William K. Black Testimony Concerning Accounting Control Fraud Crucial for Defense
Econintersect: In what is being called an unprecedented decision, a Sacremento federal court jury has acquited four charged with fraud for submitting applications for “liars’ loans. The defense attorneys argued successfully that the banks and other mortgage originators that the prosecution had identified as victims were in fact victimizing the mortgagors who signed the lairs’ loan applications and received the money for purchase of a home. An article in the Sacramento Bee says that the defense presented evidence that the lenders “ignored gaping holes and blatant lies in loan applications“.
Those who have read the many articles written by the expert witness for the defense, William K. Black, University of Missouri Kansas City, know that he has documented that a common mortgage origination practice was not to “ignore” defective applications but to actually prepare them for the applicant to sign. The objective of these originators was to get as many mortgages placed as possible for packaging into securities; they had no interest in whether mortgage payments would be made because they were compensated only for the mortgage production and were not compensated (or penalized) if no mortgage payments were made.
In fact, in Prof Black’s research he has reported a practice of the mortgage broker preparing the false application, paying the mortgage applicant a fee for “closing” (for signing) and then making the first month’s mortgage payment for the applicant so that the mortgage would appear current during the securitization process. Why was this done? If the broker received $5,000 for providing a new mortgage to the “system” and spent half of that on the “expenses” enumerated above he had a profitable business.
According to the prosecution (more below), the mortgage fraud process in this case was more complicated than the above example.
It wasn’t just small fry brokers involved in this type of operation. Bank of America just paid a $16.5 billion settlement which was in part for activity of this sort conducted by Countrywide, formerly the country’s largest mortgage banker, and now part of Bank of America.
The four defendents in the Sacramento trial were Yevgenity Charikov, Vitaliy Tuzman, Nadia Talybov and Juliet Romanishin. From the Sacramento Bee:
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.
The defense successfully argued that the lenders encouraged the actions of the defendants and therefore could not be considered victims in the affair. Defense lawyer Toni Whitemade a statement after the verdict:
“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. 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.”
The straw man multiple transfer scam to grossly inflate the ultimate property sale price (and then create a large commission for a large mortgage) is a well established accounting fraud process in mortgage finance. This is documented with specific examples in Prof Black’s book, The Best Way to Rob a Bank is to Own One.
- Sacramento federal court jury acquits 4 in local mortgage fraud case (Denny Welsh, The Sacramento Bee, 22 August 2014)
- Bill Black Helps Defendants win “Unprecedented Acquittal” (Stephanie Kelton, New Economic Perspectives, 23 August 2014)