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TARP: A Fraud Magnet?

TARP funds have been available for barely a year (Congress passed legislation appropriating $700 billion for the program in October 2008, and expenditures have been funded mainly by increases in national debt) yet the program has already been described as "ripe for fraud." In February 2009, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, expressed deep concerns about the potential for fraud. He stated that "History teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally." Barofsky based his concerns in part on the government's experiences with other fraud-plagued outlays of huge amounts of cash, such as the reconstruction of Iraq and the savings and loan bailout of the 1990s.

Fast-forward to mid-November, and we now know that TARP fraud probes have tripled since April. If Barofsky were concerned by the potential for fraud back in February, he must be aghast now.  One of the few positive aspects, according to Barofsky, is that Wall Street's reputation has become somewhat clouded and people's perceptions are more objective. Barofsky believes that "we've done a good job of instilling a greater degree of skepticism that what comes from Wall Street isn't necessarily the Holy Grail."

Barofksy's office is known as SIGTARP (Office of the Special Inspector General for the Troubled Asset Relief Program), and it is required to make quarterly reports to Congress on its progress.  The most recent report was released in October 2009, and it details the general areas in which SIGTARP is conducting investigations as well as some specific investigations. The vast majority of the investigations are veiled in secrecy, however.

SIGTARP is currently conducting investigations into several different areas, including

complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction
of justice, money laundering, and tax-related investigations.

One of the first TARP fraud casualties was a financial planner and one-time sports agent named Gordon Grigg. In classic snake-oil salesman style, Grigg lured in clients by telling them that he had invested their money in "TARP-guaranteed debt"  and other non-existent securities. Grigg defrauded his clients of almost $11 million. One man told his local news station that he had given Grigg everything he had and is now "59-years-old and crippled." Grigg plead guilty to four counts of mail fraud and four counts of wire fraud, and was sentenced to 10 years in prison.

SIGTARP is also conducting an ongoing investigation into a company called Federal Housing Modification, Inc (FHMA). The Federal Trade Commission is alleging that FHMA violated the FTC Act and telemarketing sales rules by misrepresenting itself as a government agency (it blatantly stuck "Federal" right there in its name) and falsely claiming that it could obtain mortgage modifications for customers for a $3,000 fee.

SIGTARP is conducting other ongoing investigations into the activities of Taylor, Bean & Whitaker Mortgage Corporation/Colonial Bancgroup and Bank of America. Colonial reported that it had received contingent approval from the Department of the Treasury for $553 million in TARP funding, but the funding was never made. SIGTARP, along with other offices including the New York State Attorney General's Office, is continuing its investigation of Bank of America regarding its merger with Merrill Lynch and its receipt of additional TARP funds under TIP. Bank of America recently announced that it is going to repay the money it received under TARP, which will free the bank from federal oversight on executive pay.

TARP is set to expire December 31st, 2009, and Treasury Secretary Timothy Geithner claims that the government will end TARP "as soon as we can." The New York Times reports that the program has helped some big banks bounce back, but has fallen short of many of its other goals. About $140 billion in TARP funds are uncommitted, and about $300 billion are unspent, so there are many billions of dollars that may wind up floating around out there, potentially winding up in fraudster's pockets. The government obviously has an enormous burden in monitoring what happens to all of this money, so regular citizens need to keep their eyes open for fraud. TARP will most likely continue to be a white-hot source of fraud as more money is dispersed.