Given the government's failure to bring criminal cases against bankers and other Wall Street figures for collapsing the U.S. economy in 2008, it's been left to the little guy to strike back.
To be precise, one federal jury in Sacramento, which acquitted four allegedly fraudulent mortgage borrowers of criminal charges after hearing testimony that the executives at their banks pulled out all the stops to make fraudulent loans for their personal profit.
We're a bit late to this story--the verdict was handed up at the end of August, Salon's Thomas Frank had a good analysis of the case a few weeks ago. But because of its potential significance for mortgage fraud prosecutions going forward, and because it happened in the federal district known for its aggressiveness in pursuing borrowers for mortgage fraud, the case is worth a closer look.
"The jury understood that these defendants were mice," says William K. Black, a former litigation director at the Federal Home Loan Bank Board who oversaw the prosecutions of numerous savings-and-loan executives after that industry's meltdown.
Black, who is associate professor of law and economics at the University of Missouri-Kansas City, was an expert witness for the defense in the Sacramento case. He may have delivered the key testimony blowing up the government's contention that the defendants were the main fraudsters. His testimony was that executives at the lending institutions deliberately created a system to make fraudulent loans as a recipe for personal enrichment.
The government had charged Yevgeniy Charikov, 42, a Sacramento real estate agent, and three others with buying properties, flipping them at inflated prices, and submitting fraudulent documentation to lenders Aegis Wholesale Corp. (which filed for bankruptcy in 2007) and GreenPoint Mortgage Funding (now part of Capital One) to obtain loans on the properties.
Black testified that the very business model of Aegis and GreenPoint depended on their making fraudulent loans--their executives were determined to make the companies grow fast, to collect lavish compensation, and sell off the problem loans in the secondary market so they would be someone else's problem when they blew up. Companies like like GreenPoint and Aegis couldn't grow fast and book huge profits by serving the market of good borrowers with mortgages commensurate with their ability to pay--that market was too small and too competitive. So they chose to make loans that didn't require verifying the borrowers' incomes.
In the Sacramento case, the jury essentially found that the truth or falsity of the documentation the borrowers provided was immaterial--the lenders would have made the loans anyway.
During the mortgage boom, the incidence of fraud in "stated income" loans, in which the borrowers were taken at their word, was 90%, Black testified. It was well known in the banking industry, he added, that stated income loans were "an open invitation to fraudsters."
Black explained to the jury that making such loans requires gutting the underwriting and appraisal departments, an honest bank's bulwark against bad mortgages. Asked about the "quality" of the underwriting at GreenPoint, he replied: "Using the word 'quality' is an injustice to the word. This was an utter sham in which underwriters were instructed not to underwrite." He pointed out that former underwriters at GreenPoint testified that "even if they called the (borrower's) employer, had them on the phone, they were not permitted to ask about the (borrower's) income.
"That's insane," Black said. "No honest banker would ever do that. No real underwriter would ever go along with it either....Only fraudulent lenders would ever do stated income. Period. Full stop."
Where would the directives to underwriters come from? From the executive suite, of course. "The fraudster," Black testified, "is the CEO or whoever controls the institution and decides, 'We're going to do loans that will be 90% fraudulent, and then we're going to sell them to Bear Stearns through fraudulent representations and warranties.'...Nobody gets to do anything unless the CEO says, 'Hey, let's create a system that produces almost unanimous fraud.'"
That's a key point, because the pattern of government enforcement post-recession has been to pursue corporations while leaving their actual managers alone. In the Department of Justice's "historic" (DOJ's word) $16.5-billion settlement with Bank of America this summer or its "historic" (again, prosecutors' word) $13-billion settlement with JPMorgan last fall, how many executives were made to lose their jobs or face criminal prosecution or even civil lawsuits as a condition of the deal? Not a one.
The notion that bank managements are the victims of mortgage fraud is deeply ingrained in the prosecutor mentality. In 2010, Benjamin Wagner, Sacramento's U.S. attorney, told the Huffington Post, "It doesn't make any sense to me that they (bank executives) would be deliberately defrauding themselves."
Wagner plainly doesn't recognize that a corporation and its top executives are not the same thing, or that a CEO might defraud not himself, but his bank. "Despite what the Supreme Court says," Black told the jury in Sacramento, "corporations aren't really people. The reality is corporations have no soul, they have no mind...they have no ability to protect themselves from their senior officers."
Wagner's office prosecuted and lost the Sacramento case. In its aftermath he told the Sacramento Bee, "We respect the criminal trial process, and accept the jury’s verdict in this case. It will not dissuade us from pressing forward in the many other mortgage fraud cases currently pending in this courthouse."
For the most part, they're are cases against those Black defines as "mice." The approach leaves the King Rats untouched. At least this once, a jury called foul. Wagner might be wise to recalibrate his guns.
As Black told us, "I certainly didn't go out to 'dissuade' the prosecution of mortgage fraud, but to encourage it."
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