The Justice Department’s ever more complex national security and financial crime caseload has been a boon for an often-overlooked cog in the federal legal system: the expert witness.

The department has asked Congress for more than $250 million in fiscal 2011, anticipating a spike in demand for witnesses who can distill eye-glazing arcana into something more or less accessible to the average person (or judge), according to budget documents recently posted on the department’s Web site. The funds would also be used pay the fees of physicians and psychiatrists who examine criminal defendants to determine their fitness to stand trial.

The overall funding level for witness fees and protection has remained flat, at about $168 million, since fiscal 2006, with the department using direct appropriations and carry-over balances to cover rising costs. Those carry-over balances are approaching zero, and the department says it needs an additional $92 million to pay experts on range of topics, from spent nuclear fuel to mortgage lending.

About 70 percent of the expert witnesses used by the department in 2009 were physicians, psychiatrists, appraisers, engineers or economists, according to the department. Their rates vary, and compensation is negotiated between the expert witness and the Justice Department lawyer who selects them.

Government lawyers must interview at least three potential expert witnesses before making a selection; there are no caps on costs or required minimums, a Justice official said. Each Justice Department component and U.S. Attorney’s office has a designated official who approves expert witness contracts.

“Because of that decision, the federal government may be made liable for billions of dollars in damage claims; therefore, a significant amount of expert witness resources will be needed to accurately and fairly access the thousands of claims filed in this case,” the budget document states.

Expert witnesses are also playing a key role in assessing the value of tribal lands, as the Civil Division lawyers defend the Interior Department in dozens of lawsuits alleging it mismanaged Indian funds held in trust. And the department said more expert witnesses will be needed to give testimony in trials over the storage of spent nuclear fuels, and to help defend against a “staggering increase” in claims in the Vaccine Program.

In the U.S. Attorneys’ offices, demand for expert witnesses is at least as high, particularly in mortgage fraud and tax shelter cases. The offices spent $47 million on expert witnesses in fiscal 2009, as opposed to $22 million in fiscal 2005 — a 114 percent increase, according to department figures.

Expert services companies are taking note. Ken Yormark, managing director at LECG Corp. and head of the forensic accounting practice in New York, said the company is working to get on the federal government’s vendor list.

Still, greater demand for expert witnesses in the public sector inevitably leads to greater demand for expert witnesses in the private sector. Yormark said LECG, whose clients are typically from the latter, is ”definitely seeing more activity in the market place.”

“When the bell rings and companies need assistance, they have to call on experts like us to help them,” Yormark said.

Attorney General Eric Holder today told the wealthy Florida community where Bernard Madoff’s Ponzi scheme hit hard that financial fraud is among the “greatest and most glaring threats” to the U.S. economy.

Eric Holder (DOJ)

Palm Beach was “ground zero” for Madoff’s $65 billion scam,  Holder said in a speech at the Forum Club of the Palm Beaches in West Palm Beach. The Madoff scheme is the biggest investor fraud in U.S. history.

“The simple truth is that financial crimes have become all too common,” Holder said in prepared remarks. “And the consequences of these schemes and scams are real, as this community knows all too well. ”

Late last year, President Barack Obama signed an executive order that created an interagency task force to fight financial crime. The Attorney General said the Financial Fraud Enforcement Task Force is the “cornerstone” of the Justice Department’s efforts to combat mortgage fraud, securities fraud, financial discrimination and Recovery Act and rescue fraud.

“To those who see victimization of others as an avenue to wealth, take notice: If you fabricate a financial statement, if you propagate an investment scheme, if you are complicit in an act of financial fraud, you are writing your ticket to jail,” Holder said.

The fiscal year 2010 DOJ budget signed into law last month includes funds for 43 positions in U.S. Attorney’s offices to help combat financial fraud. Congress set aside $7.5 million in the budget for U.S. Attorney’s offices to pursue bankruptcy, mortgage fraud, affirmative civil enforcement and other white collar crimes.

The U.S. Attorney’s offices received $2.4 million through the fiscal year 2009 omnibus budget to fight economic crimes, according to a DOJ spokesperson. Congress allocated an additional $10 million to the U.S. Attorney’s offices in the fiscal year 2009 supplemental budget to fight financial fraud, the spokesperson said. The supplemental funding does not expire until fiscal year 2011. DOJ was able to hire 76 new Assistant U.S. Attorneys to handle financial fraud cases with the fiscal year 2009 funds, according to the spokesperson.

The budget also includes money for 50 new FBI agents to fight mortgage fraud and work on economic recovery investigations. The FBI received almost $75.2 million from Congress to combat white collar crime, an increase of about $25.5 million.

“This budget represents the largest-ever, single-year enhancement to support and expand the Justice Department’s financial fraud programs,” Holder said. “This will allow for additional FBI agents, prosecutors and support staff to aggressively pursue mortgage fraud, corporate fraud and other economic crimes.”

This post was updated from an earlier version.

Carmen Ortiz (Adelphi Univ.)

Carmen Ortiz, the new U.S. Attorney for Massachusetts, on Wednesday said she will step up efforts to prosecute financial fraud, the Associated Press reports.

The 53-year-old Ortiz was confirmed by the Senate Nov. 5 and sworn in three weeks ago. She replaced Michael J. Sullivan, who resigned April 19 to join the Ashcroft Group after eight years in the U.S. Attorney’s post.

Ortiz  had worked as an assistant U.S. attorney in Boston for the last 12 years, mainly prosecuting economic crimes, including embezzlement, tax evasion, investment fraud and telemarketing schemes.

During a meeting with reporters, Ortiz said her efforts to root out financial fraud — in part by reaching out to government agencies and business — will help prevent another financial situation like the one caused by Bernie Madoff’s Ponzi scheme, according to the AP. “What happened with Bernie Madoff, we should make every single effort to prevent that from happening again,” Ortiz told reporters, adding, “Victims should know that we’re open for business.”

She said another priority will be catching long-sought fugitive James “Whitey” Bulger, who is the alleged leader of the Winter Hill Gang, a crime family in Boston, The AP reports. He has been charged in connection with 19 murders and is on the FBI’s “Ten Most Wanted” list.

Ortiz said she plans to meet with the FBI and other law enforcement agencies and hopes to come up with “creative ways” to generate publicity and aid the search for Bulger, now 80.

“If he is present in people’s minds, then perhaps it could be that one tip that … could lead to his capture,” she said.

The Worcester Telegram and Gazette reports that Ortiz also told reporters she plans to expand the U.S. Attorney’s office’s presence in Worcester, increasing the number of assistant U.S. Attorneys in the office from two to four. “There is a lot of business” in Central Massachusetts, Ortiz told reporters

The Worcester newspaper also reported that Ortiz did not back off the office’s commitment to continue prosecuting gun and gang violence cases even though they could also be prosecuted in state courts, where sentences are usually less severe. “Not all of those cases belong in federal court,” but “we do have an impact on the communities that are suffering due to gun and gang violence,” she said.  “We make a real effort to select the cases that belong in federal court,” she said. However, with some people disagreeing, she said, the policy will be reviewed.

UPDATED: 1:30 p.m.The Obama administration on Tuesday unveiled an interagency task force to target financial crimes that played a role in the financial crisis and try to deter future fraud.

The task force will comprise senior-level officials from more than 20 departments, agencies and offices. Attorney General Eric Holder will serve as chairman.

Holder announced the task force alongside Treasury Secretary Tim Geithner, Secretary of Housing and Urban Development Shawn Donovan, and Robert Khuzami, the Director of Enforcement at the Securities and Exchange Commission.

Holder said the effort will have a larger “breadth” than the Corporate Fraud Task Force, which President George W. Bush established in 2002 to restore investor confidence following revelations of criminal wrongdoing in America’s boardrooms.

Likewise, the Financial Fraud Enforcement Task Force is a response to last year’s financial meltdown and to lapses in enforcement that helped it along. The task force will combat mortgage, securities and corporate fraud by increasing coordination among the participating entities, which include state and local law enforcement agencies, Holder said.

From his remarks:

[A]t the core of the Task Force’s mission will be our enforcement efforts, which will focus on the types of financial crime that affect us most significantly in this time of economic recovery: These crimes include:

+ mortgage fraud –from the simplest of “flip” schemes to systematic lending fraud in the nationwide housing market;
+ securities fraud – including traditional insider trading, Ponzi schemes, and misrepresentations to investors;
+ Recovery Act and rescue fraud – we will ensure that the taxpayers’ investment in America’s economic recovery is not siphoned away by a dishonest few; and,
+ discrimination – this Task Force will work to ensure that the financial markets work for all Americans, and that no one is unfairly targeted based on impermissible characteristics.

Obama’s decision was met with praise Tuesday by Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.), who said, “We can make no greater investment in the financial security and stability of our country than by allocating the necessary resources to root out and prosecute fraud.”  
 
As Attorney General, Michael Mukasey was opposed to creating an administration-wide task force to combat the mortgage crimes, preferring instead to let the U.S. Attorneys’ offices deal with what he likened to “white-collar street crimes.”

UPDATED: 12:22 p.m. (Holder’s prepared remarks:)

Good afternoon. I am joined here by some of my partners in the new effort we are launching today, Secretary of the Treasury Tim Geithner, Secretary of Housing and Urban Development Shawn Donovan, and Robert Khuzami, the Director of Enforcement at the Securities and Exchange Commission, who is here representing SEC Chairwoman Mary Schapiro.

I am pleased today to announce the launch of an interagency Financial Fraud Enforcement Task Force to combat financial crime. The Task Force is designed to strengthen our collective efforts — in conjunction with our federal, state, and local partners — to investigate and prosecute significant financial crimes relating to the current financial crisis; to recover ill-gotten gains; and to ensure just and effective punishment for those who perpetrate financial crimes.

We face unprecedented challenges in responding to the financial crisis that has gripped our economy for the past year. Mortgage, securities, and corporate fraud schemes have eroded the public’s confidence in the nation’s financial markets and have led to a growing sentiment that Wall Street does not play by the same rules as Main Street. Unscrupulous executives, Ponzi scheme operators, and common criminals alike have targeted the pocketbooks and retirement accounts of middle class Americans, and in many cases, devastated entire families’ futures.

We will not allow these actions to go unpunished, which is why President Obama has established this Financial Fraud Enforcement Task Force to investigate and prosecute fraud and financial crime.

In the tough economic environment we face today, one of this Administration’s most important missions is to draw upon all of the resources of the federal government to fight financial fraud in all of its forms. The Financial Fraud Enforcement Task Force will wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. We will marshal the criminal and civil enforcement resources of the executive branch to investigate and prosecute financial fraud cases; recover stolen funds for victims; address discrimination in lending and financial markets; and enhance coordination and cooperation among federal, state, local, tribal, and territorial authorities responsible for investigating and prosecuting significant financial crimes and violations.

This Task Force’s mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening. By punishing criminals for their actions, we will send a strong message to anyone looking to profit from the misfortune of others: We will investigate you, we will prosecute you, and we will incarcerate you. We will be relentless in our investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives.

Even before the launch of this Task Force, we have increased our efforts to prosecute financial fraud, including securities and commodities fraud, market manipulation, and various Ponzi schemes. In just the last ten months, we have secured the convictions of Bernard Madoff and several of his associates, and working alongside the SEC, have indicted several officers of Stanford Financial Group for their involvement in another massive Ponzi scheme.

Last month, we arrested individuals on charges stemming from what has been described as the largest hedge fund insider trading case in history. We also recently secured a 20-year sentence for the president and owner of Gen-See Capital Corp., who perpetrated a $31 million Ponzi scheme between 2002 and 2009 involving more than 500 victims, as well as 30-year and 25-year sentences for two executives of National Century Financial Enterprises following their convictions on conspiracy, fraud, and money-laundering charges.

We also have devoted substantial attention to preventing and prosecuting mortgage fraud. The FBI is currently investigating more than 2,400 mortgage fraud cases, up almost 400 percent from five years ago. The Bureau has more than doubled the number of agents investigating mortgage scams, and has created a National Mortgage Fraud Team at headquarters here in Washington. And last summer, we launched a coordinated state/federal mortgage fraud initiative with state attorneys general from around the country. This initiative will result in enhanced information-sharing, improved criminal and civil enforcement efforts, and a more effective approach to fighting discrimination in the housing and lending markets.

These were important steps, and by launching this new Task Force today we will build on them in moving forward.

This Task Force will be a robust, substantial working partnership with concrete follow-through. We will enhance training and information-sharing across the government, so that our prosecutors, regulators, and law enforcement agencies work seamlessly, employing the best available practices to fight financial crime.

We will work tirelessly with the victims of financial crime to ensure that their rights are restored and their financial futures preserved.

And at the core of the Task Force’s mission will be our enforcement efforts, which will focus on the types of financial crime that affect us most significantly in this time of economic recovery: These crimes include:

+ mortgage fraud –from the simplest of “flip” schemes to systematic lending fraud in the nationwide housing market;
+ securities fraud – including traditional insider trading, Ponzi schemes, and misrepresentations to investors;
+ Recovery Act and rescue fraud – we will ensure that the taxpayers’ investment in America’s economic recovery is not siphoned away by a dishonest few; and,
+ discrimination – this Task Force will work to ensure that the financial markets work for all Americans, and that no one is unfairly targeted based on impermissible characteristics.

Our Task Force will take full advantage of the new legislative authorities Congress provided us earlier this year when it gave our agencies stronger tools to investigate and prosecute financial fraud. That legislation, the Fraud Enforcement and Recovery Act of 2009, was an important bipartisan endorsement of the work we will undertake in this area.

Our enforcement priorities will continue to be informed by the realities of the crisis we face. We will protect borrowers and ensure the integrity of the financial services industry by combating mortgage fraud head-on. We will protect investors and our capital markets by vigorously attacking securities fraud. We will ensure that recipients of federal financial rescue funds do not obtain them through fraud, or use them for improper purposes. And we will make sure that federal stimulus funds are well-spent by vigilantly protecting the integrity of federal procurement and grant processes. By carrying out this mission aggressively and effectively, we will promote the integrity of our markets, preserve taxpayers’ resources, and protect the vast majority of consumers, investors, and companies that play by the rules and adhere to the law.

Maryland U.S. Attorney Rod Rosenstein announced yesterday the creation of an asset forfeiture and money laundering section for his office. Read the news release here.

Rod Rosenstein (DOJ)

The new section will work with state and local authorities to handle federal, civil and criminal forfeitures and provide guidance on money laundering and other cases involving financial crimes.

Rosenstein — a Bush holdover supported by Maryland Democratic Sens. Barbara Mikulski and Ben Cardin — told the Maryland Daily Record that he has “beefed up” his office’s work on these crimes because the Justice Department has encouraged the U.S. Attorneys to “follow the money” in mortgage fraud and other financial criminal cases.

“It takes a certain amount of expertise to trace that money and be familiar with the asset forfeiture provisions to be able to seize that money,” Rosenstein told the newspaper.

Assistant U.S. Attorney Stefan Cassella will lead the unit. He was sworn in yesterday after serving in the Justice Department Criminal Division as assistant chief of the asset forfeiture and money laundering Section from 1994 to 2002 and the deputy chief from 2002 to 2007.

He will oversee Assistant U.S. Attorney Richard Kay, a 19-year veteran of the office specializing in asset forfeiture, and Assistant U.S. Attorney Christen Sproule, who started at the office in January to assist with asset forfeiture and restitution matters. The section will also include supervisory paralegal LaTonia Kelly and paralegal specialist Naquita Ervin.

Several former executives at Lehman Brothers Holdings Inc. have been questioned by the Justice Department as part of a criminal investigation into whether Lehman sold what they claimed were safe, liquid securities to clients when they already knew that the market for the securities was drying up.

From the Wall Street Journal article:

Prosecutors from the U.S. attorney’s office in Brooklyn and lawyers from the Securities and Exchange Commission in recent weeks interviewed several former executives who ran Lehman’s auction-rate-securities business, these people said. Auction-rate securities are short-term debt instruments in which the interest rates reset at periodic auctions.

The inquiry centers on whether Lehman employees defrauded customers as the market for these securities broke down in 2007. Authorities want to know if Lehman executives got these auction-rate securities off the firm’s books and into client accounts at a time in which the securities were becoming hard to sell, according to the people with knowledge of the matter.

Authorities also want to know if executives knew the market was in trouble and sold their own personal holdings of auction-rate securities, which could constitute insider trading, according to the people.

In a big boost to the Justice Department’s financial fraud efforts, Congress on Monday sent the Fraud Enforcement and Recovery Act (FERA) to President Obama for his signature.

The legislation is in response to the mortgage fraud and financial services meltdown. It strengthens the False Claims Act, the whistleblowing legislation that has helped the U.S. recover more than $15 billion over the last eight years.  As we reported last month, the bill also authorizes $245 million a year over two years to hire more than 300 federal agents, 200 prosecutors and 200 forensic analysts to rebuild “white collar” enforcement efforts that took a back seat after the 9/11 attacks to counter-terrorism. “This bill is a step toward holding accountable those who have caused so much damage to our economy,” Senate Judiciary Committee Chairman Pat Leahy (D-Vt.), a leading sponsor of the bill, said in a floor statement.

Sen. Ted Kaufman (D-Del.), another leading sponsor, said in a statement: “We can’t have separate sets of rules for people who rob  banks and banks who rob people.” Sen. Charles Grassley (R-Iowa) also introduced the bill and made the following statement upon its passage:

This legislation will send a message to those who have defrauded homeowners and mortgage lenders and will send an even stronger message to those who are thinking about committing a future fraud.  It includes the most significant amendments to the False Claims Act since 1986, which will ensure that court decisions that limit the FCA are overturned and congressional intent is restored.  Congress has done the right thing by passing this legislation, and I hope the president signs it as quickly as possible.

The Federal Bureau of Investigation currently has fewer than 250 assigned to financial fraud cases throughout the country, and can’t investigate the more than 5000 mortgage fraud allegations the Treasury Department receives each month, Leahy’s statement said.

The Senate today approved by a vote of 92-4 new legislation to combat financial fraud. The House Judiciary Committee passed a similar measure today, but without the Senate measures to strengthen the False Claims Act, which the House for now is considering in a stand-alone measure.

The Senate version of the Fraud and Recovery Act (FERA) would authorize $245 million a year over two years to hire more than 300 federal agents, 200 prosecutors and 200 forensic analysts to rebuild “white collar” enforcement efforts that took a back seat after the 9/11 attacks to counter-terrorism. “This bill is a step toward holding accountable those who have caused so much damage to our economy,” Senate Judiciary Committee Chairman Pat Leahy (D-Vt.), a leading sponsor of the bill, said in a floor statement.

Sen. Ted Kaufman (D-Del.), another leading sponsor, said in a statement: “We can’t have separate sets of rules for people who rob  banks and banks who rob people.” Sen. Charles Grassley (R-Iowa) also introduced the bill.

The Federal Bureau of Investigation currently has fewer than 250 assigned to financial fraud cases throughout the country, and can’t investigate the more than 5000 mortgage fraud allegations the Treasury Department receives each month, Leahy’s statement said.

Attorney General Eric Holder joined a multi-agency news conference today vowing to crack down on mortgage loan modification scams. Treasury Secretary Tim Geither, Federal Trade Commissioner Jon Liebowitz, and Housing and Urban Development Secretary Shaun Donovan also lent star power to the event. The Obama administration’s financial rescue package includes assistance to homeowners looking to refinance their mortgages on more affordable terms.

Only homeowners whose mortgages are guaranteed by Fannie Mae or Freddie Mac are eligible. But that’s more than four million homeowners – a fat target for fraud, the administration says.

Geithner said Monday that Treasury’s Financial Crimes Enforcement Network (FinCEN) will devote more resources to identifying fraud suspects. Holder noted that the Federal Bureau of Investigation has more than 2,100 mortgage fraud cases open and has created a National Mortgage Fraud Team, based in Washington.

Holder also said:

We are working with the FTC to reinvigorate the Executive Working Group, which brings together DOJ, the FTC, and state attorneys general to coordinate and exchange intelligence on competition and consumer fraud issues, such as the rescue scams we are addressing today

You can read Holder’s prepared remarks here.

The Wall Street Journal grabbed Attorney General Eric Holder on the sidelines of a conference in Mexico about combatting violent drug cartels. Holder said the Department of Justice will soon announce state-federal task forces to investigate financial crime, along the lines of the old Enron task force. Holder’s predecessor as Attorney General, Michael Mukasey, frowned on task forces as inefficient, the WSJ’s Evan Perez writes. Read his report here.