Consumer Bankruptcy Program
TITLE 18 – CRIMINAL INVESTIGATION: THE PROCESS
AND HOW TO RESPOND
Saturday, May 17, 2014
1:30 – 2:30pm
Producer: Hagop Bedoyan
Klein DeNatale Goldner Cooper
Rosenlieb & Kimball LLP
Speakers:
 Honorable Maureen A. Tighe
US Bankruptcy Court, Central District
 Peter Anderson
US Trustee, Central District
 John Pringle
Roquemore Pringle & Moore Inc.
Who files?
Real Housewives Do!
Baseball Players Do!
Even Baseball Teams
NFL Players Do
Churches Too!
And Celebrities
Why file?
Generally, bankruptcy law allows debtors, who
are unable or partially unable to pay
outstanding debts, to rid themselves of these
debts and obtain a fresh start. As stated by the
United States Supreme Court, bankruptcy gives
"the honest but unfortunate debtor ... a new
opportunity in life and a clear field for the
future, unhampered by the pressure and
discouragement of preexisting debt." (Local
Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).
In exchange, the Debtor must tell the truth, the
whole truth and nothing but the truth
However, some people:
Don’t tell the truth
or
they use the
bankruptcy filing
as part of a fraud
scheme
18 U.S.C. § 3057 – Bankruptcy Investigations
(a) Any judge, receiver, or trustee having reasonable
grounds for believing that any violation under chapter 9
of this title or other laws of the United States relating
to insolvent debtors, receiverships or reorganization
plans has been committed, or that an investigation
should be had in connection therewith, shall report to
the appropriate United States attorney all the facts and
circumstances of the case, the names of the witnesses
and the offense or offenses believed to have been
committed. Where one of such officers has made such
report, the others need not do so.
28 U.S.C. § 586 - DUTIES; SUPERVISION BY
ATTORNEY GENERAL
Section 586 of title 28 imposes a similar duty on the
United States Trustee to refer any matter that may
constitute a violation of criminal law to the United
States Attorney and, upon request, to assist the
United States Attorney in prosecuting the matter.
This statutory obligation does not provide for the
referral of only those matters which will be
prosecuted or for which there is proof beyond a
reasonable doubt. Nor is it subject to any
thresholds or guidelines established by the United
States Attorneys’ offices.
Fifth Amendment
• A DEBTOR CAN EXERCISE HIS/HER FIFTH AMENDMENT RIGHT AGAINST
SELF-INCRIMINATION;
• WHETHER THE PRIVILEGE EXTENDS TO THE PRODUCTION OF
DOCUMENTS AND PREPARATION OF SCHEDULES IS A COMPLICATED
ISSUE;
Continued…
• THE PRIVILEGE DOES NOT APPLY TO CORPORATE DEBTORS;
• THE PRIVILEGE IS WAIVED BY FAILING TO TIMELY INVOKE IT
AND BY DISCLOSURE OF INCRIMINATING EVIDENCE;
• IF THE FIFTH AMENDMENT IS PROPERLY INVOKED, THERE IS
NO DENIAL OF DISCHARGE SIMPLY FOR FAILURE TO TESTIFY;
• IF GRANTED IMMUNITY, THE DEBTOR CAN BE COMPELLED
TO TESTIFY; and,
• AN ATTORNEY CAN BE CRIMINALLY LIABLE FOR KNOWINGLY
SOLICITING FALSE TESTIMONY.
Bankruptcy Fraud
Criminal Statutes
Bankruptcy Fraud Statutes
• 18 USC §152 – giving, receiving, or concealing assets;
making false statements, withholding, destroying,
concealing or altering records; filing false claims; bribery
• §153 – Embezzlement against the estate
• §154 – Adverse interest & conduct of officers
• §155 – Improper fee agreement
• §156 – Knowing disregard of bankruptcy laws
• §157 – Scheme to defraud
• §1519 – Destruction of documents
18 U.S.C. §152
• Primary bankruptcy fraud statute
• Applies to conduct by all persons involved in
the bankruptcy process: debtors, trustees,
lawyers, property custodians
• 5 year maximum penalty
18 U.S.C. §152
Section 152 “… attempts to cover all the
possible methods by which a bankrupt or any
other person may attempt to defeat the
Bankruptcy Act through an effort to keep assets
from being equitably distributed among
creditors.” Stegman v. United States, 425 F.2d
984, 986 (9th Cir. 1970) quoting 2 Collier on
Bankruptcy 1151 (14th ed. 1968).
18 U.S.C. §152
Prohibits criminal conduct related in any way to the
bankruptcy proceeding
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–
–
–
–
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§152(1) §152(2) §152(3) §152(6) §152(7) §152(8) -
– §152(9) -
concealment of assets
false oath
false declaration or statement
bribery
pre-petition concealment/transfer
destroying, concealing or
falsifying documents
withholding documents
18 U.S.C. §152(1)
Concealment of Assets
Elements
•
•
•
•
Bankruptcy proceeding existed;
Property belonged to the bankruptcy estate;
The defendant concealed the property; and
The defendant did so knowingly and fraudulently.
Lenny Dykstra charged with
(in part) §152(1)
False Oaths
18 U.S.C. §152(2)
Elements
•
•
•
•
•
Bankruptcy proceeding existed;
A statement was made under oath;
The statement was material;
The statement was false; and
The defendant knew it was false when made and it was
made with intent to defraud.
What is Material?
The false statement, false oath or scheme
must have the capacity or potential to
influence the actions of a creditor, a
trustee, or the bankruptcy court.
False Statements Under
Penalty of Perjury
18 U.S.C. §152(3)
• Bankruptcy proceeding existed;
• Debtor made a declaration or statement under
penalty of perjury;
• The statement was material;
• The statement was false; and
• The defendant knew the statement was false when
made and it was made with intent to defraud.
Milton Vandevort guilty (in part) of
§152(2) and (3)
October 18, 2011
“A Bel-Air man was sentenced this afternoon to 70 months in
federal prison for concealing assets in a bankruptcy proceeding
and threatening a private investigator with a golf club. Milton
Lee Vandevort, 50, was sentenced by United States District Judge
Phillip S. Gutierrez. In addition to the 70-month sentence, Judge
Gutierrez ordered Vandevort to pay $12,500 in fines.” Vandevort
has been in custody since July 14, 2010, when, after a two-week
trial, a federal jury convicted him of seven counts: two counts of
concealing assets in a bankruptcy case, making a false oath in a
bankruptcy case, making a false declaration in a bankruptcy case,
assaulting a process server, and two counts of money
laundering.”
Stocker Street and Related DBAs
18 U.S.C. 152(3)
Michael Ybarra, Jeremy Lloyd, and Steven
Benjamin were indicted in 2012 for running a
foreclosure rescue service that used DBAs and
fractional interest real property transfers, and
bankruptcy to forestall foreclosure. Lloyd was
sentenced to five years probation, and Benjamin
to three years. Ybarra has entered into a plea
agreement but has not been sentenced.
Scheme to Defraud
18 U.S.C. § 157
• Modeled after the mail (§1341) and wire
(§1343) fraud statutes
• Person knowingly and intentionally devised or
participated in a scheme to defraud
• Examples are current foreclosure rescue
schemes that involve bankruptcy filings
§157 continued
• To execute the scheme, the person:
– Files a petition (voluntary or
involuntary)
– Files a document in a bankruptcy
– Made a false or fraudulent claim,
representation or promise
• concerning a bankruptcy
Cohen, Bowman and Phillips
Fractional Interests and Use of DBAs
18 U.S.C. § 157(1)
In 2010, Darwin Bowman, Irving Cohen and Robin
Phillips were accused of executing a foreclosure
rescue scheme that encompassed filing
bankruptcies that delayed foreclosure on nearly
1500 properties and affected more than $200
million in mortgages. Ultimately, Phillips and Cohen
were both sentenced to one year and a day in
prison, and 75- year-old Bowman was sentenced to
eight months in a halfway house and additional
home confinement.
Former Federal Fugitive Sentenced in California for Nationwide
Foreclosure Scam
Collected More Than $1.2 Million from More Than 800 Distressed Homeowners
18 U.S.C. § 157(3)
August 5, 2013 - Glen Alan Ward, 48, a former Los Angeles
resident who fled to Canada and was a federal fugitive for 12
years, was sentenced today to serve 132 months in prison for
aggravated identity theft and bankruptcy fraud in connection
with his leading role in a nearly 15-year foreclosure-rescue scam
that fraudulently postponed foreclosure sales for more than 800
distressed homeowners. Ward caused fractional interests in real
property to be transferred to unsuspecting debtors through the
use of a PACER account.
18 U.S.C. §1519
Sarbanes-Oxley Act of 2002
“Whoever 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 the investigation of any matter…filed
under [the Bankruptcy Code], or in relation to or
contemplation of any such matter or case, shall
be fined under this title, imprisoned not more
than 20 years, or both.”
Foreclosure Fraud
Foreclosure Fraud
According to FBI and U.S. Trustee Program, the
United States bankruptcy system is being
exploited to perpetrate foreclosure rescue
schemes:
• Advance Fee Foreclosure Rescue
• Fractional Interest Transfers with Fictitious
DBAs or Corporations
• Sale-Leaseback-Repurchase Scheme
Advance Fee Foreclosure Rescue Scheme
• Falsely tell victims that their mortgages and
delinquent loans will be renegotiated;
• Require an upfront fee and may require a
monthly fee to participate in a “loan
modification program”;
• Use the bankruptcy system to delay
foreclosures by filing fraudulent, often serial
bankruptcy petitions for as long as possible.
Fractional Interest Transfer Scheme
• Homeowners are convinced to deed partial interests
in their properties to fictitious companies;
• Perpetrators file a fraudulent bankruptcy case in the
name of the fictitious company thereby stopping the
foreclosure process and preventing any further
collection efforts;
• After the court grants relief from the automatic stay,
another interest in the property is transferred and
the process starts again.
Sale–Leaseback-Repurchase Scheme
• Perpetrators persuade delinquent homeowners to
deed their homes over;
• Promise to assume the mortgage payment, find an
investor to purchase the victim’s home and rent it
back for less than the mortgage payment;
• Promise to payoff the full value of the victim’s
delinquent payments; and reestablish the
homeowner’s credit with a lease-to-buy option;
• Instead, the perpetrators file a fraudulent bankruptcy
case.
What the OUST does…
• Pull bankruptcy documents and 341(a)
meeting recordings;
• Review and analyze them;
• Train agents and other law enforcement
personnel;
• Provide agent support by preparing
documents; and
• Assist with bankruptcy related witnesses.
How do you know of Criminal
Investigation?
•
•
•
•
You usually don’t
Might hear about a law enforcement inquiry
Might hear of a grand jury subpoena
Client might be interviewed (if not
represented)
• Assume there may be one if there is any basis
at all to believe criminal penalties could attach
USAO Process After Referral
• No mandated time frame (Can sit for years)
• Referral is reviewed and either:
– Declined
– Fed into preexisting investigation if it is related
– Referred to an investigating agency
• Usually FBI
• Might be IRS, Postal, HUD/VA IG
– Grand Jury Investigation opened
If USAO Pursues Case
• Evidence developed through
– Anything available from civil proceedings
– Grand Jury interviews and subpoenas
– Law enforcement interviews (not all witnesses
called to grand jury)
• Presentation made to internal USAO
committee of all evidence and potential
charges
After Internal USAO Review
• If urgent, Complaint sought before indictment
• If authorized, presentation of charges made to
grand jury
• Chief of Criminal Division authorizes
• Sometimes Approval required from DOJ
• Sometimes Pre-indictment contact with
subject for discussions
• Arrest or Summons Issued post-indictment