Bankruptcy Crime Referrals Rarely Lead to Prosecution

U.S. bankruptcy trustees are legally required to flag suspected criminal conduct—such as concealing assets or committing tax fraud—to federal investigators. But despite thousands of referrals each year, only a handful result in prosecution.

The Justice Department’s bankruptcy watchdog, the U.S. Trustee Program, reported an average of 2,271 referrals annually over the past six years. Yet prosecutors charged only about 40 people each year with bankruptcy crimes during that period. In fiscal 2023, just 13 cases were pursued out of 2,255 referrals, according to agency data.

“We make a lot of referrals, and we never really know what happens,” said Greg Hays, a trustee in Atlanta. “I have submitted referrals that I really would have liked to know what happened.”

Low Priority for Prosecutors

Bankruptcy fraud often falls behind higher-profile cases on prosecutors’ priority lists. Brad Simon, a former federal prosecutor, said bankruptcy cases typically move forward only if they involve “so many innocent victims somehow being affected by this and there is some kind of fraud that they feel they can prove.”

Former prosecutors note that bankruptcy referrals can take years to process, and many never result in charges. Cases are frequently hampered by resource constraints, the complexity of bankruptcy law, and shifting enforcement priorities.

Implications for System Integrity

Experts warn that the lack of follow-through undermines confidence in the bankruptcy system. “Merely being on the books does not carry any deterrent value,” said Cheryl Bader, a former federal prosecutor now teaching law at Fordham University.

The U.S. Trustee’s own staffing cuts—171 employees accepted deferred resignations earlier this year—may further limit enforcement. Meanwhile, DOJ’s May 2024 memo outlining white-collar crime priorities did not include bankruptcy fraud among its top ten.

Focus Areas and Emerging Trends

Most referrals involve asset concealment, false oaths, or tax fraud. An emerging category includes cryptocurrency concealment, with 15 such cases referred in 2023. Tax fraud remains the single largest source of referrals, though prosecutions are difficult because investigators must prove intent.

Bankruptcy referrals surged during the Covid-19 pandemic as investigators cross-checked bankruptcy filings against relief loan databases. CARES Act–related referrals spiked from 101 in fiscal 2022 to 420 the following year, leading to several prosecutions.

Still, many trustees say they are often left in the dark. “As the case progresses, things may come out in court,” said former trustee Jolene Wee. “You can’t hide much in bankruptcy, so some of the delays are probably due to how long these cases take.”

Rare Convictions

When cases do move forward, they can result in convictions with broader implications. In the Neiman Marcus bankruptcy, hedge fund founder Dan Kamensky was sentenced to six months in prison for bankruptcy fraud in 2021, after attempting to suppress a higher bid for a company asset.

But such cases are the exception. Former U.S. Trustee director Clifford White said most referrals “don’t pan out” or fall to the “bottom of the pile” compared to more urgent fraud cases.

BLOOMBERG