The U.S. Trustee Programs Criminal Enforcement Unit Another Weapon in the Fight Against Bankruptcy Fraud and Abuse

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Dec/Jan 2003

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The U.S. Trustee Program (USTP) is charged with ensuring the integrity of the bankruptcy process. Indeed,
the explicit mission of the USTP is as follows:

<blockquote>
The United States Trustee Program acts in the public interest to promote the efficiency and to protect and preserve
the integrity of the bankruptcy system. It works to secure the just, speedy and economical resolution of bankruptcy
cases; monitors the conduct of parties and takes action to ensure compliance with applicable laws and procedures;
identifies and investigates bankruptcy fraud and abuse; and oversees administrative functions in bankruptcy cases.
</blockquote>

As part of this mission, the USTP is specifically mandated to actively pursue criminal enforcement efforts.
Title 28 U.S.C. §586(a(3)(F) charges the U.S. Trustee with "notifying the appropriate U.S. attorney of matters
which relate to the occurrence of any action which may constitute a crime under the laws of the United States..." It
also requires that the USTP, on the request of the U.S. Attorney, assist in investigating and prosecuting bankruptcy
crimes.

To lead the effort in carrying out this mandate, the USTP recently created a Criminal Enforcement Unit.
The Unit is headed by Chief of Criminal Enforcement Peter Ainsworth, with Sandra Rasnak as acting deputy chief.
Celeste Miller and Sandy Klein serve as regional criminal coordinators for the Ninth Circuit, with Bob Calo as
regional criminal coordinator for the Second and Third Circuits.<a href="#2" name="2a">2</a> Peter Ainsworth handles regional criminal
coordinator duties for the Fourth Circuit, and other regional coordinators will be added in the future.

<blockquote><blockquote>
<hr>
<big></big><center>
<big>In just the first six months of Fiscal Year 2003, the USTP initiated approximately 17,750 informal inquiries and formal civil enforcement actions...
</big></center><big></big>
<hr>
</blockquote></blockquote>

<h3>Past Efforts to Combat Fraud</h3>

Criminal prosecutions for fraud and embezzlement have long been a part of our jurisprudence. The case
books contain several historical examples where prosecutors used a variety of common-law remedies, including state
prosecutions, to punish wrongdoers who committed fraud or embezzlements in the bankruptcy courts.<a href="#3" name="3a">3</a> With the
passage of the Bankruptcy Act of 1867, however, a unified set of federal statutes was enacted to address criminal
conduct in bankruptcy cases.<a href="#4" name="4a">4</a> Those statutes have been subsequently modified and amended, and are now codified
at 18 U.S.C. §§152-157.<a href="#5" name="5a">5</a> More recently, as part of the Sarbanes-Oxley Act of 2002,<a href="#6" name="6a">6</a> Congress added 18 U.S.C.
§1519 to make it a crime if someone, inter alia, "knowingly alters, destroys, mutilates, conceals, covers up,
falsifies or makes a false entry in any record, document or tangible object with the intent to impede, obstruct or
influence...any case filed under title 11, or in relation to or contemplation of any such matter or case..."<a href="#7" name="7a">7</a> These
statutes provide powerful tools to prosecute crimes involving the bankruptcy system.<a href="#8" name="8a">8</a>

Since its inception, the USTP has played an active role in enforcing these criminal laws. Over the past
several years, the USTP has worked with others in the system to detect and refer thousands of criminal allegations
to U.S. Attorneys and Department of Justice Criminal Division lawyers. The USTP's efforts have directly led to
hundreds of successful prosecutions for bankruptcy fraud nationwide. In many instances, USTP attorneys and
analysts have worked alongside law enforcement officials to achieve convictions for bankruptcy fraud.

In addition, the USTP, pursuant to its role as the "watchdog" in the bankruptcy community, has
undertaken an aggressive civil enforcement program to attack fraud and abuse in the bankruptcy system. This effort,
the National Civil Enforcement Initiative, was undertaken in response to mounting public concern that the
bankruptcy system was being abused and that more should be done to protect the system by identifying and taking
action against wrongdoers. The primary goals of the Civil Enforcement Initiative are to ensure that the bankruptcy
process is not abused and that debtors are held accountable, and to protect consumer debtors, creditors and others
who are victimized by those who mislead or misinform debtors, make false representations in connection with a
bankruptcy case or otherwise abuse the bankruptcy process.

<h3>The New Criminal Enforcement Unit</h3>

Several factors recently prompted the USTP to establish a unit focused solely on criminal prosecutions.
First, the dramatic increase in bankruptcy filings creates new challenges in the detection and prosecution of
bankruptcy crimes. Moreover, the attorney general has mandated that the USTP make the elimination of
fraud and abuse a priority. In November 2002, Attorney General John Ashcroft stated in an address to all
U.S. Trustees and Assistant U.S. Trustees:

<blockquote>
Too often, our bankruptcy system is used as a vehicle to perpetuate a myriad of fraudulent schemes... Combating
this fraud and abuse is your first priority.
</blockquote>

Adding a unit staffed with career professionals who have specialized talent and experience in federal criminal
prosecutions will immeasurably help the USTP carry out its mandate to assist in criminal prosecutions.

In addition, the increased scrutiny and aggressive civil litigation generated by the National Civil
Enforcement Initiative will inevitably ferret out additional misconduct in the bankruptcy system and increase the
number of criminal referrals. In just the first six months of Fiscal Year 2003, the USTP initiated approximately
17,750 informal inquiries and formal civil enforcement actions pursuant to 11 U.S.C. §§707(b), 727, 110 and 329
that resulted in a potential benefit to creditors of more than $224 million composed of unsecured debts not
discharged in chapter 7, fines imposed, petition preparer fees recovered and attorney fees disgorged. Private trustees
and USTP personnel have uncovered significant misrepresentations and substantial fraud through discovery in such
cases. Not surprisingly, in many of the USTP's regions the Civil Enforcement Initiative has led to an increase in
more fully developed criminal referrals.

<h3>The Goals of the Criminal Enforcement Unit</h3>

Unit attorneys have started a nationwide program to educate and train other employees in the USTP about
the process of federal criminal prosecution and the identification of cases to be referred for criminal prosecution. The
Unit is actively advising and assisting USTP employees in preparing referrals to U.S. Attorneys' offices, as well as
providing similar education and training to people outside the USTP, such as the bankruptcy bar and the chapter 7
and 13 trustees. Finally, we have assisted in training investigators and prosecutors throughout the country on
strategies for investigating and prosecuting bankruptcy crimes.

The Criminal Enforcement Unit has also been active in building relationships between the law enforcement
community and the participants in the bankruptcy process. We have worked nationwide to create "working groups"
consisting of investigators, prosecutors and USTP personnel. The Unit will continue to build and support teams of
investigators and prosecutors to regionally combat fraud within the system. Together, we will work to keep the
lines of communication open to ensure that those who provide referrals are recognized for their efforts, and that
actions taken in the bankruptcy case do not compromise a later criminal prosecution.

Finally, Unit attorneys have successfully investigated and prosecuted cases on their own in several judicial
districts and will continue to be available for appointment as special assistant U.S. Attorneys to actively assist in
the investigation and prosecution of bankruptcy cases. All the attorneys in the Unit have had years of experience in
conducting grand jury investigations and trying cases involving a variety of criminal financial frauds, including
bankruptcy crimes. Moreover, the team will help to marshal investigative resources within the USTP—including
trial attorneys, paralegals and bankruptcy analysts who are forensic accountants or former FBI agents—to assist in
criminal prosecutions. Law enforcement resources are always limited, but the Unit is working to combine traditional
law enforcement agents with USTP employees who can provide invaluable assistance in identifying cases that may
be appropriate for criminal prosecution.

<h3>Conclusion</h3>

The USTP's new Criminal Enforcement Unit will strengthen efforts to criminally prosecute those who
abuse the bankruptcy process. As Lawrence A. Friedman, director of the Executive Office for U.S. Trustees, stated
at a regional Bankruptcy Fraud Training Conference in September 2003, the formation of the Unit "will send a
strong message that the bankruptcy courts will not be a haven for criminals and thieves."

Attorneys in the Unit will provide vital assistance in training and educating federal prosecutors, the
bankruptcy bar, private trustees and others in the bankruptcy community. In addition, their experience as career
prosecutors will enable them to enhance the quality of referrals to the law enforcement community and, where
necessary, to step in and actively prosecute those who abuse the bankruptcy system. The Criminal Enforcement Unit
is a timely and much-needed addition to the USTP as it continues to fulfill its mission to combat fraud and abuse
in the bankruptcy system.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Peter Ainsworth is the director of Criminal Enforcement for the U.S. Trustee Program and Robert Calo is a regional criminal coordinator. The views expressed in this article are
those of the authors and do not necessarily reflect the views of the Executive Office for U.S. Trustees, the U.S. Trustee Program or the Department of Justice. The authors wish to
thank Regional Criminal Coordinator Celeste Miller for her comments and suggestions in reviewing a draft of this article. <a href="#1a">Return to article</a>

<a name="2">2</a> Peter Ainsworth spent 12 years handling sophisticated white collar fraud cases for the Justice Department's Public Integrity Section and its Office of Consumer Litigation. Sandra
Rasnak is assistant U.S. Trustee for the USTP's Chicago office. Celeste Miller was an assistant U.S. attorney in Boise, Idaho, for almost 16 years; Bob Calo served as an assistant
U.S. attorney for approximately six years in Los Angeles and nearly nine years in Philadelphia; and Sandy Klein has been a USTP employee for six years, prosecuting bankruptcy
fraud cases as a special assistant U.S. attorney in Los Angeles. <a href="#2a">Return to article</a>

<a name="3">3</a> See, e.g., Commonwealth v. Walker, 108 Mass. 309 (1871) (state court criminal prosecution for conspiring to obtain goods by false pretenses). <a href="#3a">Return to article</a>

<a name="4">4</a> See §44 of the Bankruptcy Act of 1867 (Rev. St. §5132); see, also, United States v. Myers, 27 F. Cas. 49 (D.C. Va. 1877) (prosecution under Clause 9 of Rev. St. §5132 for
obtaining goods under false pretenses). <a href="#4a">Return to article</a>

<a name="5">5</a> The criminal bankruptcy statutes are found at 18 U.S.C. §§152-157; most of these statutes are a recodification of similar provisions under the old Bankruptcy Act, 11 U.S.C. §52 (1940). <a href="#5a">Return to article</a>

<a name="6">6</a> PL 107-204, July 30, 2002, 116 Stat 745. <a href="#6a">Return to article</a>

<a name="7">7</a> 18 U.S.C. §1519; United States v. Albert D. Thrower, No. 03-CR-341 (N.D. Ohio Aug. 19, 2003) (Indictment charging 18 U.S.C. §1519 in the context of a bankruptcy case). <a href="#7a">Return to article</a>

<a name="8">8</a> In addition to these statutes, there are a plethora of other more "generic" criminal statutes that can be used to charge criminal conduct in the bankruptcy courts. See, e.g., 18
U.S.C. §§1341 and 1343 (mail and wire fraud); 18 U.S.C. §1001 (false statements); 18 U.S.C. §1621 (perjury); 18 U.S.C. §§1956 and 1957 (money laundering), and 42 U.S.C.
§408 (use of false Social Security number). <a href="#8a">Return to article</a>

Journal Authors

Peter Ainsworth

Robert Calo

Journal Date

Monday, December 1, 2003 - 12:00

Bankruptcy Rule

2003