of loans to the Federal Housing Administration, which suffered losses as a result.
 See United States v. Lee Bentley Farkas, No. 10-cr-200 (E.D. Va.).
 See United States v. Edward Woodard, No. 12-cr-105 (E.D. Va.).
 See United States v. Madjlessi, No. 3:14-cr-00139 (N.D. Cal.).
 See United States v. Tikal, No. 12-cr-362 (E.D. Cal.).
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