Tuesday, April 28, 2009

more power to prosecute mortgage and financial fraud and creating a commission to investigate the causes of the economic crisis

TO BE NOTED: From Bloomberg:

"Senate to Vote on Plan Bolstering Mortgage-Fraud Prosecutions

By James Rowley

April 28 (Bloomberg) -- The U.S. Senate is poised to approve legislation giving the government more power to prosecute mortgage and financial fraud and creating a commission to investigate the causes of the economic crisis.

The measure, scheduled for a vote at noon today, would make it easier to prosecute fraud in trading commodities futures, including options and debt derivatives, legal experts said. Trading in debt derivatives such as credit default swaps helped trigger the economic collapse. Such cases would be put under the same criminal law as securities fraud.

Under current law “it is harder to prove fraud in the futures realm than in the equity realm,” said Michael Greenberger, a former U.S. commodities-trading regulator who teaches at the University of Maryland’s law school in Baltimore.

The change would “level the playing field” because “it says all the financial instruments are going to be treated alike because fraud is fraud,” said Thomas Hazen, who teaches commodities law at the University of North Carolina in Chapel Hill.

The legislation would help government agencies address the legal consequences of the collapse of the housing market and the economic crisis. It would authorize $265 million over the next two fiscal years to hire more than 600 lawyers and investigators at the Justice Department, the Securities and Exchange Commission and other federal law-enforcement agencies.

The measure cleared a procedural hurdle on an 84-4 vote yesterday.

‘Crucial Step’

“This bill will be a crucial step toward deterring the type of financial fraud and manipulation of markets that are the root cause of the current economic crisis,” Senate Majority Leader Harry Reid, a Nevada Democrat, said in a floor speech yesterday. After today’s vote, the measure would be sent to the U.S. House.

The federal anti-fraud law would be extended to cover private mortgage brokers, which generate almost half the home mortgages in the U.S. Also brought under the fraud law would be crimes involving federal money dispensed to banks and insurance companies by the $700 billion Troubled Asset Relief Program and the $787 billion economic stimulus package.

Whistleblowers who report fraud on banks involving TARP assistance would be allowed to collect a share of any financial recoveries under the federal False Claims Act.

Neil Barofsky, the inspector general of the TARP program, warned in Senate testimony Feb. 11 that sending trillions of dollars in aid and loans to financially troubled banks created a potential for fraud.

‘Appropriate Resources’

“It is essential that the appropriate resources be dedicated to meet the challenges of both deterring and prosecuting fraud,” Barofsky told the Senate Judiciary Committee.

The measure would add 160 FBI agents, 200 prosecutors and Justice Department lawyers and 200 agents at the Secret Service, Postal Inspection Service and Department of Housing and Urban Development. The SEC would get funds to set up a nationwide data base to track tips and trading patterns that might help detect fraud.

The number of mortgage-fraud cases investigated by the FBI more than doubled from 721 in 2005 to more than 1,800 at the end of last year, said the committee’s report on the legislation. Fewer than 250 FBI agents are now assigned to such cases, the committee said.

The measure also would overturn a 2008 Supreme Court decision that narrowed the scope of the federal money-laundering law. The court said a provision covering “proceeds” of criminal activity applied only to profits, not overall receipts. The new legislation would enable prosecutors to recover larger amounts in fraud cases, supporters said.

Independent Commission

An independent Financial Markets Commission, with 10 members appointed by Democratic and Republican leaders in Congress, would investigate the causes of the financial crisis by looking at lending practices, accounting standards and executive compensation.

It would examine the role of credit-rating agencies in assuring investors of the safety of billions of dollars worth of mortgage-backed securities now listed as troubled assets.

The legislation also would create a separate Senate committee to conduct its own investigation of the financial- market meltdown. House Speaker Nancy Pelosi also favors a congressional investigation.

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net."

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