Three Los Angeles-area businessmen who allegedly enticed savings and loan associations across the country to invest in lucrative Sun Belt real estate loans were indicted Wednesday on charges of staging an elaborate mortgage securities swindle that cost Bank of America up to $95 million.
The 20-count indictment, returned by a federal grand jury in Los Angeles, is the most significant outgrowth so far of a four-year criminal investigation into a $144-million mortgage investment program engineered by National Mortgage Equity Corp., of Palos Verdes Estates. Allegedly tied with National Mortgage Equity in the scheme were a collection of bonding, lending and real estate companies.
Federal prosecutors say National Mortgage Equity coaxed lending institutions throughout the East and Midwest to buy into large pools of mortgages on Sun Belt property. The company made the deals appear enticing with hefty appraisals on the properties and the promise of solid bonding on the loans to protect investors in the event of default.
But according to the indictment, National Mortgage Equity made secret arrangements with the appraising and bonding companies that left investors helpless when the vast majority of the loans went into default.
Bank of America bore the brunt of the loss because it acted as an escrow agent and trustee for all but three of the mortgage pools.
"Measured on any scale, it is fair to say that this is one of the largest frauds ever perpetrated on our nation's banks and savings and loans anywhere, at any time," U.S. Atty. Robert C. Bonner said at a news conference announcing the indictment.
Named in the indictment, which includes 20 counts of mail fraud, are David Arnold Feldman, 49, of Palos Verdes Estates, who headed the National Mortgage Equity Corp., which has since shut down; Borden Kent Rogers, 50, of Huntington Beach, who allegedly controlled several of the compa nies that participated in the scheme, and George Charles Ash Jr., 45, of Alta Loma, identified as an officer of several of Rogers' companies and several others involved in the scheme.
In the wave of civil litigation spawned by the losses, all three men have denied responsibility for the losses, insisting that the companies operated independently and blaming Bank of America for failing to police the investments it oversaw.
"We really believe the problem here was a result of the Bank of America's failure to properly perform its duties and responsibilities to the lenders, who were the bank's clients," said Robert Bretz, Ash's attorney. "The bank has been trying for more than three years to get the government to bring criminal charges against anybody, blaming somebody else, in the bank's hope that it's going to somehow exonerate the bank from any wrongful activity."
Bretz said it was "ridiculous" to allege that Ash was a major officer at any of the participating companies. Ash, he said, only provided documentation for some of the loans and had no meaningful role in soliciting any of them.
Attorneys for Feldman and Rogers could not be reached for comment Wednesday.
A Bank of America spokesman declined to discuss the case, except to say that the bank has already paid out $133 million to repurchase the securities involved from the various investing institutions. The company claimed a pretax loss of $95 million after calculating the value of the mortgages but expects to reduce the total amount of the loss through the continuing sale of properties and lawsuit settlements, spokesman John Keane said.
The bank has also dismissed five of its officers for "gross negligence" and demoted a sixth in the handling of the loan pools.
The indictment returned Wednesday is the fourth, and most significant, to come out of the four-year criminal investigation. Marvin Weiss, who acted as a broker/lender on some of the properties, Charles Mobley, an independent appraiser, and Daniel Bailey, owner of a Tustin real estate firm that was involved in some of the original trust deeds, have all been convicted of various mail fraud and wire fraud charges.
John F. Hayden of Santa Ana, former president of the company that provided bonding for the mortgages, was convicted by a jury, but a federal judge has granted his motion for a new trial.
Terree Bowers, head of the major frauds unit in the U.S. attorney's office, said National Mortgage Equity lured investments from savings and loans in the East and Midwest with deals that looked like sure things. They offered high-interest-bearing Sun Belt mortgages and assurances from allegedly independent underwriters that borrowers could pay their debts, and that the properties were worth their purported values.
Also attracting the thrifts were financial guarantees from a respected 24-year-old bonding company, Glacier General Assurance, insuring payment if the borrowers defaulted.
A total of 20 financial institutions invested more than $144 million into National Mortgage Equity's so-called "mortgaged-backed pass-through certificates." The certificates entitled investors to receive a portion of monthly interest payments on the loans; it also entitled them to the principal balance on a pool of loans purchased for each investor.
In fact, however, the Southern California real estate market of the early 1980s was not a sure thing, and a majority of the loans went into default. Moreover, it quickly became clear that most of the protections that National Mortgage Equity had built into the investment packages were illusory, federal prosecutors said.
For instance, Glacier General Assurance had already been forced to pay on nearly $40 million in bad loans, and an estimated $37 million in investor funds was diverted through fictitious borrowers to help pay off the loans, according to the indictment.
The indictment alleges that the men also concealed from investors the fact that many of the companies that appeared to offer multiple layers of security for their investments were controlled by Rogers and were secretly operating in conjunction with Feldman to further the scheme.
If convicted on all counts, the three men each face a maximum of 100 years in prison and a fine of $20,000. They might also be ordered to make restitution, authorities said.