FBI targets 14 firms in subprime probe

It is looking for possible accounting fraud, insider trading and other violations and is understood to be investigating the whole gamut of the industry - from housebuilders and mortgage sellers to the big Wall Street banks.

Morgan Stanley, Goldman Sachs and Bear Stearns disclosed in regulatory filings yesterday that they were cooperating with requests for information from various, but unspecified, regulatory and government agencies. None would comment today.

Bureau investigators did not identify companies involved but said their probe began last spring as the market for poorer people's mortgages began to sour.

The FBI has been warning for years that mortgage fraud is a significant and growing problem. In 2006, it logged 35,600 suspicious-activity reports related to mortgage fraud, up from 22,000 the year before and just 7000 in 2003.

Many cases the FBI has brought so far have focused on local or regional mortgage fraud rings that involve speculators, loan officers, brokers and other housing professionals but by linking up with the Securities and Exchange Commission it has signalled it is widening the net. Its new targets include:

Advisers who colluded with borrowers to get loans they could not afford.

Banks that failed properly to disclose the high risk of default on some loans.

Accounting fraud committed by financial firms that held these loans on their books at inflated values or sold them to other investors without disclosing the risks.

Insider trading where executives sold stock ahead of big writedowns due to the crisis.

Timing offences where hedge fund managers pulled their own money out of a fund containing mortgages when they became aware of valuation problems, but left customers in.

An FBI insider told Business Week magazine recently: "The question of fraud goes to the entire process - where the loans were created, whether there was fraud in their creation, or misrepresentation as to the quality of the loans in the sales process."