Strengthening Fraud Enforcement

This afternoon, the House passed the Fraud Enforcement and Recovery Act of 2009 by a vote of 367-59-1. The bill protects taxpayers by giving the Justice Department more tools to fight fraud in the use of TARP and recovery funds, and increases accountability for corporate and mortgage frauds that have contributed to the recent economic collapse. Over the last several years, fraud cases have increased and federal authorities have been stretched thin -- the number of open FBI mortgage fraud investigations has more than doubled in the last three years, rising from 881 in FY 2006 to more than 2,000 and yet the FBI has only 240 mortgage fraud agents. This bill invests in the Justice Department and other agencies to hire prosecutors, agents, and analysts so that they can aggressively pursue mortgage, corporate, and other financial fraud during this economic crisis.

The bill also establishes a Financial Markets Inquiry Commission to examine the causes and factors leading to the financial crisis. It is similar to the Pecora Commission established to investigate the 1929 stock market crash which uncovered the fraudulent and unscrupulous practices on Wall Street that led to the Great Depression and laid the groundwork for regulatory reforms.

The Financial Markets Inquiry Commission is empowered to hold hearings and to issue subpoenas either for witness testimony or documents and will have more than twenty substantive areas of focus, including:

the role of fraud and abuse in the financial sector

state and Federal regulatory enforcement

tax treatment of financial products

credit rating agencies

lending practices and securitization

corporate governance and executive compensation

Federal housing policy

derivatives

GSEs

short-selling

Additionally, the bill requires the commission to examine the role of fraud and abuse towards consumers in the mortgage sector, examine the extent to which the legal and regulatory structure governing financial institutions creates the opportunity for financial institutions to engage in regulatory arbitrage, examine the role of credit default swaps and the impact of financial institutions that are "too big to fail" on market expectations, and examine the causes of major financial institutions that failed or were likely to fail without government assistance. The Commission will report their findings and conclusions to Congress by December 15, 2010 and is required to refer any person who may have violated U.S. law in relation to the financial crisis to the Attorney General (AG) or state AGs.

Rep. Bobby Scott (D-VA):

Rep. Scott: "Many financial crimes today go unpunished because law enforcement agencies simply lack the resources to investigate and prosecute the financial crimes such as ID theft, mortgage fraud or organized retail theft. This bill will empower federal law enforcement officials to hold criminals accountable for their crimes."

Rep. John Larson (D-CT):

Rep. Larson: "Americans have lost their homes, their jobs, their life savings. We owe them not only an explanation of how this happened but a path forward that corrects the circumstances that created the crisis. We've got to do this by looking back not just conveniently over the last eight years, but at the last 28 years. As was said, we must shed the fierce light of public scrutiny on the dark markets, on the schemes, and the negligence, and the unintended consequences that have perpetrated our financial system. Why? So we can build a regulatory framework for this century that protects the American worker and that protects the American investor."