Securities and Exchange Commissioner Philip A. Loomis Jr. yesterday called for a congressional inquiry into the use of bankruptcy laws by organized crime.
Testifying on bankruptcy law reform before a Senate subcommittee, Loomis described how criminals milk the assets and credit of a corporation and then declare bankruption to thwart the claims of creditors. Attorney General Griffin B. Bell, another witness, declared, "It is a very good way to make money." Neither official was able to supply supporting data to the subcommittee on the extent of the practice, but each promised to do so.
Loomis explained how such schemes work: Organized crime seeks to acquire the shell of a bankrupt corporation with public stockholders because it already is registered with the SEC. The purchasers thereby avoid the scrutiny a new company would have to under go.
After changing the corporate name, the criminals proceed in classic fashion to buy shares for their own associates, pump up the value of the worthless stock through false reports that stir market interest, and then sell out, leaving other investors holding the bag.
Another fraud involves sale of limited partnership interests in the corporate shell to provide purchasers with a $3 loss carry-forward for tax purposes for every dollar invested.
Loomis said this has led wealthy individuals to invest substantial sums to be few legitimate uses for the corporat-shells, and the damage to the public has been substantial," he added.
Both Loomis and Bell, as well as Donald C. Lubick, deputy assistant Treasury secretary for tax legislation, testified in favor of the bankruptcy reform bill introduced last month by Sens. Dennis DeConcini (D-Ariz.) and Malcolm Wallop (R-Wyo). The bill is a watered-down version of the House's bankruptcy reform which was withdrawn after a floor amendment cut the essence out of it.
The House sought to create an independent bankruptcy court system an independent bankruptcy court system consisting of judges appointed by the President and U.S. trustees named by the Attorney General.
This change, which would have given bankruptcy referees equal status with district court judges, was opposed bitterly by the prestigious Judicial Conference. Political reality, a staffer said, dictated such a bill would never pass. S22266 would maintain the present system, but would grant bankruptcy judges longer terms, higher salaries and more staff.
While there seems to be a consensus that litigation arising out of shifts from one chapter to another out of shifts from one chapter to another of reorganization in bankruptcy is wasteful, the SEC objected strongly to the House proposal to consolidate Chapters X and XI without making provision for a mandatory independent trustee for public companies. The trustee is charged with protecting the interests of common stockholders. S2266 mandates a trustee.
The House sought to prohibit reaffirmation of debt agreements, whereby a bankrupt consumer would continue paying old debts in exchange for receiving new credit. This measure, designed to assure a fresh start, was unpopular with finance companies. S2266 allows reaffirmation within 30 days.
The Senate version also restores priority for federal taxes in bankruptcy proceedings that the House had sought to reduce. Sen. DeConcini admitted, though that he had difficulty justifying why the government-which means the public taxpayer-should be given preferential treatment over the consumer.
Lubick replied that the private sector, unlike the government, chooses its business clients and therefore can be more careful in deciding what risks to take. Moreover, he added, giving the IRS priority will discourage the use of bankruptcy as a device for avoiding payment of liabilities by persons who have converted trust funds, like Social Security withholdings, for their private use.