Bankruptcy Crime Referrals Rarely Result in Prosecutions (1)

A US bankruptcy trustee who spots possible criminal conduct like tax fraud or concealment of assets is required by law to refer it to law enforcement agencies.

That’s often the last anyone hears of it.

“We make a lot of referrals, and we never really know what happens,” said Greg Hays, a trustee in Atlanta with a background in forensic accounting and fraud investigation. “I have submitted referrals that I really would have liked to know what happened. I’m cognizant that the US Trustee passes referrals on to the Department of Justice, but that is the last we hear.”

The US Trustee—the Justice Department’s bankruptcy watchdog—made an average of 2,271 referrals annually over the past six years, according to agency reports. Yet only about 40 people were charged with bankruptcy crimes on average annually during that period, and it’s unclear how many of those cases stemmed from a referral by a trustee, judge, or court receiver.

“Unless a bankruptcy criminal case has some kind of sex appeal, where there are so many innocent victims somehow being affected by this and there is some kind of fraud that they feel they can prove, I don’t think they see bankruptcy crimes as high on their list of cases that they want to take on,” said Schlam Stone & Dolan LLP partner Brad Simon, a former assistant US attorney for the Eastern District of New York and former trial attorney with the DOJ’s criminal division.

Bankruptcy criminal referrals can take two to four years to result in prosecution, if they ever do. Many never reach that stage, often due to limited resources, investigators finding bankruptcy law difficult to navigate, or shifting enforcement priorities within agencies that handle white-collar crime.

Safeguarding the integrity of the bankruptcy system is necessary for creditors’ confidence, with implications for the cost of borrowing, and to prevent the loss of tax revenue, said Cheryl Bader, a former assistant US attorney for the District of New Jersey.

When cases are rarely prosecuted, she said, “merely being on the books does not carry any deterrent value.”

Bankruptcy fraud wasn’t among the top 10 priorities on white-collar crime listed in a May memo by Matthew R. Galeotti, head of the DOJ’s criminal division. Under President Donald Trump’s administration, investigators are increasingly focusing on fraud in government programs, market manipulation, tariff evasion, drug-related offenses, and ties to foreign terrorist organizations.

The US Trustee will soon lose 171 staffers, including trial attorneys and bankruptcy auditors, who have so far accepted the Trump administration’s deferred resignation program. Tara Twomey, the agency’s director, was fired in March.

US Attorney’s Offices and investigative agencies apply different prosecution guidelines, often requiring minimum monetary losses to pursue a case—unless it involves public officials or systemic schemes. Tax fraud, which accounts for more than half of all referrals, is especially challenging since the alleged losses may not meet those thresholds or can be difficult to tie to intentional fraud.

The FBI declined to comment on its referral guidelines, and the rest of the agencies didn’t provide the information. A US Trustee spokesperson said in an email that the DOJ “doesn’t comment on prosecutorial strategies or thresholds.”

The agency also said in a statement that its “broad administrative, regulatory, and litigation and enforcement authorities support our mission to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders — debtors, creditors, and the public.”

Criminal Referrals

The US Trustee’s office hasn’t yet disclosed referral data for fiscal 2024-2025. Most referrals in fiscal 2023 involved asset concealment, false oaths, bankruptcy and Covid-aid fraud, and mail or wire fraud. A smaller but newly emerging category—15 referrals—involved failing to disclose cryptocurrency holdings.

Only 13 criminal cases were pursued out of 2,255 referrals in fiscal 2023-2024, but about 60% of the referrals were listed as being under review by a US attorney or an investigative agency. Almost all of the rest were declined for prosecution.

The trustee’s office has acknowledged that its reports can have delays or show discrepancies due to different tracking systems within agencies. For example, it may label a referral “administratively closed” even if it remains under review or investigation, either because other agencies didn’t provide updates or the US Trustee’s office couldn’t verify the referral outcome.

“We’re sending stuff that is reasonably suspicious, not probable cause, which is a higher standard,” said Patrick S. Layng, a former prosecutor and US Trustee for the Northern District of Illinois and the Eastern and Western District of Wisconsin. “Plenty of those referrals don’t pan out, and many investigations never turn into prosecutions.”

Jolene Wee, founder of JW Infinity Consulting and an adviser with two decades of experience in finance who has served as a trustee, said she often doesn’t know if an investigative agency is involved in one of her criminal referrals unless it files a notice of appearance or shows up at a creditors’ meeting.

“As the case progresses, things may come out in court,” she said. “You can’t hide much in bankruptcy, so some of the delays are probably due to how long these cases take.”

Prosecution Priorities

Brian Behr, a bankruptcy administrator for the Eastern District of North Carolina, said it’s common—though illegal—for people to leave out homes and other assets in their court disclosures.

Tips sometimes come from creditors, neighbors, or even ex-spouses. “These are commonly referred to as ‘poison pen letters,’” he said.

If he uncovers signs of criminal conduct, he sends a letter to the US Attorney’s Office and the FBI outlining sections of the filings and supporting transcripts.

“As someone trying to sell this to the US Attorney’s Office and federal law enforcement, we try to give them what we have on a silver platter,” Behr said.

Investigative units like the Office of Inspector General of the Department of Housing and Urban Development, which often receives bankruptcy referrals, said it will focus on public corruption, fraud in HUD programs, and mortgage fraud schemes affecting HUD insurance funds. One recent referral led to a former Chicago pastor pleading guilty to making a false bankruptcy statement and misusing HUD funds and student loans.

There often needs to be something more than a debtor hiding assets, “both from a storytelling point of view, but also from a deterrence point of view” to elevate a case to prosecution, said Bader, now a law professor with expertise in criminal law at Fordham University.

In the 2020 bankruptcy of Neiman Marcus, for instance, the judge contemplated the need for a criminal referral for Marble Ridge Capital founder Dan Kamensky, based on allegations that while serving on the creditors’ committee he attempted to suppress a higher bid for the retailer’s MyTheresa unit.

The US Trustee agreed in a letter to the judge, saying Kamensky’s actions were “problematic,” a “clear abuse” of his position, and a breach of his fiduciary duties—and one that needed to be pursued because creditors’ committees serves an important role in large commercial cases.

Kamensky pleaded guilty in February 2021 to bankruptcy fraud in relation to the Neiman case and was sentenced to six months in prison.

Tax Fraud Tops

Bankruptcy prosecutions peaked in 2021 with 55 defendants charged—at least partly due to criminal activity related to Covid-19 aid.

During fiscal 2022–2023, CARES Act-related referrals totaled 101. The following period, they jumped to 420.

Prosecutors cross-checked bankruptcy filings with a database of recipients of loans, like the Paycheck Protection Program, who claimed no business despite that being a requirement, Layng said. While losses were often small, the government prioritized those cases because funds were intended for those in need.

“It was a pretty easy catch by us,” he said.

Tax fraud is consistently the most common type of allegation referred for criminal investigation. Clifford J. White, former US Trustee director, said many of these cases involve claiming head-of-household filing status in an attempt to illegally receive certain benefits. In other cases, taxpayers or preparers have made unlawful deductions or failed to report income.

Sometimes, there may be civil consequences even if a tax crime isn’t prosecuted, White said.

Tax fraud is complicated to prosecute because investigators must prove intent to commit fraud, said Ronald Safer, partner at Riley Safer Holmes & Cancila LLP and former chief of the criminal division at the US Attorney’s Office in Chicago.

“There’s an expression, ‘ignorance of the law is no excuse,’ but tax fraud is the exception to that,” Safer said. “You do have to know that you have violated the tax code.”

The IRS didn’t respond to a list of questions.

‘Bottom of the Pile’

Some investigators find bankruptcy complex, which can make cases harder to pursue. “They don’t want to get sucked into it,” White said.

He said that while the US Trustee “has always been thinly staffed,” the priority given to making criminal referrals “has always been quite high.”

While there’s fraud in bankruptcy, it’s not as widespread as people think, Wee said. “Many bankruptcy cases happen because the debtor genuinely needs bankruptcy relief, and sometimes they just made honest mistakes,” she added.

Investigators must distinguish between those “innocent mistakes” from fraud, Safer said.

“If you don’t have the education yourself as a prosecutor, you have to educate yourself in the financial ins and outs of bankruptcy, so it takes more of an investment in time and energy than your typical fraud case,” Safer said. “Often, the more complex, less urgent, get put to the bottom of the pile.”