Mortgage fraud and bailing out the banks

As the government has been bailing out banks that are the "victims" of a crazy boom in housing, an investigative report shows that banks in Florida were looking the other way when property flippers were getting fraudulent loans from them. Here are a few quotes:

A yearlong Herald-Tribune investigation into thousands of suspicious Florida flip deals found that lenders of all kinds approved risky deals and ignored obvious red flags for mortgage fraud.

...

When a Sarasota home builder was unable to sell his newly built houses, mortgage companies lent him and his family nearly $2 million so they could purchase four themselves. Three of those properties are now bank-owned.

Washington Mutual loaned a Sarasota resident $2 million three months after it had foreclosed on a previous $2 million loan. The new loan went into default less than a year later, about the same time WaMu's crush of bad loans put it out of business.

...

Banks and mortgage companies dug an even deeper hole for themselves by continuing to lend money for suspicious deals long after the real estate boom ended. In 2007, more than a year after the market started falling in mid-2005, flippers arranged more than $1 billion in sales involving suspicious price increases.

...

What makes the flipping fraud so egregious is not just that it happened, but that it would have been so easy to stop.

It makes you wonder what happened to the huge commissions that the loan officers took home as they signed away good money for bad loans.

Yachtzi Scheme

As further evidence supporting the claim that you can sell anything to 3% of the population, the WSJ reports that an outrageous Ponzi scheme may be unraveling in southern California (thanks, Kevin Butler, for the pointer). The focus of the Ponzi scheme? Yachts:

Investors say they were lured by “boat deals.” The plan was for Mr. Fitzgerald to buy boats on the cheap, sell them to buyers he had prearranged and record a hefty profit.

One investor said he earned $4,000 on a $20,000 investment in four weeks. Profits were rolled into the next deal. The investor says he is now out $120,000–$100,000 of which was financed with a home-equity loan.

Client money held in escrow accounts by Mr. Fitzgerald for the purchase of high-end yachts has been cleaned out. Authorities say total losses could be in the millions of dollars.

The case goes to show that even during a global financial crisis, investors are again so hungry for returns they were blind to clear risks. Some investors put money with the broker just two months ago.

Buying boats and re-selling them for quick profit at a time when boat-sales have crashed? It almost make postage stamps sound sophisticated.

I guess this serves as a stark reminder of the need for common sense and skepticism when attempting to avoid fraud...

Bernie's lifestyle change...

News reports describe some fairly drastic lifestyle changes for Bernie Madoff now that he's in prison. Here are a few excerpts describing Bernie's new life:

"Some of the guys were talking about smacking him around a little, just to get the notoriety of it," said a source who has a relative locked up with the 71-year-old Madoff.

Every day's a bad hair day for Bernie, who was shocked at seeing how much his hair had grown and how unkempt it has looked since he was incarcerated in March.

"When I finally looked in the mirror, I scared myself, because I haven't seen myself in four months, and my hair was everywhere," Madoff told fellow inmates last week.

As for his diet, he's eating macaroni and cheese instead of caviar, filet mignon and $500 bottles of wine.

What's happening in New Jersey?!

A NY Times Op Ed offers these encouraging words to those who don't live in New Jersey:

No matter what dreadful embarrassment your state is facing, you can always console yourself by remembering that you do not live in New Jersey. On Thursday, a vast corruption sweep there netted three mayors, two state assemblymen, five rabbis and a guy who had allegedly been running an organ-trafficking business that has left swathes of the population of Moldova walking around with only one kidney.

Read this for more details...

A minor $700 million Ponzi scheme

Last week, Mark S. Dreier was sentenced to 20 years in prison for running a $700 million Ponzi scheme. Since Bernie Madoff and Sir Allen Stanford have stolen the fraud spotlight in the news, we hardly take notice of these frauds amounting to less than several billions of dollars. It seems that our sense of awe has been permanently warped.

As for Mr. Dreier, he explained his pressure to commit the fraud came because those that he associated with were doing “better financially and seemingly enjoying more status,” and that he felt “crushed by a sense of underachievement.”

He continued: “I was desperate for some measure of the success that I felt had eluded me,” he wrote, adding: “I lost my perspective and my moral grounding, and really, in a sense, I just lost my mind.”

I guess this is a lesson to be careful about how those you associate with may be warping your sense of reality and your priorities. Maybe Mr. Dreier is a reflection of many Americans who got caught up in the real estate boom that has come crashing down of late.

Satyam Fraud

A report by the Comptroller and Auditor General of India indicates that the Satyam fraud could have been uncovered in 2007 (source). However, a government agency appears to have looked the other way, allowing the fraud to continue undiscovered until January 2009. Many of the fraudsters who have been exposed over the past year or so seem to have had an uncanny ability to get government agencies to look the other way.

Schwab Faces Fraud Suit

Via the WSJ:

In an official notice sent to Charles Schwab & Co. Friday, Attorney General Andrew Cuomo warned that his office plans to sue the largest online brokerage firm for civil fraud over its marketing and sales of auction-rate securities to clients. Emails and testimony cited in the letter show Schwab's brokers had little idea of what they were selling and later failed to tell clients that the market was collapsing.

Seems like another example of obscurity on Wall Street. In this case, the brokers allegedly didn't even understand what they were selling...

Catching Up

I know what everyone must have been thinking over the past few days: the Zimbelmans must have been busted for running a ponzi scheme and it hasn't been in the news because it has been overshadowed by the Madoff and Stanford frauds...

Actually, although some have suggested that either my dad or I commit fraud to give our blog more credibility (see Sam Antar or Barry Minkow), neither of us are quite ready to take that step.

During our 10 day hiatus, the fraud world has kept busy. A few interesting stories:

1. An elaborate scheme to defraud state auditors and other vendors is unraveling (source):

North Carolina records show that "Christina Ann Clay" set up three corporations on Jan. 6: Deloite Consulting, Unisyss Corp. and Acenture Corp. The Clay identity was employed again March 16 to register a fourth name, Electronic Data System Corp.

Each name is similar to that of legitimate companies that West Virginia has done business with, to the tune of $202 million since the 1990s, the auditor's records show.

West Virginia isn't the only state to be hit by this scheme--the scammers are also being investigated in Utah and may have defrauded numerous other states. Looks like an epidemic of poor internal controls.

2. Madoff's auditor pleads not guilty

3. Stanford is still complaining about having to account for his assets before the judge will release funds to pay for his defense. Stanford claims that such an accounting would violate his Fifth Amendment privilege against self-incrimination. Sounds pretty sketchy to me...

Dodging the Regulators

Not only did Allen Stanford get help from Antiguan regulators, he also found ways to escape oversight in the US. The Miami Herald reports:

Years before his banking empire was shut down in a massive fraud case, Allen Stanford swept into Florida with a bold plan: entice Latin Americans to pour millions into his ventures -- in secrecy.

From a bayfront office in Miami in 1998, he planned to sell investments to customers and send their money to Antigua.

But to pull it off, he needed unprecedented help from an unlikely ally: The state of Florida would have to grant him the right to move vast amounts of money offshore -- without reporting a penny to regulators.

He got it.

Over objections by the state's chief banking lawyer -- including concerns that Stanford was laundering money -- regulators granted sweeping powers never given to a private company.

The new company was also allowed to sell hundreds of millions in bank notes without allowing regulators to check for fraud.

What good are regulations if companies can be granted exemption from regulatory oversight?

Ethics and Ponzi schemes...

The NY Times published an interesting article that describes how many Madoff victims are upset because the trustee, Irving Picard, is not counting funds that were paper gains in Madoff's Ponzi scheme. This article does a good job illustrating how we often focus on how a decision affects us, personally, and ignore how it impacts others. When we fail to concern ourselves with how a decision affects others, we often behave in ways that are immoral or unethical. I try to help my students see how unethical behavior is selfish and takes from someone else. Here is a classic example from the NY Times article:

Put yourself, for a moment, in the shoes of a certain class of Madoff victim — what the trustee is calling “net winners.” These are the people who took out more money from their accounts than they put in. ... I’m talking about the Madoff investor who put in, say, $1 million and over a 15-year period withdrew $1.2 million.

On that person’s November 2008 statement — the last one before the fraud was exposed — she probably still had a very healthy balance, maybe $500,000 or more. It’s only natural that she views that balance as money that was hers — but that she has now sadly lost. To her, that money is real.

Now look at that same net winner from Mr. Picard’s point of view. In truth, that $500,000 doesn’t exist. After all, Mr. Madoff wasn’t really running an investment fund; he was running a Ponzi scheme. The steady returns, from which that $500,000 was supposedly generated, were fictitious.

“What they were getting was other people’s money,” said David J. Sheehan, a lawyer at Mr. Picard’s firm, Baker Hostetler. In other words, any money our hypothetical Madoff investor received came from the pockets of other Madoff investors, who were putting money into their accounts. That’s how Ponzi schemes work. And because that $500,000 never really existed, Mr. Picard has said he will not count it. He is going to count only how much actual money went into an account versus how much came out.

Perhaps if people would ask whether the latest "get rich quick" scheme that they are considering might be hurting another person, Ponzi schemes wouldn't be so prevalent in our society...

Behind Stanford's Back?

Stanford's number two man, former CFO James Davis, will plead guilty to the charges leveled against him. Stanford's lawyers respond by claiming that Mr. Davis acted without Mr. Stanford's knowledge (via Houston Chronicle):

“If Mr. Davis committed crimes, it was without the knowledge or approval of Allen Stanford, and Mr. Davis will have to answer for those crimes,” DeGuerin said. “It is human nature for a criminal to try to shift the blame for his own conduct in order to make a deal with the prosecution for a lesser sentence and to escape full responsibility for his crimes.”

Let’s assume for a second that Stanford had no knowledge of any wrongdoing by Mr. Davis (which, in my opinion, is highly doubtful). In such a situation, wouldn't it be grossly negligent of Stanford to have no knowledge of activities related to the core business of Stanford Financial Group?

Multimillion Dollar Legal Defense?

Before Allan Stanford can spend millions of dollars on his legal defense, he must prove that those funds are clean (via the Houston Chronicle):

A Dallas federal judge won’t release millions of dollars for R. Allen Stanford to pay his legal team unless Stanford can account for his assets and show that money he wants unfrozen isn’t tainted by the $7 billion fraud he is accused of running.

While Stanford deserves fair legal representation, I think this is a great move by the judge--Stanford shouldn't be able to spend a fortune on his defense with funds that may have been obtained through a Ponzi scheme.

Madoff's feeders reached all the way to Austria

The WSJ reported that prosecutors in the Madoff case are alleging that a fund manager in Austria, Sonja Kohn, received $40 million in kickbacks to feed Madoff's Ponzi scheme. As we've heard many times now, Mrs. Kohn claims that she is "actually the greatest Madoff victim."

Did Madoff have inside help?

Hot off the press from The Washington Post:

Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, sent e-mails to a supervisor, saying information provided by Madoff during her review didn't add up and suggesting a set of questions to ask his firm, documents show. Several of these questions directly challenged Madoff activities that much later turned out to be elements of his massive fraud.

But with the agency under pressure to look for wrongdoing in the mutual fund industry, she wasn't able to continue pursuing Madoff, according to documents and two people familiar with the investigation, and her team soon concluded its work on the probe.

Walker-Lightfoot's supervisors on the case were Mark Donohue, then a branch chief in her department, and his boss, Eric Swanson, an assistant director of the department, said two people familiar with the investigation. Swanson later married Madoff's niece, and their relationship is now under review by the agency's inspector general, who is examining the SEC's handling of the Madoff case.

Getting to the bottom of the first ever "Madoff scheme" (the new phase for an outrageously large Ponzi scheme) may not happen in this life...

Beware of the scammers if you're looking for work.

The FTC announced a new push to crack down on the apparent increase in scammers who are preying on those who are looking for work. It seems that whenever troubles hit a group of people, scam artists see it as an opportunity to take advantage of someone. They offer some product or service that is bogus but is marketed to quickly and easily solve the victim's problems. This includes the unemployed, the elderly who have lost their retirement portfolios, even hurricane victims. Watch out for these shameless fraud perpetrators--they seem to be everywhere!