[CPENet Homepage | GNA Home Page | Search Catalog | Comment on Catalog]
CONTINUING EDUCATION ONLINE FOR THE PRACTICING FRAUD PROFESSIONAL
Let Us Hear from You-Thoughts, Comments?: mailto:compass2003@earthlink.netMay-June 2008
EDITION
Houses Stolen in Mortgage Fraud
Federal prosecutors charged 19 individuals, mainly from Southern California,
with defrauding homeowners in
trouble partly by using "foreclosure rescue pitches" and an equity-draining
technique called equity stripping.
Two indictments made public accused Charles Head, 33, of La Habra; his brother,
Jeremy Michael Head, 30, of
Huntington Beach; and others of taking part in a nationwide mortgage scam that
stole $12.6 million and fraudulently
obtained the titles to more than 100 homes.
Prosecutors said they found victims of the mortgage scam in California, Oregon,
Washington state, Nevada and
at least 14 other states.
Consumer advocates, who have been trying to help people with high-interest
sub-prime mortgages stay in their
homes, said they hoped the federal criminal indictments would scare would-be con
artists out of the troubled market.
People who try to victimize strapped homeowners "are the worst of the worst, the
ultimate vultures, looking to
mop up whatever is left from people who have already been victimized," said
Kevin Stein of the California
Reinvestment Coalition in San Francisco. "The more people are in despair, the
more vulnerable they are to the
person who says, 'I'm here to help.' "
The defendants have been charged with fraud and conspiracy. They could face
fines and sentences of as much as
20 years in prison, prosecutors said.
Charles Head was being held without bond as a flight risk in Santa Ana, where he
appeared in federal court Friday,
prosecutors said. His attorney did not return a call seeking comment.
Jeremy Michael Head's court-appointed attorney, Christopher Haydn-Myer, declined
to discuss the case but
described his client as making a modest living at an auto maintenance shop. He
said Head rides to work by bicycle
because "he doesn't even own a car."
John Balazs, an attorney for defendant Joshua Coffman, 29, of North Hollywood,
said his client would plead not
guilty to any role in the alleged conspiracy.
"This case is not anywhere near as clear-cut as the government makes it sound in
their papers," Balazs said.
"Some of these people in fact did manage to keep their homes."
Additional charges are expected to be filed in a widening probe, said Assistant
U.S. Atty. Ellen Endrizzi.
The investigation, dubbed Operation Homewrecker, involved the FBI and the
Internal Revenue Service and focused on
real-estate-related financial crimes, which have become a top priority, said
McGregor W. Scott, the U.S. attorney for
the Eastern District of California in Sacramento.
Drew Parenti, FBI special agent in charge, said his agency was "focusing on the
industry professionals, the
'insiders' who have manipulated the mortgage loan process for their own
financial gain."
Reports of mortgage fraud, including foreclosure-avoidance fraud, have surged as
the end of rising home prices
has exposed widespread corruption that accompanied the housing boom.
Financial institutions are on pace to file 60,000 suspicious-activity reports
involving mortgage fraud this year, up from
28,000 in 2005, said FBI spokesman Stephen Kodak in Washington.
The bureau investigated 721 mortgage fraud cases in 2005 and has 1,253 such
cases open at present.
Prosecutors in Sacramento said they originally learned about the alleged fraud
after receiving a complaint from a
homeowner. They said a complex investigation revealed that between Jan. 1, 2004,
and March 14, 2006, Head and
his associates contacted desperate homeowners, offering to assist them in
avoiding foreclosure and to cash out
equity in their homes to pay bills.
One variation of the alleged fraud, they said, involved adding a so-called
investor or "straw buyer" title to a property
and requiring homeowners to pay "rent" that was lower than their original
monthly mortgage payment. Prosecutors
said Charles Head and his associates would sell the home after extracting all
available equity.
Prosecutors didn't release the names of any victims Monday, but a civil case
provides a window on the disputes
involving Charles Head and his alleged associates.
In a fraud lawsuit filed in August 2005 in Los Angeles County Superior Court,
Pamela Graham accused the Head
brothers and other defendants of deceiving her into selling her Los Angeles
home, which she thought she was refinancing.
Graham responded to a mailer touting Head Financial Services' ability to "find
solutions" for homes in foreclosure.
Jeremy Michael Head visited her at home, Graham said, and promised her she would
get cash back and lower
her mortgage payments if she refinanced the home with him.
Graham said she later discovered that despite repeated assurances to the
contrary, ownership of the home had been
transferred to another woman who had been described to her as an investor in the
deal.
Graham's signature was forged on the deed of trust transferring ownership, the
suit alleged.
According to filings in the case, the defendants settled by agreeing to transfer
the property back to Graham.
Soc Gen Trader Might Sue
The world of French employment law is notoriously topsy-turvy, but could it
really be so bizarre that infamous
rogue trader Jerome Kerviel may end up suing for unfair dismissal?
According to British daily The Times, yes. The newspaper reported that Kerviel,
who was apparently responsible
for $50 billion worth of unauthorized trades at French bank Societe Generale,
now plans to sue his former
employers for unfair dismissal.
Despite the fact that Kerviel has never denied his bogus trading activities, the
report alleges that the 31-year-old
trader has two points in his favor against Societe Generale. The first is that
the bank may have only actually lost
money when it unwound Kerviel's positions in January, during an especially
turbulent time for global stock markets;
it is at best unclear how much responsibility Kerviel bears for the total losses
of $7.1 billion.
The second is that Societe Generale apparently terminated Kerviel's contract
without meeting with him face-to-face,
as stipulated by French labor laws. This technicality could allow Kerviel to
extract compensation from his employer,
which would be an unusual twist given the circumstances.
Societe Generale was unavailable for comment on Thursday. The bank has always
alleged that Kerviel acted alone,
using forged documents and deceit to carry on his unauthorized trading. As for
his current employment status, a
source close to the bank has said that it is effectively "in
suspension"--pending various aspects of the legal process.
Kerviel's lawyer, Elisabeth Meyer, told news agencies on Thursday that court
proceedings had not, in fact, been launched
against Societe Generale. But she did not rule out a future lawsuit against the
company.
Although SocGen appears to have come out of the crisis relatively unscathed,
back in January it looked as though
it would fall to a predator such as BNP Paribas. It took a 5.5
billion-euro ($8.6 billion) rights issue at the end of
February to bring SocGen back to its preferred Tier 1 capital ratio of 8%.
Kerviel is not your average rogue trader: he apparently made no personal profit
from his trades, and seemed to have
no tangible motive for his actions. His enigmatic personality has even made him
something of a folk hero, with over
150 Facebook groups dedicated to the man who almost brought down Societe
Generale.
Tax Refund Fraud is Rampant this Tax
Year
What is it that unites all U.S.
citizens? Is it freedom? Democracy? The Stars and Stripes? Perhaps, but it
may
also be our mutual love and appreciation for refunds. Tax season is officially
here in the U.S., and amidst the flood of
1040s and W-2s, there is the hope of a potential tax refund to keep the spirits
up. However, there are scams you
should be aware of – especially with the 2008 stimulus package guaranteeing
taxpayers a check in the mail, you
can be sure that fraudsters will be looking to take advantage of government
generosity. Unfortunately, similar
schemes occur in almost every country.
Identity thieves have learned that scams are more successful when they mimic
respected institutions like the Internal
Revenue Service. Be aware of phishing e-mails from people alleging to be from
the IRS informing you of an unclaimed
tax refund. The e-mail will look legitimate and usually directs the receiver to
a link that connects to a page asking you to
submit personal information such as a Social Security Number (SSN) or credit
card information. The e-mail may state
that the only way to claim the refund is by clicking the link in the e-mail.
This is a classic phishing scam, and a good one,
too. Oftentimes, the site created by the fraudsters will look nearly identical
to the IRS webpage! If you fall for it, a criminal
can access your financial accounts, run up credit card bills, apply for loans or
new credit cards, and even file fraudulent
tax returns.
The link you are directed to will look very similar to the IRS website. Be sure
to always verify the URL, as the fraudulent
website will be slightly off, sometimes by only a letter or a symbol.
You should be aware of the following information to help avoid falling prey to a
phishing scam:
The IRS never offers refunds through e-mail or sends out unsolicited e-mails to
taxpayers
When the IRS needs to contact a taxpayer, they send notice via U.S. Mail, and
every such notice includes a
telephone number that the recipient can call for confirmation
If you need to visit the IRS web site go to www.irs.gov rather than via an
e-mail link
Another problem tax-payers face this year is the prospect that someone may have
used their SSN, already filed
their taxes, and claimed the refund. Typically, a perpetrator will use false W-2
forms reflecting phantom wages and
withholding credits. To secure the fraudulent refund, the perpetrator will
usually direct the IRS to transmit the refund
electronically to a bank account under his control. Later, when the identity
theft victim attempts to file his tax return, the
IRS flags it as a "duplicate" return and freezes the refund. Although the IRS is
required to notify a taxpayer when a refund
claim is denied, the IRS does not systemically notify a taxpayer when a refund
claim is frozen in identity theft cases,
despite the fact that a refund freeze can have the same economic effect as a
refund denial.
Identity theft, already a serious problem, is exacerbated during tax season. One
example is 53-year-old Marie Mendoza
from Michigan. She received a call from a representative of a nearby office of
H&R Block Inc., the tax-preparation firm that
had prepared her returns in the past. The Block representative asked her to
bring back some paperwork that she had
accidentally taken with her two days earlier after she had filed her return for
2007.
But Ms. Mendoza hadn't been to H&R Block, in fact, she hadn't filed anything
yet. She soon discovered that someone
had filed a fraudulent return in her name. The thief had arranged to collect
$4,005 through an instant loan and had already
pocketed the money. When she tried filing her tax return electronically, the IRS
rejected it. That was the just beginning of a
financial nightmare for Ms. Mendoza.
In a report to Congress early this year, IRS National Taxpayer Advocate Nina
Olson said that identity theft has become
one of the "most serious problems" facing taxpayers. The Federal Trade
Commission received 20,782 complaints on
tax-related identity-theft issues in 2007, up from the 15,442 in 2006. But Ms.
Olson believes those numbers "significantly
understate" the size of the problem. And we can expect a similar trend for 2008.
Prevention is always the best practice.
Bank Fraud from Computer Intrusions on the Rise
U.S. financial institutions
reported a sizable increase last year in the number of computer intrusions that
led to
online bank account takeovers and stolen funds. The data also suggest such
incidents are becoming far more
costly for banks, businesses and consumers alike.
The unusually detailed information comes from a non-public report assembled by
the Federal Deposit Insurance
Corporation, the federal entity that oversees and insures more than 9,000 U.S.
financial institutions. The statistics were
gathered as part of a routine quarterly survey called the Technology Incident
Report, which examines so-called suspicious
activity reports (SARs). In this case, SARs that were filed in the 2nd Quarter
of 2007. SARs are federally mandated
write-ups that banks are required to file anytime they spot a suspicious or
fraudulent transaction that amounts to $5,000 or more.
A copy of the report was provided by a trusted source who asked to remain
anonymous. An FDIC spokesperson
could not be immediately reached for comment.
While the number of reported computer intrusion-related SARs (536) paled in
comparison to the leading SARs
categories - mortgage loan fraud (12,554) and check fraud (17,558) - the FDIC
said financial crime aided by
computer intrusions is growing at a rapid pace. Further, it noted that the mean
(average) loss per SAR from computer
intrusions was roughly $29,630 -- almost triple the estimated loss per SAR
during the same time period in 2006 ($10,536).
According to George Manning, the author of the book "Financial Investigation and
Forensics," federal banking
statutes define computer intrusion for the purposes of SAR reporting as one or
more of the following activities:
1) Gaining access to a computer system of a financial institution to steal,
procure, or otherwise affect funds of the
institution or the institution's customers;
2) Attempting to remove, steal, procure or otherwise affect critical information
of the institution including customer
account information;
3) Activities that damage, disable or otherwise affect critical systems of the
institution.
Manning notes in his book that for the purposes of this reporting requirement,
computer intrusion does not mean
attempted intrusions of Web sites or other non-critical information systems of
the institution that provide no access to
institution or customer financial or other critical information.
The report indicates that in most cases, banks are at a loss to say exactly how
cyber crooks are stealing the funds.
The report indicates that the 80 percent of the computer intrusions were
classified as "unknown unauthorized
access - online banking," and that "unknown unauthorized access to online
banking has risen from 10 to 63 percent
in the past year."
Still, the FDIC indicates that a large share of the unknown losses most likely
resulted from malicious data-stealing
programs surreptitiously installed on customer PCs by cyber crooks. The FDIC
wrote that "in several significant cases
where the source of the computer intrusions was identified suggest that Trojan
horses and key logging software infecting
the customers' computers might also be responsible for a large portion of the
unknown unauthorized access to online
bank accounts."
Indeed, one of many confidential case studies in the report told the plight of a
U.S. business that lost $188,000 in July
2007 after an employee infected a company computer with a password-stealing
Trojan horse program. The malicious
program arrived as an attachment in an e-mail purported to have been sent by the
Better Business Bureau. In this "spear
phishing," campaign, the company and the recipient were both named in the body
of the e-mail, and the recipient was urged
to open the attachment to view a complaint lodged against the company.
Of those computer intrusion-related SARs that were identified, online bill
payment applications were most frequently
targeted by cyber thieves, the FDIC found. However, unauthorized access to wire
transfers and automated
clearinghouse (ACH) payments caused the most losses to financial institutions in
the computer intrusion category,
mainly because ACH and wire transfers give the banks less time to detect and
recover from unauthorized access.
Another case study cites an unnamed financial institution that had 14 customer
account takeovers as a result of spyware
infestations that recorded keystrokes on customer PCs, stolen credentials that
allowed the crooks to initiate a series of
fraudulent ACH transfers out of the victims' corporate accounts into accounts
set up and controlled by the attackers.
All told, in the six months between October 2006 and April 2007, the attackers
managed to steal $289,000 from the 14 victims.
Avivah Litan, a financial fraud analyst with Gartner Inc., said unauthorized
wire transfers disproportionately impact
small to medium sized businesses that may be using online banking but do not
have the same stringent financial
controls in place at many larger corporations.
"It's interesting to hear them at least privately admitting that the ACH and
wire transfer system is really broken, and that
there are a lot of new Trojans targeting the banks now," Litan said. "That's
very much in line with everything I'm seeing."
Litan said small to mid-sized businesses that bank online typically are allowed
to transfer relatively large amounts
with ease, though they have far fewer protections than consumer accounts when
fraudulent transactions are at stake.
In fact, most companies have just two business days to report fraudulent or
unauthorized transfers in order to have a
decent chance at getting the charges reversed. In contrast, consumers generally
are allowed up to 60 days to report
such activity, Litan said.
Another aspect of this report should be closely noted: If the number of SARs
related to computer intrusions
seems low, remember that banks are required to file SARs only when the amount
exceeds $5,000. As such,
most the data included in this FDIC report probably comes as a result of fraud
perpetrated against businesses, not consumers.
According to a Gartner study of 4,500 adult consumers for the year ending Aug.
2007, the average loss to consumers
from online fraud was around $1,500 per victim on average, well below the SARs
reporting threshold. To better round
out the consumer side of things, consider that Gartner's study found that 2.2%
-- or an estimated 3.85 million adults --
said they were a victim of 'abuse of an existing checking or savings account,
where a thief transferred money out of
your account." Of this population: about 1.1 million had the fraud occur within
the 12 months prior to August 2007.
Some other data points from the report: Regarding data breaches by businesses,
governments and other
organizations in general, the FDIC writes:
- The number of consumer records breached doubled compared to prior quarters,
which will impact ID theft, account
takeovers, and account application fraud in the future. Fewer retailer payment
card data breaches during the quarter
caused lower losses to financial institutions. Retailers are resisting payment
card industry (PCI) data security
standards, which could lead to lower compliance, additional breaches, and more
counterfeit card losses absorbed
by card-issuing institutions.
- The level of identity theft reports by financial institutions was high, but
the growth rate has slowed. This trend may
change in the future because of a large spike in the number of consumer records
compromised and reported in the
media during the quarter.
With respect to credit and debit card fraud, as well as ID theft cases, the
report notes:
-Credit card fraud and counterfeit card reports increased slightly. Losses from
counterfeit cards, which were
extremely high during the 1st quarter, subsided during the current quarter
Witness Tampering
in Billion Dollar Case
Prosecutors allege a former health care executive accused of witness tampering
in a $1.9 billion corporate
fraud case tried to bribe a witness to give favorable testimony.
Defense attorneys say investigators misunderstood taped phone conversations.
Lawyers for executive Lance Poulsen were beginning their case after the
government spent a week playing taped
phone calls and meetings for a federal jury.
Poulsen goes on trial in August on multiple charges of conspiracy, securities
and wire fraud and money laundering.
The government alleges he misled investors about unsecured loans his company was
providing health care companies
such as hospitals and nursing homes.
Before that trial, he is defending himself against charges that he and longtime
acquaintance Karl Demmler, a Columbus
bar and restaurant owner, teamed up to persuade the witness to help Poulsen beat
the fraud case against him.
Poulsen is founder and former chief executive officer of National Century
Financial Enterprises, once described as the
country's biggest health care financing company.
Poulsen said on a tape played Friday that the government's star witness should
explain that her previous statements to
prosecutors were based on old facts.
Poulsen said the witness should say, "But now, there is a new set of charges and
it's a new indictment and I'm not familiar
with it," Poulsen said on the recording.
Prosecutors say the witness, Sherry Gibson, a former National Century executive
vice president was promised $500,000
if she could "have amnesia" when it came time to testify.
On Friday, Poulsen attorney Peter Anderson suggested telephone conversations
between Demmler and Poulsen were
harmless because they corresponded with trips that Poulsen, living in Florida,
was about to make back to Columbus.
Jeffrey Williams, an FBI agent who led the investigation, disagreed, saying
records indicated dozens of phone calls back and
forth between the two at several different times last year.
Gibson pleaded guilty in 2003 to a lesser charge of securities fraud in exchange
for helping prosecutors.
CPENet Around the World on the World-wide Web
Our lecture authors and the CPENet Editorial Board want to thank you, our students,
for
confirming our impression that there was a need for high quality, reasonably priced
CPE
available "on demand" on the World-wide Web. You have told us that you want
lectures
you can take when you want to take them no matter where your current assignment
happens
to have taken you. We thought you might like to see where your fellow students
have come from
during our first ten years of operation:
Our students are Certified Public Accountants (CPA's),
Chartered Accountants (CA's), Certified Internal Auditors
(CIA's), Certified Fraud Examiners (CFE's), Certified Information Systems Auditors (CISA's), Certified
Management Accountants (CMA's) and a large number of college students and other individuals who
simply
want to improve their knowledge of the subject matter we have to offer.
Its
interesting that most certified CPENet
students hold dual (more than one) certifications.
We are continuously looking for lecture authors willing to write self study
lectures for CPENet for publication
credit and royalties.
Check out how to write for us under the "How to Write for CPENet" link on our
homepage.
If you are interested, send
us an e-mail on the link above and we will send you
a model lecture to follow in writing your submission. We review
all lectures submitted and
will get back to you promptly.
If you are an academic... since we have a juried process in selecting our
lectures, you
can get publication credit by
publishing with us. If you are writing a book, consider
publishing the individual chapters with us as you write them
(as lectures) and getting
feedback from our students as to the quality of your material...look's great on your dust
jacket to say that your book has already been reviewed by 200 certified CPE students
on-line!
If you cannot find a lecture or program that you want, please help us by filling out a request form.
Catalog system maintained by the Globewide Network
Academy