Dennis Levine was recently sued by two Southern California men who claim that the former Wall Street inside trader duped them in an alleged advance-fee loan scheme. Levine has denied the charge. Nevertheless, ever since the economy hit the skids, advance-fee scams have quickly risen to the top of Orange County's white-collar crimes. H. L. Almond, an Orange investigative consultant with the major fraud unit of the California Department of Justice, recently sat down with Times staff writer Gregory Crouch to discuss the problem.
What is an advance-fee loan scheme?
Typically, a person pays an up-front fee in the expectation of obtaining a loan, but it never comes through.
The most typical ones we see, involving the largest amounts of money, are for a letter of commitment. For instance, assume that a person has a piece of land on which he would like to construct a motel.
If he gets a letter of commitment, he can take that letter to the bank and obtain an interim loan for construction financing. After the motel is constructed, the bank is taken out of the loan by the company that issued the letter of commitment.
It's not uncommon for the victim to pay money into an escrow account based on representations that the lending source would have assets of several hundred million dollars.
The victim's funds, of course, go to the crooks, and the victim receives a worthless letter of commitment.
It's not uncommon to see firms that have issued many letters of commitment over a period of years and have never funded a loan.
Besides fraud involving these letters of commitment, what kinds of advance-fee loan scams exist?
Some victims pay what is called a shopping fee, which in many cases may only be a few hundred dollars. The broker taking the fee will "shop" the victim's loan application around town.
Suppose you wanted to obtain a loan to buy a house and I put an ad in the paper that I'm a loan broker. You come to me with a completed loan application, and I represent to you that, for a $100 fee or more, I will present your loan package to one of my lending sources.
I won't guarantee it. I will just say that I've been very successful in the past obtaining loans for my clients. But the only service I may ever provide will be to have a messenger drop off your loan package, along with many others, at some lending source like a savings and loan. How much can someone lose?
The loss to the victims ranges from several hundred dollars to several hundred thousand dollars. In one recent case, which we have under investigation, one victim paid $450,000 in advance fees. The money was given directly to the bad guys, with the expectation of obtaining a letter of commitment which would fund (the borrower's) construction loan and later provide the permanent financing for a large commercial building.
How widespread are advance-fee scams in Orange County?
It's a very large problem because the money market is tight. Traditionally, down through the years, this always occurs. When a businessman can't go to a legitimate lending institution and obtain a loan, he is then forced to go to loan brokers and pay these exorbitant fees.
How much money is lost from advance-fee scams in Orange County?
I don't have any exact figures. Until a year or 18 months ago, it was relatively quiet because the loans were being funded indiscriminately--as you can see by our savings and loan problems. Once that ceased, money became very tight.
Within the past 12 months, I personally know of losses in excess of $20 million. These are active cases; I can't comment on them.
How can a consumer determine that someone is legitimate?
Inquiries can be directed to the Department of Real Estate to determine if the firm or broker is a licensed real estate broker. In California, strange as it may seem, loan brokers have to have a real estate license or do business using someone else's license.
Besides checks with the Department of Real Estate and Department of Corporations, ask some fundamental questions such as, "Do they have certified financial statements?" "Do they have references?" "Can they provide information on previous loans funded?" "Can they give referrals of satisfied customers?"
Is the simple fact that they want money up front a red flag?
Yes. In many cases, legitimate lending sources only charge a fee after the loan is funded. So that would raise a question in my mind as to why anyone would want advance payment of fees.
The Better Business Bureau reports advance-fee scams are getting more sophisticated in terms of marketing techniques. True?
Frauds are being advertised in the newspapers and there are 900 numbers for people to call. Normally, when you call that number, you are more or less pre-qualified by telephone.
The only qualification is whether or not you have the money to pay the advance fee as opposed to any kind of risk analysis.
How do the con artists find their victims?
A large number of victims are obtained through word of mouth. It's not unusual to get brokers involved who know of people interested in obtaining commercial financing.
For instance, if I know Charlie Brown needs a loan for a $4-million project, I would contact him and tell him I have learned of a lending source that I am convinced is legitimate. For a fee, I would put him in contact with that lending source.
That broker may only receive 0.5% or 1% of the loan amount, and then the victim pays the alleged lender an advance fee of 3% to 6%.
Typically, there are all kinds of misrepresentations about the source of funds. We've seen brokers claim all kinds of lending sources, including Saudi or Kuwaiti financiers, church groups, oil-rich American Indians, and even the Teamsters.
On a recent Orange County case. . .
"California Mutual Funds Inc. and Financial Services Inc. in Newport Beach were charging fees ranging from $3,000 to $30,000. No loans were ever funded. (Those indicted deny the charge.)"
One large national case. . .
"One supposed lending source (on an island) in the English Channel-- the Bank of Sark--cost businessmen in the United States some $115 million."
On prosecuting advance-fee con artists. . .
"It's not that difficult once you make a full and complete investigation because invariably not a single loan will ever be funded."
Stalling for time. . .
"Once the broker gets the up-front fee, they'll say a loan application requires a number of days for review. Or they claim they need additional information. Anything to lull the victim into believing his loan is going to be funded."