As of the last few months – cryptocurrency brokerage firms such as Three Arrows Capital, and Celsius Network, Ltd. filed for Chapter 11 Bankruptcy. Unfortunately for some of their customers, there are serious allegations of misappropriation of funds, mismanagement of company assets, and allegations that these companies operated as Ponzi Schemes. Although at this juncture, these are mere allegations – the allegations could rise to the level of bankruptcy fraud. If that is the case, what are the consequences of bankruptcy fraud? This blog will discuss how certain pre- and post-petition actions of a debtor (or its executives) which can have criminal implications during and after the bankruptcy proceeding.
The Bankruptcy Process
At the beginning of any bankruptcy case, there will be an investigation by either the Standing Trustee (Chapter 7 or Chapter 13) or the Office of the Trustee (Chapter 11) to determine the pre- and post- petition actions of the debtor. Creditors may also investigate the pre- and post-petition actions of the by way of Rule 2004 of the Federal Rules of Bankruptcy Procedure which allows interested parties to “investigate the acts, conduct, assets, liabilities, financial condition of the debtor, and the operation of the debtor’s business…” Here, the purpose of the investigations is to ensure that debtor has not committed any acts akin to bankruptcy fraud.
Bankruptcy Fraud
In reference to finding any potential criminal liability within the bankruptcy context, interested parties (including creditors and Trustees) will scrutinize certain financial actions and conduct of the debtor to look for evidence of bankruptcy fraud that usually takes form as the following types conduct:
- knowingly concealing property or other assets from the bankruptcy proceeding
- pre-bankruptcy transferring of assets to conceal assets;
- destruction of records to hide illicit activity;
- falsifying or concealment of documents;
- falsifying bankruptcy schedules;
- engaging in deceptive business practices;
- embezzlement of funds belonging to the bankruptcy estate; and
- committing perjury while in bankruptcy.
Of course, for a person to be charged with bankruptcy fraud, the conduct of the individual or its management must be done knowingly or intentionally (conscious aim or objective to commit the act) – not just by mistake.
As an added note, it is important to also understand that if there are any third parties (friends and family members) that were involved in assisting the debtor in carrying out any of the activities mentioned above, the third-party actor can also be held criminally liable and charged with a crime.
For example, you own a house and transfer the house to a friend before you file for bankruptcy. Unbeknownst to you and your friend, both of you can be held liable for bankruptcy fraud (since the presumptive intent was to transfer the property pre-bankruptcy in order to conceal the asset from creditors and the bankruptcy estate). Pre-petition transfers of real and personal propety happens often so it is important to speak with an attorney before transferring any assets prior to filing for bankruptcy.
The Office of the U.S. Trustee and Criminal Prosecutors
Ordinarily, when we discuss criminal liability in the context of bankruptcy, we often discuss the Office of the US Trustee (an arm of the Dept. of Justice) and its role. It is the job of the Office of the Trustee to oversee all bankruptcies. Therefore, once the Office of the Trustee finds that there is potential criminal conduct on the side of the debtor (or its management), the Office of the Trustee has a duty to report to criminal prosecutors from the Department of Justice and Office of the U.S. Attorney General about all potential criminal activity of the debtor.
Therefore, the Office of the United States Trustee will report to the Dept. of Justice any acts by the debtor that fall within the purview of U.S.C. 18 §§ 152 & 157 described below:
- Section 152 describes any action relating to “knowingly and fraudulently” misrepresenting material facts, concealment of assets, destruction and falsifying documents, perjury etc.
- Section 157 (codifying bankruptcy fraud) criminalizes any attempt to use bankruptcy relief in order to defraud and/or “concealing such a scheme or artifice or attempting to do so" made "a false or fraudulent representation, claim, or promise" related to a bankruptcy filing.
Once the Department of Justice investigates the pre- or post- bankruptcy conduct of the debtor and has enough evidence to support the allegations, criminal charges will be brought.
A conviction for bankruptcy fraud can carry a prison sentence of up to 5 years and the Court can impose fines up to $250,000. A great example of a criminal bankruptcy fraud case in New Jersey is the case of Joe and Teresa Giudice. Here, the debtors were investigated, and prosecutors determined that the debtors (among other things) concealed assets, committed perjury, and falsified documents presented to the bankruptcy court. Accordingly, both debtors were denied a discharge, were sentenced to prison and were forced to pay hefty fines.
Conclusion
As discussed above, the Office of the Trustee (as well as creditors) have the right to investigate the debtor (and management) for any pre- and post-petition criminal activity. Accordingly, it is important to be truthful and honest with your bankruptcy attorney so your bankruptcy attorney can properly advise you of the consequences of certain pre- and post- petition conduct. If this sounds anything like your situation, the best thing for you and your peace of mind is to speak with an experienced bankruptcy attorney to discuss your options for your particular situation. Give us a call today for a free consultation.
