For The Defense, October 2010 - DRI Today

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G O V E R N M E N T E N F O R C E M E N T A N D C O R P O R AT E C O M P L I A N C EDefense counsel will needto balance the sophisticatedfinancial aspects of thecase with the street crimenature of the investigationand prosecution of the case.Recent Legislation Explainsthe Increase in Prosecutionof Mortgage Fraud CasesOn May 20, 2009, President Obama signedinto law the Fraud Enforcement and RecoveryAct of 2009 (FERA). FERA providesthe federal government with new andimproved tools to investigate and prosecutemortgage, corporate and other financialfrauds. The purpose of FERA is toincrease enforcement oversight over thetypes of financial frauds that contributed tothe current economic crisis. Among otherthings, FERA:• provides substantial funding andresources to the Justice Department,the FBI, the U.S. Postal Inspection Services,the U.S. Secret Service, and theInspector General for the Departmentof Housing and Urban Development forenforcement activities, including $50million per year to the U.S Attorney’soffices to staff the FBI’s fraud strikeforces, and $40 million to Departmentof Justice criminal, civil and tax divisionsto provide litigation and investigativesupport in fraud cases;• modifies the definition of “financialinstitutions” in the criminal code toinclude mortgage lending businessesthat are not directly regulated or insuredby the federal government. FERA §2(a)(modifying 18 U.S.C. §20);• amends the false statements in mortgageapplications statute to criminalize makinga material false statement or willfullyovervaluing a property in order toinfluence any action by a mortgage lendingbusiness. FERA §2(c) (modifying 18U.S.C. §1014);74 n For The Defense n October 2010• strengthens the Civil False Claims Act(31 U.S.C. §3729 et seq.) to ensure thatthe government can recover taxpayerdollars purportedly lost to fraud andabuse; and• establishes a Financial Crisis InquiryCommission (the “Commission”) toinvestigate the causes of the currentfinancial and economic crisis. The Commissionhas the power to hold hearingsand to compel production of documentsand testimony. The Commission willsubmit a report on December 15, 2010,that will contain findings and conclusionsregarding the causes of the currentfinancial and economic crisis.Prior to FERA, private mortgage lenderswere not subject to the same kind of oversightand regulations as traditional financialinstitutions. FERA extended criminallaws to cover private mortgage companies—to“level the playing field”—in thesame way that existing regulations applyto federally insured and regulated financialinstitutions.On November 17, 2009, President Obamasigned an executive order establishing anew interagency Financial Fraud EnforcementTask Force (“Task Force”) to combatfinancial crime. The Task Force was established“to lead an aggressive, coordinated,and proactive effort to investigate and prosecutefinancial crimes.” The Task Force isdesigned to strengthen collective efforts offederal, state and local agencies to investigateand prosecute significant financialcrimes relating to the current financial crisis;to recover illegally obtained funds; andto ensure just and effective punishment forthose who perpetrate financial crimes.The Department of Justice and FBI fieldoffices worked to establish more than 75regional task forces and working groupsaround the country. These efforts have successfullytargeted real estate professionalsincluding bankers, brokers, appraisers andlawyers who allegedly engaged in fraudulentactivities. On December 9, 2009, LannyBreuer, Assistant U.S. Attorney General,reported the following task force results tothe United States Senate Committee on theJudiciary:• On October 8, 2009, in the Southern Districtof Texas, a jury convicted a Houstonloan officer at a financial institutionfor submission of fraudulent loan applicationsand packages to residential lendersacross the country resulting in over$24 million dollars in fraudulent loans.The defendant and her co- conspiratorsmisrepresented the credit- worthiness ofindividual borrowers who were recruitedto purchase multiple properties.• On August 10, 2009, in the Central Divisionof California, two real estate professionalswere convicted for their roles ina massive mortgage fraud scheme thatcaused more than $40 million in lossesto federally insured banks. The jury convicteda prominent Beverly Hills realestate agent and licensed appraiser oncharges of conspiracy, bank fraud andnumerous loan fraud charges for theirroles in the mortgage fraud scheme.Eight other real estate professionals pledguilty to federal felony charges for theirroles in this scheme.• In November 2009, the Middle Districtof Florida announced the resultsof a nine-month long “Mortgage FraudSurge” that resulted in charges againstmore than 100 defendants involvingmore than $400 million in loans onmore than 700 properties.On June 17, 2010, members of the TaskForce released the results of a nationwideinitiative called “Operation StolenDreams,” that targeted mortgage fraudstersthroughout the country. Operation StolenDreams is the largest collective enforcementeffort to confront mortgage fraud. SeeDepartment of Justice Press Release datedJune 17, 2010. From March 1, 2010, throughJune 17, 2010, “Operation Stolen Dreamshas involved 1,215 criminal defendantsnationwide, including 485 arrests, who areallegedly responsible for more than $2.3billion in losses. Additionally, … the operationhas resulted in 191 civil enforcementactions which have resulted in the recoveryof more than $147 million.” Id. In a pressconference announcing the results of OperationStolen Dreams, FBI Director RobertS. Mueller III stated that “[f]rom homebuyers to lenders, mortgage fraud has hada resounding impact on the nation’s economy.”Mueller issued a warning: “[t]hosewho prey on the housing market shouldknow that hundreds of FBI agents on taskforces and their law enforcement partnersare tracking down your schemes and youwill be brought to justice.”
The Task Force helped to identify mortgagefrauds such as loan originationschemes, short sales, property flipping,and equity skimming. As part of OperationStolen Dreams, on June 17, 2010, theFBI reported the following examples of thetypes of mortgage fraud cases that were targetedin this operation:• Two people were arrested in Miami forpreying upon the Haitian- Americancommunity by offering to assist themwith immigration and housing issues.Instead the fraudsters used the Haitian-American’s personal information toproduce false documents to obtainmortgage loans.• In California, a prominent home builderused straw buyers to sell his houses at inflatedprices. The scheme inflated priceson other homes in the area, creating artificiallyhigh comparable sales and affectingthe overall new-home market.• In Detroit, FBI agents arrested severalindividuals in a $130 million schemeorganized by a local motorcycle gang.The gang members fraudulently representedthemselves as mortgage brokers,appraisers, real estate agents, andtitle agents and used straw buyers toobtain around 500 mortgages on only180 properties.See FBI Press Release on Operation StolenDreams dated June 17, 2010.White Collar DefenseWhile you may be an attorney skilledin handling commercial, financial, andmortgage banking litigation matters, youmay soon need to learn about white collarcriminal defense to fully represent yourcurrent clients. Criminal mortgage fraudcases present unique challenges for defensecounsel. On one hand, a criminal mortgagefraud case may involve numerous documentsand transactions that are familiar toa civil defense attorney who is experiencedwith commercial, financial, and mortgagebanking litigation cases. On the otherhand, the opposing side is not a local plaintiff’sattorney, but an assistant U.S. attorneywith the support of nationally trainedand experienced task force agents with proactiveinvestigative techniques includingundercover operations, wiretaps, and surveillance.Defense counsel will need to balancethe sophisticated financial aspects ofthe case with the street crime nature of theinvestigation and prosecution of the case.Who Is a Target?Mortgage fraud has been defined as a “materialmisstatement, misrepresentation, oromission relied upon by an underwriteror lender to fund, purchase or insure aloan.” See Financial Crimes Section, FBI,FBI Financial Crimes Report to the Public(September 2006) (hereinafter “2006FBI Financial Crimes Report”). The targetsof these serious federal investigationsinclude borrowers, lenders, investors, realestate professionals, appraisers, and real estatebrokers. Many cases involve multipleco- conspirators involved in the underlyingmortgage fraud scheme. In some cases it isnot obvious which participants are involvedin the conspiracy as participants and whichpersons may be innocent bystanders or additionalvictims. It is crucial that you knowand understand the roles of the participantsin assessing your client’s role in a criminalinvestigation or indictment.The InvestigatorsThe Justice Department is not sympatheticto anyone perpetuating mortgagefraud crimes. In white collar crime, it’s onestrike and you’re out. FBI agents are utilizingintelligence, enhanced surveillance,and undercover operations to identify keyplayers behind large scale fraud and identifytrends. Rest assured that the TaskForce and numerous local and regionaltasks forces targeting mortgage fraud areequipped with experienced personnel andadvanced investigative tools.Federal prosecutors are developing andmaintaining relationships with communitygroups that come in contact with mortgagefraud victims, which helps prosecutorsidentify potential schemes. “Legal servicesattorneys, housing counselors, and housingactivists … have direct, personal contactwith the people that mortgage fraud affects.By contacting [the U.S Attorneys’ office]right away when someone comes to them,they can save … the time of searching outvictims.” See Michael S. Blume and RichardJ. Zack, Using Community Outreach toFind and Prosecute Mortgage Fraud, UnitedStates Attorneys’ Bulletin, May 2010.“Mortgage fraud is no different from anyother scheme to defraud; it is about lyingor hiding the truth for money. The factthat mortgage fraud occurs in the businessenvironment is actually a huge plus for theinvestigation and… prosecution. The businessenvironment requires documentation,and documentation means the fraudhas left tracks.” See Barbara E. Nelan, Findingthe Smoking Gun, United States Attorneys’Bulletin, May 2010. Prosecutors haveWell before indictment,the prosecutors have alreadyidentified and catalogued allthe smoking gun documentsnecessary for prosecution.the subpoena power and the investigativetools necessary to gather all relevant documentsand piece together the documentpuzzle before the defendants and theircounsel even know that they are under afederal investigation. Well before indictment,the prosecutors have already identifiedand catalogued all the smoking gundocuments necessary for prosecution.The CrimeHistorically, mortgage fraud cases are generallydivided by law enforcement investigationsinto two basic categories: fraud forhousing and fraud for profit. See 2006 FBIFinancial Crimes Report; see also FFIECFraud Investigations Symposium, The Detection,Investigation, and Deterrence ofMortgage Loan Fraud Involving Third Parties:A White Paper 2 (Oct. 27–Nov. 7, 2003)(hereinafter “FFIEC Mortgage Loan WhitePaper”). Fraud for housing is typically perpetratedby an individual borrower whowants to purchase property that the borrowerwould not otherwise qualify to purchase.On the other hand, fraud for profitis a scheme where the purpose is to profitfrom either creating fictitious properties orfalsely creating high property values andthen looting the values of the properties.Mortgage fraud schemes can come in allshapes and sizes depending upon the ingenuityof the participants. However, there areFor The Defense n October 2010 n 75
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