U.S. Steps Up Bankruptcy Fraud Prosecution in L.A.

The Justice Department is expected to announce today a surge in prosecutions for bankruptcy fraud, including 31 cases involving 35 defendants in the Los Angeles area, a leading trouble spot in the country.

The Los Angeles area accounts for nearly a third of the more than 100 cases filed under a stepped-up prosecution effort, dubbed Operation Total Disclosure, that Atty. Gen. Janet Reno ordered earlier this year, department officials said.

Reno took the action after U.S. bankruptcy trustees said they were concerned that increased fraud could undermine faith in the system, an official said. The fraud included illegally hiding assets, filing falsified petitions and otherwise abusing the system.

In one case in Orange County, a man was indicted Tuesday on charges that he manipulated bankruptcy protections to halt foreclosures on real estate. He allegedly transferred phony partnership stakes in troubled properties to a bankrupt person, thus stalling foreclosures.

That case will be the first in the nation to be prosecuted under a 1994 law that was drafted specifically to deal with bankruptcy fraud, according to federal authorities. The law arose from difficulties in dealing with such sham property transfers, authorities said.

In a Palmdale case, a sporting goods merchant claimed to have no remaining inventory when filing for bankruptcy but was found to have $70,000 of inventory in his garage, car trunk and a storage locker, a department official said.

In a Los Angeles case, defendants allegedly secretly transferred more than $1 million from a troubled gas station into other accounts they controlled but did not disclose to Bankruptcy Court, according to a report prepared for Reno.

Elsewhere in the country, a Pennsylvania man filed to clear his debts five times in five years, each time allegedly concealing his previous difficulty.

A Chicago attorney declared personal bankruptcy, allegedly concealing at least two bank accounts, several real estate parcels and two automobiles.

A Seattle case involved a woman who solicited $1.5 million from 15 elderly investors, some of whom gave her their life savings. She allegedly diverted the money to buy condominiums and luxury automobiles but concealed those assets from the court when she declared bankruptcy.

Although declining to discuss individual cases, Maureen Tighe, head of the bankruptcy fraud task force in the U.S. attorney’s office in Los Angeles, said the area accounts for nearly 10% of the bankruptcies filed annually nationwide.