Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Archive for the ‘Fraud’ Category
Apr 16
2014

Offshore Accounts? IRS is Watching

If you have unreported income from offshore accounts, now may be the best time to come forward and report those earnings; otherwise, you may be susceptible to criminal prosecution.

The IRS initially began this open-ended Offshore Voluntary Disclosure Program (OVDP) in 2009 and later renewed it in 2011. Due to strong interest from previous years, the IRS rolled the 2012 Offshore Voluntary Disclosure Program back out in January. This program provides a way for taxpayers to come forward voluntarily and report their previously undisclosed foreign accounts and assets. The program is designed to resolve an inordinate amount of cases without the IRS having to take the time to conduct independent, thorough investigations of alleged tax fraudsters.

Despite the name, and unlike its predecessors, the 2012 OVDP has no set deadline for taxpayers to apply. However, citizens should be cognizant of the fact that the IRS can change the terms at any given time. For example, the program’s tax penalty could increase, or worse – the program could completely end without any notice, leaving taxpayers as fair game for IRS crosshairs. Those choosing to not report their offshore assets could be prosecuted under the fraud penalty and foreign information return penalties, in addition to increasing their risk of criminal prosecution.

Additional and possible criminal charges that could stem from undisclosed tax returns include tax evasion, filing a false return and failure to file an income tax return. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Taxpayers should understand that the likelihood of undisclosed offshore accounts being found is increasing through information available to the IRS by tax treaties, information from whistleblowers and more revealing information by way of the Foreign Account Tax Compliance Act (FATCA), which we’ve blogged on before.

Citizens are wising up and taking advantage of the program. Since 2013, more than 39,000 citizens have utilized OVDP and disclosed unreported earnings. This has netted over $5.5 billion in recovered tax revenues for the IRS.

A few citizens, such as Ty Warner, have ignored the ODVP. The creator of Beanie Babies saw this enforcement first hand when the IRS came knocking on his door, alleging that he hid a secret offshore bank account. In September 2013, a federal court in Chicago issued tax evasion charges against Warner. The court fined Warner a civil fine of $53 million and he was sentenced to two years of probation. Additionally, Warner paid $14 million in back taxes.

While some citizens will surely be tempted to allow their offshore earnings go unreported, we are here to tell you that decision (and risk) may come at a high price.

Mar 17
2014

Supreme Court Expands Whistleblower Protection

The U.S. Supreme Court recently held that Sarbanes–Oxley extends whistleblower protection, not just to employees of public companies, but to employees of private contractors and subcontractors that serve public companies. In a 6-3 decision, the Court rejected the First Circuit’s narrow construction of the statute in favor of the Labor Department’s more expansive interpretation. Now more than ever, affected contractors and subcontractors need to ensure they have robust policies in place for addressing whistleblower complaints.

Congress passed the Sarbanes–Oxley Act in 2002, the year after Enron’s collapse. The Act was intended to protect investors in public companies and restore trust in financial markets. It achieved these goals in part by providing whistleblower protection: 18 U.S.C. § 1514A makes it unlawful for employers to retaliate against employees who report suspected fraud. The provision certainly protects employees of publicly traded companies. It was less clear whether § 1514A protects employees of private contractors that service public companies. The plaintiffs in Lawson v. FMR, LLC, claimed it did.

Jackie Lawson and Jonathan Lang were employees of private companies that serviced the Fidelity family of mutual funds. As is often the case with mutual funds, the Fidelity funds were subject to SEC reporting requirements, but had no employees. Private companies contracted with the funds to provide accounting and investment advisory services. In this case, the private companies were Fidelity-related entities referred to collectively as FMR. Lawson was a 14-year veteran and Senior Director of Finance for her employer, Fidelity Brokerage Services. She alleged that she was constructively discharged after raising concerns about cost accounting methods for the funds. Zang was an 8-year veteran of Fidelity Management & Research Co. He alleged that he was fired for raising concerns about misstatements in a draft SEC registration statement related to the funds. Both plaintiffs sued for retaliation under § 1514A.

FMR responded by asking the district court to dismiss the claims on grounds that § 1514A protects employees of public companies, not employees of privately held companies. The trial judge rejected FMR’s argument, but the First Circuit Court of Appeals reversed. Months later, the Labor Department’s Administrative Review Board issued a decision in another case, making clear that ARB agreed with the trial judge. Last year, the Supreme Court agreed to consider the question.

On March 4, the Court issued its opinion that § 1514A shelters employees of private contractors, just as it shelters employees of public companies served by those contractors. Speaking for the majority, Justice Ginsburg explained that the Court’s broad construction finds support in the statute’s text and broader context. As relevant to the plaintiffs’ claims, § 1514A provides, “‘No public company . . . , or any officer, employee, contractor, subcontractor, or agent of such company” may take adverse action “against an employee . . . because of [whistleblowing or other protected activity].’” Boiled down to its essence, the phrase in question states that “no . . . contractor . . . may discharge . . . an employee.” In ordinary usage, the phrase means that no contractor (of a public company) may retaliate against its own employees. After all, those are the people contractors have power to retaliate against. According to the Court, if Congress had intended to limit whistleblower protections to employees of publicly traded companies, as FMR argued, Congress would have said “no contractor may discharge an employee of a public company.” The statute doesn’t say that because Congress was not attempting to remedy a nonexistent problem. Enron did not collapse because its private contractors retaliated against Enron employees who tried to report the company’s fraud.

The Lawson Court explained further that its interpretation flows logically from the statute’s purpose to prevent another Enron debacle. Often, the first-hand witnesses of corporate fraud are employees of private companies that service a public company—law firms, accounting firms, and business consulting firms, for example. Without adequate protections against retaliation, contractor employees who come across fraud in their work for public companies will be less likely to report misconduct. The Court’s point was particularly relevant with respect to the Fidelity funds. Like most mutual funds, the Fidelity funds had no employees. A narrow reading of § 1514A would insulate a $14 million industry from retaliation claims. Congress could not have intended that result.

Given the Court’s decision in Lawson v. FMR, LLC, privately held companies that service public companies should consider how best to deal with whistleblower complaints. At a minimum, robust whistleblower policies will (i) safeguard whistleblower anonymity to the extent possible; (ii) encourage whistleblowers to exercise discretion without discouraging them from reporting misconduct; (iii) address the preservation of evidence relating to putative fraud; and (iv) establish procedures for the conduct of internal investigations into suspected fraud.

 

Dec 20
2013

First Circuit Reverses District Court Order Granting New Trial

Appellate courts do not often reverse a trial judge’s decision to grant a new trial, so we took notice when the First Circuit did so in United States v. Carpenter.  Given the case history, the First Circuit decision should help to answer an important question:  How much leeway do prosecutors have when summarizing evidence in closing arguments?

In 2005, a jury convicted Daniel Carpenter on nineteen counts of wire and mail fraud.  The charges pertained to Carpenter’s operation of Benistar, a company that handled “like kind” exchanges for owners of investment property.  Under federal law, investors may defer capital gains on the sale of investment property if they exchange it for another property of like kind.  In order to qualify, the seller or “exchangor” must complete the exchange within 180 days of the initial sale and must not take possession of sale proceeds in the interim.  To meet the requirements, exchangors usually rely on a qualified intermediary to hold the exchange funds until they are reinvested.  Benistar’s business as a qualified intermediary gave rise to the charges against Carpenter.

The government alleged that Carpenter obtained investors’ exchange funds by fraud.  At trial, the prosecution argued that Carpenter persuaded investors to contract with Benistar by misrepresenting that their funds would be managed conservatively for a modest return of 3 to 6%.  According to prosecutors, Carpenter made the representations knowing full well that the money would be used for high-risk trades.  The jury apparently agreed, returning a guilty verdict on all counts.

Carpenter requested a new trial, which the trial judge granted due to the government’s repeated use of a gambling metaphor in closing arguments.  The court noted that the evidence against Carpenter was sufficient for a conviction, but not overwhelming.  The government may have tipped the scales by arguing that Carpenter had gambled with investors’ money hoping to make millions for himself.  It was possible the jury convicted based on moral disapproval of gambling rather than evidence of fraud.

In a divided opinion, the First Circuit affirmed, largely deferring to the trial court’s assessment.

At the end of the re-trial, the government omitted the gambling metaphor, focusing instead on Benistar’s marketing materials, contracts with investors, and Carpenter’s profit motive.  Again, the jury returned a guilty verdict on all counts having deliberated for roughly two hours.

At Carpenter’s request, the trial judge ordered a third trial, but not for reasons advanced by the defense.  This time, the judge was troubled by the jury’s two-hour deliberation.  He observed that it would be nearly impossible for jurors to walk through the evidence for nineteen different counts in two hours.  They must have taken a shortcut.  Thus, the judge ordered a new trial on grounds that the prosecutor had invited jurors to employ certain presumptions based on mischaracterizations of evidence.  For one, the government implied that Benistar’s marketing materials made express misrepresentations about the safety and security of investor funds.  In reality, the marketing materials supported only an inference to that effect.  The government also invited jurors to presume that qualified intermediaries are prohibited from using exchange funds for high-risk trades, when that is not the case.  Moreover, by emphasizing Carpenter’s profit motive, the government may have encouraged jurors to convict for “greed” rather than fraud.

On appeal, the First Circuit disagreed and reinstated the guilty verdict.  A unanimous panel held that the prosecution’s statements were permissible summations of the government’s theory of the case, not mischaracterizations of record evidence.  The government had argued that Carpenter took in millions based on false pretenses that Benistar would keep the exchange funds safe and secure.  That argument was not improper, as the trial court found, because the prosecution followed it with a discussion of specific evidence supporting that conclusion.  Similarly, the government argued that “like kind” transactions are typically conservative—not so the jury would convict based on some imaginary statutory violation or breach of contract, but to establish that Carpenter knew Benistar’s risky investment strategy differed from investors’ expectations.  And the government’s references to Carpenter’s profit motives were equally permissible.  Those comments went to prove Carpenter’s specific intent for the fraud, which was to make more money.

A comparison of the two appellate decisions suggests that the district court erred because it failed to see the forest for the trees.  By treating each of the government’s questionable statements in isolation, the court found support for a new trial.  But the statements had to be considered in context.  In context, the prosecution’s comments were not mischaracterizations of evidence but main points of the government’s theory, which the prosecution supported from the record.

Given Carpenter’s pro-defense trial judge, it’s unclear why the defense opted for a third jury trial.  In hindsight, Carpenter may have fared better by ditching the jury request in favor of a bench trial.

Dec 17
2013

Supreme Court Grants Cert to Resolve Circuit Conflict on Intent Required to Prove Federal Bank Fraud

On December 13, 2013, the United States Supreme Court granted a certiorari petition in a case that squarely poses the question of what the government must prove with respect to intent in order to convict a defendant of federal bank fraud.  There is wide agreement among the Courts of Appeal that, in order to secure a conviction under Title 18, United States Code section 1344(1) (making it illegal “to defraud a financial institution”), the government must prove that the defendant intended to defraud the government and to expose it to a risk of loss.  With respect to subdivision 2 of the statute, however (making it illegal to obtain money and the like of a financial institution “by means of false or fraudulent pretenses, representations, or promises”), the Circuits are split six to three – with the First, Second, Third, Fifth, Seventh and Eighth Circuits holding that the same intent requirement applies under either subsection of the statute, and Sixth, Ninth and Tenth Circuits holding that subsection 2 establishes an independent crime that requires only intent to defraud someone (and not necessary a bank) and some nexus between the fraudulent scheme and a financial institution.

In the case in question, Kevin Loughrin v. United States, the defendant was convicted of bank fraud arising from a scheme to make fraudulent returns at a Target store despite the undisputed fact that he did not intend to cause (nor actually caused) any risk of financial loss to the bank.  The Tenth Circuit acknowledged that it took the minority view of split Circuits, but nevertheless upheld the conviction, and Loughrin filed a petition for certiorari to the Supreme Court.  In his petition, Loughrin emphasized that having different standards for each subsection regularly led to opposite results in factually similar cases.

The Court’s decision in this case could be a game-changer for the way in which prosecutors use the federal bank fraud statute.  In many cases – for example, the Black Friday poker cases in the Southern District of New York – bank fraud charges pose the most serious consequences for a criminal defendant but are asserted in cases in which there is no intent to expose the financial institution to loss.  A change in the law will change the way such cases are charged by prosecutors, and alter the dynamics of how such cases are negotiated and tried.  Whatever the Court’s ultimate decision on the  issue, it will bring badly needed clarity to this area of the law.

Dec 11
2013

Taking Advantage of a Video Poker Glitch Can Land you in Jail in Nevada

Last month, federal prosecutors in Nevada filed a motion to dismiss an indictment that shined a bright light on overly broad federal criminal statutes and the abuse of prosecutorial discretion in using them.

John Kane and Andre Nestor were each charged in an indictment in January 2011 with one count of conspiracy to commit wire fraud and one count of computer fraud in violation of the Computer Fraud and Abuse Act (CFAA), the same law that was used to prosecute Internet activist Aaron Swartz and Andrew Auernheimer.

The indictment alleged that Kane and Nestor used an exploit on video poker machines to defraud casinos and win money that they were not entitled to, which “exceeded their authorized access” on the machines in violation of the CFAA. Kane, who reportedly spent an extremely significant amount of time playing video poker, discovered a bug in the software of the video poker machine that allowed for him, and later his co-defendant Nestor, to achieve large payouts on certain slot machines through a series of moves where he switched games and made bets at different levels. There is absolutely nothing illegal about pressing buttons on slot machines to change the amount of money you are betting or to switch games you are playing, but the prosecution alleged that doing this exceeded lawful access. The court agreed with the defendants and ruled in favor of their motion to dismiss the CFAA count in the indictment.

The CFAA was enacted in 1986 to protect computers that there was a compelling federal interest in protecting, such as computers owned by the federal government and certain financial institutions. The CFAA has been amended numerous times since it was enacted to cover a broader range of computer related activities and there has been recent discussion on Capitol Hill of amending it further. The CFAA prohibits accessing a computer without proper authorizationor it is used in a manner that exceeds the scope of authorized access. The law has faced steep criticism for being overly broad and allowing prosecutors wide discretion by allowing them to charge individuals who have violated a website’s terms of service.

In November, after filing nine stipulations to continue the trial date, the government filed a motion to dismiss the remaining conspiracy to commit wire fraud charges against both Kane and Nestor because “the government has evaluated the evidence and circumstances surrounding court one [wire fraud conspiracy] and determined that in the interest of justice it should not go forward with the case under the present circumstances.”

Although the charges were ultimately dismissed,the issue remains that these charges never should have been brought in the first place. Kane and Nestor had to deal with open criminal charges against them for nearly three years. There are proper uses for statutes such as the CFAA, but the people and the courts should demand that the government only use them for their intended purposes. Prosecutions taking broad and unjustified interpretations of these statutes are not justified.

Jul 05
2013

Andrew Auernheimer Appeals Hacking Conviction

Earlier this week, attorneys for convicted computer hacker Andrew “Weev” Auernheimer filed their opening brief in their appeal to the U.S. Court of Appeals for the Third Circuit to have his conviction overturned.

In 2010, Auernheimer’s co-defendant Daniel Spitler, who agreed to plead guilty in 2011, discovered a flaw in AT&T’s iPad user database, that he used to collect 114,000 email addresses. Auernheimer then disclosed those email addresses to Gawker, who published a redacted form of some of the account information. The disclosure of the email addresses attracted significant media attention and ultimately forced AT&T to change their security protocols.

Last November, Auernheimer was found guilty by a jury after a five day trial of violating the Computer Fraud and Abuse Act (CFAA) and conspiracy to gain unauthorized access to a computer without authorization. He was sentenced in March to 41 months imprisonment to be followed by three years of supervised release.

Auernheimer’s appellate brief focuses on the argument that he did not violate the CFAA because visiting an unprotected public website is not unauthorized access which is required under the statute. Spitler’s program visited the publicly accessible websites and collected the information that was available on those sites. The email addresses that were collected by Spitler’s program were published on publicly accessible websites that did not employ security measures such as passwords. Auernheimer’s lawyers argued that it is irrelevant that AT&T “subjectively wished that outsiders would not stumble across the data.” Spitler’s program did not access any private accounts and according to Aurenheimer’s lawyers, it did not even violate any written prohibitions or Terms of Use on AT&T’s website. His lawyers also stated that no data was taken, deleted or destroyed.

The CFAA prohibits accessing a computer without proper authorization, which is the same statute that Internet activist Aaron Swartz was convicted of violating. The law has faced steep criticism for being overly broad and allowing prosecutors wide discretion by allowing them to charge individuals who have violated a website’s terms of service. Last month “Aaron’s Law” was introduced in Congress, which would amend the CFAA to prevent prosecutors from charging an individual with violation a company’s terms of service and from bringing multiple charges against an individual for the same act.

The government’s brief is due on July 22 and Auernheimer will then have the opportunity to file a reply brief by August 5.

We will know in a matter of months how the Third Circuit will rule on Auernheimer’s appeal and whether his conviction and sentence will be upheld. This case raises some very interesting issues on the scope of computer crime laws and prosecutorial discretion. Is the conduct of Auernheimer the type that we need to devote government resources to send a person with no criminal record to prison for a significant period of time?

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Apr 09
2013

What’s at the Bottom of the ‘Robosigning’ Scandal?

The problematic practice of robosigning – whereby banks and other lenders improperly foreclosed on properties through formulaically processing foreclosure documents – has been much in the news over the past couple of years. The feds have been investigating banks and individuals; state attorneys general have joined forces in pursuit of robosigners; and, unsurprisingly, there have been a number of class actions filed by consumers whose homes were foreclosed.

The fallout of these actions has been somewhat inconsistent. On the settlement side, banks and individuals are facing hefty penalties: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally entered into a massive $25 billion settlement with the Justice Department and state attorneys general (of 49 states) in early 2012. The mortgage servicing firm, Lender Processing Services (LPS), recently entered into a $120 million settlement with a coalition of state attorneys general (of 45 states). A founder of one of LPS’s subsidiaries, Lorraine Brown, pleaded guilty to federal conspiracy charges and Missouri state charges and faces not less than two years imprisonment.

Those defendants who have not settled may be faring better. In early March, a Nevada district judge threw out an entire case against two title officers of LPS who faced more than 100 felony counts. (The judge’s ruling was not merits-based but rather based upon prosecutorial misconduct.) A New Jersey federal judge recently dismissed a putative class action against Bank of America, noting the plaintiff’s failure to prove that robosigning constituted fraud.

Part of the challenge for cases that don’t settle out may be proving damages to homeowners who lost their homes: If a home was foreclosed on deadbeats, where are the damages in rapid-fire paper pushing? Some banking experts have found that, between 2009-2012, mortgage servicers created some 800,000 foreclosures that could have been avoided through loan modification programs. And foreclosure practices at BofA and Morgan Stanley subsidiaries were found to have violated the Servicemembers Civil Relief Act, which provides active servicemembers financial protection in matters such as civil proceedings, income tax disputes and foreclosures. But these two categories are only a small subset of foreclosures, which have amounted to between one million and four million each year for the last six years.

One lesson from these matters may be that settling is not always the best option. But another take-away that hasn’t come up is how banks and mortgage servicers got into the practice of robosigning in the first place. The issue faced by the banks and lenders was a glut of foreclosures and a related mountain of paperwork to process those foreclosures. How could they effectively address the problem and the dead weight on their ledgers? The answer was to institute an efficient, and automated, process. The problem with automation, though, is a lack of oversight or subjective inquiry – the very purpose behind much of the required foreclosure documents.

While the banks and processors are certainly to blame for false certifications and notarizations, their actions are not as nefarious as many make them out to be. How often are we all guilty of “robosigning” the terms and conditions for a new software program or credit card application? How often do we read all the new disclosures that financial institutions are required to send with each statement or loan request? Part of the problem is that we are faced with a mass of disclosures resulting from both regulation and excess litigation. The information overload is part of what has played out in the robosigning scandal.

The Government Accountability Office just released a report criticizing the Federal Reserve’s review of the robosigning matter, saying that the review itself has become cumbersome and inconsistent. The only problem is that there is no realistic resolution to the problem. Until we can devise a way to be both thorough and totally efficient in processing information, we will inevitably face new versions of the robosigning scandal.

Dec 04
2012

Are Medicaid Claims Becoming the Next Battleground for FCA Cases?

A qui tam case that was recently dismissed on summary judgment may signal the next front in the legal enforcement war arising from off-label use of prescription medications.

In United States ex rel. Watson v. King-Vassel et al., filed in the U.S. District Court for the Eastern District of Wisconsin, the complaint alleged that defendant Dr. Jennifer King-Vassel violated the Federal False Claims Act and Wisconsin False Claims Law by prescribing medications to a minor patient receiving Medicaid assistance for off-label purposes – that is, for purposes other than the specific ones for which the Food and Drug Administration has authorized use. The complaint also alleged that the company that employed Dr. King-Vassel was liable under a theory of respondeat superior.

On October 23, 2012, the court granted summary judgment to the defendants on the ground that there was no specific allegation that Dr. King-Vassel had submitted a Medicaid claim (or made any other false claim) specifically arising from the prescription of the medication in question, and on the ground that Dr. King-Vassel was actually an independent contractor, and not an employee, of the corporate defendant.

The Watson case was clearly resolved in the way it was because of specific deficiencies in the pleadings and proof in that case, and the court’s order dismissing the case was also highly critical of ethically questionable behavior committed by the relator as a means of creating and supporting the qui tam case. Nevertheless, the case raises the specter of a whole new series of legal actions that appear likely to arise from off-label use of FDA-approved medications.

We have written before about the massive fines paid by pharmaceutical companies for promotion of off-label use of medications. The Watson case focuses on a whole other universe of potential deep-pocket defendants: medical professionals and institutions involved in the prescription of the medications in question. Notwithstanding the dismissal of the Watson case, its operative theory – that a Medicaid claim relating to off-label use of a medication may constitute a false claim – may still be viable, though it is largely untested. Going forward, in any case in which a medical professional or institution faces civil or criminal legal action based on such a theory, counsel will have to scrutinize carefully whether the claims on which liability purports to be based truly fall within the scope of the false claims statute.

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Apr 16
2012

$25 Billion Mortgage Fraud Settlement Marks Turning Point for Industry

On April 4, the $25 billion national mortgage servicing settlement, which was announced in February, was finalized by a judge in the U.S. District Court for the District of Columbia. The settlement with the nation’s five largest mortgage servicers — Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc. (formerly GMAC) — was negotiated by 49 state attorneys general and the federal government. The complaint alleged that the servicers’ misconduct “resulted in the issuance of improper mortgages, premature and unauthorized foreclosures, violation of service members’ and other homeowners’ rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds.”

The settlement of this major mortgage fraud case requires that servicers provide a minimum of $20 billion in benefits directly to borrowers through a series of national homeowner relief effort options, and pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government). Eligible borrowers who lost their homes to foreclosure from January 1, 2008 through December 31, 2011, and suffered servicing abuse may each qualify for an estimated $1,500 cash payment, and eligible homeowners whose homes are currently underwater may qualify for principal reduction.

While these payments will assist homeowners who have already fallen victim to servicers’ mortgage fraud, perhaps the most important development to emerge from this settlement is the creation of new servicing standards that will take effect over the next two to six months.

The standards seek to improve consumer access to help and information by requiring servicers to provide a single point of contact for borrowers seeking information about their loans and adequate staff to handle calls. These servicing standards set procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. Finally, they will stop many past foreclosure abuses by requiring servicers to evaluate homeowners for other loan mitigation options before resorting to foreclosure, forbidding banks from foreclosing while the homeowner is being considered for a loan modification, requiring strict oversight of foreclosure processing, and prohibiting abuses such as robo-signing and improper mortgage documentation.

To ensure that the servicers comply with the terms of the settlement and prevent future mortgage fraud, a monitor has been appointed to work with non-compliant institutions to establish corrective plans, or to recommend penalties or to seek injunctive relief to enforce the settlement. The U.S. Department of Justice and state attorneys general can enforce through the court process compliance with the servicing standards and the banks’ financial obligations. The settlement does not prohibit further relief for individuals, and borrowers and mortgage investors can pursue individual, institutional or class action cases without restriction.

We hope that this $25 billion settlement is enough to get the attention of servicers engaged in unscrupulous practices and to ensure that they change their operations moving forward. We also hope that now that this cloud over the industry is dissipating, it can proceed to provide and service mortgages in a way that is legal and ethical and that will aid in facilitating a housing recovery that is still only on the horizon.

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Mar 05
2012

DOJ Goes After Smaller Fraudsters, Lets Big Fish Escape

Successful criminal prosecutions of mortgage fraud seem to have one thing in common: a fraud figure well below $10 million. One of the recent cases that generated a fair amount of press involved the convictions of co-conspirators in a mortgage scheme carried out by an ex-NFL player. That scheme, which took place during the housing boom in the early 2000’s, resulted in 10 convictions. Former Dallas Cowboy linebacker Eugene Lockhart is facing jail time of up to 10 years. The nine other individuals are looking at sentences of roughly two to five years.

The mortgage scheme – which led to convictions for wire fraud, conspiracy to commit wire fraud, and making false statements to a federal agency – seems pretty typical of the conduct that prosecutors have been going after: the use of “straw borrowers” to apply for loans on home purchases; falsification of data on loan applications to ensure that straw borrowers would qualify for home loans; and creation of artificially high appraisal values for the homes to be purchased by the straw borrowers. In the case of Lockhart and his cohorts, the Justice Department alleges that the scheme resulted in an actual loss to lenders of roughly $3 million.

While $3 million is not a trivial sum, it is a very tiny portion of the housing industry. Even the total amount in all similar prosecutions nationwide is quite small. Recent headline prosecutions involving similar schemes include a Florida case valued at $8 million in loan proceeds, an Alabama case valued at $2 million, and a New York case valued at $82 million in loan proceeds. At least the latter is a more aggressive number (as apparently was one of the defendants in the New York case, who moonlighted as a dominatrix in a Manhattan club).

The government has been touting these prosecutions as a part of a major crackdown on the mortgage business. The DOJ press statements note that “[m]ortgage fraud is a major focus of President Barack Obama’s Financial Fraud Enforcement Task Force.” But these are comparatively minor matters if one looks to the real causes of the housing crash that led to the 2008 financial crisis. Bank of America, Goldman Sachs, JPMorgan Chase, and Wells Fargo, who were all in the business of packaging and selling subprime mortgages, have been more or less covered with Teflon.

The lack of criminal prosecutions against the big banks in the subprime crisis has been written about many times. But that doesn’t mean it’s not worth repeating. Something seems just wrong about the DOJ’s focus on the smaller fraudsters and its soft approach to the bigger players.

Hopefully, the SEC’s recent decision to send Wellsnotices to Goldman Sachs, JPMorgan Chase, and Wells Fargo indicating possible enforcement proceedings, means that at least these banks could face some civil liability for their role in the housing crash. And Bank of America recently settled a False Claims Act case with the Feds for $1 billion. But approaching the banks with civil actions, and skirting individual culpability, sends the message that once you reach a certain level of success, you are above the law.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, Casselle Smith, and Griffin Finan. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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