Compliance

Two former managers in charge of Bear Stearns hedge funds that invested in subprime bonds and derivatives were found not guilty of fraud charges Tuesday afternoon in New York. A jury in Federal District Court in Brooklyn acquitted former Bear executives Ralph Cioffi and Matthew Tannin, believing the two men did not lie to investors by presenting an upbeat picture without disclosing that the two funds they managed were plummeting in value. In particular, Mr. Cioffi was found not guilty of insider trading charges on accusations that he moved $2 million he had invested in one of the failing subprime hedge funds to another less risky fund while telling investors he was adding to his position. The government accused them of defrauding at least 300 investors out of $1.6 billion. The two had been charged with three counts of securities fraud and two counts of wire fraud. They still face civil damages in regard to the hedge funds. Massachusetts sued Bear Stearns Asset Management, accusing Mr. Cioffi of making hundreds of trades on behalf of the hedge fund with the approval of the fund's independent directors. In late 2007 Bear disclosed in an SEC filing that the funds were the subject of a criminal investigation. Bear, which collapsed in early 2008, was a major player in the subprime mortgage market. Previous to its collapse, Bear operated a trading desk and a warehouse unit, and also owned a mortgage banking firm called Encore Credit. (Photos: Bloomberg News)

Kawana Latrell Melvin of Atlanta pleaded guilty in Superior Court of Clayton County in Georgia to felony charges that she operated a mortgage banking business without a license. She also admitted to making a false statement with respect to her eligibility to work in the state's residential mortgage industry. The Georgia Department of Banking and Finance referred this matter to the State Attorney General's Office after learning she continued to work a as mortgage loan processor for a residential mortgage licensee in violation of a final cease and desist order. Melvin used a false document purportedly written by the Commissioner of the Department that provided that she was not prohibited from engaging in residential mortgage activities. Melvin has been placed on probation for a period of three years and must pay a fine in the amount of $2,000. While on probation, she is prohibited from obtaining employment in any real estate or mortgage business and cannot apply for or obtain professional licenses in either of these industries.

William Everett Nichols of Alexandria, La., president and sole shareholder of First Fidelity Mortgage, pleaded guilty to defrauding Sabine State Bank out of $2.9 million. Sentencing is scheduled for Feb. 4, 2010. According to Donald W. Washington, U.S. attorney for the Western District of Louisiana, Sabine State Bank provided a line of credit to First Fidelity Mortgage, monies that were in turn used by First Fidelity to fund mortgages for its customers. The customer notes pledged by First Fidelity secured this line of credit at Sabine State Bank. Nichols devised a scheme by which he prepared fraudulent notes by forging signatures of borrowers and notaries public, and would then deliver them to Sabine State Bank as collateral in order to cause the bank to deposit more money into First Fidelity Mortgage's account. When the bank would deposit funds into the account to fund these loans, Nichols just kept the money for himself. In total, Nichols defrauded the bank out of $2.9 million. Nichols has been detained without bond since his arrest in July.

Fraud continues to flourish in unstable metro areas in Arizona, Nevada, Southern California and Florida and is popping up in surprise locations like Bend, Ore., according to panelists at the SourceMedia Loan Modification Conference in Dallas. Ann Fulmer, vice president of business relations at Interthinx, said fraud is increasing in these markets among distressed borrowers through foreclosure rescue and loan mod scams. The industry is seeing illegal flipping of REO properties, false appraisals, tarnished broker price opinions and loan reductions in short sales. "There is no training in fraud recognition for servicers. They are pressed for time," she told conference attendees. It is crucial to find ways to train key loss mit staff and to verify a property's listing history, the speakers stressed. Lenders and servicers should create a red flag list within the shop of what to look out for, including a list of other parties and companies they work with on a regular basis, and identify borrowers with multiple loans for properties. In Dallas alone, Chris Day, a special agent in mortgage fraud from the FBI, said there are 75 cases of fraud, each one with at least $1 million in losses, and Dallas "isn't even a fraud hot spot." It is members of the industry who will correct this problem, he said. "Separate each transaction out. Identify things that don't fit. False companies and associations to maybe another case."

Edward William Farley, a former mortgage broker from Georgia, pleaded guilty in federal district court to charges stemming from a mortgage fraud scheme and a related real estate investment Ponzi scam involving more than 150 victims. According to Sally Quillian Yates, acting U.S. attorney for the Northern District of Georgia, Farley, operating through numerous mortgage firms, defrauded mortgage lenders through same-day property flips throughout the state. He paid an appraiser to fraudulently inflate the value of each property by $50,000 to $100,000 and recruited unqualified borrowers to purchase them from one of his companies. However, Farley did not purchase the properties until the fraudulently obtained loan proceeds on the second purchase had been disbursed. In the real estate investment-Ponzi part of the scheme, Farley then began to operate under the name Alliance Resource Management to conceal his new source of income from prior victims. Real estate investors and lenders were induced through false promises that their investments and loans were fully secured. The same property was used to "fully secure" multiple investors and lenders, causing losses in excess of $20 million. Sentencing is scheduled for Feb. 3, 2010.

The Department of Housing and Urban Development's Mortgagee Review Board is imposing civil money penalties totaling $27,000 on two Federal Housing Administration-approved lenders in Wisconsin and Connecticut for a variety of violations of FHA lending and marketing standards. In the first action, HUD imposed $20,000 in penalties against Green Bay, Wis.-based 1st Rate Mortgage Corp. for allegedly violating HUD/FHA's third-party origination restrictions, making false certifications concerning the compliance with these restrictions and failing to maintain a quality control plan in accordance with HUD/FHA requirements. In the second action, HUD imposed $7,000 in penalties against New Haven, Conn.-based Access Mortgage Corp. for allegedly violating HUD/FHA requirements by improperly using the official FHA logo and failing to notify HUD of a change in its "doing business as" name. Each lender, neither of which responded to requests for comment, will have an opportunity to challenge the imposition of civil money penalties and seek a hearing before an administrative law judge. In addition, HUD reached tentative settlements with four other lenders — Irvine, Calif.-based Nations Direct Mortgage, Grand Rapids, Mich.-based VanDyk Mortgage Corp., Minneapolis-based U.S. Bank NA and Cerritos, Calif.-based Sun West Mortgage Co. — and issued a letter of reprimand to Community Lender Inc. of Boise, Idaho, for allegedly violating HUD regulations.

Tahmeane Elrod of Tyler, Texas, has pleaded guilty to conspiracy to commit wire fraud in connection with a mortgage fraud scheme. According to John Malcolm Bales, U.S. attorney for the Eastern District of Texas, in September 2007 Elrod devised a scheme to defraud mortgage financing companies by submitting false documents in order to qualify for mortgages for the purchase of a residential property. Elrod falsely inflated levels of earned income and forged signatures on a Request for Verification of Employment form as part of a loan application package. Sentencing has not yet been scheduled.

A nine-month investigation done as part of a Florida fraud crackdown has resulted in charges against more than 100 defendants with allegations concerning over $400 million in loans and more than 700 properties. According to A. Brian Albritton, U.S. attorney for the Middle District of Florida, there are currently mortgage fraud-related charges pending against approximately 500 defendants in federal mortgage fraud cases around the nation. The cases concern both mortgage schemes designed to defraud mortgage lenders and "foreclosure rescue schemes" which prey on distressed homeowners. Florida's Mortgage Fraud Surge crackdown was launched in January 2009 in response to the epidemic of mortgage fraud throughout the state, which began during Florida's real estate boom earlier this decade.

A federal judge rejected a request by Angelo Mozilo, the former CEO and founder of Countrywide Financial Corp., to dismiss a Securities and Exchange Commission lawsuit accusing him of securities fraud and insider trading. Mr. Mozilo's lawyer David Siegel called the court's order "disappointing" but added he was confident Mr. Mozilo eventually "will be vindicated." In a court filing, U.S. District Judge John Walter in Los Angeles also rejected requests by David Sambol and Eric Sieracki, respectively Countrywide's former chief operating officer and former chief financial officer, to dismiss related SEC charges. In June the three were slapped with a massive civil fraud suit, accusing them of deliberately misleading investors in the company's stock and engaging in insider trading. They could not be reached for comment. Two years ago CFC's shares were trading in the $40 range. By the time Bank of America bought the firm in the summer of 2008, its stock was trading as low as $3. Investors lost billions on CFC.

Uto Essien, the ringleader of a Colorado based multimillion-dollar mortgage fraud operation, was sentenced to 30 years in the Colorado Department of Corrections. Essien, a Nigerian national, will be deported upon completion of his sentence. An Adams County jury convicted Essien in July after a seven-day trial on four felony charges all related to the use of shell corporations and false invoices to skim money off the top of nearly three-dozen real estate transactions. According to Colorado attorney general John Suthers, Essien and his colleagues fraudulently obtained $10.9 million in mortgages to buy 34 properties in Adams, Arapahoe, Denver and Jefferson counties between April 28, 2004 and Dec. 29, 2006. Essien and his colleagues then skimmed $1.1 million from the transactions to pay for repairs to the properties that the defendants' shell corporations never completed. While acting as a real estate broker, Essien negotiated the property acquisitions and directed the buyers to create the shell corporations. Nine of Essien's co-defendants in the mortgage fraud ring have either pleaded guilty or been convicted.

Michael Chou, a San Francisco mortgage broker, pleaded guilty in federal court to wire fraud conspiracy in connection with a scheme to defraud mortgage lenders. According to Joseph P. Russoniello, U.S. attorney for the Northern District of California, Chou admitted that, in a scheme that began in 2003 and continued through April 2009, he defrauded mortgage lenders and financial institutions by providing false information on loan applications. Working out of an office in San Francisco, Chou and his colleagues assisted individuals who wanted to obtain mortgages for residential properties in Northern California and elsewhere. As a part of this scheme, Chou routinely transmitted fraudulent loan applications to mortgage lenders that inflated the borrowers' creditworthiness. In addition, the loan applications were supported by forged documents that purported to verify the borrowers' employment, income and assets. Chou and others used a network of co-conspirators who posed as the borrowers' employers to falsely verify the employment and income information listed on the loan applications. As a result of Chou's participation in this conspiracy he illegally earned $360,800, which he agreed to forfeit. Eleven other individuals have been charged in connection with the case. Chou, who is currently not in custody, is scheduled for sentencing on March 19, 2010.

U.S. District Judge J. Frederick Motz sentenced Terrence White of Oxon Hill, Maryland, to 42 months in prison, followed by three years of supervised release for mail fraud from fraudulently purchasing 25 properties in Maryland, the District of Columbia and Virginia using false mortgage and settlement documents. Judge Motz also ordered White to pay $4.2 million in restitution. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, White and others paid straw purchasers to purchase houses for White and others. White created false mortgage and settlement documents, many of which misrepresented the straw purchasers' income and assets. This scheme involved fraudulent loans worth more than $19 million. More than 10 individuals and banks were harmed. The loss amount foreseeable to White is between $2.5 and $7 million. Many of the purchased properties have been foreclosed upon. Co-conspirators Kara McIntosh and Sabrina Weinberg were sentenced to three years and two years in prison, respectively. Osman Sharrieff Al-Bari was sentenced to 78 months in prison. Jamilah Al-Bari and Timothy Reed have pleaded guilty to participating in this scheme and are scheduled for sentencing in the next two months.

The Department of Housing and Urban Development is threatening to stop Financial Mortgage USA, Honolulu, from making Federal Housing Administration reverse mortgages and allegedly taking advantage of seniors. HUD alleges that the mortgage brokerage firm "duped" seniors into using the proceeds of their FHA reverse mortgages to purchase annuities from an affiliated insurance firm. [Reverse mortgages have an annuity feature depending on the payment plan the senior chooses.] The HUD Mortgagee Review Board is "particularly concerned about one case in which the company steered an 88-year-old borrower into purchasing an annuity which did not mature until she reached her 104th birthday," the department said. The MRB has proposed to permanently withdraw Financial Mortgage USA's status as a FHA-approved lender and fine the company $97,500 for violating FHA rules. The Honolulu lender can request an administrative hearing to contest HUD's actions. Company executives could not be reached for comment.

The incidence of property valuation fraud rose 46% in the third quarter compared to the same period a year ago, according to a new report from risk mitigation firm Interthinx. Interthinx noted that on a sequential basis property valuation fraud jumped 25%. The company, whose software helps lender/servicers track fraud, said it is seeing a continued shift to fraudulent schemes involving short sales, real estate owned inventories and refinancing by borrowers whose equity has been impaired by falling real estate values.

A lawsuit alleging Countrywide Financial Corp. violated the Real Estate Settlement Procedures Act through a mortgage insurance captive reinsurance kickback scheme has been reinstated by a federal appeals court. The suit, Alston v. Countrywide, was originally filed in December 2006. In 2008, a trial court judge dismissed the suit, ruling there was a lack of jurisdiction. But in a new ruling, Judge Maryanne Trump Barry of the U.S. Court of the Appeals for the Third Circuit, said "What is before us for decision turns on a question of statutory interpretation - does or does not the plain language of RESPA Section 8 indicate that Congress created a private right of action without requiring an overcharge allegation? We conclude that it does." The decision also states that the "filed rate doctrine" does not apply because those suing are challenging Countrywide's alleged wrong conduct and not the "reasonableness or propriety of the rate that triggered the conduct." According to the attorneys for the plaintiffs, who are seeking class action status, Countrywide allegedly assigned each loan which lacked a 20% down payment to one of seven private mortgage insurance companies on a rotating referral fee basis. The MI companies allegedly then were required to reinsure the policy with a Countrywide subsidiary, Balboa Reinsurance Co. The plaintiffs claim that between 2000 and 2006, Balboa collected $892 million in reinsurance premiums and paid $0 in claims. Edward W. Ciolko, a partner with Barroway Topaz Kessler Meltzer & Check, the law firm that brought the suit, said "Consumers faced with inherently opaque real estate settlements have the right under RESPA to be compensated if they are subjected to practices such as kickbacks or unearned closing fees. These abusive practices eliminate competition and increase prices over time, and they are what RESPA is specifically intended to address." Barroway Topaz said it has brought similar lawsuits against Washington Mutual, GMAC and Wells Fargo that were on hold pending this ruling. A representative of Bank of America, the current owners of Countrywide said "At this point we evaluating the ruling and will respond in court at the appropriate time."

Five people, feeling they were victims of a loan modification scheme, allegedly took matters into their own hands and as a result, they themselves have been charged with a crime. Daniel Weston of La Cañada, Calif., and Gustavo Canez of Los Angeles, were charged with two counts of torture, two counts of false imprisonment by violence and two counts of second-degree robbery in connection with the beating and torture of the two loan modification agents. Three others were arraigned and pleaded not guilty. Mario Soloman Gonzales of Glendale, Marissa Parker of Sylmar, and Mary Ann Parmelee of La Cañada, were each charged with two counts of torture, two counts of false imprisonment by violence and two counts of second-degree robbery. According to Los Angeles County deputy district attorney Norma Serna, Mr. Weston and Ms. Parmelee, who live in a house in foreclosure, allegedly sought loan mod assistance from the victims but believed that nothing was being done and wanted their money back. The defendants, including Mr. Gonzales and Ms. Parker, purportedly set up a meeting with the victims, where Mr. Weston and Mr. Canez allegedly attacked, detained and tortured them in front of the other defendants. Mr. Canez and Mr. Weston allegedly used a handgun. The victims also were allegedly robbed of their loan paperwork and personal belongings. Mr. Gonzales, Ms. Parker and Ms. Parmelee, a Realtor, had a business relationship with the victims and allegedly funneled loan mod referrals to the two agents. Bail was recommended at $2.1 million for Mr. Weston and $2.8 million for Mr. Canez. Mr. Gonzales, Ms. Parker and Ms. Parmelee are due at Burbank Superior Court on Nov. 2 for a preliminary hearing. The defendants could not be reached for comment.

Karen Axline, a former title agent from Granville, Ohio, was sentenced to four years in prison for her role in a $9 million mortgage fraud scheme involving more than 30 properties in central Ohio. According to Ohio Attorney General Richard Cordray, in the scheme, participants falsified loan applications and documents on behalf of borrowers and made downpayments allowing borrowers to secure loans in which tens of thousands of dollars were laundered through fictitious home contractor companies. Axline operated the now-defunct Granville Title Agency in Granville and colluded with others in structuring many of the transactions to deceive lenders. Axline is one of 13 defendants charged in the scheme. The investigation is still ongoing.

Timothy Lynn Beliveau of Mound, Minnesota, was charged with allegedly swindling 14 investors and their lenders out of more than $2.5 million through a real estate fraud scheme. According to B. Todd Jones, U.S. attorney for the District of Minnesota, the indictment charges that Mr. Beliveau, while owning U.S. Housing & Financial Services, a company that assisted homeowners who were close to losing their homes to foreclosure, and American Alliance Mortgage Group, a mortgage brokerage company, allegedly orchestrated a scheme to defraud vulnerable homeowners and induce investors to purchase distressed real estate from those homeowners at inflated prices. The alleged scheme created a pool of funds Mr. Beliveau then allegedly used to buy boats, motorcycles, a Florida vacation home and other personal items. Mr. Beliveau could not be reached for comment.

A group of credit unions whose mortgages were fraudulently sold by defunct U.S. Mortgage Corp./CU National Mortgage to Fannie Mae are lobbying Congress for return of their stolen funds, part of a $140 million fraud by the former owner of U.S. Mortgage. The group of 16 credit unions are asking Congress to direct Fannie Mae, which is now owned by the federal government, to return their mortgages, which U.S. Mortgage President Michael McGrath confessed in June to selling to Fannie Mae without their knowledge or consent. So far, Fannie Mae has rejected legal pleas for the return of the mortgages and is fighting a suit brought by one of the credit union victims, Picatinny FCU of New Jersey. "I don't know what the full story is about what McGrath did with the money but we do know that he sold them to Fannie Mae," said Alfred Scipio, president of Treasury Department FCU, who claims Fannie Mae illegally holds $8.8 million of his credit union's mortgages. "We believe that they bought stolen merchandise and they should return it." McGrath confessed to selling more than $138 million of mortgages his company was servicing for about 30 credit unions and lost almost all of the money on stock trading. Fannie Mae did not respond to requests for comment.

Local, state and national government agencies, nonprofits and other financial institutions gathered in Los Angeles to enter into an alliance that aims to help homeowners protect themselves from loan modification fraud. The "Loan Modification Scam Alert" campaign is the first of a number of other events that will be announced in major cities around the country. Partners include some of the country's largest organizations. NeighborWorks will coordinate the efforts with partner organizations such as the Department of Housing and Urban Development, the Federal Trade Commission, the U.S. Department of Treasury, Fannie Mae, Freddie Mac, and the Lawyers' Committee for Civil Rights Under Law. "As the foreclosure rate grows more and more homeowners are being deceived by scam artists who prey on their fears," said the COO of NeighborWorks, Eileen Fitzgerald. "Knowledge is the best defense, which is why the campaign equips homeowners with the tools they need to minimize their risk."