Bribery, compromised officials leave indicted financial-crime suspects free from prosecution under Holder’s DOJ

Matthew Boyle Investigative Reporter
Font Size:

A U.S. Justice Department source has told The Daily Caller that at least two DOJ prosecutors accepted cash bribes from allegedly corrupt finance executives who were indicted under court seal within the past 13 months, but never arrested or prosecuted.

The sitting governor of the U.S. Virgin Islands, his attorney general and an unspecified number of Virgin Islands legislators also accepted bribes, the source said, adding that U.S. Attorney General Eric Holder is aware prosecutors and elected officials were bribed and otherwise compromised, but has not held anyone accountable.

The bribed officials, an attorney with knowledge of the investigation told TheDC, remain on the taxpayers’ payroll at the Justice Department without any accountability. The DOJ source said Holder does not want to admit public officials accepted bribes while under his leadership.

That source said that until the summer of 2011, the two compromised prosecutors were part of a team of more than 25 federal prosecutors pursuing a financial crime ring, and at least five other prosecutors tasked to the case were also compromised by the criminal suspects they were investigating, without being bribed.

TheDC is withholding the name of the source, a knowledgeable government official who served on the Justice Department’s arrest team and was involved in the investigation, in order to prevent career retaliation from political figures in the Obama administration.

A former high-level elected official vouches for the government source’s veracity. “[The source] was trustworthy … and you could tell [the source] information or [the source] could hear information and [the source] would keep things close to [the source’s] chest,” that former official told TheDC. “You could trust [the source] with your life.”

The identities of the prosecutors who accepted bribes and others who were compromised have not yet been made public, and TheDC has not yet independently confirmed their identities. The prosecutors themselves are now cooperating with Justice Department investigators. (RELATED: Full coverage of the Justice Department)

Eric Holder, the source said, personally approved the makeup of the investigation and arrest teams.

“The team which was put in place, of course, in tracking all the information that we had — Holder had to sign off on the teams. He signed off on them a year and a half ago,” the source said during an interview. “He wasn’t fully in control of it, but of course the knowledge and approval of it came from him.”

“There are internal documents, of course. He was briefed. He got a full scope of what transpired, and he got a full scope of what is going on with this case in particular. There is nothing going on in this case that Holder doesn’t know about right now.”

DOJ leadership has been fretting internally, the source said, about how to handle the story when the news breaks because it represents a new level of corruption in the Obama administration. The Holder Justice Department is concerned about the appearance that it lacks the competence to enforce the laws in which Obama has shown political interest, including those related to corruption and other financial crimes.

Taxpayer money and alleged financial irregularities

Alleged financial irregularities first emerged on the books of the National Rural Utilities Cooperative Finance Corporation — CFC, for short — during the early 2000s.

A trade group that solicits funding from the federal government and lobbies on behalf of electricity cooperatives created the organization in 1969 to help rural electric co-ops gain access to private capital.

A significant amount of CFC’s money originates within the federal government. The U.S. Department of Agriculture and the Federal Agricultural Mortgage Corporation combined to give more than $5.1 billion to CFC between July 2005 and February 2010, according to federal court documents obtained by The Daily Caller.

CFC’s tax return for the fiscal year ending in May 2010, the most recent publicly available filing, shows that borrowers owed it more than $18.5 billion in outstanding loans.

CFC created the Rural Telephone Finance Cooperative (RTFC) in 1987 as a telecommunications affiliate. While it was initially launched to help rural communities finance their telephone infrastructure, its mission has grown to encompass broadband Internet and other more modern telecommunications platforms. It is still affiliated with and operated by CFC.

In at least four different years between 2000 and 2005, and possibly in other years, CFC allegedly inflated its own balance sheet with millions of dollars in nonexistent operating income. At the same time, it deflated RTFC’s worth, essentially siphoning money away from a member co-op that it created.

CFC is a non-profit organization, and exempt from federal income tax, but RTFC is not tax-exempt. Secretly moving money from RTFC to its tax-exempt parent organization resulted in a far lower income tax liability.

CFC’s control of RTFC’s books allegedly allowed the subtle financial transfers to go unnoticed. The two groups shared executive staff, including a common CEO, and still do to this day.

And while CFC executives were, allegedly, in effect bailing out rural electric co-ops on the backs of rural telephone co-ops, their salaries grew. By mid-2010, the non-profit organization’s top three executives earned annual compensation packages worth $2.6 million, $1.5 million, and nearly $1.2 million.

CFC’s alleged financial irregularities may never have been uncovered if not for the Enron accounting scandal, whose corporate casualties included Arthur Andersen, CFC’s accounting firm. Another firm, Deloitte, ultimately won that account, but not before the accounting firm of Ernst & Young took over auditing duties for CFC’s books during the interim.

According to legal documents obtained by The Daily Caller and reviewed by independent forensic accountants, the Ernst & Young audits detected irregularities in CFC’s annual statements that Arthur Andersen had allowed to persist.

Randall B. Johnston, the Deloitte partner who later audited CFC’s books, was the same accountant who had handled the organization’s books at Arthur Andersen.

Curious investor pokes the beehive

When the RTFC loaned telecommunications investor Jeffrey Prosser approximately $100 million in 1988, his Virgin Islands-based Innovative Communications Corporation became a co-op member. By 2004, the company had significantly expanded its RTFC loan obligations after a string of acquisitions, owing the co-op a total of $600 million.

Prosser and his attorney, John Raynor, were among the first to notice CFC’s misuse of RTFC members’ funds.

Prosser raised his concerns with CFC leadership at least twice. On both occasions, CFC pushed to foreclose on his loans in what he and Raynor considered an effort to silence him.

Lanny Davis, the former Clinton administration White House counsel, represented Prosser’s company in 2004 while he was a litigation partner at Orrick, Herrington & Sutcliffe. Davis asked global expert services and financial consulting firm LECG Corporation to conduct a financial analysis of CFC’s accounting behavior.

“What I found very suspicious was the structure of the CFC and the RTFC,” Davis said in a phone interview with The Daily Caller. “I saw inherent conflicts of interest in the structure. I saw movements of money between a taxable entity and a non-taxable entity that seemed very suspicious to me. I was absolutely convinced — I’ll use a stronger word than suspicion — that they lacked transparency and that that was intentional.”

LECG concluded that there were indeed financial irregularities on the two organizations’ books, something that LECG forensic accountant John DeLuca confirmed to TheDC.

“Lanny hired LECG in the mid to later part of 2004, in his capacity at Orrick as Jeff Prosser’s outside legal counsel, to review and provide analysis on selected CFC and RTFC financial statements, tax information and other related documents,” DeLuca said. “David Bloch, Esq. and myself, John J. DeLuca, CPA, CVA, found certain financial and tax ‘irregularities’ that portray ‘badges and indicia of fraud.’ These ‘irregularities’ warranted further investigation.”

Davis forwarded LECG’s report to former Securities and Exchange Commission official Jim Meyers, who had recently joined Orrick.

“I said I wanted his unbiased opinion,” Davis recalled. “I didn’t want him to make the best argument he could make — I wanted him to tell me if he were still an enforcement official at the SEC, would he investigate this matter?”

Meyers wrote a lengthy letter to the SEC supporting the allegations in LECG’s report, and pushing for an investigation. None ever materialized.

CFC’s leadership continued to squeeze Prosser’s company in the Virgin Islands until it was driven into involuntary bankruptcy. Overtures were made to the Justice Department for investigations of Prosser for bankruptcy fraud in an effort, he told TheDC, to tarnish his reputation and make his allegations less believable.

The DOJ investigated Prosser on three different occasions for unspecified bankruptcy crimes. The first investigation ran from late 2007 through early 2008, Raynor said.

That investigation began almost immediately after Prosser was forcibly removed as CEO of Innovative Communications Corporation on Oct. 8, just two weeks after its Sept. 25 bankruptcy.

Prosser was cleared of wrongdoing.

According to Alex Angueira, an attorney who worked with Raynor on Prosser’s behalf, in August 2009 the DOJ finally decided to take seriously Prosser’s allegations about financial crimes at CFC.

DOJ prosecutors plan a financial-crimes investigation

Angueira told The Daily Caller that he, Raynor and Guy Lewis, then director of the Executive Office for United States Attorneys, met with Paul Pelletier, then the Fraud Section deputy chief of the DOJ’s Criminal Division.

“We presented a wide ranging RICO [Racketeer Influenced and Corrupt Organizations Act] conspiracy spanning two decades,” Angueira said. “Though Paul said he was interested, he said they did not have the resources to pursue a RICO action. Paul indicated that he was interested in what he described as ‘bank fraud.’”

Angueira and Raynor narrowed the case down to its bank-fraud elements and resubmitted it to Pelletier the following month.

“In September of 2009 we presented a narrow case focusing upon CFC’s use of false financial statements to secure federal funds,” Angueira recalled. “After his review of the materials, I was told he was recommending an investigation or an assignment of resources.”

Raynor said Pelletier assigned two prosecutors to the case.

At about the same time, during Innovative Communications Corporation’s bankruptcy proceedings, Prosser’s team deposed Arthur Stelzer, a former personal assistant to Prosser who was siding with his opponents.

“Who’s paying for your counsel?” the attorneys asked.

“The guy responded that either Vinson & Elkins was, or ICC — the debtor,” Raynor explained. “This was at the very end of the deposition. It was witness bribery. There’s a federal statute that when you’re dealing with an ‘occurrence witness’ — versus an ‘expert witness’ — you can’t pay for their representation. It falls within witness bribery.”

Vinson & Elkins attorneys Dan Stewart and James Lee represented the bankruptcy trustee Stan Springel, who handled the proceedings. Springel himself was managing partner at Alvarez & Marsal, a forensic accounting firm.

TheDC’s source said officials from both firms were intimately involved in the activity at the heart of the DOJ’s financial-crimes investigation.

The DOJ launched a second investigation of Prosser later in 2010, according to Raynor, who said he was interviewed in November 2010. But by January 2011, he recalled, the DOJ appeared ready to classify Prosser as a victim and put a hold on the bankruptcy proceedings.

By early 2011, Raynor said, he and the rest of Prosser’s legal team had learned that Pelletier at the DOJ “had a grand jury underway investigating CFC, and investigating some of the bankruptcy crimes.”

Pelletier, Raynor said, eventually “authorized the U.S. attorney in the Virgin Islands [Ronald Sharpe] to go ahead and file for a stay” of the bankruptcy proceedings surrounding Prosser’s company, “which means, as we were told clearly, the second investigation had cleared Mr. Prosser again.”

But Sharpe never put the bankruptcy proceedings stay in place.

“Being a U.S. Attorney in the Virgin Islands is like being a diplomat in a small country in South America,” Prosser said. Sharpe, he explained, would have found it difficult to go against the political grain to file the papers necessary to halt the bankruptcy case.

“You’ve got a lot of power,” Prosser told TheDC. “He and the governor are very close. They were in the same social clubs and the same parties.”

“It’s very difficult for him because he knows that once he indicted V&E [Vinson & Elkins], Alvarez [& Marsal], the trustees — he knows the governor is next and tied directly to it. We have emails showing it.”

No prosecutions, no explanations

Pelletier planned his departure from the DOJ for the spring of 2011, officially retiring on May 13. Raynor told TheDC that Pelletier vowed not to retire until the case was closed and arrests were made.

According to Angueira, the attorney who worked with Raynor to present the RICO case to Justice, Pelletier expected a full-scale prosecution to begin immediately after his exit.

“From our conversations with DOJ,” Angueira told TheDC, “I was left with a very strong impression that Paul Pelletier was ensuring that the investigation was proceeding to conclusion and that the case would be taken down in two waves: a smaller case initially followed by a bigger case after the initial takedown of the smaller case.”

“We were not told [the] specifics of … these two waves. However, it was very evident that the case had expanded as a result of the DOJ investigation.”

Pelletier, he said, called him and Raynor shortly after his retirement. “After he left, he advised us sometime in early May — the week after he left — that he was surprised the case had not gone public yet,” Angueira recalled. “As a former federal prosecutor, [he said] matters become public when indictments are announced and arrests are made.”

Angueira wasn’t sure what specific charges would be filed against CFC executives and others.

“The case against CFC involves the use of false and misleading financial statements used to improperly secure federal funds to the tune of several billion dollars,” he explained. “So there is an aspect involving false claims against the U.S. government and U.S. taxpayers, together with various tax crimes related to CFC’s misreporting of income and illegally manipulating co-op rules.”

With the resolution hanging in the air and no arrests made, Raynor said, the next shoe to drop was a third investigation of Prosser.

It “probably started in July 2011 and closed out in early October 2011,” Raynor said.

For a third time, Prosser was cleared of wrongdoing.

DOJ springs a leak

While the DOJ was taking its final look at Prosser, its case against the CFC suspects sprung several leaks.

According to the source on the team preparing to make financial-crimes arrests, DOJ investigators discovered that several members of its team had been compromised, and that at least two were corrupt. Information from the investigation was being passed to the Vinson & Elkins law firm and the Alvarez & Marsal accounting firm.

By this time, the case had grown so large that the DOJ’s team had grown from just two prosecutors to more than 25, making the leak difficult to find.

“What happened was the team was assembled — some members from the U.S. Virgin Islands and some main Department of Justice personnel,” TheDC’s source said. “It was discovered that information that was supposed to have been confidential was leaving U.S. DOJ and going straight into Vinson & Elkins’ and Alvarez & Marsal’s hands.”

“Subsequently, individuals were brought in from all different areas in one meeting. Individuals who were on the team [who were compromised] were then removed. There were 26 or 27 prosecutors that met, [and] were all called into one city.”

The source added that the summit meeting, held during the summer of 2011 in Washington, D.C., led to the discovery that two prosecutors had accepted cash bribes. That led to the team’s partial dismantling.

“There were two individuals who were the main players,” the source said. “What happened was those individuals who were a part of the team — the team broke down significantly. Individuals were moved from the investigation because of their involvement, whether or not they were paid.”

“We have information showing that they — the two main players [who were bribed] — agreed not to move it [the investigation] in the way that it should have. The group of prosecutors from D.C. called CFC ‘the Godfather.’”

By this time, the source added, arrest teams were already in place around the country. “The indictments were to be served with teams already in place. The assets, the residence[s] — all these things were already identified. The teams were actually marked to strike. And with this issue in DOJ, of course, that whole thing went to sleep.”

“It never happened. There were going to be arrests.”

Alleged bribes and corruption on the Virgin Islands

The alleged corruption ultimately reached the rarefied air of the Virgin Islands’ current governor, Democrat John de Jongh. TheDC’s source alleges that collectively, de Jongh, Attorney General Vincent Frazer, and assorted Virgin Islands legislators accepted at least $20 million in cash bribes to quash local concerns about CFC’s financial irregularities.

That money, the source said, was meant to insure against the possibility that concern about financial crimes at CFC would spring from the Virgin Islands and spread to the nationwide public.

During ICC’s bankruptcy proceedings, CFC officials testified that only two offers had surfaced for the company’s assets — including the Virgin Islands Telephone Company.

At best, they said, CFC would recover between $1 million and $10 million if another buyer purchased those assets. Once expenses were paid, CFC’s net proceeds from its loan to ICC would be next to nothing.

But just days later, CFC’s quarterly filing with the Securities and Exchange Commission showed that it was carrying the ICC loan on its books at a value of $525 million, a massive premium over what its officials told the federal bankruptcy court it was actually worth.

Raynor told TheDC that CFC “had to buy the assets” to justify the financial irregularities on its books — including the funds siphoned from RTFC.

“Now you have CFC in a position where they’re going to be operating the Virgin Islands Telephone Company and they need to get their acquisition through the local PSC [in the Virgin Islands], as not only did the bankruptcy judge have to sign off on it, but the Public Service Commission had to sign off on it,” Raynor said.

“So you had CFC organizing to acquire this company because they can’t afford to recognize the loss to continue their accounting fraud. And that’s where the cooperation with the governor became absolutely key.”

Prosser said CFC needed de Jongh to “make sure that the PSC not only approved the sale, but would, God willing, allow enough cash flow to come through to help them support the [$525 million] valuation that they put on this [loan].”

“When we say the governor was instrumental in this case — without the governor’s involvement that sale never would have happened,” Prosser said.

“At a certain point,” Raynor added, “the Public Service Commission was fighting the bankruptcy and supporting Jeff Prosser. Then all of a sudden, overnight, that attorney got removed, a new attorney came in and they were in line with CFC.”

According to Prosser, the governor fired the PSC’s outside counsel and hired the Virgin Islands attorney general — an employee of the governor — to represent the PSC.

TheDC’s source said the governor and Virgin Islands Attorney General Vincent Frazer have both accepted bribes, explaining that “there have been a significant amount of transactions.”

Speaking of officials in Frazer’s office, the source explained: “What they did — of course this is a civil matter — is arrange these meetings. Then you have the local government behind the stage participating in something they shouldn’t have been participating in and, of course, being financially rewarded for their assistance.”

The source points to an Oct. 6, 2010 CFC press release in which CFC Chief Financial Officer Steven Lilly publicly thanked the Virgin Islands government for supporting the co-op during its purchase of the local phone company, which had been among ICC’s assets.

“CFC thanks Governor John de Jongh, the commissioners, staff and consultants of the Virgin Islands Public Services Commission and other public officials who were supportive throughout this process,” Lilly said in the release.

That same source, who believes the press release was a tactical error on CFC’s part, said de Jongh, Frazer and others ultimately accepted “in excess of $20 million.”

Several individuals who were involved with the scheme and have evidence of the massive bribes, the source added, are now cooperating with federal investigators.

“There are individuals who have been involved with the governor of the Virgin Islands who have been turned,” the source said. “More than one.”

In addition to Frazer and de Jongh, TheDC’s source said, several members of the Virgin Islands legislature are under investigation for their parts in the corruption related to CFC’s alleged financial corruption.

The source pointed to a recent federal law-enforcement raid at the Virgin Islands legislature as evidence. The Oct. 5, 2011 raid, officials told the Associated Press, targeted a government building’s central computer system and the office of at least one Virgin Islands senator.

The Department of Justice has been silent on the reasons for this raid, saying only that 25 agents from the Internal Revenue Service, the Drug Enforcement Administration and the U.S. Marshall Service were involved. The AP reported that an FBI spokesman declined to say who was being targeted and whether any evidence was seized.

Cold case file

As it stands, TheDC’s source explained during an interview, no suspects under sealed indictment have been arrested, but the DOJ is planning to execute arrest warrants at some point in the future. The sticking point, according to the well-placed source, is that the Department of Justice — particularly Attorney General Eric Holder — does not want to admit public officials accepted bribes.

Raynor said that while the DOJ has failed to act on its sealed indictments, his client — Jeffrey Prosser — is still being treated unfairly “as a result of criminal activity that they did in the bankruptcy case and [those under indictment] are still benefiting from.”

“And it’s still ongoing even though they know they’re sitting on sealed indictments.”

Raynor was quick to reiterate that CFC solicits and receives funds from the federal government, adding a new criminal dimension to every financial filing it uses to secure public money.

“Every financial statement they file, every dime they go to get from federal government money, it’s another crime,” Raynor said. “And you have the people who are sitting on sealed indictments who know this is going on. And they’re allowing the criminal activity to continue.”

Bribed officials, he insists, remain on the taxpayers’ payroll at the Justice Department without any accountability.

Reached for comment, Pelletier refused to back up the allegations. “I’m not in a position to comment on the existence or non-existence of a federal investigation,” Pelletier said when TheDC presented him with the facts of the case. “But, what I’ve just heard sounds kooky and implausible.”

Gov. de Jongh’s spokesperson directly attacked the revelations. “What your sources have told you about Governor John P. de Jongh, Jr. (D-VI) is completely false,” de Jongh communication director Jean Greaux told TheDC.

Greaux also made a threat seemingly aimed at scaring TheDC away from running this story.

“Given that your information is false and that you cannot confirm these rumors, you will be going down a slippery slope if you print this story,” Greaux wrote. “If you do print inaccurate information about the governor, we will seek a correction and possible legal action.”

When provided with an outline of this report, Justice Department spokeswoman Tracy Schmaler refused to comment.

Spokespersons for CFC, RTFC, Deloitte, Vinson & Elkins, Alvarez & Marsal, Sharpe and Frazer did not return requests for comment.

During his State of the Union Address on Jan. 24, President Obama directed Attorney General Holder to create a special unit inside the DOJ to address a broad category of financial crimes that includes large-scale institutional fraud.

“We’ll also establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments,” Obama said. “Some financial firms violate major anti-fraud laws because there’s no real penalty for being a repeat offender. That’s bad for consumers, and it’s bad for the vast majority of bankers and financial service professionals who do the right thing.”

Follow Matthew on Twitter