Oct. 16 (Bloomberg) -- U.S. prosecutors are adding employees to investigate New York-area financial firms for possible fraud linked to a global credit crisis that has wiped out $30 trillion of equity value in the past year.

The extra personnel will use strategies that proved successful in prosecuting executives of Enron Corp. and Refco Inc., U.S. Attorneys Michael Garcia of Manhattan, Benton Campbell of Brooklyn and Christopher Christie of Newark, New Jersey, said. A central question will be whether executives lied to investors about securities linked to overvalued subprime mortgages that sparked the credit crisis, the three said in interviews.

``It usually boils down to some type of fraud, some type of misrepresentation,'' said Garcia, 47, whose office covers the headquarters of most U.S. financial companies as well as the exchanges where their shares are traded.

Triggered by bankruptcies or stock losses linked to the credit crisis, the U.S. has begun investigations of mortgage lending, securitization and failed banks. Grand juries in Manhattan, Brooklyn and New Jersey are probing Lehman Brothers Holdings Inc., according to the firm's lawyer, Harvey Miller. Nationally, the FBI is looking into 26 firms, including American International Group Inc., a senior law-enforcement official said.

Bear Stearns

The probes follow the collapse of Bear Stearns Cos. earlier this year, the bankruptcy last month of New York-based Lehman, the government takeover of Fannie Mae and Freddie Mac and the rescue of New York-based AIG.

Garcia's white-collar crime unit now has 20 prosecutors, up from 17, and he has assigned eight lawyers to a new mortgage- fraud division. One case this month led to a 10-year sentence for a man who duped homeowners facing foreclosure out of $2.5 million.

In addition to 12 prosecutors working on securities-fraud cases, Brooklyn's Campbell has created a task force to probe the subprime fallout. He said he's made white-collar crime a priority. Christie has added a prosecutor to his 10-person securities-fraud unit.

``There are various iterations -- valuations questions, insider trading, material misrepresentations,'' Campbell said. ``What we are generally seeing is the same kind of fraudulent activity. But it's the factual background to the fraudulent activity that's different.''

Books Were Cooked

In the last wave of white-collar prosecutions, capped by the imprisonment of WorldCom Inc. Chief Executive Officer Bernie Ebbers and Enron CEO Jeffrey Skilling, prosecutors convinced juries that executives knew their companies' books were cooked.

Aware that jurors may get confused by financial instruments such as credit-default swaps, the government is looking to simplify prosecutions in the same way.

In Manhattan, prosecutors this year won convictions against top executives at New York-based Refco, which engaged in complicated futures transactions. They focused on lies CEO Phillip Bennett and President Tone Grant told investors about the now-defunct firm's operations.

``Refco is an example of a model'' for future prosecutions, Garcia said.

Campbell obtained indictments of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin in June. The two, who pleaded not guilty, face fraud charges for allegedly cheating investors out of $1.6 billion.

Credit Suisse

Last month, Brooklyn prosecutors charged two ex-Credit Suisse Group Inc. traders with fraudulently selling corporate clients more than $1 billion of auction-rate securities linked to subprime mortgages, which they claimed were backed by U.S. guaranteed student loans.

Campbell, 42, a former member of the Justice Department's Enron task force, said his staff has begun to see ``classic'' signs of fraud emblematic of the Enron era.

``How valuation questions were handled or how these structured finance vehicles were put together, for example, look very familiar,'' said Campbell, who declined to discuss the specifics of his ongoing investigations.

The Brooklyn prosecutor has opened investigations into whether Lehman executives misled investors about the firm's financial health and whether UBS AG lied to investors about securities backed by subprime mortgages, according to a person familiar with the probes.

12 Subpoenas

At a hearing today in U.S. Bankruptcy Court in Manhattan, Lehman attorney Harvey Miller of New York-based Weil Gotshal & Manges said 12 people have been subpoenaed as part of a grand jury investigation. Prosecutors are focusing on the auction rate securities market, Miller said.

Doug Morris, spokesman for Zurich-based UBS, and Lehman spokesman Hugh Burns declined to comment.

New Jersey U.S. Attorney Christie has subpoenaed documents to determine whether Lehman failed to fully disclose its eroding financial condition at the time of a $6 billion stock offering, according to people familiar with the matter.

``The scandals in the earlier part of this decade were much more contained,'' Christie said. ``Here, you have something that is potentially much broader across the marketplace. As a result, it's going to make it more time-consuming to figure out.''

Prosecutors will rely on e-mails obtained through subpoenas, interviews of firm employees and forensic accounting as they look for evidence. In the Bear Stearns case, for example, Cioffi and Tannin's e-mails showed their disparagement of the securities they were touting to clients, Campbell said.

`Great Tool'

``E-mails are a great tool,'' said Christie, 46, who declined to comment on the specifics of any probe. ``People seem freer to say things in e-mails that they might not say otherwise.''

The first challenge for the U.S. attorneys in prosecutions resulting from the subprime collapse will be distinguishing normal business activities from fraud.

``It's not a crime to make bad business decisions,'' Campbell said. ``What gets people in trouble is when they lie, cheat or steal.''

Defense lawyer Mary Jo White, who served as the U.S. attorney for Manhattan from 1993 to 2001 and is now a partner at New York's Debevoise & Plimpton, said her clients and colleagues have a ``real concern'' that some prosecutors or regulators will bow to political pressure and bring unwarranted cases.

She said the collapse of banks like Lehman and New York- based Bear Stearns will inevitably trigger official inquiries, including some that may not be justified by the facts.

`Good Faith'

``People doing their job in good faith should not find themselves under massive investigation,'' White added.

Garcia said that prosecutors won't begin a case merely because a company collapsed. Rather, referrals from the Federal Bureau of Investigation or Securities and Exchange Commission, as well as allegations from witnesses who ``walk-in through the door,'' may generate subpoenas and grand juries in cases that will develop quickly, or possibly ``take years.''

``It's the old Watergate question,'' said James McMahon, chief of Campbell's securities fraud section, on how they will decide whether to bring charges. ``What did they know and when did they know it?''

To contact the reporters on this story: David Glovin in U.S. District Court, Southern District of New York, Manhattan, at dglovin@bloomberg.net; Patricia Hurtado in U.S. District Court, Eastern District of New York, Brooklyn, at pathurtado@bloomberg.net; David Voreacos in U.S. District Court, District of New Jersey, in Newark, New Jersey at dvoreacos@bloomberg.net.

Last Updated: October 16, 2008 17:27 EDT