Real estate flippers avoided criminal conviction because they argued, and persuaded the jurors, that the REAL criminals were the banksters!! No way!!!
“In an unprecedented trial, four people charged with mortgage fraud were acquitted Friday by a jury in Sacramento federal court after defense attorneys argued the real culprits are the so-called victim lenders.” https://www.sacbee.com/2014/08/22/6648529/sacramento-federal-court-jury....
Let’s do a little background.
We all know of the real estate boom, and bust, particularly in California, and specifically localized in massive numbers in California’s Central Valley. Essentially, some of us have correctly pointed out that the root cause of the onset of the bubble, were criminal bankers, beginning with Blythe Masters of JPMorgan, who conjured up the scheme of securitized finance for home mortgages. The scheme was simple: the big banks would write loans, using investor money, and none of the banks’ own money. Once the loans were made, the banks would in turn package a thousand loans or so, and bundle them up, then sell them as a whole to investors, as a security. Investors getting first dibs at repayment streams [upper tranches] were paid less interest, than investors who were last to be paid [lower tranches]. The whole theory was that out of the pool of the thousand home loans, not all would default and go bad. Since in the aggregate, most of the loan payments would be paid on time, then those investors at the upper tranches were not risking non-payment as compared to the investors and the lower tranches. The interest rates were balanced against this risk, and the securities were marketed and sold off to investors.
The problem, though, crystal clear to anyone with a brain, from the inception of the whole scheme, is in the incentive structure of the whole mess.
Not a single participant in the scheme had a single incentive to scrutinize the deal. The prospective home loan applicant, wanted a home, and inflated the income and other figures on the application. None of the bankers cared about the fake applications, because the bankers were only going to bundle the loans and sell them off, having no skin in the game and having massive incentives to get more and more loans bundled regardless of the underwriting standards or risk of default.
The investors at the upper tranches cared not. They were guaranteed first payment from the income stream. Their risk of loss was near zero. The lower tranch investors cared not either, as they were getting astronomically high rates of return, and on balance, the risk to them of defaulting payment streams was outweighed by the lucrative returns, much like unsecured credit cards. They figured there would be defaults, but the high interest rates made it, on balance, perfectly acceptable.
The various middlemen in all the transactions, like appraisers, real estate agents, escrow companies, and all the durable goods manufacturers filling all those new homes with shiny new appliances cared not one bit either. Local governments, always desperate for tax dollars, care not one bit either that the mortgage applications were filled with false incomes, and outright lies.
Then, of course, the incentive structure, understood as it was, created a new class of opportunists: the flippers and fraudsters.
These criminals, correctly realizing that there existed NO incentive by any of the participants to scrutinize mortgage applications, began scheming with straw buyers to flip properties.
In Sacramento, this type of fraud was particularly rampant.
Here is where the story gets fun.
The basic crime details are set out here:
“According to prosecutors’ filings, Charikov, a 42-year-old real estate agent who lives in West Sacramento, used straw buyers to purchase properties in a declining real estate market and then immediately resold them to another straw buyer at fraudulently inflated prices. To qualify for the mortgage loans, prosecutors contended, the defendants submitted fraudulent loan applications to lenders, falsely stating the straw buyer’s income, liabilities, and intent to occupy the home as a primary residence.
“The indictment alleges that Charikov recruited his loan officer wife, Romanishin, 32, of West Sacramento; Tuzman, 42, of Citrus Heights; and Talybov, 32, of Antelope, as straw buyers in transactions involving the sale and purchase of two West Sacramento properties in 2006 and 2007.
“After the first set of straw buyers obtained the proceeds from Talybov’s fraudulent purchases, they allegedly split the take with Charikov. Subsequently, Talybov defaulted on loans for both properties.
All four were charged with fraud that resulted in alleged losses to the lenders of at least $710,000. Charikov and Tuzman were also charged with laundering their ill-gotten gains.”
Got it so far? The United States Attorney, in a hard-hit part of California, used its massive massive, taxpayer-funded resources, and made the decision to charge the low-level fraudsters, and none of the bankers. No plea deals were reached.
Instead, in an act of incredible lawyering, the defense attorneys turned the case on its head by arguing the real criminals were the banksters! Unbelievable.
Remember, to prove fraud, one element is reliance. That means the banksters, who lost the $710,000, had to prove that they relied upon the statements in the loan application to lend the money. The criminal defendants showed that the loans would have been made anyway, whether the application information was true or completely false. Thus, there was no reliance, an essential element, and the jury acquitted the criminal defendants. Brilliant, simply brilliant, and my hat is off to those fine lawyers who advocated a winning position. It was a risky move, too, one that drew sharp objections from the prosecution:
“In this trial, U.S. District Judge Lawrence K. Karlton, over the government’s strenuous objection, allowed testimony meant to show that the lenders in the two transactions at issue – Aegis Wholesale Corp. and Greenpoint Mortgage Funding – didn’t care whether information on the applications was true or false. Under those circumstances, the defense argued, the information was not material because, either way, the loan would have been approved.”
As an aside, I am a bit miffed that the criminals got away with fraud, as this now sends a message that prosecuting low level fraud may not achieve the desired convictions. This now creates a MOPE problem for the Feds. That means those idiots and criminals in Washington have to dream up a new class of criminal defendants to pursue. Who knows what the next set of criminals will be? Maybe us bloggers who dare to challenge the government spin machine? Perhaps returning war veterans who dare to criticize the inept commander in chief? Stay tuned on this one.
Anyhow, back to the story.
In a statement given after losing a sure winner, the US attorney, Benjamin Wagner, did not mention his own office’s lack of pursuing the real criminals, the banksters:
“U.S. Attorney Benjamin Wagner, in a statement issued at The Sacramento Bee’s request, said:
“Criminal trials are inherently uncertain endeavors. We have had tremendous success in convicting scores of persons in mortgage fraud cases over the last several years, but it is unrealistic to expect that we will get the outcome we are seeking in every single case.
“We respect the criminal trial process, and accept the jury’s verdict in this case. It will not dissuade us from pressing forward in the many other mortgage fraud cases currently pending in this courthouse.”
What is telling here, is the UA attorney’s reliance on PAST success, attempting to foreshadow future success: “An acquittal in Sacramento federal court is rare, regardless of the charges. But with respect to mortgage fraud, it is virtually unheard of. There was little or no difference between the mail fraud charges against Yevgenity Charikov, Vitaliy Tuzman, Nadia Talybov and Juliet Romanishin and charges brought against hundreds of other defendants prosecuted by the U.S. attorney’s office in the Sacramento-based Eastern District of California. The office has often described the Central Valley as “ground zero” for mortgage fraud, and noted it has been a national pacesetter in pursuing the perpetrators.”
The winning defense attorney, naturally, highlighted the real issue:
““The big banks and other lenders made as many loans based on patently false information as they could, packaged them as securities and passed them up the chain to Wall Street’s investment and management bankers, who peddled them to an unsuspecting public,” said defense lawyer Tim Pori after the verdict.
“No bank executives have been prosecuted,” Pori said. “Sure, there have been multibillion-dollar settlements with some big banks, but none of their officers – the ones who really pulled the strings – will ever see the inside of a cell.”
“In the week when details of the United States government’s $16.5 billion civil settlement with Bank of America was disclosed, I hope the jury’s verdict causes the U.S. attorney’s office to readjust its priorities and investigate criminally the true culprits of our country’s financial collapse, the mortgage lenders’ officers who committed the real fraud – not those who allegedly lied on the industry’s ‘liar’s loans,’ ” said defense lawyer John Balazs.”
The star defense witness, none other than William Black, chimed in as well:
William Black, who boasts long academic and regulatory careers, was a key expert witness for the defense, again over Coppola’s objection. Black is an associate professor of economics and law at the University of Missouri, Kansas City, and the “distinguished scholar in residence for financial regulation” at the University of Minnesota’s School of Law.
His testimony purportedly connected the fraud in the Sacramento case directly to the lenders, and he explained to the jury why the false information on the applications had no bearing on lending decisions.
“This is the first time that the overwhelming fraud at the banks has been discussed in a criminal courtroom by the person with the greatest expertise on the issue, William Black,” said defense lawyer Toni White after the verdict.
“Prosecutors have refused to criminally prosecute the elite bankers responsible for the mortgage crisis that decimated our economy. The jurors heard shocking testimony from ‘control fraud’ expert William Black that regular people who got loans they were unable to pay back did not (defraud) the banks. The elite bankers commit the fraud while prosecutors look the other way and prosecute the wrong people.”
If Rand Paul wins the presidency, he could do no better than to appoint William Black as Attorney General. Will we see that?