Comments on Current Events In Criminal Law from the Federal Criminal Courts in Texas

September 3, 2007

INDICTMENTS FOR MORTGAGE FRAUD ON THE RISE

Investigations and Indictments for mortgage fraud are on the rise in the current climate of the sub-prime mortgage scandal. From high profile investigations involving the powerful to small time straw buyers, the government is showing a zero tolerance policy when it comes to investigating and prosecution of allegations of mortgage fraud.

For example, in July 2007 Sharpe James, the former Mayor of Newark, New Jersey, and a powerful state senator, was indicted, along with a female companion named Tamika Riley, in a real estate flipping scheme. James allegedly directed Riley to low cost city property who would then purchase the property and quickly sell it at exorbitant profit without any redevelopment as required by law. Enough profit that she allegedly made more than $500,000 from the purchases and sales, according to a federal indictment.

In 2006 twenty-one prominent Georgia citizens were indicted in a massive mortgage fraud scheme. In July 2007 seven of those defendants plead guilty to the mortgage fraud scheme. The defendants were indicted in a scheme that used “straw borrowers” – sometimes illegal aliens – to purchases millions of dollars in mortgages at steeply reduced prices.

The federal indictment charged that the defendants used the straw borrowers to purchase residential properties from builders and others at fraudulently inflated prices. The defendants then secured inflated appraisals that supported their purchase prices which, in turn, allowed them to obtain inflated mortgage loans in the names of the straw borrowers. All the parties would then split the excess loan proceeds, including some of the straw borrowers.

In California a foreclosure specialist named Christopher Craig pled guilty in July 2007 to bank fraud in a scheme in which he approached homeowners on the verge of having their homes foreclosed by mortgage lenders. Craig promised to loan them money, but instead got the desperate homeowners to sign documents which deeded their property to “straws” who then applied for home equity loans from Washington Mutual Bank. These “straws” falsely claimed to be the real owners and that there were no other mortgages against the property. Washington Mutual loaned some $1.2 million that ended up in Craig’s bank accounts.

In United States v. Weiss, 469 F.Supp.2d 941 (D.Colorado 2007) a federal district court dealt with a case in which the defendants were charged with wire fraud, mail fraud, and witness tampering in connection with a scheme to arrange fraudulent home mortgages. Id. at 943. The defendants brought a motion to prohibit the Government from using evidence related to 32 properties that were not identified in the indictment as evidence of wire fraud and mail fraud. Id.

The district court outlined the factual background in the Weiss case:

“The Grand Jury indicted defendants on April 20, 2005 on multiple counts of mail fraud, 18 U.S.C. § 1341, wire fraud, 18 U.S.C. § 1343, and jury tampering, 18 U.S.C. § 1512(b)(3). According to the Indictment, the defendants organized a scheme to obtain mortgage loans for low-income, unsophisticated Hispanic home-buyers through a housing subsidy program sponsored by the United States Department of Housing and Urban Development (‘HUD’). Defendants purchased homes, made modest improvements, and resold the homes at a profit to the purchasers. Defendants worked with the buyers to obtain HUD subsidized loans for which they were not otherwise eligible. Defendants provided the lenders with false information about the buyers, provided the buyers' down payment money in violation of HUD rules and provided false social security numbers and other identification for the purchasers. The Indictment lists nine properties that were the subject of this scheme.” Id., at 945.

The Government in Weiss wanted to use transaction related to the additional 32 properties as “substantive evidence of the scheme element in the charges for mail fraud and wire fraud.” Id. The defendants objected, arguing that this impermissibly expanded “the scope of the indictment, violating their fundamental constitutional protections and potentially subjecting them to double jeopardy.” Id.

The defendants objections were rooted in a fundamental premise of constitutional law: a criminal defendant may be tried only on the charges laid out in a grand jury indictment. See, Russell v. United States, 369 U.S. 749, 770-71 (1962). This rule of constitutional law arises from the Fifth Amendment right of a grand jury indictment and the Sixth Amendment right of notice of the charges filed against him. See, e.g., United States v. Hien Van Tieu, 279 F.4d 917, 921 (10th Cir. 2002).

These constitutional guarantees prohibit a prosecuting attorney from expanding the charges against a defendant and prevent an accused from being convicted for something not charged in the indictment. By limiting the prosecution to the charges contained in the indictment, the accused has adequate notice of the charges he must prepare to defend against. See, United States v. Radetsky, 535 F.2d 556, 562 (10th Cir. 1976).

The district court in Weiss said that an indictment can be broaden under two theories: “constructive amendment” and “material variance.” Id., at 946. A constructive amendment occurs when the evidence presented at trial and the jury instructions create the possibility that a defendant was convicted of an offense not charged in the indictment. Id. A material variance occurs when the charging terms in the indictment are not changed, but the evidence presented at trial establishes facts different from those alleged in the indictment. Id.

The district court concluded that evidence of additional properties was inadmissible “if it allows the jury to convict on a crime not charged in the indictment, if it subjects the defendants to prejudice at trial due to inability to anticipate evidence, or if it subjects defendants to double jeopardy.” Id.

The court then discussed the elements of both mail fraud and wire fraud:

“In this case, proving violation of mail fraud requires satisfying two distinct elements: ‘(1) the existence of a scheme or artifice to defraud or obtain money or property by false pretenses, representations or promises, and (2) use of the United States mails for the purpose of executing the scheme.’ Tal v. Hogan, 453 F.3d 1244, 1263 (10th Cir.2006). The elements of wire fraud are ‘very similar,’ but require the use of ‘inter-state wire, radio or television communications in furtherance of the scheme to defraud.’ Id. Under the mail and wire fraud statutes, each individual use of the mail and the wires constitutes a separate offense. U.S. v. Gardner, 65 F.3d 82, 85 (8th Cir.1995). See also U.S. v. Kennedy, 64 F.3d 1465, 1476 (10th Cir.1995) (‘The statute clearly contemplates a separate mail fraud count each time the mail is used to help execute the fraudulent scheme-not each time a misrepresentation is made.’) The Indictment alleges 12 specific counts of mail fraud and 5 specific counts of wire fraud in relation to 9 specific properties between June of 1998 and February of 2002. The Indictment does not specify the additional properties and so does not identify any specific wire or mail fraud transactions in relation to these properties.” Id.

The district court was faced with two constitutional problems presented by the defendants. First, the jury could convict them for wire and mail fraud violations not charged in the indictment, and, second, the indictment did not provide a jeopardy bar for mail or wire fraud charges brought in the future in connection with the additional properties. Id., at 947.

The district court dismissed both of these potential constitutional problems, finding that “this evidence (the additional properties) is admissible as substantive evidence to prove the alleged scheme, one element of the mail and wire fraud counts.” Id., at 948.

The Weiss decision reflects an increasing judicial and law enforcement intolerance for mortgage fraud. The defendants in that case were involved in an organized scheme “to obtain mortgage loans for low-income, unsophisticated Hispanic home-buyers….” designed to cheat the government.

Speaking about the indictment of the former Newark mayor, FBI Special Agent in Charge Weysan Dun said: “The indictment of Senator and former Newark Mayor Sharpe James is powerful proof that the FBI will not allow corruption to exist in New Jersey government.”

This legal column offers one piece of sound advice: if investigation or indicted in a mortgage fraud scheme involving mail fraud, wire fraud, and/or bank fraud, quickly secure a highly qualified attorney in this area of this law and be prepared to wage a protracted defense. These are technically difficult cases for the government to prove and an aggressive initial defense can make all the difference.

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