When the FBI Comes Calling…®
MORTGAGE FRAUD (Continued)
Prosecutions
We have separated the various mortgage fraud cases that have been decided by discussing them in context with the federal statutes under which the defendants were charged. In many ways, this is an arbitrary distinction. After all, some cases find the defendant charged with several different violations, ranging from wire fraud, submitting false statements, and making false entries, to making and passing false mortgage notes, bank fraud, money laundering, and conspiracy. See United States v. McLean, 131 F. Appx. 34 (4th Cir. 2005). It almost seems that the exact statutes a defendant is charged under are secondary; what is more important to the AUSA is the scheme, and how it has defrauded somebody. However, categorizing the cases by statute provides a way to manage the information found within the cases.
One other problem confronted with discussing mortgage fraud is that since these are criminal cases, the cases for which an appellate decision has been published have defendants who have more often than not already been found guilty of mortgage fraud, so determining what does not constitute mortgage fraud can be difficult to accomplish. Where possible, therefore, we have tried to include opinions from the district courts which acquit the defendant of mortgage fraud.
Furthermore, as many of the schemes discussed in conjunction with mortgage fraud are quite complicated. To adequately represent what constitutes mortgage fraud, we feel it is important to provide the fact patterns of the cases, as the cases are usually fact-specific. Therefore, many of the following case synopses are quite long.
One final consideration: many of the cases that deal with mortgage fraud are technically classified as unreported, or not for publication. Therefore, their precedential value is technically nil. However, they still provide insight into how the FBI and AUSAs investigate and prosecute mortgage fraud cases, and as such, where appropriate, we have included them on these pages.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 225 (Continuing Financial Crimes Enterprise)
18 U.S.C. § 225 (2007).
The Crime
It is a crime under section 225 for a person to
- organizes, manages, or supervises a continuing financial crimes enterprise; and
- receives $5,000,000 or more in gross receipts from such enterprise during any 24-month period. I8 U.S.C. § 225(a).
The Punishment
The punishment for violating section 225 is
- a fine of not more than
- $10,000,000 if an individual, or
- $20,000,000 if an organization, and
- imprisoned for a term of not less than 10 years and which may be life. 18 U.S.C. § 225(a)
Definition
For purposes of subsection (a), the term "continuing financial crimes enterprise" means a series of violations under section 215, 656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of this title affecting a financial institution, committed by at least 4 persons acting in concert. 18 U.S.C. § 225(b).
Case Law Interpreting Section 225
Prosecutions for mortgage fraud under section 225 are fairly rare; only one case has been reported where the defendant was charged with managing a continuing financial crime enterprise in conjunction with mortgage fraud.
United States v. Lefkowitz, 125 F.3d 608 (8th Cir. 1997).
The defendant in Lefkowitz was convicted on forty-five counts of mail and wire fraud, managing a continuing financial crimes enterprise, defrauding an agency of the United States, aiding in the preparation of false tax returns, making a false statement in connection with a bankruptcy case, and obstruction of justice. Lefkowitz at 612. In this case, the defendant was the President of a California corporation from 1984 to 1994 that formed real estate limited partnerships to build low- and moderate-income housing, specifically concentration of projects that would qualify the limited partners for low-income housing tax credits. Id To qualify for these credits, the investors were required to "build, rehabilitate, or acquire buildings in which a prescribed percentage of the apartment unites are occupied by low-income tenants." Id. A typical project for the president's company would include finding land in a desirable location, develop an apartment complex, hire a builder, and apply for tax credits. Id. With the allocated tax credits, the defendant's company would form an L.P. with the defendant and his company as general partners, and release a Private Placement Memorandum to securities broker-dealers who would market the investment to prospective L.P.s. Id. The project's equity came from the L.P.s, and upon completion, the defendant's management company would lease out the apartments, the allocated tax credits would be released, the remaining debts to the builder would be paid, and the L.P.s would begin receiving annual tax credits. Id.
When the defendant eventually left his company in 1994, "properties in which limited partners and … investors had invested more than $80,000,000 were unbuilt, unfinished, or lost in foreclosure." Id. at 613. Evidence introduced in the district court demonstrated that the defendant ran his company to defraud investors: "[f]unds from limited partners and … investors were first deposited in an operating account for each particular investment. But [the defendant] and [his company] as general partners immediately transferred funds to a central [company] account. From there, [the defendant] personally controlled all expenditures, and [company] employees had standing instructions first to pay [the defendant's] personal bills, then [the company's] general operating expenses, and finally expenses for the various ongoing projects." Id. Over $9.5 million was used to pay the defendant's expenses, including $5 million that was deposited in his wife's personal bank account. Id. The company's employees began referring to the monetary shortfall as "the black hole." Id. This black grew exponentially, and as it did so, the defendant "increasingly relied on funds from new projects to complete old projects." Id. The IRS began tracing new partnership deposits as they were used to meet the defendant's personal needs, a practice which was not disclosed to the company's investors. Id. The defendant also defrauded builders-by not disclosing a lack of permanent financing or coercing builders to extend their construction loans-as well as Housing Agencies and the IRS-by representing that the "National Development Council" was a nonprofit general partner (which it was not), taking nonprofit tax credits which were allocated to the company's projects based on those misrepresentations, and having the company's employees file tax returns claiming that buildings finished late in the year had been completed and leased to tenants at the beginning of the year. Id. at 614.
The defendant was charged with one count of managing a continuing financial crimes enterprise (hereinafter, CFCE). Id. at 618. "The manager of a [CFCE] violates 18 U.S.C. § 225 if (i) he supervises a series of mail or wire fraud transactions which affect a financial institution, (ii) receives at least $5,000,000 in gross receipts from the criminal enterprise in a twenty-four-month period, and (iii) acts in concert with at least three other persons in executing the crimes." Id. The jury found that Lefkowitz violated section 225 when his company raised more than $5,000,000 from investors within a two-year period, "because banks invested in those offerings and at least three other persons acted in concert with Lefkowitz in executing mail and wire frauds." Id. Because the defendant used his company's funds for his personal use, the more than $5 million that the investments showed up as the defendant's gross receipts. Id. Though the defendant attempted to argue that banks weren't harmed or affected by the fraud because he used later funds to repay the investors, the court stated that "whatever the banks finally realized on their investments, they were affected when deceived into investing funds that [the defendant's company] then fraudulently misused." Id. The defendant also attempted to argue that the government failed to prove he acted "in concert" with at least three other persons in defrauding financial institutions; he claimed that "there was no knowing complicity by his subordinates in the continuing … fraud against financial institutions." Id. However, the court found that the jury instructions, which stated that the government needed to prove that "[t]he defendant organized managed or supervised these three or more other persons in connection with this series of violations," was sufficient to show the defendant acted "in concert" with at least three other persons. Id.