First Case of Alleged Bailout Fraud

USA Today reports that ex-bank president Charles Antonucci has become the first person charged of attempting to defraud the federal bailout program (note: this should not surprise any regular FraudBytes readers).  According to the article:

Among other allegations, Antonucci was accused of using false information to request $11.3 million from the federal government's TARP bank bailout program.

...Antonucci lied to banking authorities in late 2008 and early 2009 to make them believe he had invested $6.5 million of his own money in the bank when the money actually belonged to the bank and had merely been moved around to make it seem as if it came from Antonucci.

The prosecutor said it was the "functional equivalent of Monopoly money" and was meant to convince federal authorities he should qualify for TARP money, a program to aid struggling banks that was announced on Oct. 14, 2008.

Fortunately, this story didn’t end in a huge loss for the federal government--Antonucci's TARP application was denied:

After the application for TARP money was rejected on Feb. 24, 2009, Antonucci did a media interview in March 2009 in which he said the bank withdrew its application because of "issues" with the TARP program and a desire to avoid "market perception" that bad banks take TARP money, the complaint said.

Federal authorities say Antonucci actually wanted to obtain millions of dollars for his own use, in part so he could obtain a controlling interest in the bank.

Score one for federal oversight!  Still, I wouldn't be surprised if we start seeing many other similar headlines, with less fortunate endings, in the days to come.

TARP and fraud

In his quarterly report to Congress, Neil Barofsky, the special inspector general for the trouble asset relief program (TARP) says: "The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse."

According to an article published yesterday by National Public Radio (NPR), Barofsky's report said:

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Here are a few more quotes from NPR:

The (financial) institutions that were deemed "too big to fail" have grown larger and failed to restrain the lavish pay for their executives...the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

This sounds like a serious conflict of interest. As such, whenever there is a lot of money floating around, stretched resources to oversee the funds and conflicts of interest, you can bet fraud is around the corner. In this regard, here's more from NPR's article:

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

One case concerns apparent self-dealing by one of the private fund managers Treasury picked to buy bad assets from banks at discounted prices. A portfolio manager at the firm apparently sold a bond out of a private fund, then repurchased it at a higher price for a government-backed fund. A rating agency had just downgraded the bond, so it likely was worth less, not more, when the government fund bought it. The company is not being named pending the outcome of Barofsky's investigation.

Is the Government Guilty of Round Tripping?

Round tripping is a method some financial statement fraud perpetrators have used to boost their revenues. Essentially, they transact with another party to sell goods or services and then buy from that party some goods or services. This was a common scheme used in the "new economy" boom era that internet businesses used to create sales volume.

As it turns out, Citibank is currently under negotiations with the SEC as an investigation is under way regarding Citibank's disclosure of troubled mortgage assets. However, if the SEC imposes a fine, the concern is that since the government has used TARP funds to prop Citibank up, then they will be taking their own funds back in the form of a fine.

The WSJ reported:

Among issues being debated inside the SEC is whether, as a recipient of government-rescue funds, Citigroup should pay a large penalty in the case. There is concern at the SEC about the notion of financial firms in effect using taxpayer money to pay penalties, people close to the situation say. Citigroup received $45 billion from the government's Troubled Asset Relief Program ... "The question is: Is the money being round-tripped, going from one part of the government to another part?" said Oliver Ireland, a partner in the financial-services practice at the law firm Morrison & Foerster LLP. If the government is "trying to shore up the capital of an institution so it can function in the marketplace, you've got to take that into consideration" in determining the size of any fine or penalty, Mr. Ireland said.