ASSISTANT AG CALDWELL'S REMARKS ON DIGITAL CURRENCIES LIKE BITCOM

FROM:  U.S. JUSTICE DEPARTMENT
Assistant Attorney General Leslie R. Caldwell Delivers Remarks at the ABA’s National Institute on Bitcoin and Other Digital Currencies
Washington, DC United States ~ Friday, June 26, 2015
Thank you Nina [Marino] for that kind introduction.

It is a pleasure to address today’s ABA National Institute on Bitcoin and Other Digital Currencies.  As head of the Justice Department’s Criminal Division, I am privileged to lead over 600 attorneys who investigate and prosecute federal crime, help develop criminal law and formulate law enforcement policy.  Our talented prosecutors perform crucial work in many of the areas relevant to today’s discussion, including the fight to combat money laundering, financial fraud, child exploitation and cybercrime.

This afternoon, I’d like to discuss the department’s approach to the emerging virtual currency landscape, our ongoing efforts to prosecute those who commit crimes by using virtual currency, and our view that compliance and cooperation from exchanges, companies and other market actors can ensure that emerging technologies are not misused to fund and facilitate illicit activities.

The department is aware of the many legitimate actual and potential uses of virtual currency.  It has the potential to promote a more efficient online marketplace.  It also potentially can lower costs for brick and mortar businesses, by removing the need to pay credit card-related costs.  And in theory, it can help speed and reduce the cost of cross-border transactions.  But we also have seen that criminals have been among the first to enthusiastically embrace the use of virtual currency, primarily in crime involving the internet.

Many of the inherent features of virtual currencies are exactly what makes them attractive to criminals.  Many criminals like virtual currency systems because these systems conduct transfers quickly, securely and with a perceived level of anonymity.  For others, the irreversibility of payments made in virtual currency and lack of oversight by a central financial authority is appealing.  Finally, the ability to conduct international peer-to-peer transactions that lack immediately available personally identifying information has made decentralized virtual currency attractive to those who wish to cover their money trail.

As a result, virtual currency facilitates a wide range of traditional criminal activities as well as sophisticated cybercrime schemes.

Much of the illicit conduct involving virtual currency occurs through online black markets such as the now-shuttered Silk Road, which operated on an anonymized “dark web” network that masked users’ physical locations, making them difficult to track.  Similar online black markets continue to operate, offering on a global scale, a wide selection of illicit goods and services.  While these have included more traditional crimes such as narcotics trafficking, stolen credit card information, and hit-men for hire, we have also seen a significant evolution in criminal activity.

For example, Bitcoin has been utilized to fund the production of child exploitation material through online crowd-sourcing – a development rarely seen before the prevalence of virtual currency.  It has also been used to buy and sell lethal toxins over the internet and as a payment method for virtual kidnapping and extortion, allowing near-instantaneous transactions across the globe between perpetrators of phishing and hacking schemes and their victims.

Despite the significant challenges in investigating, much less prosecuting, this activity, the department already has a strong record of bringing cases in which virtual currencies were used to facilitate criminal conduct.  While the burgeoning assortment of online exchanges, virtual currencies and virtual marketplaces has created a complex and evolving environment or “ecosystem” as this audience knows it, we too are keeping pace and will pursue those who exploit vulnerabilities in that ecosystem for illegal gain.

In this arena, we rely principally on money services business, money transmission and anti-money laundering statutes.  While individual users who are not acting as exchangers or transmitters are not required to register with FinCEN, many virtual currency systems, exchangers and related services are.  Additionally, most states also require money transmitters to obtain a state license in order to conduct business in that state, and some like New York have established virtual-currency specific licensing requirements.  Any failure to register or obtain a license may subject a money transmitter to criminal prosecution, and a money transmitter that knowingly moves funds connected to a criminal offense also faces prosecution for money laundering, regardless of licensing status.  Whether the currency involved is virtual or traditional, the department enforces these critical laws to prosecute money services businesses that engage in money laundering or facilitate crime by flouting registration and licensing requirements.

The department’s enforcement actions have evolved along with the virtual currency ecosystem.  Our first major action against a virtual currency service used for illicit purposes was in 2007, when the Criminal Division’s Asset Forfeiture and Money Laundering Section (AFMLS), together with our Computer Crime and Intellectual Property Section (CCIPS), spearheaded the prosecution against e-Gold and its owners on charges related to money laundering and operating an unlicensed money transmitting business.  E-Gold was a popular online currency exchange, and was a favored hub for cybercriminals in part because of the lack of account holder identity verification.  An e-mail address was the only information needed to set up an account, allowing global anonymous transactions.  After a multi-agency investigation, e-Gold and three associated individuals pleaded guilty in 2008 to charges of money laundering and operating an unlicensed money transmitting business.

In the wake of e-Gold’s demise, the virtual currency system Liberty Reserve was created.  As alleged in our pending indictment, Liberty Reserve was structured and operated to help users conduct illegal transactions anonymously and launder the proceeds of their crimes.

Liberty Reserve quickly became one of the principal money transfer agents used by cybercriminals around the world to distribute, store and launder the proceeds of their illegal activity.  Like e-Gold, any would-be account holder needed little more than a working email address to move funds around the globe.  Again, this virtual currency platform became a favorite of cybercriminals and other tech-savvy wrongdoers, enabling them to engage in anonymous financial transactions, all conducted in violation of BSA requirements.

Before the government shut down Liberty Reserve in 2013, it had accumulated more than one million users worldwide, including more than 200,000 in the United States, who conducted approximately 55 million transactions through its system totaling more than $6 billion in funds.  These funds included suspected proceeds of credit card fraud, identity theft, investment fraud, computer hacking, child pornography, narcotics trafficking and other crimes.

In a case jointly spearheaded by AFMLS and prosecutors from the Southern District of New York, several of Liberty Reserve’s top executives, including a co-founder of the company, the IT Manager and its Chief Technology Officer, have pleaded guilty to money laundering and operating an unlicensed money transmitting business and have been sentenced up to five years in prison.  The creator of Liberty Reserve was extradited to the United States from Spain in October 2014 and is currently awaiting trial, where he is, of course, presumed innocent.

The department has also taken action against a number of individuals and groups who sought to exploit decentralized systems such as Bitcoin and anonymized dark web servers to finance illicit trade and activity in online black markets.

The first major prosecution of a dark market website was by the Southern District of New York in a case against Ross Ulbricht, aka “Dread Pirate Roberts,” who was arrested in October 2013 and convicted by a jury for his role in creating and operating Silk Road, an online black market whose payment operations exclusively used Bitcoin.

Silk Road – designed to act as a black-market bazaar completely free from government regulation and oversight – attempted to enable its users to exchange illegal drugs and other unlawful goods and services anonymously and beyond the reach of law enforcement.  It emerged as one of the most extensive criminal marketplaces on the internet.  Before it was dismantled by law enforcement, Silk Road was used by thousands of drug dealers and other vendors to distribute hundreds of kilograms of illegal drugs and other unlawful goods and services to well over a 100,000 buyers, and has been linked to at least six overdose deaths around the world.  Further, Silk Road was also used to launder hundreds of millions of dollars derived from these unlawful transactions.  And just a few weeks ago, in a federal courtroom in New York City, Ulbricht was sentenced to a term of life in prison – a cautionary tale for all those who would use dark spaces on the internet to flout the law.

The Silk Road story, however, did not end with Ross Ulbricht.  Two federal agents, sworn to uphold the law, were also apparently lured by the perceived anonymity of virtual currency.  

Carl Force, a Special Agent with the Drug Enforcement Administration, and Shaun Bridges, a Special Agent with the U.S. Secret Service, were both assigned to the Baltimore Silk Road Task Force, which investigated illegal activity in the Silk Road marketplace.

Force served as an undercover agent.  According to court documents, Force went rogue and developed additional online personas to engage in complex bitcoin transactions to steal hundreds of thousands of dollars from the government and from the targets of the investigation.  Independently, Bridges also allegedly engaged in an even larger direct theft, illegally diverting over $800,000 in virtual currency to his personal account.

Both individuals have been charged by the Criminal Division’s Public Integrity Section and prosecutors from the Northern District of California with wire fraud, theft of government property and money laundering.  These investigations and prosecutions should send a strong message to those who would exploit technology to commit crimes: no matter how anonymous people might feel using virtual currency, their actions are not untraceable.  People should not assume that law enforcement will not notice when they act on the dark web, or that we are not keeping up with emerging technology.  Our successful prosecutions have shown that neither the supposed anonymity of the dark web nor the use of virtual currency is an effective shield from arrest and prosecution.

In addition to the operators of Silk Road and the drug traffickers who conducted their deals online in bitcoin, prosecutors from the Southern District of New York have also taken action against those who enabled this activity through the operation of Bitcoin currency exchanges.  We understand that there are legitimate exchanges, and many of those are working closely with FinCEN and other regulators to ensure compliance with the law.  But there are also many exchanges that don’t concern themselves with following the law.

From approximately December 2011 to October 2013, Robert Faiella ran an underground Bitcoin exchange on the Silk Road website under the alias “BTCKing,” and sold bitcoin to users to fund their purchases on the site.

Faiella would run bitcoin orders through Charlie Shrem, who operated a New York-based company that acted as a bitcoin to fiat currency exchange.  Although Shrem was the company’s Anti-Money Laundering Officer and had registered the company with FinCEN as a money services business, Shrem failed to report any of BTCKing’s activity, despite knowing it was being used for illegal purchases.  Shrem’s assistance enabled BTCKing to finance Silk Road transactions without collecting any personal identifying information from customers.  Faiella pleaded guilty to operating an unlicensed money transmitting business involving funds he knew were intended to support unlawful activity, and Shrem pleaded guilty to aiding and abetting Faiella’s operations.  Just this past winter, they were sentenced to four and two years in prison, respectively.

While these cases demonstrate that the criminal use of virtual currency has grown rapidly in recent years, its comparative scale versus traditional money laundering still pales in magnitude.  Few virtual systems currently can accommodate the hundreds of millions of dollars we have seen in certain large-scale money laundering schemes involving government-issued currency.  That said, as virtual currencies become more mature and better understood by criminals, we expect to see an increase in both individualized criminal activity and large-scale money laundering enterprises.

In some ways, companies and individuals operating in the virtual currency ecosystem are at a crossroads, and they have an opportunity to help virtual currency emerge from its association with criminal activities.  While there obviously are good and legitimate reasons to use these currencies, industry participants are now on notice that criminals too, make regular use of them.  So, to ensure the integrity of this ecosystem and prevent its penetration by crime, the industry must raise the level of its game on the compliance front.

That includes strict compliance with money services business regulations and anti-money laundering statutes.  I understand that you have heard from our partners at FinCEN this morning about our collaborative efforts to investigate and enforce anti-money laundering laws, and you’ll also hear more from Katie Haun this afternoon about the investigation of the virtual currency business Ripple Labs, which operated an unlicensed money transmitting business.

Ripple sold a virtual currency called “XRP,” but failed for a time to register with FinCEN as a money service business and failed to establish and maintain appropriate anti-money laundering protections.  Importantly, the department resolved this investigation after Ripple agreed to a number of substantial remedial measures.  This includes cooperation in other ongoing investigations, a change in business model and oversight by independent auditors, an extensive look-back through their previous activities and development of an extensive compliance framework.

The resolution with Ripple Labs underscores the importance of having a strong compliance program to ensure adherence to the law.  Virtual currency exchangers and other marketplace actors comprise the front line of defense against money laundering and other financial crime.  Robust compliance programs, such as those imposed on Ripple Labs, are essential to keeping crime out of our financial system.  If a money services business finds itself subject to a criminal investigation, we will look, as we do in all cases involving potential prosecution of a business entity, at the factors set forth in the Principles of Prosecution of Business Organizations, or Filip Factors.  Two of the Filip Factors in particular, the existence of an effective and well-designed compliance program and a company’s remedial actions, including steps to improve upon an existing compliance regime, are explicitly set forth as factors prosecutors should consider.

As you know, there is no “one-size-fits-all” compliance program.  Rather, effective anti-money laundering and other compliance programs must be tailored to meet the circumstances, size, structure and risks encountered by each entity.  And virtual currencies, with their perceived anonymity, pose compliance risks that money transmitters such as Western Union do not face. Industry participants must address those risks, even when it may be costly to do so.

Just as in any other corporate investigation, when reviewing the conduct of, for example, an exchange, the department will examine whether a company has meaningfully addressed compliance.  We have resolved cases against many financial institutions and other entities, and are deeply familiar with hallmarks of a genuine compliance program.

We expect virtual currency businesses to take compliance risk as seriously as they take any other business risk.  Now, we recognize that new entrants in emerging fields may find that compliance requires a significant expenditure of resources, and we will be context-specific in analyzing appropriate compliance frameworks including consideration of the size and scope of the business.  But a real commitment to compliance is a must, particularly given the significant risks in the virtual currency market.  In the long run, investment in effective compliance programs will be well worth it, especially in the event that a company has to interact with law enforcement.

In many ways, I think that is a message that everybody gathered here today can appreciate.  As the virtual currency markets attempt to move past their association with the Silk Roads and Liberty Reserves of the online world, are used to finance legitimate activity, and are becoming increasingly subject to regulation, robust compliance with existing anti-money laundering laws and regulations is necessary – indeed, critical – to bolster the reliability and value of virtual currency.

The challenges posed by the cases I’ve described are not unique to the virtual currency world.  Indeed, these dark web criminals are merely using new tools to conduct the same old crimes, committing what is essentially street crime like drug trafficking and extortion, but over computer networks.

For those investors, exchanges and compliance officers who deal in virtual currency, compliance is of paramount importance.  Adherence to regulations and state license requirements can reduce the liability of corporations who invest or deal in virtual currency.  As seen with Ripple Labs, compliance and remediation can lead to a more favorable resolution of criminal investigations and adhering to anti-money laundering guidelines allows the legitimate use of virtual currency to grow and be responsive to infiltration and abuse by criminal elements.  While the department will aggressively investigate and prosecute criminal activity that is funded through virtual currency, money services businesses that fall under the department’s scrutiny can also receive credit for meaningful and sincere compliance efforts.

 Your compliance and cooperation will make it more difficult for those who seek to operate illicit and underground marketplaces and will be a key element for law enforcement to shed light on these illegal virtual currency transactions.  It also will help to ensure the continued viability of virtual currency systems in the future.

Thank you for the opportunity to address this year’s National Institute on Bitcoin and Other Virtual Currencies.

DOJ ANNOUNCES $16.85 BILLION SETTLEMENT WITH BANK OF AMERICA

FROM:  U.S. DEPARTMENT OF JUSTICE 

Thursday, August 21, 2014

Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading up to and During the Financial Crisis 

Attorney General Eric Holder and Associate Attorney General Tony West announced today that the Department of Justice has reached a $16.65 billion settlement with Bank of America Corporation – the largest civil settlement with a single entity in American history ­— to resolve federal and state claims against Bank of America and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch.  As part of this global resolution, the bank has agreed to pay a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) – the largest FIRREA penalty ever – and provide billions of dollars of relief to struggling homeowners, including funds that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness.  The settlement does not release individuals from civil charges, nor does it absolve Bank of America, its current or former subsidiaries and affiliates or any individuals from potential criminal prosecution.

“This historic resolution - the largest such settlement on record - goes far beyond ‘the cost of doing business,’” said Attorney General Holder.  "Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct.  This is appropriate given the size and scope of the wrongdoing at issue.”

This settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force and its Residential Mortgage-Backed Securities (RMBS) Working Group, which has recovered $36.65 billion to date for American consumers and investors.

“At nearly $17 billion, today’s resolution with Bank of America is the largest the department has ever reached with a single entity in American history,” said Associate Attorney General West.  “But the significance of this settlement lies not just in its size; this agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct through a $7 billion consumer relief package that could benefit hundreds of thousands of Americans still struggling to pull themselves out from under the weight of the financial crisis.”

The Justice Department and the bank settled several of the department’s ongoing civil investigations related to the packaging, marketing, sale, arrangement, structuring and issuance of RMBS, collateralized debt obligations (CDOs), and the bank’s practices concerning the underwriting and origination of mortgage loans.  The settlement includes a statement of facts, in which the bank has acknowledged that it sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitized loans.  When the RMBS collapsed, investors, including federally insured financial institutions, suffered billions of dollars in losses.  The bank has also conceded that it originated risky mortgage loans and made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).

Of the record-breaking $16.65 billion resolution, almost $10 billion will be paid to settle federal and state civil claims by various entities related to RMBS, CDOs and other types of fraud.  Bank of America will pay a $5 billion civil penalty to settle the Justice Department claims under FIRREA.  Approximately $1.8 billion will be paid to settle federal fraud claims related to the bank’s origination and sale of mortgages, $1.03 billion will be paid to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $135.84 million will be paid to settle claims by the Securities and Exchange Commission.  In addition, $300 million will be paid to settle claims by the state of California, $45 million to settle claims by the state of Delaware, $200 million to settle claims by the state of Illinois, $23 million to settle claims by the Commonwealth of Kentucky, $75 million to settle claims by the state of Maryland, and $300 million to settle claims by the state of New York.

Bank of America will provide the remaining $7 billion in the form of relief to aid hundreds of thousands of consumers harmed by the financial crisis precipitated by the unlawful conduct of Bank of America, Merrill Lynch and Countrywide.  That relief will take various forms, including principal reduction loan modifications that result in numerous homeowners no longer being underwater on their mortgages and finally having substantial equity in their homes.  It will also include new loans to credit worthy borrowers struggling to get a loan, donations to assist communities in recovering from the financial crisis, and financing for affordable rental housing.  Finally, Bank of America has agreed to place over $490 million in a tax relief fund to be used to help defray some of the tax liability that will be incurred by consumers receiving certain types of relief if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007.

An independent monitor will be appointed to determine whether Bank of America is satisfying its obligations.  If Bank of America fails to live up to its agreement by Aug. 31, 2018, it must pay liquidated damages in the amount of the shortfall to organizations that will use the funds for state-based Interest on Lawyers’ Trust Account (IOLTA) organizations and NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.  The organizations will use the funds for foreclosure prevention and community redevelopment, legal assistance, housing counselling and neighborhood stabilization.

As part of the RMBS Working Group, the U.S. Attorney’s Office for the District of New Jersey conducted a FIRREA investigation into misrepresentations made by Merrill Lynch to investors in 72 RMBS throughout 2006 and 2007.  As the statement of facts describes, Merrill Lynch regularly told investors the loans it was securitizing were made to borrowers who were likely and able to repay their debts.  Merrill Lynch made these representations even though it knew, based on the due diligence it had performed on samples of the loans, that a significant number of those loans had material underwriting and compliance defects - including as many as 55 percent in a single pool.  In addition, Merrill Lynch rarely reviewed the unsampled loans to ensure that the defects observed in the samples were not present throughout the remainder of the pools.  Merrill Lynch also disregarded its own due diligence and securitized loans that the due diligence vendors had identified as defective.  This practice led one Merrill Lynch consultant to “wonder why we have due diligence performed” if Merrill Lynch was going to securitize the loans “regardless of issues.”

“In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together, and sold them off in securities – even when the bank knew a substantial number of those loans were defective,” said U.S. Attorney Paul J. Fishman for the District of New Jersey.  “The failure to disclose known risks undermines investor confidence in our financial institutions.  Today’s record-breaking settlement, which includes the resolution of our office’s imminent multibillion-dollar suit for FIRREA penalties, reflects the seriousness of the lapses that caused staggering losses and wider economic damage.”

This settlement also resolves the complaint filed against Bank of America in August 2013 by the U.S. Attorney’s Office for the Western District of North Carolina concerning an $850 million securitization.  Bank of America acknowledges that it marketed this securitization as being backed by bank-originated “prime” mortgages that were underwritten in accordance with its underwriting guidelines.  Yet, Bank of America knew that a significant number of loans in the security were “wholesale” mortgages originated through mortgage brokers and that based on its internal reporting, such loans were experiencing a marked increase in underwriting defects and a noticeable decrease in performance.  Notwithstanding these red flags, the bank sold these RMBS to federally backed financial institutions without conducting any third party due diligence on the securitized loans and without disclosing key facts to investors in the offering documents filed with the SEC.  A related case concerning the same securitization was filed by the SEC against Bank of America and is also being resolved as part of this settlement.

“Today’s settlement attests to the fact that fraud pervaded every level of the RMBS industry, including purportedly prime securities, which formed the basis of our filed complaint,” said U.S. Attorney Anne M. Tompkins for the Western District of North Carolina.  “Even reputable institutions like Bank of America caved to the pernicious forces of greed and cut corners, putting profits ahead of their customers.  As we deal with the aftermath of the financial meltdown and rebuild our economy, we will hold accountable firms that contributed to the economic crisis.  Today’s settlement makes clear that my office will not sit idly while fraud occurs in our backyard.”

The U.S. Attorney’s Office for the Central District of California has been investigating the origination and securitization practices of Countrywide as part of the RMBS Working Group effort.  The statement of facts describes how Countrywide typically represented to investors that it originated loans based on underwriting standards that were designed to ensure that borrowers could repay their loans, although Countrywide had information that certain borrowers had a high probability of defaulting on their loans.  Countrywide also concealed from RMBS investors its use of “shadow guidelines” that permitted loans to riskier borrowers than Countrywide’s underwriting guidelines would otherwise permit.  Countrywide’s origination arm was motivated by the “saleability” of loans and Countrywide was willing to originate “exception loans” (i.e., loans that fell outside of its underwriting guidelines) so long as the loans, and the attendant risk, could be sold.  This led Countrywide to expand its loan offerings to include, for example, “Extreme Alt-A” loans, which one Countrywide executive described as a “hazardous product,” although Countrywide failed to tell RMBS investors that these loans were being originated outside of Countrywide’s underwriting guidelines.  Countrywide knew that these exception loans were performing far worse than loans originated without exceptions, although it never disclosed this fact to investors.

“The Central District of California has taken the lead in the department’s investigation of Countrywide Financial Corporation,” said Acting U.S. Attorney Stephanie Yonekura for the Central District of California.  “Countrywide’s improper securitization practices resulted in billions of dollars of losses to federally-insured financial institutions.  We are pleased that this investigation has resulted in a multibillion-dollar recovery to compensate the United States for the losses caused by Countrywide’s misconduct.”

In addition to the matters relating to the securitization of toxic mortgages, today’s settlement also resolves claims arising out of misrepresentations made to government entities concerning the origination of residential mortgages.

The U.S. Attorney’s Office for the Southern District of New York, along with the Federal Housing Finance Agency’s Office of Inspector General and the Special Inspector General for the Troubled Asset Relief Program, conducted investigations into the origination of defective residential mortgage loans by Countrywide’s Consumer Markets Division and Bank of America’s Retail Lending Division as well as the fraudulent sale of such loans to the government sponsored enterprises Fannie Mae and Freddie Mac (the “GSEs”).  The investigation into these practices, as well as three private whistleblower lawsuits filed under seal pursuant to the False Claims Act, are resolved in connection with this settlement.  As part of the settlement, Countrywide and Bank of America have agreed to pay $1 billion to resolve their liability under the False Claims Act.  The FIRREA penalty to be paid by Bank of America as part of the settlement also resolves the government’s claims against Bank of America and Countrywide under FIRREA for loans fraudulently sold to Fannie Mae and Freddie Mac.  In addition, Countrywide and Bank of America made admissions concerning their conduct, including that they were aware that many of the residential mortgage loans they had made to borrowers were defective, that many of the representations and warranties they made to the GSEs about the quality of the loans were inaccurate, and that they did not self-report to the GSEs mortgage loans they had internally identified as defective.

“For years, Countrywide and Bank of America unloaded toxic mortgage loans on the government sponsored enterprises Fannie Mae and Freddie Mac with false representations that the loans were quality investments,” said U.S. Attorney Preet Bharara for the Southern District of New York.  “This office has already obtained a jury verdict of fraud and a judgment for over a billion dollars against Countrywide and Bank of America for engaging in similar conduct.  Now, this settlement, which requires the bank to pay another billion dollars for false statements to the GSEs, continues to send a clear message to Wall Street that mortgage fraud cannot be a cost of doing business.”

The U.S. Attorney’s Office for the Eastern District of New York, together with its partners from the Department of Housing and Urban Development (HUD), conducted a two-year investigation into whether Bank of America knowingly made loans insured by the FHA in violation of applicable underwriting guidelines.  The investigation established that the bank caused the FHA to insure loans that were not eligible for FHA mortgage insurance.  As a result, HUD incurred hundreds of millions of dollars of losses.  Moreover, many of Bank of America’s borrowers have defaulted on their FHA mortgage loans and have either lost or are in the process of losing their homes to foreclosure.

“As a Direct Endorser of FHA insured loans, Bank of America performs a critical role in home lending,” said U.S. Attorney Loretta E. Lynch for the Eastern District of New York.  “It is a gatekeeper entrusted with the authority to commit government funds earmarked for facilitating mortgage lending to first-time and low-income homebuyers, senior citizen homeowners and others seeking or owning homes throughout the nation, including many who live in the Eastern District of New York.  In obtaining a payment of $800 million and sweeping relief for troubled homeowners, we have not just secured a meaningful remedy for the bank’s conduct, but have sent a powerful message of deterrence.”

“Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” said Rhea Kemble Dignam, Regional Director of the SEC’s Atlanta Office.  “Requiring an admission of wrongdoing as part of Bank of America’s agreement to resolve the SEC charges filed today provides an additional level of accountability for its violation of the federal securities laws.”

“Today’s settlement with Bank of America is another important step in the Obama Administration’s efforts to provide relief to American homeowners who were hurt during the housing crisis,” said U.S. Department of Housing and Urban Development (HUD) Secretary Julián Castro.  “This global settlement will strengthen the FHA fund and Ginnie Mae, and it will provide $7 billion in consumer relief with a focus on helping borrowers in areas that were the hardest hit during the crisis.  HUD will continue working with the Department of Justice, state attorneys general, and other partners to take appropriate action to hold financial institutions accountable and provide consumers with the relief they need to stay in their homes.  HUD remains committed to solidifying the housing recovery and creating more opportunities for Americans to succeed.”

“Bank of America and the banks it bought securitized billions of dollars of defective mortgages,” said Acting Inspector General Michael P. Stephens of the FHFA-OIG.  “Investors, including Fannie Mae and Freddie Mac, suffered enormous losses by purchasing RMBS from Bank of America, Countrywide and Merrill Lynch not knowing about those defects.  Today’s settlement is a significant, but by no means final step by FHFA-OIG and its law enforcement partners to hold accountable those who committed acts of fraud and deceit.”

The attorneys general of California, Delaware, Illinois, Kentucky, Maryland and New York also conducted related investigations that were critical to bringing about this settlement.  In addition, the settlement resolves investigations conducted by the Securities and Exchange Commission (SEC) and litigation filed by the Federal Deposit Insurance Company (FDIC).

The RMBS Working Group is a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead to the 2008 financial crisis.  The RMBS Working Group brings together more than 200 attorneys, investigators, analysts and staff from dozens of state and federal agencies including the Department of Justice, 10 U.S. Attorneys’ Offices, the FBI, the Securities and Exchange Commission (SEC), the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA-OIG, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board’s Office of Inspector General, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network, and more than 10 state attorneys general offices around the country.

The RMBS Working Group is led by Director Geoffrey Graber and five co-chairs: Assistant Attorney General for the Civil Division Stuart Delery, Assistant Attorney General for the Criminal Division Leslie Caldwell, Director of the SEC’s Division of Enforcement Andrew Ceresney, U.S. Attorney for the District of Colorado John Walsh and New York Attorney General Eric Schneiderman.

Investigations were led by Assistant U.S. Attorneys Leticia Vandehaar of the District of New Jersey; Dan Ryan and Mark Odulio of the Western District of North Carolina; George Cardona and Lee Weidman of the Central District of Carolina; Richard Hayes and Kenneth Abell of the Eastern District of New York; and Pierre Armand and Jaimie Nawaday of the Southern District of New York.

AG HOLDER HOLDS PRESS CONFERENCE TO ANNOUNCE $4 BILLION FINANCIAL FRAUD SETTLEMENT

FROM:  U.S. JUSTICE DEPARTMENT 

Attorney General Holder Speaks at Press Conference Announcing Major Financial Fraud

Washington, D.C. ~ Monday, July 14, 2014

Good morning – and thank you all for being here.  Today, I am joined by Associate Attorney General [Tony] West; United States Attorney for the Eastern District of New York [Loretta] Lynch; United States Attorney for the District of Colorado [John] Walsh; and Acting Inspector General for the Federal Housing Finance Agency [Michael] Stephens – as we announce a significant step in our ongoing effort to hold accountable those whose actions have threatened the integrity of our financial markets and undermined the stability of our economy.

Today, the Justice Department attained a landmark civil resolution with Citigroup totaling $7 billion in fines and consumer relief to address the bank’s involvement in a scheme to sell fraudulent securities that were backed by toxic loans.  This total includes a civil penalty of $4 billion, the largest penalty to date of its kind.

The penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi.  Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitizing, the bank and its employees concealed these defects.  They misrepresented the facts, including the level of risk.  They sold defective loans to countless investors, including federally-insured financial institutions.  And they made false statements to investors, in marketing materials, and even in documents filed with the Securities and Exchange Commission.  They led investors and the public to believe that these financial products had been originated in compliance with the law and key underwriting guidelines when this was often not the case.

The bank’s misconduct was egregious.  And under the terms of this settlement, the bank has admitted to its misdeeds in great detail.  The bank’s activities shattered lives and livelihoods throughout the country and around the world.  They contributed mightily to the financial crisis that devastated our economy in 2008.  While Citigroup was not alone in its willingness to ignore internal warnings and disregard the law in order to defraud consumers and investors, as a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits.  They did so at the expense of millions of ordinary Americans and investors of all types – including other financial institutions, universities and pension funds, cities and towns, and even hospitals and religious charities.  Ultimately, these investors suffered billions of dollars in losses when Citi’s false and fraudulent claims came crashing down.

Today, we hold the bank accountable for this wrongdoing – which had devastating ripple effects that cascaded through economies and financial institutions across the globe.  I want to thank U.S. Attorneys Lynch and Walsh, along with their dedicated staff members, for their leadership in making this resolution possible.  Alongside attorneys, analysts, and other committed public servants assigned to the RMBS Working Group – part of the President’s Financial Fraud Enforcement Task Force, which I am proud to chair – they questioned a succession of witnesses, sifted through terabytes of data, and reviewed millions of documents.

In addition to the historic $4 billion penalty assessed against Citi, this resolution also includes $2.5 billion in relief that will be provided to those homeowners and communities affected by the bank’s fraudulent activities.  This assistance has become a must-have element in our agreements with banks that contributed to the mortgage crisis.  It will remain so.

Importantly, this agreement does not in any way absolve Citigroup or its individual employees from facing any possible criminal charges in the future.

Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business.  In fact, it was not at all inevitable in these last few weeks that this case would be resolved out of court.  But in all of its cases, the Justice Department is committed to delivering outcomes that are commensurate with the misconduct at issue.

This action is merely the latest step in our active and ongoing pursuit of those whose activities defrauded the American people and inflicted grave damage on our financial markets.  Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.  In the investigations that remain open, we will continue to move forward – guided by the facts and the law – to achieve justice for those affected by the financial crisis.  These investigations are not only about holding those who violate the public trust to account; they are also intended to deter banks from engaging in this type of conduct in the future.

Now I’d like to turn things over to Associate Attorney General Tony West, who will provide additional details on today’s announcement.

TAYLOR, BEAN & WHITAKER'S FORMER CFO PLEADS GUILTY TO FRAUD

The following excerpt is from the Department of Justice website:
Tuesday, March 20, 2012
Former Chief Financial Officer of Taylor, Bean & Whitaker Pleads Guilty to Fraud Scheme
WASHINGTON – Delton de Armas, a former chief financial officer (CFO) of Taylor, Bean & Whitaker Mortgage Corp. (TBW), pleaded guilty today to making false statements and conspiring to commit bank and wire fraud for his role in a more than $2.9 billion fraud scheme that contributed to the failures of TBW and Colonial Bank.

 The guilty plea was announced today by Assistant Attorney General Lanny A. Breuer of the Criminal Division; U.S. Attorney Neil H. MacBride for the Eastern District of Virginia; Christy Romero, Deputy Special Inspector General, Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP); Assistant Director in Charge James W. McJunkin of the FBI’s Washington Field Office; David A. Montoya, Inspector General of the Department of Housing and Urban Development (HUD-OIG); Jon T. Rymer, Inspector General of the Federal Deposit Insurance Corporation (FDIC-OIG); Steve A. Linick, Inspector General of the Federal Housing Finance Agency (FHFA-OIG); and Rick A. Raven, Acting Chief of the Internal Revenue Service Criminal Investigation (IRS-CI).

De Armas, 41, of Carrollton, Texas, pleaded guilty before U.S. District Judge Leonie M. Brinkema in the Eastern District of Virginia.  De Armas faces a maximum penalty of 10 years in prison when he is sentenced on June 15, 2012.

“As TBW’s chief financial officer, Mr. de Armas concealed a massive $1.5 billion deficit in TBW’s funding facility and another large deficit on TBW’s books,” said Assistant Attorney General Breuer.  “He tried to conceal the gaping holes by falsifying financial statements and lying to investors as well as the government.  Ultimately, Mr. de Armas’ criminal conduct, along with that of his co-conspirators, contributed to the collapse of TBW and Colonial Bank.  With today’s guilty plea, Mr. de Armas joins seven other defendants – including the former chairman of TBW Lee Bentley Farkas – who have been convicted of participating in this massive fraudulent scheme.”

“When Mr. de Armas learned of a hole in Ocala Funding’s assets, he used his position as CFO to cover it up and mislead investors,” said U.S. Attorney MacBride.  “Today’s plea is the eighth conviction in one of the nation’s largest bank frauds in history.  As CFO, Mr. de Armas could have put a stop to the fraud the moment he discovered it.  Instead, the hole in Ocala Funding grew to $1.5 billion on his watch, and as it grew, so did his lies to investors and the government.”

According to court documents, de Armas joined TBW in 2000 as its CFO and reported directly to its chairman, Lee Bentley Farkas, and later to its CEO, Paul Allen.  He admitted in court that from 2005 through August 2009, he and other co-conspirators engaged in a scheme to defraud financial institutions that had invested in a wholly-owned lending facility called Ocala Funding.  Ocala Funding obtained funds for mortgage lending for TBW from the sale of asset-backed commercial paper to financial institutions, including Deutsche Bank and BNP Paribas. The facility was managed by TBW and had no employees of its own.

According to court records, shortly after Ocala Funding was established, de Armas learned there were inadequate assets backing its commercial paper, a deficiency referred to internally at TBW as a “hole” in Ocala Funding.  De Armas knew that the hole grew over time to more than $700 million.  He learned from the CEO that the hole was more than $1.5 billion at the time of TBW’s collapse.  De Armas admitted he was aware that, in an effort to cover up the hole and mislead investors, a subordinate who reported to him had falsified Ocala Funding collateral reports and periodically sent the falsified reports to financial institution investors in Ocala Funding and to other third parties.  De Armas acknowledged that he and the CEO also deceived investors by providing them with a false explanation for the hole in Ocala Funding.

De Armas also admitted in court that he directed a subordinate to inflate an account receivable balance for loan participations in TBW’s financial statements.  De Armas acknowledged that he knew that the falsified financial statements were subsequently provided to Ginnie Mae and Freddie Mac for their determination on the renewal of TBW’s authority to sell and service securities issued by them.

In addition, de Armas admitted in court to aiding and abetting false statements in a letter the CEO sent to the U.S. Department of Housing and Urban Development, through Ginnie Mae, regarding TBW’s audited financial statements for the fiscal year ending on March 31, 2009.  De Armas reviewed and edited the letter, knowing it contained material omissions.  The letter omitted that the delay in submitting the financial data was caused by concerns its independent auditor had raised about the financing relationship between TBW and Colonial Bank and its request that TBW retain a law firm to conduct an internal investigation.  Instead, the letter falsely attributed the delay to a new acquisition and TBW’s switch to a compressed 11-month fiscal year.

“With our nation in a housing crisis, de Armas, as chief financial officer of TBW, one of the country’s largest mortgage lenders, papered over a gaping hole in the balance sheet of TBW subsidiary Ocala Funding and lied to regulators and investors to cover it up,” said Deputy Special Inspector General Romero for SIGTARP.  “The fraud provided cover to others at TBW to misappropriate more than $1 billion in Ocala funds and sell fraudulent, worthless securities to conspirators at Colonial BancGroup.  SIGTARP and its law enforcement partners stopped $553 million in TARP funds from being lost to this fraud and brought accountability and justice that the American taxpayers deserve.”

“Mr. de Armas has admitted that, during his tenure at TBW, he purposefully misled investors in a massive scheme to defraud financial institutions,” said FBI Assistant Director in Charge McJunkin.  “The actions of Mr. de Armas and his co-conspirators contributed to the financial crisis and led to the collapse of one of the country’s largest commercial banks.  The FBI and our partners remain vigilant in investigating such fraudulent activity in our banking and mortgage industries.”

“The guilty plea of Mr. de Armas is one small measure in our continued efforts to restore the trust and confidence of the general public and of investors in our financial system,” said HUD Inspector General Montoya.  “In response to the many recent articles of mortgage fraud and misconduct, the mortgage industry needs to do much to rethink their values and their idea of client service in order to help rebuild a stronger economy and to restore the confidence of American homeowners.”

“The Federal Deposit Insurance Corporation Office of Inspector General is pleased to have played a role in bringing to justice yet another senior official in a position of trust who was involved in one of the biggest and most complex bank fraud schemes of our time,” said FDIC Inspector General Rymer.  “The former chief financial officer of Taylor, Bean & Whitaker is the latest participant who will be held accountable for seeking to undermine the integrity of the financial services industry.  Even as the financial and economic crisis seems to be easing, we reaffirm our commitment to ensuring that those contributing to the failures of financial institutions and corresponding losses to the Deposit Insurance Fund will be punished to the fullest extent of the law.”
“Mr. de Armas and his colleagues committed an egregious crime,” said FHFA Inspector General Linick.  “FHFA-OIG is proud to be part of the team that continues to protect American taxpayers.”

In April 2011, a jury in the Eastern District of Virginia found Lee Bentley Farkas, the chairman of TBW, guilty of 14 counts of conspiracy, bank, securities and wire fraud.  On June 30, 2011, Judge Brinkema sentenced Farkas to 30 years in prison.  In addition, six individuals have pleaded guilty for their roles in the fraud scheme, including: Paul Allen, former chief executive officer of TBW, who was sentenced to 40 months in prison; Raymond Bowman, former president of TBW, who was sentenced to 30 months in prison; Desiree Brown, former treasurer of TBW, who was sentenced to six years in prison; Catherine Kissick, former senior vice president of Colonial Bank and head of its Mortgage Warehouse Lending Division (MWLD), who was sentenced to eight years in prison; Teresa Kelly, former operations supervisor for Colonial Bank’s MWLD, who was sentenced to three months in prison; and Sean Ragland, a former senior financial analyst at TBW, who was sentenced to three months in prison.

The case is being prosecuted by Deputy Chief Patrick Stokes and Trial Attorney Robert Zink of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Charles Connolly and Paul Nathanson of the Eastern District of Virginia.  This case was investigated by SIGTARP, FBI’s Washington Field Office, FDIC-OIG, HUD-OIG, FHFA-OIG and IRS-CI.  The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury also provided support in the investigation.  The Department would also like to acknowledge the substantial assistance of the U.S. Securities and Exchange Commission in the investigation of the fraud scheme.