FBI Shift Crimps White-Collar Crime Probes

A massive shift of FBI agents to anti-terrorism and counterintelligence duties has undermined the work of fraud investigators, who are taking on fewer scam artists and corporate miscreants and taking longer to complete cases, Justice Department officials say.

The shift, a response to the Sept. 11, 2001, attacks on the World Trade Center and the Pentagon, has been felt especially hard in Southern California, a traditional breeding ground for fraud.

“The number of agents currently working white-collar crime is significantly diminished from the number of agents working it before 9/11, because we’ve had to move a lot of personnel resources over to counterterrorism and counterintelligence,” said James M. Sheehan, FBI special agent in charge of the Los Angeles office’s criminal division.

As a result, he said, “It could be that there are cases that meet the U.S. attorney’s guidelines for federal prosecution and we simply can’t get to them because we don’t have the resources.”

Given the continuing threat of terrorism, however, Sheehan said the shift of resources was “the right thing to do.” And he said the FBI wasn’t turning away any big cases.

“If there are major cases that need to be addressed, and only the FBI has the investigative talent or resources to do it, then we’re going to find a way to do it,” he said in an interview last week.

Sheehan wouldn’t say how many agents were being assigned cases or how many fraud investigations were being opened these days compared with before the terror attacks. FBI officials in Washington didn’t respond to a request for national figures.

One key former supervisor in Los Angeles said the local FBI office had reduced by nearly 60% the number of agents assigned to white-collar crime, public corruption and related work.

Prosecutors said probes must often be put on hold as agents take on temporary terrorism assignments. U.S. Atty. Debra W. Yang in Los Angeles, the top Justice Department official in the region, said the FBI’s ranks have become so thin that she at times has had to negotiate to retain individual agents working on important fraud cases.

Morale has suffered, according to some prosecutors, as the number of white-collar agents dwindles and the importance of their overall mission is reduced.

The U.S. Postal Inspection Service has helped fill some of the gap by moving experienced agents back to fraud work.

“Our local management said, ‘Hey, use us more!’ Because we are aware that there’s a void these days,” Postal Inspector Yvonne Guerrero, a spokeswoman for the agency’s offices in Orange County, Long Beach and Pasadena, said Friday.

“What we’re asking them to do is make the postal inspectors the lead agency, so when the FBI agents get pulled away to work on terrorism we can continue to work the cases,” she said.

Guerrero said federal prosecutors responded by handing three investment scams and two corporate fraud cases over to the postal inspectors for investigation as mail frauds.

Yang says the postal inspectors were a help, as is her close relationship with the Securities and Exchange Commission’s regional office, which coordinates its fraud investigations with prosecutors and is headed by Randall Lee, a former federal prosecutor in L.A. She added, though, that the overall shortage of investigators had made it impossible to pursue “the scorched-earth approach” of exhausting every facet of a criminal case.

“You’re going to see some decline in numbers” of fraud cases, Yang said, as the FBI deploys itself against the threat of attacks. “We need to have agents working terrorism.”

Yang, a former assistant U.S. attorney and Superior Court judge, was named U.S. attorney in early 2002, a time when the federal government was concentrating on prosecuting corporate fraud in the face of a series of scandals that made the names Enron Corp., WorldCom Inc. and Adelphia Communications Corp. synonymous with greed and corruption.

Although Los Angeles prosecutors handled nothing as large as those cases, they brought a series of fraud cases against officers of the smaller companies that predominate in Southern California, such as Homestore Inc. of Westlake Village, El Segundo-based Aura Systems Inc. and Motorcar Parts & Accessories Inc. of Torrance, Yang said.

“I think it’s fair to say that the proliferation of those kinds of frauds is not as great today because the [Justice Department] focused on it so hard over the last two years,” Yang said. “I think it’s been successful, and to some extent that allows you to ease up ever so slightly.”

But the dwindling number of agents on the white-collar crime squads was on her mind when she crossed paths recently with Brent Braun, the FBI’s former white-collar supervisor for L.A., at a law enforcement function.

“She busted my chops about how ever since I left, the white-collar crime program in the bureau went down the drain,” said Braun, who took a private-sector job in April 2003.

“When I retired ... the L.A. office had about 185 agents assigned to white-collar crime, civil rights and public corruption matters,” Braun said. “I hear it is now something like 75 agents.”

He said it was a mistake to cede fraud cases to postal inspectors, who have only about 20 people to investigate all mail frauds in the Los Angeles area.

“The bureau can’t get out of that business without losing market share, contacts and expertise,” Braun said. “Once it is lost you never get it back.”

Federal prosecutors, speaking on condition of anonymity, tended to agree.

“The postal inspectors are good,” said one veteran fraud expert in the U.S. attorney’s office, “but the biggest and best is still the FBI. It always increases my confidence level when the FBI is involved. I knew, at least before 9/11, that would mean I had the resources and the expertise to accomplish the job.”

Another fraud prosecutor said inexperience plagued the remaining FBI fraud investigators because the best had been moved to counterterrorism, while others had been overworked and suffered from flagging morale.

“Take half the business desk at your paper and assign them to counterterrorism, then tell the other half: ‘There’s 500 press releases on the fax machine -- start writing.’ That’s about what it’s like,” he said.