Legal News

The FBI Ramps Up: Mortgage-Fraud Probes Go Bigtime

By Dan Slater

Charles Keating Jr., right, leaves federal court in Los Angeles with attorney Stephen Neal after being freed from jail, April 1, 1998. (AP Photo/Nick Ut)

In early June, a couple weeks before news broke of the Bear Stearns fund manager indictments, AG Michael Mukasey raised hackles in Congress when he rejected the idea of a national task force to combat the national mortgage crisis. In what struck us as a provocative metaphor, Mukasey called the problem a localized one akin to “white-collar street crimes” and distinguished it from the Enron collapse, for which a task force was created. He added that it was better left to local prosecutors to oversee separate FBI investigations.

So just how are those local investigations coming? Federal investigators have opened probes into whether fraud helped cause some of the troubles at Fannie, Freddie, Lehman and AIG, according to a WSJ report.

Lehman and AIG declined to comment. A spokeswoman for the Federal Housing Finance Agency, which regulates Fannie and Freddie and has both companies in conservatorship, also declined to comment. According to the FBI, that brings the number of companies under investigation to 26, in addition to pursuing more than 1,400 mortgage-fraud cases nationwide. (Here’s another update on the investigations from the NYT.)

The FBI, reports the WSJ, says that the corporate probes are part of an effort to pursue allegations of higher-level fraud more sweeping than the retail-level infractions that have been at the center of most cases brought so far, such as charges against brokers who allegedly tricked institutional investors into buying auction-rate securities.

But nabbing higher-level fraudsters — like Charles Keating (pictured), the banker who, in the aftermath of the savings & loan crisis, served four years in prison for fraud related to the collapse of American Continental Corp. — might be difficult. The WSJ writes:

Investigators say that despite calls from some quarters to prosecute wealthy bankers who helped fuel the mortgage bubble, it is unclear what crimes they will find at the root of the exotic financial vehicles that have sickened banks around the world. A more likely outcome of the probes will be hundreds more retail-level fraud cases of the type already being brought against brokers, real-estate agents, and buyers related to falsified mortgage applications.

CORRECTION: An earlier version of this post incorrectly stated that Charles Keating served time in prison related to the Savings and Loan troubles at American Financial Corp.

Full post as published by Law Blog - WSJ.com on September 24, 2008 (boomark / email).