High Risk, Low Reward Crimes

Mortgage Loan Fraud Assessment based upon Susp... Mortgage Loan Fraud Assessment based upon Suspicious Activity Report Analysis (Photo credit: Wikipedia)

One of the many things I do a lot lately is talk. I am the floor show for many bar meetings. I recently did two of these with a very nice lawyer from the Connecticut U.S. Attorney’s office, David Huang. They were both about mortgage fraud and how easily some lawyers got ensnared in a federal criminal prosecution.

Many really bad folks found ways to scam lots of money in real estate in the last decade, especially when property values were rocketing up weekly and banks were giving mortgages away with little or no due diligence. Most of the latest round involved inflating sales prices in order to mortgage more than the real price the property was being sold for. Sometimes the numbers were made to balance by using phony deposits. Other times, bogus “seller’s concessions” or equally dubious “repair credits” found their way to the HUD-1. Incredibly, there were instances when multiple HUD-1 forms were prepared for the same closing—one for the bank and one showing the real deal. The difference was that on the latter recap, cash moved to and not from the buyer.

Because someone had to prepare the paperwork, lawyers were offered the work, sometimes by their clients, sometimes by their colleagues and friends. In most cases, all the lawyer got out of the deal was his or her typical fee, and sometimes the title premium. In exchange, these lawyers exposed themselves to federal criminal prosecutions where the range of guidelines sentences ran from 41 to 51 months. David described those cases, in perhaps the biggest understatement of the year, as “high risk, low reward” crimes.

The list of criminal violations related to these seemingly simple transactions includes mail, wire and bank fraud as well as conspiracy and other wrongs. The fact that the lawyers did not plan and benefited little from the activity seems to be irrelevant. One of the tricks of conspiracy and accessory jeopardy is that anyone and everyone can be tagged with the activity of the worst actor, the degrees of culpability being only relevant for sentencing purposes. Claims of ignorance (who knew?) were met either with skepticism or claims of willful ignorance. When faced with serious jeopardy, most lawyers took plea deals. Their sentences have been in the 2-year range, with orders of restitution climbing into the millions.

Once the criminal consequences were established, the lawyers have had to deal with the collateral consequences of a criminal conviction on their law licenses. Suspensions have ranged from disbarment and 12-year suspensions on one end to 30 months on the low side. Some judges are imposing suspensions concurrent not only with incarceration but also with the period of post-release supervision.

This is not the first time that lawyers have been sucked into these cases. Real estate frauds seem to be a cyclical phenomenon. But in many past rounds, the lawyers got short sentences or probation and concomitantly short license suspensions. Apparently believing that greater jeopardy would add to the general deterrence associated with these prosecutions and maybe break the cycle, this time the Department of Justice has upped the ante.

Folks have asked me if there is a test to determine when a deal is so bad the lawyer should walk away. My short answer is to apply a “but for” test to the transaction. If the deal has been structured a certain way because, and only because, there is a first position purchase money mortgage that can be inflated to cover more of the buyer’s “skin” in the game than the bank usually requires, then fraud is probably afoot. Walk away from that deal. Oh, and if someone tries to tell you that the misrepresentations are only “white lies”, that “everyone does this”, that good intentions (a home for everyone!) can overwhelm or justify “just a little fraud” do not walk away, run!

In about every case I have seen, if the lawyers had understood the jeopardy associated with what they thought were small, garden-variety, “fudging” on the HUD-1 forms they were helping to prepare, they would have found the paltry remuneration so inadequate as to make the whole enterprise risible. Instead, they gave up their careers for tiny amounts of money. Big risk, low reward, indeed.

More by | Mark Dubois Mark Dubois , Law.com Contributor
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