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On March 30, the SEC announced charges against a Michigan pastor, his company, and business associate (Defendants) for allegedly cheating church members, retirees, and laid-off autoworkers out of approximately $6.7 million by convincing them to invest in a “successful” real estate scheme. The complaint alleges the pastor presented the investment opportunity at churches nationwide and through media outlets using “faith-based rhetoric” and guaranteed high returns. The Defendants—who were never registered to sell investments—raised the money from more than 80 investors who were told their money would be kept in qualified IRAs and could be rolled over tax-free. However, investors stopped receiving agreed-upon interest payments, and to date, Defendants owe more than 40 Michigan-based investors $2 million in past due promissory notes and also allegedly have obligations to investors outside the State of Michigan. The complaint claims violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.
Federal Judge Sentences Ex-Mortgage Banker to 12.5 Years for $30 Million Scheme, Fined $22.5 Million in Forfeiture and Restitution
On March 24, the United States Attorney for the Eastern District of New York announced that District Judge Arthur Spatt levied a 12 ½ year prison sentence against the former head of a mortgage lending bank charged in connection with a conspiracy to commit bank fraud in a $30 million scheme to deceive lenders by lying about property values. The former CEO of a New York state licensed mortgage bank allegedly artificially inflated home prices through a series of same-day transactions, submitted loan applications and appraisals to “warehouse lenders” (financial institutions which fund loans for companies lacking the assets to fund the loans themselves) with values nearly double the true sales prices of the homes, and “inflated [his] own personal assets, used straw purchasers and sham trust entities, and concealed significant liabilities to get loan approval, typically obtaining proceeds for 80 to 100-percent more than the actual value of the homes.” The defendant, found guilty by a jury in January 2016, was also ordered to pay $22.5 million in forfeiture and restitution as part of his sentence.
On March 8, a U.S. District Court Judge sentenced a New Jersey lawyer to a four year prison term for participating in a mortgage fraud scheme that tricked lenders into releasing $40.8 million based on fraudulent loan applications. The investigation, led by the District of New Jersey U.S. Attorney’s Office, concluded that the defendant and his co-conspirators created false documents to help “straw buyers”—“people with good credit scores but lacking the financial resources to qualify for mortgage loans”—appear more creditworthy so they could purchase properties. The defendant then falsified mortgage loan applications and supporting documents, submitted the paperwork to mortgage lenders, and laundered a portion of the loan proceeds through accounts controlled by the defendant and co-conspirators. In addition to the prison term, the defendant was sentenced to three years of supervised release, ordered to pay restitution of over $13.1 million and required to forfeit over $2.41 million of fraudulent proceeds.
On February 23, the FTC announced that it had reached a settlement with the final defendant facing charges originally brought against six mortgage relief operations in 2014. The FTC had alleged that the defendants preyed on distressed homeowners by claiming to be able to lower mortgage payments and interest rates or prevent foreclosures, while illegally charging advance fees. The stipulated order requires the defendant to pay $105,487, which represents the amount of money he received from the scam, and imposes a total judgment of more than $1.7 million which will become due immediately if it is found that the defendant misrepresented his finances. The defendant was also banned from the mortgage and debt relief business. Certain other defendants reached settlements in 2016, which, in addition to imposing a judgment of more than $1.7 million, also prohibited them from participating in the mortgage and debt relief business.
On February 10, the U.S. Court of Appeals for the Seventh Circuit issued an opinion, in which it held that a District Court had erred in failing to consider a bank’s responsibility for nearly $900,000 in losses resulting from a scheme in which defendants persuaded the bank to issue mortgage loans to borrowers who, the defendants knew, were unable to repay the loans. See U.S. v. Litos, et al., Nos. 16-1384, -1385, -2248, -2249, -2330 (7th Cir. Feb. 10, 2017) (Posner, R.). At issue before the appellate court was the propriety of the restitution, in the amount of $893,015. The district judge had ordered the defendants to pay such restitution to the bank, on the ground that they had misled the bank by pretending that the buyers were the source of the down-payment, when it was defendants themselves who had supplied the money.
In remanding the matter with instructions to re-sentence defendants based on the bank’s role in allowing the fraud to occur, the appellate panel determined that the bank’s professed ignorance as to the source of the down payments and the creditworthiness of the loan applicants was “reckless” in light of the information that was available at the time of the transaction. Specifically, the appellate court held that, based on the record, the fraud evident in the loan applications was “transparent,” and that the bank had “ignored clear signs” of problems with the loans. The appellate court held that, as a result, the lower court needed to determine whether the bank’s lack of clean hands rendered it partially responsible for the losses. Among other things, the appellate panel noted statements by the district judge that the loan applications were “a joke on their face” and “laughable,” as well as the fact that the bank had approved multiple loans to the same individuals in short spans of time. Accordingly, the court ordered the district judge to consider whether the bank is entitled to restitution.
A federal jury has ordered two Texas-based home mortgage entities and their chief executive to pay nearly $93 million for defrauding the U.S. government into insuring thousands of risky loans, the Department of Justice announced on November 30.
The mortgage companies and their former CEO were found liable for violating the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by, among other things, failing to maintain an adequate quality control program; and submitting false annual certifications regarding quality control requirements. Specifically, the government contended that defendants operated over 100 “shadow” branch offices that originated FHA-insured mortgage loans without obtaining the necessary HUD approval, and which were therefore not subject to HUD oversight.
Ultimately, the jury awarded $92,982,775 in total damages, including $7,370,132 against the CEO specifically—a sum that is subject to mandatory tripling. Further penalties relating to the FIRREA violations are expected, which U.S. District Judge George Hanks will set at a later date.
On January 22, Virginia State AG Mark Herring announced a settlement with eleven banks over their alleged misrepresentation of residential mortgage-backed securities to the Commonwealth of Virginia and the Virginia Retirement System. Virginia recovered more than $63 million collectively from the banks involved, making it the “largest non-healthcare-related recovery ever obtained in a suit alleging violations of the Virginia Fraud Against Taxpayers Act,” and, according to AG Herring, “one of the largest of its kind in the nation.” As part of the settlement, the Commonwealth dismissed the claims against the defendants with prejudice and the defendants did not admit liability.
Owner of Mortgage Company Sentenced to Serve More Than 11 Years for Role in $64 Million Mortgage Fraud Operation
On September 24, the DOJ released a statement regarding the sentencing of the owner of a Florida mortgage company for allegedly organizing a mortgage fraud scheme. In July 2015, the owner, along with his business partner and a senior underwriter for the mortgage company, pleaded guilty to the mortgage fraud scheme that resulted in $64 million in losses to the FHA. The August 2014 indictment stated that the three individuals edited borrowers’ loan applications, altering important information so that they appeared to be qualified for FHA loans when, in fact, they were not. As a result of the September sentencing, the owner of the company will pay more than $64 million in restitution and forfeit $8 million in illegal profits. The owner’s business partner was sentenced to serve 41 months in prison; in addition, he will pay more than $7 million in restitution and forfeit $400,000 in illegal profits. The company’s underwriter will pay more than $24 million in restitution and serve 51 months in prison. A total of 24 defendants were charged in the case, which was jointly investigated by the HUD-OIG and the DOJ.
On July 14, the DOJ, in coordination with HUD’s Office of Inspector General and the U.S. Attorney’s Office for the Southern District of Florida, announced that a Miami-area real estate developer and mortgage company owner, his business partner, and a senior underwriter with the mortgage company each pleaded guilty to a mortgage fraud scheme that resulted in $64 million in losses to the FHA. According to the August 2014 indictment, the three defendants knowingly participated in a scheme to alter important information contained in potential borrowers’ loan applications so that they appeared qualified for FHA-insured loans when, in reality, they were not qualified. According to the DOJ, the developer/owner and his business partner “admitted to pressuring their employees to approve and close loans using earnings statements and verification of employment forms that made it appear as if the borrowers had higher incomes and more favorable work histories than they actually did, and documents falsely improving or explaining borrowers’ credit histories.” The senior underwriter admitted to providing false information to her co-workers and endorsing borrowers’ applications when she knew that they did not qualify for the loans. Eventually, many of the loans went into foreclosure and HUD was obligated to pay the outstanding loan balances to the financial institution investors. To date, 25 individuals have pleaded guilty to offenses related to this mortgage fraud scheme.
On July 8, the DOJ announced the prison sentences of three real estate developers for their roles in an alleged mortgage fraud scheme that resulted in over $27 million dollars in losses. Convicted in November 2014 of wire fraud, bank fraud, and conspiracy, the three individuals “engaged in a scheme in which they facilitated payments to straw buyers as well as the submission of false loan applications on behalf of the straw buyers to secure mortgages to purchase units” in the condominium developments they controlled or managed. Post-sale, the individuals retained profits from the sales and control over the units. According to trial evidence, two of the individuals funneled some of the loan proceeds to shell companies to pay the buyers’ closing cash obligations and mortgage payments. Shell companies were also used to divert over $2 million in fraudulent funds to bank accounts in Switzerland and Liechtenstein. Because the defendants and their co-conspirators were eventually unable to make mortgage payments, dozens of condominium units entered into foreclosure, causing the FHA, Freddie Mac, Fannie Mae, and other private lenders a combined loss of $27.8 million. In addition to the varying prison sentences, U.S. District Judge Seitz ordered each defendant to forfeit over $35 million in fraudulent proceeds and to pay over $21 million in restitution.
- Daniel P. Stipano to discuss “Beneficial Ownership: You have questions – We have quick answers” at the ABA/ABA Financial Crimes Enforcement Conference
- Moorari K. Shah to discuss "Legal & regulatory issues – Next wave of regulatory policy" at the Marketplace Lending & Alternative Financing Summit
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at an American Bar Association webinar
- Kari K. Hall and Christopher M. Walczyszyn to speak on the "Understanding updates to Regulation CC to ensure effective check processing" at a National Association of Federal Credit Unions webinar
- Daniel P. Stipano to discuss "ACAMS Moneylaundering.com Year-End Compliance Review and 2020 Outlook" at an ACAMS webinar
- APPROVED Webcast: Periodic reporting made easier
- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference