Six Sentenced in Georgia for Reverse Mortgage Fraud Scheme

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You've probably heard of reverse mortgages, pitched on television ads by celebrities such as Robert Wagner and Fred Thompson. The mortgages are part of the U.S. Department of Housing and Urban Development's (HUD) Home Equity Conversion Program (HECP) which permits senior citizens aged 62 years or older to purchase a home or remain in a home where it may be difficult for them to provide a conventional loan. There are two types of "reverse mortgages." First there is, the “refi-reverse” in which the lender pays the homeowner for a portion of the equity in the owner's home. The homeowner must have significant equity in the home to qualify. There is also the “purchase-money reverse,” in which the lender pays the homeowner towards the purchase of a home. The HECP is insured by the Federal Housing Administration (FHA).

On Monday, as fully recounted by RealEstateRama Georgia, six defendants, Kelsey Torrey Hull, Jonathan Alfred Kimpson, James Michael Green, Herbert Bush, Wilbur “Sonny” Letak, and Kevin Claude Barnett, were sentenced in the U.S. District Court for the Northern District of Georgia for reverse mortgage fraud. The defendants were charged with taking money from seniors to purchase homes under the HECP and then placing the seniors in homes worth only a fraction of the value paid. They were also alleged to have used forged and back-dated documents, faked down-payments, and to have purchased properties and resold them to seniors at up to 16 times their appraised value. The defendants included a closing attorney.

The defendants' sentences ranged from 5 years probation to 151 months' imprisonment. 


Former Cartersville, GA, Mayor Sentenced for Mortgage Fraud

H. Gregory Cordell, the former Mayor of Cartersville, Georgia, was sentenced to over two years imprisonment last Friday in the U.S. District Court for the Northern District of Georgia for mortgage fraud, as reported by the Chattanoogan. According to statements by the U.S. Attorney's Office for the Northern District of Georgia, Cordell inflated the purchase price of the property, lied on his mortgage application, and received a $1 million loan, from which Cordell was paid a kickback.

Florida Attorney and Police Officers Acquitted of Federal Mortgage Fraud Charges

Prosecutors with the U.S. Attorney's Office for the Southern District of Florida have dropped charges of mortgage fraud against Plantation, Florida, attorney Steven Stoll and police officer Dennis Guarancino, according to the Miami Herald. Stoll and Guarancino were charged in relation to a $16.5 million dollar loan fraud scheme by Guarancino's brother, Joseph Guarancino, also a police officer, which involved purchasing and flipping properties. However, their trial last month ended in a mistrial when the jury could not reach a verdict. The Government has stated that it will re-try Joseph Guarancino. Three other Plantation police offers and an FBI agent were acquitted by a jury in April.


Contact the attorneys of Gillen Withers & Lake LLC for your criminal and civil matters, in Savannah or Atlanta.

Real Estate Market May Be Down, But Mortgage Fraud Rising

Al Lewis of the Wall Street Journal's MarketWatch reports that mortgage fraud is surprisingly on the rise despite the current weakness in the housing market. Mr. Lewis cites the FBI's report on mortgage fraud for 2010, which reports that mortgage brokers, appraisers, underwriters, accountants, real-estate agents, settlement attorneys, land developers, investors, builders, lenders, and bank and trust account representatives continue to utilize fraudulent schemes to defraud lenders, from inflating appraisals and fabricating income statements to recruiting straw buyers. As a result of the depressed housing market, inventive would-be felons have also apparently developed scams involving short sales, loan modifications, and firms offering relief from foreclosures.

The report states that mortgage fraud cases increased 12% in 2010 and that the majority of cases arose in California, Florida, New York, Illinois, Nevada, Arizona, Michigan, Texas, Maryland, New Jersey and, of course, Georgia. The Bureau claims that at least $10 billion in loans were advanced on fraudulent mortgage applications in 2010.

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Economic Concerns Driving DOJ's Prosecutorial Discretion in Large Corporate Prosecutions; Government Files Civil Suit Against Deutsche Bank Over Alleged Massive Mortgage Fraud

Federal officials last week announced that Deutsche Bank and its mortgage division, MortgageIT, allegedly engaged in fraud on a massive scale as a civil complaint was filed against Deutsche Bank. The complaint alleges that the massive German bank allegedly defrauded the government of up to $1.2 billion through alleged reckless lending practices. The Federal Housing Administration has allegedly paid out approximately $386 million in wrongful insurance claims. The government is seeking three times this amount in fines and penalties. Among the government's allegations is a charge that documents which would have informed bank officials about high rates of default were hidden in a closet at MortgageIT. The civil complaint fails to disclose any incriminating documents which could be used to establish an intent to defraud the government.

However, according to an article by Fox Business News, the government is holding back in the Deutsche Bank case from bringing criminal charges in response to the alleged massive fraud. The author points to the case as illustrative of a trend by Federal officials to prosecute alleged wrongdoing by corporations through civil, rather than criminal, means.

The article speculates that Federal officials might have elected civil, rather than criminal, proceedings due to the lower burden of proof , as well as the more time and resource-consuming nature of criminal proceedings. It also acknowledges concerns by prosecutors over potential harm to corporations, investors and the economy and markets in general, illustrated by the demise of accounting giant Arthur Andersen in 2002 as a result of the federal prosecution in the wake of the Enron scandal. The article cites the fact that criminal, as opposed to civil, actions, are often accompanied or followed by de-licensing actions by regulatory bodies.

The article also cites the relatively few criminal prosecutions following the financial collapse of 2007. What criminal proceedings there have been have focused on individuals with various Wall Street firms--rather than the firms themselves. Furthermore, several of these prosecutions have ended in failure, as exemplified by the acquittal of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin in 2009.

Former Community Bank & Trust Executive Pleads Guilty to Fraud Charges

Randy Jones, a former executive vice president with Community Bank & Trust who worked for the bank for 30 years, pled guilty last week in the U.S. District Court for the Northern District of Georgia for an alleged multi-million dollar fraud scheme, according to an article in the Atlanta Journal-Constitution. Specifically, Jones was alleged to have made loans to a customer, Joseph Penick, Jr., to purchase tracts of land in North Georgia. Penick is alleged to have paid Jones $770,000. Penick has pled guilty to his involvement in the scheme.

Jones was also alleged to have used family members and friends to obtain more than $800,000 in loans from Community Bank & Trust to purchase an interest in six Zaxby's restaurants.


Community Bank & Trust was shut down by regulators in January of 2010. The bank opened in 1900 and had been insured by the Federal Deposit Insurance Corporation since 1934. Before it failed, it had 36 branches across the region and $1.1 billion in assets. An FDIC report in September of 2010 found that Community Bank & Trust failed to follow its own loan policy and had made more than $10 million in bad loans. Georgia has had more failed banks than any other state--52 since 2008. 

Investigators say he used the names of family members without their consent to obtain more than $800,000 in loans from the bank, which he used to buy a stake in six Zaxby's restaurants. And they claim he approved more than $2.8 million in loans to fraudulent borrowers so that a customer who was a real estate developer could pay down interest on loans.

The bank failures have also led to a number of prosecutions and suits against former bank executives, employees and others. Five people with ties to Omni National Bank of Atlanta were convicted on bank fraud and other charges after the bank collapsed during a federal mortgage fraud probe. A lawsuit by the FDIC also alleges that former officers of Alpharetta-based Integrity Bank engaged in gross negligence and breach of fiduciary duty relating to making bad loans. One of the defendants is State Senator Jack Murphy, a former bank official and the new Chairman of the Senate Banking Committee. Sen. Murphy has denied any wrongdoing.


Beazer Homes Executive and Alpharetta Resident Michael Rand Indicted in NC for Fraud

As reported in the Charlotte Observer, Michael Rand, former Chief Accounting Officer for Beazer Homes USA and a resident of Alpharetta, Georgia, has been indicted in the U.S. District Court for the Western District of North Carolina on 11 counts, including securities fraud, witness tampering and making false statements. Rand is alleged to have directed a conspiracy to manipulate Beazer's books, achieve earnings targets, and deceive the company's auditors.

Specifically, the indictment alleges that, from 2005 to 2007, Rand entered into an agreement with another company to allow Beazer to get revenue from purported sales of model homes, and that he and others created a false set of books to understate income when business was doing well, and "smoothing" income when business became tighter. Beazer terminated Rand in June of 2007 for allegedly destroying documents during an internal investigation.

Federal authorities began investigating Beazer in 2007 after the Charlotte Observer ran a series that claimed that Beazer arranged larger loans than some customers could afford and violated federal lending rules, leading to high foreclosure rates in certain communities. Prosecutors filed mortgage fraud and accounting fraud charges against Beazer in July of 2009, and the company entered into a deferred prosecution agreement in which it agreed to pay up to $50 million. Beazer was also the defendant in a class action lawsuit over lending practices, which it settled in 2009 for $30.5 million. The company stopped mortgage lending in 2008. Beazer has reported 1,643 home closing in the third quarter of this year, as well as losses of $27.6 million.

A detention hearing for Rand is scheduled for Friday. Rand is also the subject of a lawsuit filed in July of 2009 by the Securities and Exchange Commission in the Northern District of Georgia.

Chairman of Nation's Largest Mortgage Company Indicted for Bank Fraud and TARP Fraud in Relation to Scheme Against Colonial Bank, SEC Charges Filed

The U.S. Department of Justice and the U.S. Securities and Exchange Commission have brought criminal charges and civil claims against Lee B. Farkas, former Chairman of Taylor, Bean and Whitaker Mortgage Corp. (“Taylor Bean”) for allegedly selling at least $1.5 billion in fictitious and impaired residential mortgage loans to Colonial Bank and its parent company, The Colonial BancGroup, Inc. (“CBG”), according to press releases by the Department of Justice and the SEC, and the SEC’s complaint. Mr. Farkas, a resident of Ocala, Florida, is also charged with attempting to defraud the U.S. Department of Treasury through its Troubled Asset Relief Program (“TARP”) by allegedly representing to CBG and the public that Taylor Bean had secured a $300 million equity investment in CBG which would allow CBG and Colonial Bank to qualify for $550 million in TARP funds. The government contends that the investment and prospective TARP grant was a sham.

Taylor Bean was the largest non-depository mortgage lender in the United States by 2008, originating more than $30 billion in mortgage loans. Taylor Bean engaged in the the origination, acquisition, sale and servicing of residential mortgages through a network of local banks and mortgage brokers. The company filed for Chapter 11 bankruptcy in August of 2009. 

Colonial Bank, one of the fifty largest banks in the U.S., has had its own problems. In August of last year, the Alabama State Banking Department seized the bank and appointed the Federal Deposit Insurance Corp. as receiver. CBG subsequently filed for Chapter 11 bankruptcy and a financial holding company purchased Colonial Bank’s assets and assumed its deposits.

Taylor Bean had a financing arrangement with Colonial Bank to fund the mortgage loans which it originated. Under the agreement, Taylor Bean would represent that the loans were of a certain quality and that there was a commitment from a third-party investor to ultimately purchase the loan. When the investor purchased the loan, Colonial Bank would receive the proceeds to reimburse it for advancing the loan funds.

Colonial Bank and Taylor Bean also had another financing agreement, called an assignment of trade agreement, under which Colonial Bank would purchase a 99 percent interest in a bundled group of mortgage loans, or mortgage-backed securities, which Taylor Bean would issue, market and sell to third parties. Under the agreement, Taylor Bean was required to provide evidence of a binding commitment from a third party investor to purchase the securities.

The government alleges that Taylor Bean began experiencing liquidity problems in 2002. It alleges that Farkas and an unnamed officer of Colonial devised a pattern of “kiting” in which certain debits to Taylor Bean’s warehouse line of credit were not entered until after credits for the following day were entered. As a result of this kiting, Taylor Bean was supposedly overdrawing its accounts with Colonial Bank by approximately $150 million a day.

Farkas and the bank officer, in order to conceal the kiting activity, allegedly devised a scheme in which Taylor Bean would create and submit fictitious loan information to Colonial Bank. In December of 2003, Farkas allegedly directed Taylor Bean to submit approximately $150 million in non-existent loans, which Farkas allegedly referred to as “Plan B,” and impaired loans, which Farkas is alleged to have referred to as the “Crap,” to Colonial Bank for funding.

In 2004, as the loans began to age, in order to conceal them, Farkas and the officer allegedly bundled the loans in fictitious trades to Colonial Bank. Following the trades, Colonial Bank was unable to identify individual loans, or the age of the loans, within the trade. Farkas and the officer then caused information to be submitted to Colonial Bank which would reset the commitment dates on the loans and make the loans appear as if they had only recently been purchased. Farkas also caused Ocala Funding, L.L.C., a wholly-owned subsidiary of Taylor Bean, to divert funds which it received from Freddie Mac and other third parties for purchases of mortgages to Taylor Bean in order to pay down Taylor Bean’s debt to Colonial Bank.

By the close of 2007, Colonial Bank allegedly held $1 billion in impaired loans and $500 million in wholly fictitious, unsecured loans, as a result of Farkas’ and the officer’s conduct. The impaired and fictitious loans caused Colonial Bank to misstate its assets to the SEC and investors.

Finally, in November of 2008, Colonial Bank applied for TARP funds from the U.S. Treasury. The Department of Treasury approved Colonial Bank to receive $550 million in TARP funds on the condition that Colonial Bank increase its equity by $300 million. In 2009, Farkas allegedly approached Colonial Bank to raise the $300 million captial infusion through an investment group. Farkas falsely represented to Colonial Bank that it had found investors to participate in the capital infusion, and created a false stock purchase agreement. Farkas diverted $50 million in funds from an Ocala Investors Account to an escrow account in a move which he allegedly referred to as “Project Squirrel” in order to convince Colonial Bank that Taylor Bean had obtained investors. Colonial Bank entered the stock purchase agreement with Taylor Bean, however both companies subsequently terminated the agreement.

The indictment against Farkas in the U.S. District Court for the Eastern District of Virginia charges him with one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; six counts of wire fraud; and three counts of securities fraud. The SEC complaint alleges violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Former Broncos and UGA Football Player Arthur Marshall Sentenced to 69 Months for Mortgage Fraud

Arthur Marshall, a former wide receiver for the Denver Broncos, was sentenced to 69 months imprisonment yesterday for bank fraud in the U.S. District Court for the Southern District of Georgia, Augusta Division, as reported by the Augusta Chronicle. Marshall was indicted in June of last year and pled guilty to two counts of bank fraud last October for defrauding banks in the Augusta area of over $3 million in mortgage loans. Marshall admitted to falsifying information to obtain the loans.

Marshall's victims included veterans whom Marshall met through his father's American Legion post, who never received title to the properties they purchased. The post is in bankruptcy and has filed a $91,000 claim against Marshall. Marshall's company, Custom Contractors, declared bankruptcy in August of 2008, listing $11 million in debts.

Marshall was born in Fort Gordon, Georgia. He played football at Hephizbah High School before going on to play for the University of Georgia Bulldogs. Marshall was a wide receiver for the Broncos from 1992 through 1996, receiving for 1,267 yards during his five year NFL career and scoring four touchdowns.

Ponzi and Check Kiting Schemes by Georgia Mortgage Broker Cost Victims $23 Million

According to a press release by the U.S. Attorney's Office for the Northern District of Georgia, Edward William Farley, of Hoschton, Georgia, was sentenced to 25 years imprisonment today in the U.S. District Court for the Northern District of Georgia for causing more than $23 million in losses to mortgage lenders in a real estate investment Ponzi scheme. Walter Julius Herman, of Dunwoody Georgia, was sentenced to over 2 years imprisonment. Farley was also ordered to pay restitution of $24,131,857. He had pled guilty to the charges last November.

Farley, a mortgage broker, operated through the entities Creative Home Search, Southern Land Partners, Georgia Land Group, and Global Mortgage. Farley engaged in same-day flips of properties in Buford, College Park, Conyers, Cumming, Dacula, Grayson, Lawrenceville, Lithonia, Norcross, Marietta, Roswell, Snellville and Suwanee. He paid Hermann, an appraiser, to fraudulently inflate the value of each property by $50,000 to $100,000. He also recruited purchasers to purchase the properties from one of his entities. In the process of flipping the properties, Farley would submit loan applications with false statements.

Farley was also charged with operating a real estate investment/Ponzi scheme through an entity called Alliance Resource Management. Farley falsely represented to investors that  Alliance Resource Management was in the business of purchasing residential properties, renovating the properties and selling them at a profit, when in truth Alliance Resource Management had insufficient equity or income to purchase or renovate property. Farley also falsely promised investors that their investments were guaranteed by a first security position in property, a personal guarantee or title insurance, and provided investors with false promissory notes promising interest rates between 14 and 60 percent. In typical Ponzi scheme fashion, Farley paid early investors with investment proceeds from later investors.

Finally, Farley was charged with fraudulently obtaining $1.2 million from Washington Mutual Bank
in a check kiting scheme by transferring funds he did not have among several Alliance Resource Management bank accounts, and withdrawing scheme proceeds before the “insufficient funds” checks were returned.

Senate Permanent Subcomittee on Investigations Grills Goldman Sachs Execs

Goldman Sachs alleged securities fraud and role in the financial collapse has dominated the news this week, as reported by ABC News, NBC news and Bloomberg. It is difficult to evaluate the evidence against or supporting Goldman at this stage, but Goldman's fortunes were not helped by an inquisitorial and highly publicized hearing by the Senate Permanent Subcommittee on Investigations. The Subcommittee scheduled the hearing less than two weeks after the U.S. Securities and Exchange Commission filed a complaint against Goldman alleging that the firm committed securities fraud.

Goldman officers and employees testified that Goldman was managing its risk on individual transactions, and not betting against the future of the housing market. Six Goldman officers and employees, including its Chief Executive, Lloyd Blankfein, were summoned to testify. Senators asked the witnesses to look through binders of evidence containing internal e-mails and communications.

Goldman defended that the Subcommittee had reached its conclusions before the hearing. The firm also released documents showing that any gains it made from short sales of mortgage backed securities in 2007 were entirely erased by its losses when higher quality mortgages failed in 2008. Goldman's representatives pointed out that the firm had no special advance knowledge that the market would collapse.

The Senators asked Mr. Blankfein if it was morally correct to sell securities to clients while betting against the securities at the same time. Mr. Blankfein promised Goldman would "tighten up" the practices subject to criticism. Michigan Democratic Senator Carl Levin scolded Mr. Blankfein for Goldman selling securities, allegedly described by Goldman's own employees as "crap," and betting against them. Mr. Blankfein told the Committee that it was not Goldman's responsibility to tell its clients how to trade or invest. Blankfein had testified in January before the Financial Crisis Inquiry Commission led by former California Treasurer Phil Angelides.


In an e-mail from November 18, 2007, Blankfein allegedly stated to a colleague that Goldman was making more money from short bets on mortgages than it had lost on its investments in home loans. However, Blankfein also states in the same e-mail that Goldman did not dodge the mortgage crisis, and noted that the crisis was not over. Another document discussed during the hearing was an e-mail between Goldman's Chief Financial Officer, David Viniar, and its President and Chief Operating Officer, Gary Cohn, regarding a profit and loss statement from July 2007 and short sales of stock by Goldman.

Goldman's mortgage chief Dan Sparks admitted in his testimony that Goldman made poor decisions in hindsight.


The Senators frequently interrupted witnesses. Their questioning was also not confined to the allegations of the SEC's complaint. Senator Levin seized on an e-mail between the head of Goldman's mortgage desk, Thomas Montag, and Sparks, in which Montag called a set of mortgage linked investments "one shitty deal." Republican Senator Tom Coburn criticized Goldman for making Goldman bond trader Fabrice Tourre a "whipping boy" and releasing his personal e-mails. In response to Goldman's contention that the Committee had cherry picked its evidence, Senator Levin retorted that the evidence was the "whole bowl of cherries," and reflected the history of what happened.

Tourre also tesfied and asserted his innocence, claiming that he did not mislead any parties in dealings relating to a collateralized debt obligation which he helped to develop. He told the panel that he would defend himself in court against the "false" allegations.

Protestors attending the hearing wore striped prison uniforms and held signs stating "shame" and "Goldman banksters," recalling a term coined by Ferdinand Pecora, an Assistant District Attorney appointed by the Senate to head the Pecora Commission which investigated the causes of the 1929 stock market crash.

Goldman received $10 billion in stimulus money from the federal government following the financial collapse. It repaid the monies with interest eight months later.

It will be interesting to see if the SEC or the Subcommittee--coincidentally the same panel led by Wisconsin Republican Senator Joseph McCarthy in the 1950s--has any more damning evidence up its sleeve. In the meantime, in happier news for Goldman, shares in the company have risen from a low of $152 per share on April 26, to $160 in current trading.

Federal Prosecutions of Corporate, Financial and White-Collar Crimes Fall to Six-Year Low; Congress Increases Funding & DOJ Increases Criminal Probes

Brad Heath points out a disturbing trend in today's USA Today--federal prosecutions of serious corporate, financial and other white-collar crimes have fallen to new lows. In this age of Enron, Madoff and massive failures of financial institutions, this is a serious breach of the public trust. The article contains a chart which shows that, in fiscal year 2009, the Department of Justice opened only 63 new corporate fraud prosecutions. That is barely one case per year per district and represents a 55% decrease since 2003. Securities fraud charges have decreased 17% and bankruptcy fraud cases have decreased 44% over the same period. The article cites Professor Ellen Podgor of Stetson University College of Law and creator of White Collar Crime Prof Blog who attributes the decline was the result of the Bush administration's push of federal prosecutors and the FBI to focus on terrorism and national security.

However, relief appears to be on the way. The article states that lawmakers have put new pressure on DOJ officials, who have launched thousands of new criminal probes into financial crimes. Congress has approved extra money to target financial crime, and Attorney General Eric Holder announced a new task force to target financial fraud last month. As if to herald a change of direction, prosecutors in New York also announced indictments yesterday against Raj Rajaratnam, founder of Galleon, claiming that the case is the largest hedge fund insider trading case ever. The article also states that the FBI currently has more than 2,800 open mortgage fraud cases..

Trial of Bear Stearns Hedge Fund Managers Cioffi and Tannin Gets Underway

The trial of Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin got underway last week. As reported by attorney Jacob Zamansky in Forbes and the New York Daily News, the parties gave opening statements on Thursday. Assistant U.S. Attorney Patrick Sinclair argued that Bear Stearns financial officer Matthew Tannin allegedly told investors on 11 occasions that he was putting more of his own money into Bear Stearns’ troubled High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Enhanced Leveraged Fund. Tannin allegedly told investors that it would be “silly” to redeem their investments. Sinclair also told the jury that Cioffi failed to disclose to investors that he had transferred $2 million of his own money to another Bear Stearns fund. The prosecution cited alleged incriminating e-mails between Cioffi and Tannin in which the defendants allegedly acknowledged that the subprime mortgage market was “toast” and that they should “close the fund.” Sinclair argued that Cioffi’s and Tannin’s actions were allegedly to save their bonuses and reputations. He spoke to the jury for about 45 minutes.

In contrast, Cioffi’s attorney, Dane Butswinkas, delivered a two hour opening statement using charts and exhibits to show the complexity of Bear Stearns’ management structure, hedge funds and the operation of the collateralized debt obligation (CDO) market. Butswinkas argued that the defendants were the victims of market forces beyond their control and that the defendants did their best to predict the future performance of the market and the funds. Tannin’s counsel, Susan Brune, also spent approximately two hours explaining to the jury about hedge funds, CDOs and market risk. Brune attributed the failure of the funds on a “run on the bank” and argued that the funds’ investors were well aware of the risks. Brune characterized the prosecution’s theory as “I lost my money, therefore there has to be a fraud.” The defense argued that the e-mails were taken out of context, and that worrying about markets is not a crime.

Nearly 300 investors kept their investments in the hedge funds, which lost $1.4 billion in July of 2007. The two hedge funds had experienced positive growth until the preceding quarter, however an internal Bear Stearns report showed that securitized subprime mortgages were losing value fast.

Bear Stearns Hedge Fund Managers' Trial Begins Today

The trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin begins today in Brooklyn, as reported by Bloomberg. A jury will be selected today. 

Cioffi and Tannin are charged with allegedly causing losses of $1.4 billion to investors by misleading investors regarding the health of two Bear Stearns hedge funds, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. ("Enhanced Fund"). and the Bear Stearns High- Grade Structured Credit Strategies Master Fund Ltd. ("Master Fund"). Cioffi was a hedge fund manager and Tannin was an attorney who served as chief operating officer. They are charged with alleged conspiracy, securities fraud and wire fraud. Cioffi is also charged with alleged insider trading.

Cioffi's and Tannin's attorneys have argued that the collapse of Bear Stearns was actually the result of the failure of two other Bear Stearns hedge funds a year prior to the failure of the Enhanced Fund and the Master Fund.

U.S. Attorney Benton Campbell, a former member of the Justice Department’s Enron Corp. Task Force, and Assistant U.S. Attorney James McGovern, are leading the prosecution of Cioffi and Tannin. The prosecution alleges that Cioffi and Tannin were promoting the funds to investors while knowing that the health of the funds was in serious risk. The government has listed 38 witnesses and 532 exhibits which it intends to present at trial, however, the centerpiece of the government's evidence is expected to be Cioffi's and Tannin's own words in e-mails.Cioffi allegedly sent one e-mail on March 15, 2007, with the subject-line "Fear," stating that he was fearful of what the markets were going to do. In another e-mail, Tannin allegedly stated that if AAA bonds were downgraded, there would be no way for the funds to make money. Google released additional private e-mails to the government last week. Prosecutors allege that e-mails show Cioffi and Tannin allegedly boasting of how they were luring investors to invest more money in the funds at the same time they knew that the funds were in trouble. Witnesses for the government are expected to include Bear Stearns employees and investors in the hedge funds.

Cioffi is defended by attorney Brendan Sullivan, who won reversal of the charges against Alaska Senator Ted Stevens, as well as Margaret Keeley and Dane Butswinkas, all of Williams & Connolly LLP. Tannin is being represented by Susan Brune and Nina Beattie of Brune & Richard LLP. Commentators have observed that the e-mails by Cioffi and Tannin can be read in "many" ways.

A year following the failure of the funds, Bear Stearns itself failed and was purchased by JP Morgan Chase & Co. The failure of Bear Stearns was accompanied by failures of Lehman Brothers Holdings, Inc., and AIG. Losses from U.S. banks and mortgage companies in the financial collapse total at least $396 billion.


Indictment in the Bear Stearns Prosecution Traces Origins of the Financial Crisis

The indictment against Bearn Stearns executives Ralph Cioffi and Matthew Tannin is available here. Cioffi and Tannin are charged in the only major prosecution to date arising out of the collapse of numerous Wall Street firms beginning in 2007.

As related in the indictment, the Bear Stearns High Grade Structured Credit Strategies Fund Ltd. ("High Grade Fund") and the Bear Stearns High Grade Credit Strategies Enhanced Master Fund Ltd. ("Enhanced Fund") were hedge funds registered as a Cayman Island corporation. The High Grade Fund and the Enhanced Fund were brokered by Bear Stearns Securities Corporation (BSSC). Cioffi was the founder and Senior Portfolio Manager of the funds. Tannin was a Portfolio Manager who reported to Cioffi.

The indictment alleges that the High Grade Fund opened in 2003 and was invested in low-risk, high grade debt securities and collateralized debt obligations (CDOs). The fund purchased income earning assets through repurchase agreements. The indictment alleges that Cioffi and Tannin allegedly told investors that they could expect annual returns of 10 to 12 percent and that the fund was only slightly riskier than a money market fund.

By 2006, the performance of the High Grade Fund began to decline due to investors' threats to withdraw their investments. In response to this decline, Cioffi and Tannin allegedly created the Enhanced Fund, which was also invested in CDOs, but had greater leverage than the High Grade Fund and could allegedly provide greater returns than the High Grade Fund with only slightly more risk. Cioffi and Tannin had their own monies invested in the funds. In July, 2006, Cioffi and Tannin allegedly told investors that they were moving their funds from the High Grade Fund to the Enhanced Fund. Many investors allegedly moved their investments to the Enhanced Fund.

The Government acknowledges that the funds had positive monthly returns until January 2007. It alleges that in about March 2007, The indictment also alleges that Cioffi and Tannin owed duties to BSAM, the funds and the funds' investors. Cioffi and Tannin, despite allegedly knowing that the funds had serious problems, allegedly began to make misrepresentations to investors in hopes that the funds' incomes would recover. Cioffi and Tannin allegedly misrepresented material facts in communicationswith investors and lenders including the funds' financial prospects, liquidity and exposure to the subprime mortgage market, as well as Cioffi's and Tannin's personal investments in the funds. Cioffi allegedly had a meeting with the funds' portfolio management team in March of  2007 after which he instructed those attending the meeting not to discusse the funds' difficulties with others. The indictment cites communications between Cioffi, Tannin and others on the portfolio management team, in which they allegedly expressed concern over the condition of the funds.

Despite the condition of the funds, Cioffi and Tannin allegedly continued to make misrepresentations regarding the condition of the funds in hopes of enticing more investors and improving the financial condition of the funds. Furthermore, the indictment alleges that, beginning in March 2007, Cioffi allegedly began to transfer the more than $6 milion which he had invested in the funds to other Bear Stearns hedge funds without disclosing this fact to the funds investors.

 On April 17, 2007, the management team produced a CDO report which stated that the CDOs held by the funds were worth significantly less than had previously been determined. The indictment alleges that Cioffi and Tannin communicated regarding hiding the funds' troubles from other fund employees and allegedly made false statements regarding the financial condition of the funds during a conference call with investors on April 25, 2007. In the meantime, major investors in the funds were redeeming tens of millions from the funds. In June, 2007, investors in the funds were told that the funds had lost 100% of their value, or approximately $1.4 billion.

Cioffi and Tannin are charged in the Eastern District of New York with one count of conspiracy to commit securities fraud and wire fraud, three counts of securities fraud, and four counts of wire fraud, as well as a criminal forfeiture count against their real and personal property. Cioffi's and Tannin's trial is scheduled to begin on September 28.

Bear Stearns Execs Head for Trial on Wire and Securities Fraud Charges

As is well known, Bear Stearns, one of the largest investment banks in the world, was sold to JP Morgan Chase and effectively ceased to exist in March of 2008, after two Bear Stearns hedge funds invested in collateralized debt obligations—mainly subprime home loans—and once worth approximately $1.6 billion, lost nearly all of their value. The collapse of Bear Stearns was the harbinger for a succession of massive failures of financial institutions, including Lehman Brothers, Merrill Lynch and AIG, triggering the current global recession.

As reported by New York Magazine, Reuters and the Daily Telegraph, two managers of the hedge funds, Ralph Cioffi and Matthew Tannin were charged in June in the Eastern District of New York with several counts of wire and securities fraud for allegedly misleading investors regarding the status of the funds in the Spring of 2007. Cioffi, a hedge fund manager, and Tannin, the Chief Operating Officer of Bear Stearns Asset Management (BSAM), have pled not guilty. The collapse in value of the funds cost investors approximately $1.4 billion. When traders wanted to sell some of the funds’ subprime mortgages, no one wanted to buy them.

The trial of Cioffi and Tannin is set to begin in October. The evidence against Cioffi and Tannin consists largely of e-mails between them and investors describing the funds as “an awesome opportunity,” despite allegedly knowing that the funds had problems. Bear Stearns investors are expected to testify at the trial. Both men have consistently maintained their innocence. They face a potential 20 years in prison if convicted.

Cioffi is also charged with alleged insider trading for withdrawing $2 million of his own money from the funds. The government alleges that he engaged in hundreds of transactions involving the funds without the necessary approval by the fund’s directors and despite being warned about conflicts of interest. All trades between Bear Stearns, a securities firm, and BSAM, an asset management firm, were supposed to be vetted by an independent committee. In the Fall of 2006, Bear Stearns ordered a moratorium on such internal trades by Cioffi. Prosecutors sought to introduce evidence of Cioffi’s alleged insider trading in order to demonstrate how Cioffi allegedly operated.

British bank Barclays, a shareholder of one of the funds, also filed suit against Cioffi and Tannin for alleged fraud, however, the suit has been withdrawn.

The prosecution of Cioffi and Tannin makes conspicuously noticeable the fact that no senior executives from Bear, Lehman Brothers, AIG, etc., have been charged with any wrongdoing in the fallout from the financial crisis.


Atlanta No. 2 in Mortgage Fraud Nationwide--Defendants in $7 Million Mortgage Fraud Scheme to Be Sentenced Tomorrow

According to the Atlanta Journal and Constitution, Perimeter Mortgage Funding, which operated from 2001 to 2005 before collapsing, cost lenders $7 million. One of its principals, Kevin Wiggins has pled guilty to one count of conspiracy and two counts of wire fraud in the United States District Court for the Northern District of Georgia, and who faces up to 15 years in prison and a $750,000 fine and who will be ordered to repay the defrauded lenders. Wiggins' sister, Lydia Wiggins Christopher, and appraiser Frank Astwood have also pled guilty. The defendants will be sentenced on Tuesday.

Perimeter Mortgage Funding originated mortgage loans and sold them to larger lenders, including to Fannie Mae, Freddie Mac, Colonial Bank, JP Morgan Chase, Wachovia and Washington Mutual. It collapsed when it ran out of funds to reimburse purchasers of the fraudulent loans.

The prosecution claims that Wiggins would agree to purchase properties and then deed them to straw borrowers, who were really Wiggins' relatives and friends. The borrowers would then secure loans on the properties, either purchase loans or cash out refinancings, using falsified information, including inflated appraisals and false statements about renovations and rental income. Lenders were deceived by photographs showing false renovations and concealing damage to the properties. Wiggins used the proceeds of the loans to purchase the properties and to pay himself and his accomplices, including by having closing attorneys disburse checks to corporations controlled by him.

In all, Wiggins and his accomplices obtained inflated loans on 88 distressed properties, many in Atlanta's West End neighborhood. In one case, a loan for $128,000 was obtained for a home which was purchased for $24,000. Wiggins would not pay the mortgages, and the properties would go into foreclosure. Mortgage fraud by individuals such as Wiggins has made approximately 20 percent of the homes in West End vacant. Wiggins has claimed that he had good intentions for the properties, including a desire to rehabilitate the West End and rent the properties to students before selling them. West End residents Brent Brewer and Paulette Richards, have submitted a video to the court about their community's struggle with mortgage fraud entitled "When a House is Not a Home," and are asking for the maximum sentence for Wiggins.

A recent Fannie Mae report lists Atlanta as the second worst for mortgage fraud, only behind Minneapolis. In June, the United States Department of Justice began "Operation Malicious Mortgage," a nationwide crackdown on mortgage fraud. Last year, Phillip Hill and nine other defendants were convicted in Georgia's largest-ever mortgage fraud case.

"Foreclosure Rescue" Fraud Replacing Mortgage Fraud

     The decline in the housing market has been accompanied by a huge increase in the area of “foreclosure rescue” fraud, as reported by the Atlanta Business Chronicle. Given the slowdown in the mortgage market and the rise in foreclosures, unscrupulous types have found new areas for fraud. Although foreclosure rescue fraud may take many forms, in its simplest manifestation, companies or consultants seek out homeowners facing foreclosure and offer to help them save their homes for a fee. According to Bill Brennan, Director of the Atlanta Legal Aid Society’s Home Defense Project, homeowners send $800 or $900 to the out-of-state companies which take the money and do nothing. Another form of the scheme involves consultants who convince homeowners voluntarily surrender the titles to their homes to them, and then walk away with all the equity in the home. The companies and consultants review court foreclosure lists and then target their victims through telemarketing and other means.

     States are responding to the rise of foreclosure rescue fraud by passing laws prohibiting foreclosure rescue fraud and giving victims recourse. California and Florida, which have the highest numbers of foreclosures in the nation, have already enacted laws. 19 other states, including Georgia, have introduced bills this year regarding the practice. Georgia’s bill, sponsored by State Senator Gail Davenport of Jonesboro, contains a series of restrictions on foreclosure rescue fraud, including requiring any rescuer obtaining a home through foreclosure to pay the owner at least 82% of the fair market value of the home, and allowing homeowners to obtain treble damages.

     Foreclosures in the metropolitan Atlanta area are up 23% from spring of 2007. Fulton, DeKalb and Gwinnett lead the area in the number of monthly foreclosures.