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Defending Mortgage Fraud Cases 1

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Defending Mortgage Fraud Cases 1 Defending Mortgage Fraud Cases 1 Defending Mortgage Fraud Cases Jodi L. Avergun1 Jeannine F. D’Amico2 Cadwalader, Wickersham & Taft LLP Washington, D.C. I. INTRODUCT I ON rhinestones. The couple was serenaded by Patti LaBelle. Their guests dined on lobster, shrimp, Mortgage fraud takes many guises but can be and four wedding cakes, while drinking Moët and succinctly classified as either fraud for profit or Cristal champagne. Reportedly, the couple gave fraud for housing. In general, this article concerns select members of the wedding party a Porsche, a fraud for profit, as the vast majority of mortgage house, and a $10,000 check. All told, the wed- fraud cases concern this type of fraud. Industry ding’s price tag was close to $800,000.3 All the insiders such as real estate brokers and appraisers, while, Jackson’s lavish lifestyle and fairytale wed- lenders, loan originators, mortgage underwriters, ding were funded by a widespread mortgage fraud and settlement and title company employees have scheme run by Jackson, Fordam and others through all been targets of FBI investigations in the wake which they lured distressed homeowners with the of the financial crisis. However, perhaps as a re- promise of help and financial assistance and then sult of political pressure or the desire to make a fleeced them of their assets and what little money big impact quickly, prosecutors and investigators they had left. also have focused on criminal charges stemming Just two years later, on June 12, 2008, Jackson from investment banks that packaged and sold and her husband, along with several others, would mortgage-backed securities (“MBS”) in, at least in face criminal charges. They were indicted in the the government’s view, a fraudulent manner. District of Maryland and charged with conspiracy This article explores two such cases and the to commit mail and wire fraud, mail fraud, and differing results in each. It then explores strate- money laundering in connection with their efforts gies and tactics that can be used to defend similar to obtain money and property from homeown- cases and potentially any other type of mortgage ers and lenders through a “foreclosure reversal” fraud investigation—from the straightforward scheme that lasted from September 2004 through scammers taking advantage of the financial cri- June 2007.4 The indictment alleged that the de- sis to sophisticated investment bankers and their fendants used a foreclosure prevention scheme to managers against whom it is exceedingly difficult cheat homeowners out of the remaining equity in to prove scienter. their houses by transferring their homes to straw buyers. The defendants then defrauded lenders by inducing them to make new loans based on inflat- II. JOY JACKSON AND KURT FORDAM VERSUS ed appraisals and fraudulent credit applications.5 RALPH CI O ffi AND MATTHEW T ANN I N Beginning in September 2008,6 the eight named defendants began pleading guilty, with Jackson’s In June 2006, Joy Jackson and Kurt Fordam were guilty plea for conspiracy to commit mail and wire married in an extravagant ceremony in Washing- fraud finally entered on March 25, 2009.7 Jackson ton, D.C., at the historic Mayflower Hotel. Jackson was sentenced to 151 months in prison and 5 years wore a handmade oriental silk wedding gown with of supervised release, and was ordered to pay res- a 42-foot train and a tiara with Swarovski crystal titution in the amount of $16,880,884.86 and to 2 Jodi L. Avergun and Jeannine F. D’Amico forfeit residential and personal property.8 Her hus- ers and defrauded countless lenders. At the other band, Fordam, was sentenced to 10 years in prison extreme, Cioffi and Tannin stand as examples of for his participation in the scheme.9 The docket the complexities inherent in sophisticated finan- reveals little about whether, when faced with the cial fraud cases, and the pitfalls of trying to make somewhat daunting allegations in the case, the de- all investment bankers scapegoats for the financial fense was able to mount much of a challenge. distress that resulted from the subprime mess. At the same time that a grand jury in Maryland How does a lawyer go about defending the was issuing its indictment of Joy Jackson and Kurt charges brought against the Joy Jacksons and Kurt Fordam, Ralph Cioffi and Matthew Tannin were Fordams that walk through her door? How does being hauled out of their New York and New Jer- a defense attorney counsel her financial institu- sey homes in handcuffs, accused of lying to Bear tion clients to help them avoid falling victim to Stearns’ investors about the downturn of several such schemes? What strategies will work at trial? Bear Stearns mortgage-backed securities.10 As Where are the inherent weaknesses in these types former Bear Stearns hedge fund managers, Cioffi of investigations? and Tannin were indicted for mail fraud and With 18 mortgage fraud task forces and 53 FBI conspiracy and charged with misleading inves- working groups focused on ferreting out mortgage tors about the strength of two Bear Stearns hedge fraud schemes,14 plus the hyper-vigilant SIGTARP funds that later collapsed, allegedly initiating the making every effort to track and trace every dollar subprime mortgage crisis. Cioffi was also charged of taxpayer money paid out in the financial recov- with insider trading. They faced as much as 20 ery,15 mortgage fraud cases are becoming more years in prison each if convicted of conspiracy, and more prevalent. Consequently, it is increas- and Cioffi faced an additional 20 years if found ingly important for defense counsel to have an un- guilty of insider trading.11 derstanding of basic mortgage fraud defenses. Cioffi and Tannin succeeded in convincing a jury that the concerns they expressed in a series III. INVEST I GAT I ON of e-mails over the future performance of certain funds did not amount to criminal conduct. The government’s argument that the e-mails clearly A. Conducting Interviews. showed that Cioffi and Tannin knew that the funds One of the most effective defenses to mort- were performing poorly, and failed to disclose this gage fraud cases can be challenging the information to investors, was not persuasive to government’s assertion that the defendant the jury. After a mere six hours of deliberation, knowingly acted in a fraudulent manner. the jury returned not guilty verdicts on all counts. By interviewing eyewitnesses, underwriters, Defense counsel successfully argued that the gov- bank managers, appraisers, and others, it ernment’s “silver bullet” e-mails were just the op- may be possible to demonstrate that the de- posite—when read in their entirety, they proved fendant did not have the requisite intent, but that Cioffi and Tannin, at best, felt uncertain about rather was misled or unaware that he or she the performance of the funds at issue in the case, was a party to mortgage fraud. but that they had not intentionally committed a crime.12 In fact, one juror in the case later stat- B. Hiring the Right Experts. ed that she felt the market collapse could not be Unlike more traditional white collar fraud blamed on two people; another described Cioffi cases where hiring a forensic accountant may and Tannin as “scapegoats for Wall Street.”13 be enough, additional experts may be re- Joy Jackson and Kurt Fordam stand as extreme quired to investigate and defend a mortgage examples of one type of mortgage fraud— preda- fraud case. For example, property valuation tory actions by a select group of industry insiders and ownership are likely to be critical com- who took advantage of unsuspecting homeown- Defending Mortgage Fraud Cases 3 ponents of any defense. Thus, both forensic 7. Title Opinion. A title opinion will ex- accounting experts and forensic appraisal ex- amine all public records, laws and court perts may be required.16 decisions to confirm that the seller has a valid claim to the property. It will in- C. Tracing the Documents. clude past and current facts about the A typical mortgage fraud prosecution includes property. certain key documents, which together may 8. Mortgage documents and deeds, includ- amount to critical evidence in the case. It is ing warranty and quitclaim deeds, will key that defense attorneys and their experts demonstrate title transfers and the terms examine these documents for telltale signs of of any collateral pledged to the lender. fraud and forgery.17 9. Public filings, public statements, rating 1. Loan Application. Borrowers must com- agency reports, company financials, plete a loan application to qualify for the and e-mails and other correspondence loan. The application will include infor- are likely to be other key types of docu- mation such as social security number, ments associated with financial institu- income, employment information, the tion prosecutions or regulatory actions. purpose of the loan, debts and assets. 2. HUD-1 Form. Also called settlement IV. PRE -TR I AL AND T R I AL T ACT I CS : SUGGES - sheets, HUD-1 Forms detail the amount T I ONS F OR SUCCESS F UL MOT I ONS of funds paid at closing, including com- missions, taxes, escrow amounts, and loan fees. HUD-1 Forms are issued by A. Seeking a Bill of Particulars. the Department of Housing and Urban Rule 7 of the Federal Rules of Evidence may Development. be used to seek out additional specifics con- 3. IRS Form 4506. Form 4506 authorizes cerning the alleged misstatements made or the release of prior tax returns for in- scheme charged. Furthermore, successfully come verification purposes. obtaining a bill of particulars allows the de- fense to argue variations therefrom at trial 4.
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