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.