Thursday, April 17, 2008

FBI's Mueller Says Subprime Fraud Probe May Lead to Hedge Funds

By Robert Schmidt

April 17 (Bloomberg) -- FBI Director Robert Mueller said the agency's investigations into the subprime loan meltdown may uncover financial crimes committed by hedge funds and private equity firms.

Federal Bureau of Investigation agents have opened 19 criminal probes of companies in connection with the lending crisis, focusing on accounting fraud, insider trading and allegations of deceptive sales practices. Mueller, speaking today to an American Bar Association group in Washington, said he expects more to come as housing prices continue to fall.

``These investigations may well lead to other instances of fraud, from investment banks and private equity firms to hedge funds,'' Mueller said. ``We do not take these investigations lightly.''

The collapse in the credit markets has shaken Wall Street and forced people from their homes. Mueller told Congress yesterday that the FBI has seen a ``tremendous surge'' in fraud cases related to subprime loans, which are made to borrowers with poor credit.

Mueller didn't name any companies or hedge funds. A person familiar with the matter has said the FBI is probing Countrywide Financial Corp., the U.S.'s largest mortgage lender, for possible accounting fraud.

On hedge funds and private equity firms, the FBI is primarily looking into potential insider trading by investment managers. The agency is also reviewing whether hedge funds, either on their own or on behalf of investment banks, improperly hid losses on securities tied to subprime loans.

Speaking with reporters after his speech today, Mueller said the bureau is stretched for resources as it works to handle the onslaught of cases. It shifted about 2,000 agents from criminal to terrorism investigations after the Sept. 11 attacks.

Still, Mueller said the agency will be able to combat the mortgage problem.

``We'll put whatever agents onto this as necessary to address it,'' he said.

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