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.

May - June 2008 Lecture

 For our new members and  those of you who are unfamiliar with the way the virtual meetings work...at each virtual meeting, a password protected lecture is made available for downloading and reading.  The password was e-mailed you  with the meeting announcement.  To be able to open the lecture, you must have the Adobe Acrobat Reader installed on your computer.  If you don't have Adobe, you can download it for free at http://www.adobe.com/.

Chapter members  whose annual dues are current may receive credit for all twelve hours of CPE (2 hours for each of six annual meetings).   Invited guests who are not members of the Chapter but who have received a meeting announcement may download and receive credit for two lectures per year for a total of 4 CPE.   Guests who decide to join the Chapter may receive the entire 12 hours by paying the annual Chapter dues of $15.00. 

Your answers are graded  and, if you achieve a score of 75,  we will e-mail you a digitally signed certificate of completion.  Since our Chapter is certified by the Virginia Society of CPA's as a CPE provider, those taking our lectures will receive a certificate bearing the Chapter's provider number.  The number which appears on your certificate is the Virginia Society number for the Richmond Chapter of Certified Fraud Examiners.

Chapter members and invited guests can open this file and read it by clicking on the following link.  You will be asked by Adobe for a password...use the password we e-mailed or faxed you notifying you of the virtual meeting.  We will e-mail you a digitally signed certificate of completion after we receive and grade your answers."  

To open this month's lecture, click on the link at the top of the page.  When the lecture opens in Adobe, supply the password you were e-mailed....