TARP Inspector General Investigations January 2010

Well, first of all, even if you like the Colts and Peyton Manning (I do), you still have to be happy for the Saints and the City of New Orleans. What a great American story.

Back to business though, the Troubled Asset Relief Program Inspector General (TARP IG), Neil Barofsky, announced in his January 20, 2010 report that TARP has continued to develop into a sophisticated white-collar investigative agency. Through December 31, 2009, TARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

The Inspector General (IG) highlighted three current investigations. First, the IG remarked that Omni National Bank (“Omni”) a national bank headquartered in Atlanta with branch offices in Birmingham, Tampa, Chicago, Fayetteville, N.C., Houston, Dallas, and Philadelphia continued to be under scrutiny. Omni failed and was taken over by the Federal Deposit Insurance Corporation (“FDIC”) on March 27, 2009. Prior to its failure, Omni had applied for but had not been approved for TARP funds. TARP has participated in several investigations concerning Omni that have led to criminal charges as part of a mortgage fraud task force that includes TARP, the U.S. Attorney’s Office for the Northern District of Georgia, the Office of the Inspector General of the Federal Deposit Insurance Corporation (“FDIC OIG”), the Office of the Inspector General of the Department of Housing and Urban Development (“HUD OIG”), the Federal Bureau of Investigation (“FBI”), and the U.S. Postal Inspection Service.

TARP, the IG noted continues to play a significant role in the investigations by the Office of the New York Attorney General, the U.S. Attorney’s Offices for the Southern District of New York and Western District of North Carolina, the Securities and Exchange Commission (“SEC”), and the FBI into the circumstances of Bank of America’s merger with Merrill Lynch and its receipt of additional TARP funds.

And, finally, as previously reported, in August 2009, TARP, along with the FBI, FDIC OIG, and HUD OIG, conducted search warrants at the offices of Colonial Bancorp and Taylor, Bean & Whitaker (“TBW”). On December 16, 2009, TBW consented to its debarment from participating as an originator of Federal Housing Administration (“FHA”)-insured mortgages. HUD also terminated TBW as a Government National Mortgage Association (“Ginnie Mae”) issuer of mortgage-backed securities and took control of TBW’s $25 billion Ginnie Mae portfolio. In conjunction with the suspensions, HUD also proposed debarments of two officers of TBW. On August 7, 2009, Colonial reported that it is the target of a criminal probe. The investigation, the IG noted is ongoing.

The federal government’s enormous investment of monies into the TARP program and the establishment of the TARP IG, means a continued focus on financial crimes in the future.

First TARP Criminal Case Reaches Speedy Conclusion

Last month, we described how the Office of the Special Inspector General for the Troubled Asset Relief Program (TARP), SIGTARP, had 20 criminal investigations in progress and had announced the first charges to be brought relating to TARP. The first case involved Gordon Grigg, who was charged in the Middle District of Tennessee for defrauding investors of more than $10 million in a Ponzi scheme in which Grigg falsely represented to investors that their funds were being used to purchase TARP guaranteed debt.

The criminal information against Grigg, which is available here, charges Grigg with 8 counts of mail fraud and wire fraud in violation Title 18 United States Code Sections 1341 and 1343. The information alleges that Grigg, an investment advisor in Franklin Tennessee, owned a group of corporations under the name of ProTrust. The information charges Grigg with soliciting investments for ProTrust beginning in 1996 and continuing through 2009 by falsley promising to invest and manage the money in "safe" investments, including alleged fixed-term certificates of deposit, private placements, corporate notes and debentures. Grigg falsely promised a high rate of return on the investments. Instead, Grigg used investors' funds for his personal benefit, to operate ProTrust and to disburse fictitious earnings and returns of deposit. Grigg also created false investment documents and account statements, and made false statements to investors to deceive them into believing that the investments were profitable. Grigg further falsely represented that ProTrust had partnerships or special relationships with large investment firms such as Berkshire Hathaway, Inc., Goldman Sachs & Co. and Morgan Stanley & Co.

The information states that Grigg and ProTrust never met any of the qualifying criteria to receive TARP funds, a never applied for, received approval from the Department of Treasury for, and never received any TARP funds. The TARP allegations in the Indictment allege that, between November 4, 2008, and January 28, 2009, Grigg, via mail and e-mail, solicited funds from new investors and existing ProTrust clients for investment in "government-guaranteed commercial paper and bank debt" under the TARP program and falsely represented that ProTrust had already committed more than $5 million in pooled client funds towards purchase of TARP guaranteed debt as part of a partnership between Berkshire Hathaway and Kohlberg Kravis Roberts & Co. Grigg stated that the investment was a 12.5 % government-guaranteed fund. Grigg further sent investors counterfeit investment contracts and release forms with false Committee on Uniform Securities Identification Procedures numbers.

The information against Grigg was issued on April 22 and Grigg entered a guilty plea to all counts on April 29. Grigg will be sentenced on August 6. Only a small portion of the conduct in the Grigg case actually concerns TARP. We will be monitoring for other criminal investigations and proceedings.

Tarp Tales, a site run by Citizens for Ethics and Responsibility in Government, has published a Bailout Halftime Report, in which it notes that, according to the Congressional Budget Office, 32 institutions have already repaid the government some $70 billion loaned under the Emergency Economic Stablization Act of 2008, with $369 billion still outstanding. The site notes that the highest subsidy rate and losses so far have been from the government's $79.7 billion investment in General Motors and Chrysler. The subsidy rate in the first $50 billion loaned to the automakers was $40 billion in lost value--or roughly 70 percent.


Criminal Enforcement of the Troubled Asset Relief Program (TARP)-and the Term Asset-Backed Loan Securities Facility (TALF) program-Part II

We have mentioned the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), one of the entities charged with oversight on how the eventual $700 billion in TARP funds disbursed to various banks and institutions are used. Special Inspector General (SIG) Neil Barofsky, the “TARP Cop,” issued a Quarterly Report to Congress back on April 21, 2009, which set out in detail the structure for criminal oversight of TARP, which we have reviewed and outlined herein.

SIG Barofsky has announced that there are currently 20 criminal investigations and 6 audits relating to whether TARP funds have been mismanaged. The audits relate to (1) use of funds by TARP recipients, (2) how TARP recipients are implementing controls on executive compensation, (3) TARP assistance to Bank of America, (4) possible external influences on Treasury or bank regulators in determining applications from banks seeking TARP funds, and (5) the large bonus payouts to American International Group, Inc. (AIG) employees and any counterparty payments to other financial institutions by AIG of the TARP monies which it has received.

SIGTARP was created by Section 121 of the Emergency Economic Stabilization Act of 2008 (EESA), which gives SIGTARP the authorities listed in Section 6 of the Inspector General Act of 1978, including the power to obtain documents and other information from Federal agencies and to subpoena reports, documents, and other information from persons or entities outside of Government. On March 25, 2009, Congress enacted the Special Inspector General for the Troubled Asset Relief Program Act of 2009, which gives SIGTARP the authority to conduct audits and investigations and allows SIGTARP the authority to undertake law enforcement functions without prior approval from the Attorney General. SIGTARP will receive $50 million in Federal funds to carry out its oversight and enforcement activities.

SIGTARP’s stated mission:

[I]s to advance economic stability through transparency, coordinated oversight, and robust enforcement, thereby being a voice for, and protecting the interests of, those who fund TARP — i.e., the American taxpayers… [through] promoting transparency in TARP, through effective oversight of TARP in coordination with other relevant oversight bodies, and by robust criminal and civil enforcement against those, whether inside or outside of Government, who waste, steal, or abuse TARP funds.

SIGTARP cooperates in its functions with the other TARP oversight bodies, the Financial Stability Oversight Board (FSOB), the Congressional Oversight Panel (COP), and the Government Accountability Office (GAO), as well as numerous other Federal entities.

In regard to criminal investigations, SIGTARP’s Investigations Division is led by Christopher R. Sharpley, Deputy Special Inspector General for Investigations. The Investigations Division employs special agents, investigators, analysts, and attorney advisors. The Quarterly Report states that:

The Investigations Division will, of course, pursue any wrongdoers within Government, but it will also focus on the recipients of TARP funds — i.e., the institutions that receive TARP investments and the vendors hired to administer TARP activities. Those who make intentional misrepresentations in the TARP application process or in their fi nancial reporting to Treasury may be in violation of several criminal statutes, including securities fraud, wire fraud, mail fraud, and false statements. SIGTARP intends to investigate these potential crimes vigorously.

SIGTARP partners with the FBI, the IRS, the Securities and Exchange Commission, the Department of Justice and States’ Attorneys General. Investigations and sharing of information between these law enforcement entities are coordinated by the Assistant Inspector General for Investigations (AIGI) TARP Working Group. SIGTARP further gains information from the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

SIGTARP has also established a hotline for the public to report “allegations of fraud, waste, abuse, and reprisals for bringing to light TARP-related concerns.” The Quarterly Report claims that SIGTARP has received and analyzed over 200 tips.

The Term Asset-Backed Loan Securities Faciliy (TALF) program is an asset-backed securities loan program guaranteed by the Small Business Administration initiated by the U.S. Federal Reserve in November 2008. The TALF program will eventually involve up to $1 trillion in loans. The Term Asset-Backed Loan Securities Faciliy (TALF) Task Force consists of the Office of the Inspector General of the Board of Governors of the Federal Reserve Board, the Federal Bureau of Investigation, Treasury’s Financial Crimes Enforcement Network, U.S. Immigration and Customs Enforcement, the Internal Revenue Service Criminal Investigation division, the Securities and Exchange Commission, and the U.S. Postal Inspection Service. SIGTARP organized the TALF Task Force “to deter, detect, and investigate any instances of fraud or abuse in TALF.” The TALF Task Force Consists of the Federal Reserve Board Inspector General, the FBI, FinCEN, U.S. Immigration and Customs Enforcement, IRS-CI, SEC, and the U.S. Postal Inspection Service. The Quarterly Report states that:

The members of the TALF Task Force will combine their shared expertise in securities fraud investigations and maximize their resources to deter potential criminals, to identify and stop fraud schemes before they can fully develop, and to bring to justice those who seek to commit fraud through TALF. Although TALF participants who play by the rules have nothing to fear from this Task Force, Federal law enforcement is ready now to detect, investigate, and bring to justice any who would try to steal from this important program.


Criminal Enforcement of Troubled Asset Relief Program (TARP): Criminal Investigations and First Prosecution Already in Progress

The Federal Government is spending billions on bailouts and stimulus in order to resuscitate the economy. This money, however, does not come without strings, both in the non-criminal and the criminal sphere. Following is a survey of the potential criminal consequences of misuse of monies issued by the Government under the Troubled Asset Relief Program (TARP) , 12 U.S.C. § 5201 et seq., part of the Emergency Economic Stabilization Act (EESA) of 2008.


President Georgia W. Bush signed the EESA and TARP into law on October 3, 2008. As of the end of March, the Treasury Department has disbursed $303.4 billion out of $700 billion in TARP funds, according to a Government Accountability Office (GAO) status report . Most of the monies—$198 billion—have gone to TARP’s Capital Purchase Program (CPP), the preferred stock and warrant purchase program. About $40 billion has been given to failing institutions, and approximately the same amount has been used for targeted investment programs. $24.5 billion has been given to the auto industry.


The central TARP provision, 12 U.S.C. § 5211, governing purchases of troubled assets, authorizes the Secretary of the of Treasury “to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary…” 12 U.S.C. § 5211(a)(1). Section 5211 further directs the Secretary to prevent unjust enrichment of financial institutions in making purchases. 12 U.S.C. § 5211(e).


The Comptroller General is responsible for oversight of TARP. 12 U.S.C. § 5226(a). The Comptroller General, through the GAO, is also charged with auditing programs, activities, receipts, expenditures and financial transactions under TARP. 12 U.S.C. § 5226(b).


12 U.S.C. § 5234 provides that “Any Federal financial regulatory agency shall cooperate with the Federal Bureau of Investigation and other law enforcement agencies investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products.” 12 U.S.C. § 5234.


As related by an article at NewGeography.com, TARP creates three monitoring entities, one of which has the authority to prosecute crimes relating to TARP, the Special Inspector General (SIGTARP). SIGTARP is headed by Special Inspector General in charge, Neil Barofsky, dubbed the "TARP Cop." SIGTARP has set up a hotline for citizens to report fraud or “evidence of violations of criminal and civil laws in connection with TARP” and had received 200 tips and launched 20 criminal investigations by the end of April. SIGTARP has released a 250-page report on TARP to educate the public http://sigtarp.gov/reports/congress/2009/April2009_Quarterly_Report_to_Congress.pdf.  


In February, SIGTARP began issuing all financial insititutions receiving TARP funds audit letters requesting, within 30 days:



  1. A narrative of (a) the recipient's anticipated use of TARPfunds; (b) whether the TARP funds were segregated from other institutionalfunds; (c) the recipient's actual use of TARP funds to date; and (d) the recipient's expected use of unspent TARP funds.
  2. The recipient’s specific plans for addressing executive compensation, and the status of implementation of any plans.


The audit letters further request supporting documentation and requires that the response be:

[B]e signed by a duly authorized senior executive officer of your company, including a statement certifying the accuracy of all statements, representations, and supporting information provided, subject to the requirements and penalties set forth in Title 18, United States Code, Section 1001 [the Federal false statement criminal provision].

 SIGTARP subsequently issued a Frequently Asked Questions (FAQ) sheet to TARP fund recipients. Earlier this year Barofsky testified before the Senate Finance Committee that the massive amounts of TARP money "will inevitably attract those seeking to profit criminally" and that SIGTARP was "looking at the potential exposure of hundreds of billions of dollars in taxpayer money lost to fraud." Among SIGTARP's current investigations is insurance giant AIG.

 On March 11, 2009, FBI Director Robert Muller stated before the the Senate Committee on Appropriations, Subcommittee on Commerce, Justice, Science, and Related Agencies:


With the passage of recent legislation that includes billions of dollars being infused into the U.S. economy, including the Housing and Economic Recovery Act (HERA), the Emergency Economic Stabilization Act of 2008, the Troubled Asset Relief Program (TARP), and other asset relief programs, we anticipate an increase in fraud. In addition to the agents that are currently on board, the FBI’s 2010 budget includes 143 new positions (50 special agents and 93 professional staff) and $25.5 million to assist the FBI in combating mortgage and corporate fraud.




Only one investigation has resulted in charges relating to abuse of TARP funds so far. In April, a felony information was filed in the U.S. District Court for the Middle District of Tennessee, charging Gordon B. Grigg, a financial advisor in Franklin, Tennessee, with four counts of mail fraud and four counts of wire fraud. Grigg is charged with having allegedly embezzled more than $10,922,000 in client investment funds in a Ponzi-type scheme. He is alleged to have conducted a scheme since 1996 to defraud investors by inducing them to invest in pooled-client purchases of fixed-term certificates of deposit, private placements, corporate notes and debentures in the name of Grigg’s company, ProTrust. Grigg allegedly falsely told investors that he personally managed the accounts, that he had negotiated partnerships and special business relationships with several of the nation’s most successful investment firms, and that the investments were safe and would generate and sustain high rates of annualized returns. He is also charged with allegedly falsely representing that he had already committed more than $5,000,000 in Pro Trust pooled client funds towards purchase of TARP guaranteed debt as part of private placement partnership. The Government alleges that Grigg never invested the investors’ monies, but instead used the monies to disburse false “earnings” and “returns of deposit” to clients who cashed out their ProTrust investment accounts, and for his own personal benefit and expenses.


In order to conceal the scheme, Grigg fabricated documents, including correspondence, invoices and account statements, and used counterfeit corporate letterhead and the forged signatures of national investment firm executives. From 1990 to 2009, Grigg solicited approximately sixty investors to invest approximately $10,922,661, of which, approximately $6.6 million was returned to investors who either cashed out or closed their Pro Trust investment accounts. 


Special Inspector General Barofsky announced in the press release by the U.S. Attorney’s Office for the Middle District of Tennessee on the charges against Grigg:


“The filing of charges today against Gordon Grigg, the first criminal charges brought in connection with a SIGTARP investigation, marks a significant milestone in the evolution of SIGTARP and of TARP oversight generally.”

“Today, SIGTARP, the U.S. Attorney’s Office for the Middle District of Tennessee, the SEC, and the FBI, along with our state and local partners, serve notice on all who might try to profit criminally from the current national crisis that the United States Government stands ready to detect, investigate and punish any and all who use the TARP program to commit fraud.  This is true irrespective of whether the victim is the United States Government itself, unsuspecting investors, or struggling home owners.”


 With hundreds of billions in TARP funds already disbursed and hundreds of billions remaining to be disbursed, and great public concern over how such staggering amounts of money are being spent and used, TARP-related criminal investigations and prosecutions can only increase. Recipients of TARP funds must be especially careful in using the funds for their intended purposes and in scrupulously accounting for all uses of the funds. It is furthermore of utmost importance that recipients exercise extreme caution and thoroughness in responding to audit inquiries from SIGTARP, including through the retention of competent and proactive legal counsel.