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Photo: David Holloway
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Neil Barofsky, Special Inspector General for TARP, is looking out for American taxpayers as he works to ensure Troubled Asset Relief Program (TARP) funds are used properly and fraudsters taking advantage are pursued and prosecuted.
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Neil Barofsky walked into an enormous, historic job when he became the special IG for TARP last year. But he knows that his relentless push for transparency and dogged pursuit of fraudsters will protect his bosses – the American taxpayers.
When Neil Barofsky was sworn into office on Dec. 8, 2008 as the new special inspector general of the Troubled Asset Relief Program he knew he would have to be an IG like no other. One hyperbolic editorial writer said Barofsky’s position would be a “Sisyphean task.” You might remember King Sisyphus of Greek mythology who had to repeatedly roll a huge boulder up a hill only to watch it roll back down through eternity.
Monitoring the allocation and receipt of TARP funds for fraud, waste, and abuse is hardly an everlasting, hopeless task. And Barofsky seems to have the mettle for the job. He’s young (39), and has the heart of a tenacious federal prosecutor (more than eight years in the United States Attorney’s Office for the Southern District of New York). And he wasn’t afraid to take on the U.S. Treasury Department when it appealed to the Justice Department to see who his boss really was when it disagreed with Barofsky’s demands for complete transparency. Still, Barofsky enjoys those unsolicited e-mails of support from taxpayers – his “real bosses,” as he calls them.
The U.S. Congress’ Emergency Economic Stabilization Act of 2008 (EESA) established the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) as the watchdog for all those who might want to take advantage of the billions flowing into the economic system after the country’s financial meltdown.
Under EESA, Barofsky has the responsibility, among other things, to conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets under TARP. The stated goal of SIGTARP, with 93 employees and many more to be hired, is to promote economic stability by “assiduously protecting” the interests of those who fund the TARP programs: the American taxpayers. As the mission reads, “This is achieved by facilitating transparency in TARP programs, providing effective oversight in coordination with other relevant oversight bodies, and through robust criminal and civil enforcement against those, whether inside or outside of government, who waste, steal or abuse TARP funds.”
As The Wall Street Journal has said, “Mr. Barofsky has gained a reputation for his aggressive posture and demands for information from government officials and Wall Street.” Barofsky and his crew are determined to roll that boulder up and over the mountain.
Joseph T. Wells, CFE, CPA, founded the ACFE in 1988 with the goal of teaching not just fraud examination skills but methods to deter fraud. What are some general principles you follow to deter fraud in the use of TARP funds?
We follow a number of different paths when addressing deterrence. Obviously, when you have a program of this size that involves hundreds of trillions of dollars – however good our law enforcement efforts are in detecting fraud – our success or failure as an agency is really going to be judged on deterrence as much as detection. It’s really an important part of what we do, and it figures in with many different layers of our organization. So, for example, our front line on deterrence is before a TARP program is even formally announced there’s a consultation process with [the] Treasury [Department]. Typically, although not uniformly, when a new program is being developed, we sort of push our way into the room and start having a discussion as early as possible with Treasury officials on the anti-fraud measures that are going to be included in the program.
When I first got here and there was no IG at TARP there were … no oversight or deterrent mechanisms. The capital purchase program really had almost nothing in that regard. So when we came on board, within eight days we made our first series of recommendations to try to set up some very, very basic deterrent trip wires. Things like requiring certification from senior executive officers [to ensure] they’re complying with conditions. And it really went on from there.
For example, in the housing program, before we even got briefed on what the program was going to look like ... we gave a series of key fraud vulnerabilities to any mortgage modification program. So in each program our first line of defense in deterrence is getting in there early on and trying to make recommendations to limit the extent to which the programs are vulnerable to fraud and setting up trip wires.
We try to get law enforcement out in front of fraud in a variety of ways. I think the best example is our TALF [Term Asset-Based Securities Loan Facility] task force, which pulls together eight different law enforcement agencies. We meet basically on a monthly basis to brainstorm to figure out where the vulnerabilities are and we use those to make our recommendations. We train and sensitize law enforcement so that all of us are involved in our task force to see the signs of potential fraud.
Through those recommendations we try to have a big footprint so folks know where we are and who we are. And so that when the potential bad guys are thinking of taking criminal advantage of this program, they will think twice when they know there’s a watchdog out there whose sole existence is dedicated to finding them out and putting them in jail if they try to steal. But also to encourage use of our hotline so that insiders – those who know about these people, maybe victims – have an avenue to bring it to our attention.
In your July 21 quarterly report to Congress, you wrote: “Although [the] Treasury [Department] has taken some steps toward improving transparency in TARP programs, it has repeatedly failed to adopt recommendations that SIGTARP believes are essential to providing basic transparency and fulfill Treasury’s stated commitment to implement TARP ‘with the highest degree of accountability and transparency possible.’ ” Do you believe the Treasury has worked to become more transparent since this report was issued?
No. They haven’t done anything substantive to address our recommendations. They still get the same failing grade on transparency.
What’s the problem here?
I’m as puzzled and frustrated as others. I don’t know what the problem is. I think that we set very clearly identified paths for greater transparency except there are objections [from the Treasury Department]. I think we’ve met those and sort of made it clear that there are workarounds as to any concerns that might be there. I don’t know the answer to the question of why they’ve not adopted these recommendations [for transparency]. I could refer you to our [quarterly] report [to Congress] where they put in text what their responses are, but I think even there they’ve more or less just backed off.
But you know in this tweak that they’re doing on a quarterly report, they’re going to be including quantitative data on areas that are responsive to our recommendation on use of funds. And that is an implicit acceptance of the fact that you can measure how TARP recipients are using funds; they’re just refusing to do so on an institution-by-institution basis. They’re refusing to do so in all the categories that we’ve identified on how TARP recipients are using their funds and they’re refusing to ask that question to give it context. So I don’t really know the answer.
I know earlier this year you had a dispute with the Treasury Department on how much independence you had in requesting information from government officials and Wall Street that seems to have been ironed out by default. Is that still an issue right now?
No, they withdrew their request. We took our position that we’re an independent agency of the Treasury Department not subject to the supervision of the secretary. They decided to seek an opinion from [the Justice Department’s] Office of Legal Counsel. Then they decided to withdraw that request. So we proceed under the assumption that they have recognized our independence and we feel like the matter has been resolved in our favor. I think it was a needless distraction. I think it was pretty obvious from Congress and the legislation when it was enacted. Then all the statements from members of Congress when this controversy bubbled to the surface that were uniform in what they clearly intended for us to be – an independent agency not subject to the supervision of the secretary. I think Treasury finally recognized that that was the case and withdrew their letter.
So you’ve had no further response from the Treasury Department after they withdrew their letter from the Justice Department?
They didn’t even tell us they withdrew the letter. We found out a month later. So not only did they not discuss it with us, they didn’t even tell us about it.
Do you have a feeling sometimes they don’t even really want SIGTARP?
Well, I mean to be clear – one of the first things I was told when I got this job was that the Treasury Department didn’t want SIGTARP to be included in the legislation. They were very up front with that. But I’ll leave it for others to read into their motives.
The bottom line is when I took this job I was never under the illusion that it was going to make me the most popular guy at Treasury, but that’s not the role of an inspector general. The role of an inspector general is to uncover the truth and to promote transparency and do things that are not always going to be the most comfortable for an administration. That’s what the taxpayers have hired me to do and that’s what we’re going to continue to do.
You have a varied fraud-fighter career. Were you particularly excited when they offered this job to you?
I was initially reluctant when I was first approached. I was happy where I was and the idea of picking up my family, moving to D.C. and entering into the world of Washington was not immediately attractive to me. But when I was first approached by then U.S. Attorney Mike Garcia, he emphasized the opportunity as a lawyer to serve the public, our country.
This is really a historical and unprecedented opportunity to serve in a way that I never really imagined. Although, certainly, this job at times can be very frustrating, overall I think that in the last nine months or so we’ve had an opportunity to have a very, very positive effect on this program, on the culture of Treasury. And I think we’ve saved, and will continue to save, the taxpayer hundreds of millions, if not billions, of dollars before we’re done.
What kind of advice can you give our members as they work to deter and detect fraud?
The No. 1 thing I would ask them is that if they come across anything related to any TARP program, please contact us. I think we’ve had almost 7,000 hits on our hotline. [See “SIGTARP Solicits Reports Through its Hotline” at right.] We’re now over 26 million hits for our Web site [www.sigtarp.gov]. More than half of our criminal investigations have come from hotline tips so you know we rely heavily on members of the public – whether the people are victims or insiders. Or we get calls from people with suggestions and who think there are ideas that we should look into. And we take all those contacts and calls seriously.
The advice I got when I was first starting out as a prosecutor doing fraud cases, and the key to any investigation, is just to be relentless. Criminals can do a lot of things, but they can’t change the truth. You can’t change the documents; they’re already there. You can’t change those electronic messages that have already been sent. The one advantage that we always have over the criminal – they may have more money, they may have fancier lawyers and deeper pockets and more resources – but the one thing we have is our relentlessness. I think my agency understands that no matter how big the guy we’re going up against, we will always be relentless and we will tirelessly pursue. And if something doesn’t seem just quite right, trust your instincts and just keep pushing and pressing and eventually you will prevail with the truth.
In February 2009, SIGTARP sent survey letters to more than 360 institutions that had completed TARP funding agreements through January 2009. You wrote in your July report that you did this because Treasury refused to adopt your recommendation of requiring TARP recipients to disclose what they have been able to do with TARP funds except for Citigroup, Bank of America, and AIG. You wrote that Treasury had argued “that the fungible nature of money would make such reports not ‘meaningful’ ” and that Treasury instead decided to “track the effects of the TARP funds by measuring institutions’ lending over time.” Has Treasury modified its position? Did you receive some survey answers that surprised you? Dismayed you?
I think what was surprising most about the survey responses were that we got so many of them and that most of the institutions went to such efforts to give us their honest and straightforward assessment of how they used the funds. And I think that the reason why I was surprised is that Treasury didn’t want us to do the survey. They rejected our recommendation and then they opposed our doing this survey. They sent out a clear message that the survey was a waste of time. And I think they sent a message to banks that that was an acceptable response. So I was truly expecting that we would get 364 non-responses.
It was a pleasant surprise to see the quality of many of the responses. Of course, we require those banks to certify under criminal penalty that the responses are accurate. We have to make reference to it and retain all the documents they have about how their plans use TARP funds. But nonetheless, that was a pleasant surprise.
How does Treasury receive the paid-back TARP funds and where do they actually go when they’re paid back?
When principal is retained it goes back to pay down the debt temporarily. But they view it as a revolving fund so principal can be reused. So, for example, when Goldman paid back the $10 billion, physically the money goes back to general funds but Treasury views that they can reuse or relend that money in TARP up to the $700 billion cap. Interest payments, dividend payments, profits from the sale of warrants – all that isn’t reusable. That just goes straight into Treasury to pay that debt.
I know that some of our readers might be interested in working for SIGTARP. What kinds of experiences, abilities and skills are you looking for when you’re hiring investigators?
I’m glad you raised that. We’re still building and we’re still hiring. We’re about to open an office in New York City and we’re going to be recruiting for investigators there. Generally, what we’re looking for are those who have white-collar investigative experience: anyone who has experience in looking at accounting fraud, law enforcement officers, agents who have backgrounds in accounting. Also, those who have experience in tracing money and investigating accounting frauds.
We don’t bring in people just beginning their careers. We don’t train like a lot of law enforcement agencies. We don’t really have the time, given the urgency of our task and the nature of our organization.
People with backgrounds in investigating mortgage fraud are very helpful because we have oversight responsibility of the Making Home Affordable program. We also hire retired federal agents. We have a statutory exemption that they can come back and work for us and get their full pensions as well as their salaries.
A number of federal agencies are using the Certified Fraud Examiner credential when they’re hiring. Is the CFE something that you look for on a résumé?
We look at the entire résumé. I wouldn’t say there’s any one particular thing that’s more important. Obviously, that’s a relevant consideration along with everything else. It doesn’t automatically get them through the door – if somebody doesn’t have it, it doesn’t mean that they’re not considered, but those types of training and certifications all go into the mix when our investigators are recruiting and bringing people on board.
You touched on this earlier, but what are some of the major agencies and groups that you work with right now and how do you coordinate your efforts?
We work with so many different agencies. We work with the Department of Justice, the FBI, U.S. attorney’s offices like the Southern District of New York, and others. We work with the district attorneys’ offices and state attorneys general offices. Our highest profile is probably our investigation with the New York State attorney general of the Bank of America. We work closely with Housing and Urban Development inspectors general offices particularly involving mortgage fraud cases, of course. We work with the U.S. Postal Inspection Services. We work extensively with the Securities and Exchange Commission. So we work with every law enforcement agency that has a white-collar presence. Our task is so immense that we couldn’t possibly do it ourselves. By forging these relationships and working together, it’s one of the ways we accomplish our oversight goal.
You’ve only been in the job a short time, but in what areas do you see that you’ve had some success so far?
When the first TARP program was rolled out, it had almost no oversight-enabling conditions and no fraud deterrence. On day eight we made our first series of recommendations that were adopted. I spend a lot of time talking about the recommendations that have not been adopted because that’s where they’re most acute, particularly in the transparency route. But on the compliance side and on the oversight side, the Treasury Department has done a very solid job of adopting many of our recommendations.
In each program you see where it began and where it is now – it’s breathtaking, the distance that we’ve covered. A great example is the TALF program. You know this is a very complex program to restart the assets-backed securities market. When we came in and got our first briefing on the TALF, which was maybe two weeks after I got sworn in, we were told that the basic protections for the TALF program were going to be no more than reliance on credit-rating agencies and investor due diligence. If you look at where this program is now compared to where it was then, based on our recommendations, it’s a pretty significant distance.
Another thing that’s encouraging – before it was almost like we were dragging the Federal Reserve kicking and screaming into implementing fraud protection. Now on some of these issues, they’re out in front of us. They’re coming up with ideas and ways for protection that go beyond our suggestions. So I think we see a real mechanical change in the way these programs are designed and the way they’re implemented that make them far, far less vulnerable to fraud. And I think we’re also expecting a positive cultural change for those designing and working with these programs; fraud prevention and fraud protection is much more ingrained in the development and the process. So there’s a new proactive effort from the agencies, to include Treasury as well, in making these programs better for their inception.
The other area in which we’ve really made a big difference is the transparency. Treasury should have provided that level of transparency, but when they refused we took matters into our own hands. We have a series of articles coming out that I think will bring increased transparency to several other areas and answer some questions and make some hard recommendations for going forward.
Have you received encouragement just from the general public as to what you’re doing? I know Washington can be a pretty combative place, but do you have any anecdotes of people that have actually thanked you for what you’re doing so far?
We get some traffic on our general e-mail box. We’ve gotten some e-mails for support, which you know we appreciate; it’s just tremendous. People from my past have reached out. My high school history teacher sent me an e-mail saying she was proud of me. That was nice. Somebody from summer camp sent me an e-mail the other day!
Some members of the general public have dropped us an e-mail or a letter expressing their support for what we do. And look, we really do appreciate that, because at the end of the day, the people are our clients. We’re here to serve – not a government agency or a member of Congress – but the taxpayers. They’re the investors – and the involuntary investors – in this program. We always try to keep them in mind every day in everything that we do. So when we hear from those people and hear that they appreciate our efforts, it does mean a lot.
And what do you say to motivate your troops?
I don’t really need to say anything. The amazing thing about our staff is how motivated they are about our mission. Many of them have given up large salaries in the private sector or partnerships in law firms for us because they believe in our mission. It’s not like we regularly get a lot of pats on the back and thanks for our work. But most of the people here are very, very self-motivated.
Dick Carozza is editor-in-chief of Fraud Magazine.
Barofsky Brings Solid Anti-Fraud Experience to SIGTARP Job
Prior to becoming the special inspector general of the Troubled Asset Relief Program, Neil Barofsky was a federal prosecutor in the United States Attorney’s Office for the Southern District of New York for more than eight years.
In that office, Barofsky was a senior trial counsel who headed the Mortgage Fraud Group, which investigated and prosecuted all aspects of mortgage fraud – from retail mortgage fraud cases to investigations involving potential securities fraud with respect to collateralized debt obligations. He supervised the broad investigation into the $55 trillion credit default swap market, which was conducted in partnership with the New York State Attorney General’s Office.
Barofsky also had extensive experience as a line prosecutor leading white-collar prosecutions during his tenure as a member of the Securities and Commodities Fraud Unit, which included the case that led to the conviction of Tone Grant, the former president of Refco Inc. and the guilty plea of Phillip Bennett, Refco’s former chief executive officer. Barofsky received the U.S. attorney general’s John Marshall Award for his work on the Refco case.
He also led the investigation that resulted in the indictment of the top 50 leaders of the Revolutionary Armed Forces of Colombia (FARC) on narcotics charges, a case described by the then attorney general as the largest narcotics indictment filed in U.S. history.
Barofsky is a magna cum laude graduate of the New York University School of Law.
SIGTARP Solicits Reports Through Its Hotline
SIGTARP asks the American public (and fraud examiners) to call its hotline at (877) SIG-2009 or complete a hotline form at www.sigtarp.gov if they’re aware of fraud, waste, abuse, mismanagement, or misrepresentations affiliated with the Troubled Asset Relief Program.
Matters to report:
- Allegations of fraud including false statements, false claims, and misrepresentations affiliated with the TARP
- Any activities that might impact the integrity of the Troubled Asset Relief Program including, but not limited to, allegations of fraud or misconduct by federal employees and/or entities receiving TARP funds
- Actions by persons or entities attempting to misrepresent their association with TARP by utilizing deceptive contracts or financial instruments including allegations of identity theft or misrepresentations
SIGTARP says the confidentiality of contact information is assured when received via phone, mail, or in person. Laws protect citizens from reprisals – any action taken against them because they filed complaints.
SIGTARP Investigations
SIGTARP’s investigations include suspected accounting fraud, securities fraud, insider trading, mortgage servicer misconduct, mortgage fraud, public corruption, false statements, and tax investigations. The following is one of two cases made public, so far, at press time:
Gordon Grigg Receives 10-year SentenceGordon B. Grigg was sentenced August 6 in federal court to 10 years in prison for perpetrating a Ponzi scheme that resulted in a loss of more than $6 million to more than 60 investor victims.
Grigg was charged April 23 in the U.S. District Court for the Middle District of Tennessee with four counts of mail fraud and four counts of wire fraud. Grigg pleaded guilty to all charges.
According to public documents, Grigg never purchased securities or managed accounts for clients who invested funds with him. Instead, he used the investor funds for his personal benefit and expenses and to disburse fictitious earnings and return of deposits to clients who cashed out or closed their accounts. As an inducement for clients to invest, Grigg promised he would generate and sustain high rates of annualized returns on investment, and, as part of his solicitation, he falsely claimed he had the ability to invest client funds in government-guaranteed commercial paper and bank debt as part of TARP.
SIGTARP investigators provided assistance in the case in coordination with the U.S. Attorney’s Office for the Middle District of Tennessee, the SEC, the FBI, the United States Postal Inspection Service, the Tennessee Department of Commerce and Insurance, and the Franklin, Tenn., Police Department.
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