Wednesday, July 8, 2009

Mortgage Fraud

Manhattan District Attorney Robert M. Morgenthau announced today the indictment of 13 individuals and a mortgage origination company for perpetrating over $100 million in mortgage fraud over a four-year period in the New York City metropolitan area. In addition, 12 individuals have already waived indictment and pleaded guilty to felonies relating to their participation in the mortgage fraud scheme.

The indictment charges 13 individuals and the mortgage company, AFG FINANCIAL GROUP, INC., with enterprise corruption, grand larceny, scheme to defraud and conspiracy involving 19 fraudulent mortgage transactions. The defendants include the principals and a number of employees of the mortgage company, as well as bank employees, appraisers, and three attorneys. Two other attorneys are among the defendants who already pleaded guilty. The crimes charged in the indictment occurred between June 2004 and April 2009 with the bulk of the fraudulent closings occurring from mid-2005 through the end of 2007.

The 10-month investigation leading to today’s indictment revealed that AFG Financial Group (AFG), along with a network of co-conspirators and accomplices, located distressed residential real estate properties in New York City and surrounding counties. They then engaged in a fraudulent scheme to steal millions of dollars from lending banks in Manhattan and elsewhere using sham sales of those properties. The conspirators caused the banks to front millions of dollars to finance purchases of the properties. They then walked away with most of the cash, leaving behind over-valued properties and worthless mortgage papers.

AFG was located in Garden City, Long Island, and was the primary vehicle of the fraudulent scheme. AFG held itself out as a legitimate mortgage broker. It was founded by defendants AARON HAND, EUGENE CULBREATH and ERIC SHIELDS. HAND was the President of the company and ultimately controlled the criminal enterprise. CULBREATH and FRANK MIALE were the principal lieutenants and controlled the day-to-day operations, including supervising the execution of fraudulent real estate mortgage transactions. SHIELDS held the title of CEO and held AFG’s mortgage broker license. He also participated in and ran some of the sham mortgage transactions.

The AFG Criminal Enterprise represented to lending institutions that it put together arms-length residential real estate transactions to be financed by secured mortgages. In fact, AFG’s business model was focused solely on defrauding the lending banks of millions of dollars. AFG paid property locaters, including defendants JERRY STRKLJA and MARIA ALBERTINA, to find properties suitable for their fraudulent ventures. Generally these were properties owned by people in financial distress. AFG paid recruiters, including defendants MARILYN MATEO, DARLITA BOSTIC, ALLYSON HINDS, RAJMOHAN AUTAR and GIOVANNI MUNIVE, to find straw buyers – people with good credit ratings but little cash who would be the putative buyers at the real estate closings. The straw buyers were told they had the opportunity to participate in risk-free real estate transactions. They were often told that the transactions would help distressed home owners save their homes, while earning the straw buyer and other investors a healthy return on their investment. Instead, after an initial up-front payment, the straw buyers received nothing. Because the defendants failed to make any mortgage payments after the first few months, the mortgage loans went quickly into default and the straw buyers’ credit ratings were ruined. And, the sellers’ homes went into foreclosure.

Once a straw buyer had been recruited and matched to a specific property, the AFG Criminal Enterprise used forgeries and false records to enhance the fraud by falsifying the straw buyer’s loan worthiness. Defendants MATTHEW MCDERMOTT, WAYNE SISMAN, SALVATORE TRAPANI and CHRISTOPHER CARR and other AFG employees created forged documents such as W-2’s and bank statements to increase the straw buyer’s apparent income and assets so they could borrow more money. They also assembled the false loan packages to submit to lenders, assisted in the sham closings, and helped launder the stolen funds. Corrupt property appraisers, including defendant STEPHEN MARTINI, provided written appraisals that inflated the apparent values of the properties beyond their true market value. Bank employees, including defendant JENNIFER SCHIFF, provided documents verifying that the forged bank statements were accurate. Finally, AFG submitted the fraudulent applications with false statements and forged documents to mortgage lenders such as Countrywide Home Loans or New Century Mortgage Corp. where defendants JEFFREY PHELAN and PATRICK KUHL were employees. In exchange for a share in the illicit proceeds, PHELAN, KUHL and other still-uncharged lending institution employees made sure that the loan applications were processed quickly and without proper diligence or investigation.

At the sham real estate closings, AFG brought in lawyers to play the roles of legal counsel for buyers, sellers and banks. Instead of looking after their clients’ interests, these lawyers made sure that the closings went smoothly, that no one asked any questions, and that the principals of AFG received the lion’s share of the funds obtained from the defrauded banks. Defendants MARC ZIROGIANNIS and FRED LAX generally represented the banks. In so doing, they betrayed their clients and caused their client’s funds to be stolen. ZIROGIANNIS and LAX also ran title companies that were employed as part of the scheme.

They received into their title company escrow accounts closing funds from the banks that were, according to the fraudulent closing documents, supposed to go to the sellers of the properties. Instead, ZIROGIANNIS and LAX re-directed these funds to shell accounts controlled by the principal members of AFG. Defendants EDMOND BEROOKHIM, KENNETH LAW and KATHLEEN SCANLON were paid by AFG to represent buyers and sellers at the sham closings, a role sometimes played by LAX and ZIROGIANNIS as well. These attorneys often did not meet or communicate with their so-called clients until the day of the closings, did not negotiate closing or contract terms, and generally betrayed their clients’ interests and were paid off by AFG for their efforts. In addition, defendant SHARON THOMPSON posed as a real estate agent at the closings and received a portion of the closing funds that was then laundered back to the AFG principals.

In one particularly brazen sham transaction, the defendants created an appraisal report for a two-family home with a stated value of over $500,000. In reality, the location was a vacant lot. Defendant STEPHEN MARTINI was paid by the AFG participants to create the bogus appraisal report. The AFG participants then altered the title paperwork – changing the designation vacant land to reflect a certificate of occupancy for a two-family structure. Armed with the false appraisal and title documentation, the AFG group then proceeded with their typical sham closing. This deal alone accounted for over $500,000 in stolen proceeds.

The larcenies in the indictment charge the defendants with stealing over $12 million in lending proceeds through trickery and fraud, mostly from banks in Manhattan. In fact, the efforts of the AFG Criminal Enterprise appear to have defrauded banks of well in excess of $100 million. In addition, their efforts undermined a financial system that is relied upon by individuals, government and business for its accuracy and integrity. The mortgages fraudulently obtained by AFG were quickly securitized and sold into the secondary market as collateralized debt obligations. Bond rating companies assigned qualitative values to these securitized mortgage instruments, assuming that they were, in act, arms length transactions secured by real property owned by bona fide owners.

District Attorney Morgenthau also noted flaws in the City’s deed recording and registration system, as well as scant regulatory oversight of the mortgage industry, helped the defendants in their criminal endeavors. District Attorney Morgenthau called for accountability in the financial sector, reform of the regulatory system, and substantial changes to the City and State’s oversight procedures. “These defendants were able to get away with this conduct for four years because the mortgage industry simply passed the defective loans to the secondary markets with little motivation to scrutinize the actual risks, industry regulators paid little or no attention, and the City and State’s systems provide for no verification of property sales. These defendants and others who commit mortgage fraud contributed to the failure of the securitized debt market. Our investigation will continue as we make efforts to hold accountable those who cheat, lie and steal to undermine our financial systems for personal gain.”

All of the defendants were indicted for Enterprise Corruption, a class B felony punishable by up to 8 1/3 to 25 years in prison, Grand Larceny in the Second Degree, a class C felony punishable by up to 5 to 15 years in prison, Scheme to Defraud in the First Degree, a class E felony punishable by up to 1 1/3 to 4 years in prison, and Conspiracy in the Fifth Degree, a class A misdemeanor punishable by up to 1 year in jail. In addition, defendants AFG, AARON HAND, EUGENE CULBREATH, MARC ZIROGIANNIS, KENNETH LAW, JEFFREY PHELAN, JERY STRKLJA, MARILYN MATEO, ERIC SHIELDS, RAJMOHAN AUTAR, and ALLYSON HINDS were indicted for Grand Larceny in the First Degree, a class B felony.

The investigation is continuing.

Mr. Morgenthau thanked the New York State Banking Department and Superintendent of Banking Richard H. Neiman for their assistance, and Rholda Ricketts Deputy Superintendent of the Mortgage Banking Division, Ricardo Velez, Director of the Criminal Investigations Bureau, Gia Morris, Assistant Director of the Criminal Investigations Bureau and Delroy Levy, Lead Investigator of the Criminal Investigations Bureau.

Assistant District Attorney Ted Starishevsky led the investigation with Investigation Division Central Deputy Chief Gary T. Fishman, Senior Investigative Counsel Harold J. Wilson, and Assistant District Attorney Garrett Lynch. Investigative Analysts Alexis Etow and Richard Kim and Investigative Paralegals Song-Mee Yoon-Smith and Stephen Hsia assisted in the investigation, along with Investigative Paralegal Aaron Davidowitz and Financial Intelligence Director David Rosenzweig. The investigation was supervised by Investigation Division Central Chief Adam S. Kaufmann. In addition, Investigators Jerry Bergold, Michael Wigdor, Walter Alexander, Santiago Batista, Stephen McCallion, Jason Malone and Alex Farrugia of the District Attorney’s Investigations Bureau assisted in the investigation under the supervision of Deputy Chief Investigator Thomas Jackson, Assistant Chief Investigator Terrence Mulderrig and Chief Investigator Joseph Pennisi.

Indicted Defendants:

AFG FINANCIAL GROUP, INC.

AARON HAND, 12/25/1971
21 Koenig Drive
Oyster Bay Cove, New York

EUGENE CULBREATH, 5/30/1973
806 North Corona Avenue
Valley Stream, New York

ERIC SHIELDS, 12/19/1964
92 Old Mill Drive
Media, Pennsylvania

MATTHEW MCDERMOTT, 10/20/1986
1086 North Drive
Merrick, New York

MARC ZIROGIANNIS, 5/21/1968
48 Hawk Lane
Levittown, New York

KENNETH LAW, 6/01/1956
21 Fifth Avenue
Pelham, New York

KATHLEEN SCANLON, 11/27/1968
3415 Howard Blvd.
Baldwin, New York

JEFFREY PHELAN, 10/14/1964
152 Plymouth Blvd.
Smithtown, New York

JERRY STRKLJA, 10/03/1974
2525 27th Street
Astoria, New York

MARILYN MATEO, 9/19/1974
280 Calhoun Avenue
Bronx, New York

DARLITA BOSTIC, 6/27/1964

ALLYSON HINDS, 4/15/1968
23 Southfield Drive
Middle Island, New York

RAJMOHAN AUTAR, 8/08/1974
94-11 210th Street
Queens Village, New York

Convicted Defendants:

MARIA ALBERTINA, 2/06/1965
Grand Larceny in the Second Degree
Scheme to Defraud in the First Degree
Conspiracy in the Fifth Degree

EDMOND BEROOKHIM, 6/26/1973
Grand Larceny in the Third Degree

CHRISTOPHER CARR, 9/04/1985
Grand Larceny in the Fourth Degree

PATRICK KUHL, 8/01/1976
Falsifying Business Records in the First Degree

FRED LAX, 6/10/1961
Grand Larceny in the Second Degree
Grand Larceny in the Third Degree

STEPHEN MARTINI, 4/17/1953
Grand Larceny in the Second Degree

FRANK MIALE, 2/21/1982
Grand Larceny in the Second Degree (2 counts)

GIOVANNI MUNIVE, 3/28/1971
Grand Larceny in the Third Degree

JENNIFER SCHIFF, 6/25/1975
Falsifying Business Records in the First Degree

WAYNE SISMAN, 6/09/1975
Grand Larceny in the Third Degree

SHARON THOMPSON, 5/23/1965
Scheme to Defraud in the First Degree

SALVATORE TRAPANI, 7/23/1984
Grand Larceny in the Third Degree
Conspiracy in the Fifth Degree

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