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/
In February, SIGTARP began issuing all financial insititutions receiving TARP funds audit letters requesting, within 30 days:
- 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.
- 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.
http://www.fbi.gov/congress/
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.
