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Policing the Bankruptcy System An Informal Statistical Analysis of U.S. Bankruptcy Fraud Prosecutions

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embers of the bankruptcy bar have been murmuring for years that the U.S. Department of Justice (DOJ) either ignores the problem of bankruptcy fraud or does not give it sufficient attention. Are the complaints warranted? The answers may, perhaps, be found in the numbers.

The U.S. Trustee system has recently compiled informal statistics concerning the number of bankruptcy fraud convictions obtained in the United States from 1990 through the fall of 1999. The numbers reflect convictions to bankruptcy fraud charges (18 U.S.C. §§152-157), and in only those cases actually reported to the U.S. Trustees by federal prosecutors. The numbers are revealing. The following overview sets forth those districts with the most convictions in a given year, the total number of bankruptcy fraud convictions obtained nationwide and other data.

The three years with the lowest totals of bankruptcy fraud convictions obtained were 1990, 1991 and 1992. The districts with the highest numbers during this time frame were generally those with larger populations. In 1992 Attorney General William Barr commanded Department of Justice attorneys and investigators to redouble their efforts to deal effectively with bankruptcy fraud. It should come as no surprise that thereafter, the numbers began to grow—nearly doubling between 1992 and 1993, and increasing again in 1994.

1990
District No. of Convictions
Eastern VA 13
Northern IL 8
Nothern TX 7
Southern CA 5
Massachusetts 4
Total convictions (all districts) 70
Total bankruptcy filings 782,960

1991
District No. of Convictions
Western TN 8
Central CA 7
Northern IL 7
Eastern CA 5
Massachusetts 4
Total convictions (all districts) 57
Total bankruptcy filings 943,987

1992
District No. of Convictions
Massachusetts 8
Eastern & Central CA 8
Western TN 5
Northern & Southern TX 4
Utah 4
Total convictions (all districts) 65
Total bankruptcy filings 971,517

The larger districts still prosecuted the most cases (understandably). However, smaller districts that placed an emphasis on being aggressive in the area, such as Montana and Kansas, began to show significant growth in the number of bankruptcy fraud convictions obtained. The numbers went down slightly in 1995, with the U.S. Attorney's offices in more populated states still leading the charge.

1993
District No. of Convictions
Central CA 25
Western TN 9
Northern IL 8
Massachusetts 7
Northern TX 6
South Carolina 5
Southern TX 5
Eastern WI 5
Total convictions (all districts) 124
Total bankruptcy filings 875,202

1994
District No. of Convictions
Central & Southern CA 12
Western TN 11
Southern TX 10
Northern IL 9
Eastern CA 8
Montana 7
Kansas 6
Colorado 6
Total convictions (all districts) 148
Total bankruptcy filings 832,829

1995
District No. of Convictions
Central CA 10
Massachusetts 8
Southern CA 7
Northern IL 7
Arizona 6
Southern NY 6
Eastern PA 6
Northern TX 6
Eastern & Northern NY 5
Western LA 5
Total convictions (all districts) 133
Total bankruptcy filings 926,602

This prompted Attorney General Janet Reno to remind her troops of the "Barr Memo" and to express her interest in seeing the DOJ be aggressive in this area. The number of convictions went up in 1996 to an all-time high, but dropped off a bit in 1997.

1996
District No. of Convictions
Northern IL 16
Northern TX 9
Oregon 7
Massachusetts 6
Eastern PA 6
Eastern CA 5
Western LA 5
Western NY 5
South Dakota 4
Western TN 4
Total convictions (all districts) 151
Total bankruptcy filings 1,178,555

1997
District No. of Convictions
Massachusetts 9
Northern IL 7
Western LA 7
Northern TX 7
Middle FL 6
Middle TN 6
Maryland 5
Central CA 4
Montana 4
Eastern VA 4
Eastern WA 4
Total convictions (all districts) 130
Total bankruptcy filings 1,404,145

In 1998, when bankruptcy filings reached a record high, the DOJ similarly achieved its highest conviction total of the decade (to date).

The numbers for 1999 were incomplete when obtained, but seem to indicate a significant drop-off in convictions, absent a "rush to judgment" in the final three months of the year.

A look at the big picture reveals that the vast majority of bankruptcy fraud convictions have been obtained in large judicial districts, since (a) more bankruptcy cases are filed there, and (b) law enforcement authorities (arguably) have more resources available.

1998
District No. of Convictions
Central CA 22
New Jersey 10
Northern FL 9
Southern CA 8
Eastern CA 7
Western LA 7
South Dakota 7
Western TN 7
Northern TX 7
Eastern VA 7
Northern IL 6
Massachusetts 6
Maryland 5
Minnesota 5
Middle PA 5
Total convictions (all districts) 176
Total bankruptcy filings 1,442,549

1999 (through Sept. 30)
District No. of Convictions
Central CA 9
Maine 6
Massachusetts 6
Eastern NY 5
Middle FL 4
Total convictions (all districts) 75

However, rural districts such as Kansas and South Dakota were also among the leaders in bankruptcy fraud convictions obtained during the past decade, with numbers better than (or equal to) those of Northern California (12 reported); Colorado (12); Southern Florida (4); Southern Georgia (9); Eastern and Western Kentucky (0); Eastern and Middle Louisiana (0); Eastern (0) and Western (4) Michigan; Eastern (11) and Western (12) Missouri; New Jersey (15); New Mexico (0); Eastern (19), Northern (14), Southern (10) and Western (14) New York; and Eastern (0) and Western (12) Texas, among others.

While it is somewhat difficult to draw many conclusions from these numbers, they do reveal a few things. First, the numbers go up when the Attorney General keeps the pressure on. Second, while higher conviction numbers are in part a product of population density, commitment also plays a significant role. South Dakota's numbers compare favorably to larger U.S. Attorney's offices because the state made the commitment to develop a bankruptcy fraud task force, headed by a prosecutor with a strong background in bankruptcy law. Third, the ability to prosecute bankruptcy fraud cases is a matter of resources and priorities. For example, Southern Florida (Miami), the four districts in New York and the districts in Texas may have lower bankruptcy fraud convictions numbers than other U.S. Attorney's offices because their attorney time must be allocated to more pressing problems, such as violent crime, drug prosecutions or immigration matters. This is particularly true in bankruptcy fraud cases involving relatively low dollar amounts. A $25,000 fraud may be worth pursuing in South Dakota, but difficult to justify in Manhattan. Blatant fraud in small-dollar cases should not, however, be ignored, as this sends the message that small lies are okay in bankruptcy.

Top Districts 1990-1999
District No. of Convictions
Central CA (Los Angeles) 125
Northern IL (Chicago) 70
Massachusetts (Boston) 62
Western TN (Memphis) 55
Northern TX (Dallas) 50
Eastern CA (Sacramento/Fresno) 43
Southern CA (San Diego) 41
Western LA (Shreveport) 33
Eastern VA (D.C. area) 33
Southern TX 26
Arizona 25
Middle FL (Tampa, Jacksonville, Orlando) 24
Kansas 23
Eastern PA (Philadelphia) 21
Eastern NY (Brooklyn) 19
South Dakota 19
Total convictions (all districts) 1,129
Total bankruptcy filings 8,098,345

Organizational Framework to Fight Fraud

While underreporting may account for some of the low numbers, it seems problematic for 22 districts to have reported no bankruptcy fraud prosecutions during the 1990s, and for 55 districts to average less than one bankruptcy fraud conviction per year. What can the DOJ do to improve these numbers?

It is unlikely that each U.S. Attorney's office has the resources to commit one prosecutor to work either full- or part-time on bankruptcy fraud matters. However, the Bankruptcy Fraud Task Force idea may work just as well on a regional level as on a local one. Federal law divides the bankruptcy system into 21 regions, each one of which has a U.S. Trustee to supervise the administration of cases and trustees. The U.S. Trustees are already involved in reporting suspected bankruptcy fraud and assisting in investigating such matters. The expertise to handle bankruptcy fraud cases seems to exist within many regions, if not within each district.

Within Region 9, Northern Ohio reported 18 convictions, while Southern Ohio and Eastern Michigan reported 0. Appointing an Assistant U.S. Attorney—or a locally based prosecutor from the Fraud Section of the Criminal Division of Main Justice—to develop investigative leads within a region, and prosecute the cases with the assistance of the officials within the district where the offenses occurred, would seem to be an excellent and cost-effective method of marshaling resources to address the low numbers in some districts. Basing the head of each task force locally is critical for developing relationships with the U.S. Trustee, panel trustees and members of the bankruptcy bar, whose assistance in obtaining referrals and putting together prosecutable cases is crucial. Perhaps a pilot program in select regions over a five- or 10-year period might establish the merits of such a venture.

However, the regional task force idea will not be of much use in larger districts or regions (such as Central California) that have a backlog of cases that have been referred, but few persons to investigate and prosecute. The DOJ may wish to consider developing a small team of prosecutors that can be detailed from district to district, as the need arises, to assist with eliminating any such backlogs. The Fraud Section of the Criminal Division, which has expertise in the area of white-collar crime, would seem to be the logical place to center such a unit.

In summary, the numbers indicate that it is difficult to measure the success of the DOJ on a systemic level because it has not systemically addressed the problem. Those districts that have made the effort to be aggressive in prosecuting bankruptcy fraud cases have obtained the convictions to vindicate their dedication. Those districts that have been unable to make such a commitment have low numbers. In order to fulfill its dual obligations to protect the integrity of the bankruptcy system and to enforce the law with equal vigor throughout the land, the time has come for the DOJ to consider a systemic way to improve its bankruptcy fraud conviction rates in each district.


Footnotes

1 Assistant U.S. Attorney, District of South Dakota (coordinator, Bankruptcy Fraud Task Force); former law clerk to Hon. Frank W. Koger, Chief Judge, U.S. Bankruptcy Court for the Western District of Missouri; and chair of ABI's Commercial Fraud Task Force. The views expressed in this article are solely those of the author and definitely should not be attributed to the U.S. Department of Justice, the U.S. Attorney for South Dakota or Judge Koger. Return to article

Journal Date: 
Tuesday, February 1, 2000

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