Subprime probe may lead to hedge funds, others: FBI

WASHINGTON (Reuters) - The Federal Bureau of Investigation's probe of the subprime mortgage industry could uncover fraud involving Wall Street investment banks, private equity firms or hedge funds, the head of the agency said on Thursday.

Robert Mueller, FBI director, told an American Bar Association conference he expected to see more corporate fraud cases in the future "because of the ripple effect" of the subprime mortgage crisis.

The bureau's investigation of potential fraud in the U.S. home mortgage industry now encompasses 19 companies in "cases that may have a substantial impact on the marketplace," Mueller said.

"We are targeting accounting fraud, insider trading and deceptive sales practices. These investigations may well lead to other instances of fraud, from investment banks and private equity firms to hedge funds."

The subprime probe demonstrates why independent members are needed on corporate boards of directors, he said.

"These investigations further emphasize the need for independent board members, auditors and outside counsel," he said. "Shareholders rely on the board of directors to serve as the corporate watchdog. But often, we see conflicts of interest in the corporate suites."

Mueller also told the meeting of lawyers that their corporate clients should come forward and admit any wrongdoing before the FBI or Justice Department become involved.

"Executives who let the situation escalate to the point of a sudden restatement -- and a resulting loss of shareholder confidence -- often do greater harm to the companies they are trying to protect than if they had exercised early intervention," he said.

Mueller did not identify any of the companies targeted in the FBI's subprime investigation.

To date, the FBI has publicly acknowledged the identity of only one company involved in the probe, Doral Financial Corp (DRL.N). A former Doral treasurer was indicted for investment fraud last month. He denied the allegations and the company has declined to comment.

The largest U.S. mortgage lender, Countrywide Financial Corp CFC.N, also is under FBI investigation, authorities have said, although the FBI has declined to comment and Countrywide said it was unaware of any investigation.

When the FBI disclosed its industry investigation, major investment banks Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and Bear Stearns Cos Inc BSC.N each said the government had asked them for information, but there was no confirmation of any FBI role. Beazer Homes USA Inc (BZH.N) said last year it received a federal grand jury subpoena related to its mortgage business.

The credit market crisis traces its roots to defaults in the subprime mortgage market last year. Losses and write-downs have choked the credit market and could eventually approach $1 trillion, the International Monetary Fund said earlier this month.

(Reporting by Julie Vorman; Editing by Andre Grenon)