Low rate of bankruptcy fraud prosecutions attracting attention Rob Garver

Picking up on a story reported earlier this year by AssetRecoveryWatch.com, a number of mainstream media outlets have begun to note the decline in bankruptcy fraud cases being brought by Federal prosecutors.


In a story carried by numerous media outlets this week, Bloomberg News noted that criminal bankruptcy fraud cases had plummeted to levels not seen since the 1980s, even as financial fraud cases have dominated the headlines in the past year.


The story focuses on the role played by the Federal Bureau of Investigation and by prosecutors, noting that they have focused more closely on other forms of fraud in the recent past. However, it fails to note the role of the US Trustee Program, and arm of the department of Justice, which oversees nearly all bankruptcy filings.


The Justice Department has estimated that one in ten bankruptcy filings have an element of fraud in them, but the number of criminal referrals produced by the US Trustee Program doesn’t come close to reflecting that figure.


An AssetRecoveryWatch.com story posted in October noted that “in fiscal 2008, the United States Trustee Program handled 993,815 bankruptcy cases and filed 1,471 criminal referrals. That is equivalent to a rate of 0.148%, meaning that less than one and one-half criminal referrals were made for every thousand bankruptcy filings the USTP handled.”


The AssetRecoveryWatch.com report also revealed that private trustees hired by the US Trustees Program are not required to have any training in the detection of fraud or the tracing of assets.


Commenting on the original AssetRecoveryWatch.com story, Wayne Klein, a principal with the forensic accounting and consultancy firm Klein & Associates, said, “Given the economic incentives we would expect there to be bankruptcy filers who engage in fraud by hiding assets or activity.


“Given that DOJ estimates that fraud occurs in 10% of filings, the question can be asked: How well are trustees doing at detecting that fraud?” Klein said. “The number of referrals is really low and we ought to be looking at why. Is bankruptcy fraud not occurring? Or are bankruptcy trustees either not competent to detect it or not making the effort to detect it?”


He said it is the former that seems more likely.


“Absent a requirement that trustees be adequately trained in fraud detection and asset recovery, we can’t expect them to be as successful at detecting fraud and identifying efforts to hide assets,” he said.


Published on 10/01/2010 10:23:52