Beware of Real Estate Investment Fraud
From The FBI Files ~
These are just two examples of numerous mortgage fraud schemes in 2008 alone. These in particular are disturbing because the brokers scammed the investors as well as the banks for millions before getting caught. In these cases, the perpetrators used houses in need of renovation as the carrot. Under normal circumstances an investment in this kind of vehicle could likely be a very lucrative venture, and it could do well to revitalize neighborhoods while stimulating local economies.
As a nearly 20 year mortgage lending veteran and currently licensed real estate broker, I am particularly sensitive to these types of crimes because of the far-reaching damage to my profession and the economies that are so dependant upon legitimate activities. Hopefully these characters will spend a long time in prison for what they’ve done. Be sure to read the closing paragraph below for some tips in how to find out if a real estate investment is legitimate.
OWNER OF REAL ESTATE COMPANY CHARGED WITH OPERATING MASSIVE INVESTMENT FRAUD SCHEME
Scam took at least $62 million from victims
A Norwalk man who owned and operated Best Diamond Funding, a real estate brokerage and mortgage lending company, was arrested this morning on federal charges for allegedly running an investment fraud, also known as a Ponzi scheme that lured more than 2,000 victims into investing more than $62 million. Milton Retana, 43, was indicted on December 12, 2008, on seven counts of mail fraud, one count of wire fraud, and one count of making a false statement to federal law enforcement agents. The El Salvadoran national made his initial appearance this afternoon in United States District Court in Los Angeles.
According to the indictment, Retana began soliciting investors in late 2006 to invest with Best Diamond Funding by telling them that their money would be used to buy and sell real estate. Best Diamond Funding advertised in Spanish-language magazines, on the Internet, and held weekly investment seminars at several locations in Los Angeles.
The indictment alleges that in these advertisements, at investment seminars, and in personal meetings with potential investors, Retana, and others at Best Diamond Funding, told potential investors that the company's success in buying, renovating, and selling properties allowed it to pay investors returns as high as seven percent of their invested principal each month, for a total guaranteed return of 84 percent each year. Potential investors were also encouraged to use the equity from their homes to fund their investment with the company. The indictment also alleges that investors were told that Best Diamond Funding employed as many as 60 real estate agents and often purchased as many as 50 to 60 properties at one time.
The indictment alleges that, in reality, Best Diamond Funding used only a fraction of the money that it received from investors to purchase and sell real estate. The indictment also alleges that most, if not all, of the monthly "profit" payments to investors did not come from real estate activity, but instead was siphoned from money invested by other investor victims, and in some cases, from the investor victims' own principal. Finally, Best Diamond Funding is alleged to have employed fewer than five licensed real estate brokers and purchased fewer than 50 properties from late 2006 through October 2008.
"By perpetrating this giant Ponzi scheme, the defendant stole tens of millions of dollars from thousands of innocent investors, depriving them of their hard-earned life savings and financial security," stated United States Attorney Thomas P. O'Brien. "The United States Attorney's Office will prosecute him and others who steal investor money to the fullest extent of the law."
The scheme was disrupted in October when inspectors from the United States Postal Inspection Service and agents from the Federal Bureau of Investigation executed a federal search warrant at the business offices of Best Diamond Funding Corporation in Huntington Park, as well as the religious bookstore Libreria del Exito Mundo, which was located in the adjacent building and was owned by Retana's wife. During the search, agents seized nearly $4 million in cash. The FBI also froze approximately $8 million in funds from Best Diamond Funding and Retana's bank accounts.
"Thousands of victims were lured by what appeared to be legitimate investments in the real estate market," said Salvador Hernandez, Assistant Director in Charge of the FBI in Los Angeles. "The FBI is increasingly concerned with alleged scam artists who prey on individuals affiliated with certain religious or community groups and exploit their trust." The FBI and its partners, while committed to investigating fraud, encourage citizens to be cautious before investing their hard-earned money."
"The devastation to one's emotional well-being is immeasurable, when the trust they have placed in another is violated. The Postal Inspection Service is committed to these investigations to ensure public trust in the mail," said B. Bernard Ferguson, Inspector in Charge of the Los Angeles Division of the United States Postal Inspection Service. Rentana faces a statutory maximum penalty of 165 years in federal prison.
This case was investigated by the United States Postal Inspection Service and the Federal Bureau of Investigation.Contact: Assistant United States Attorney James A. Bowman (213) 894-2213
Release No. 08-155
TWO MORE PLEAD GUILTY IN MORTGAGE FRAUD SCHEME
COLUMBUS – Two more Columbus-area people indicted as part of a mortgage fraud scheme that secured more than $7 million in mortgage loans pleaded guilty in United States District Court here today. Aryeh Schottenstein, age 34, of Columbus, pleaded guilty to one count of conspiracy to commit wire fraud and one count of money laundering, and Shawn A. Griffin, age 38, also of Columbus, pleaded guilty to two counts of conspiracy to commit wire fraud and one count of money laundering.
Gregory G. Lockhart, United States Attorney for the Southern District of Ohio, Jose A. Gonzalez, Special Agent in Charge, Internal Revenue Service Criminal Investigation, and Keith L. Bennett, Special Agent in Charge, Federal Bureau of Investigation, announced the pleas entered today before United States District Judge Algenon L. Marbley.
Schottenstein and Griffin were indicted along with Donald F. Green, Jeffrey Lieberman and George "Terry" Jordan for a mortgage fraud scheme in central Ohio in 2003 and 2004. According to statements of facts filed with Schottenstein's and Griffin's pleas, Schottenstein and Lieberman owned a company called Parkview Bank. One of Parkview=s business purposes was to locate financing for real estate investors seeking to buy and renovate houses in Columbus. Parkview needed a source for the financing for this venture. In 2003, Schottenstein and Lieberman met with the managing partners for Stillwater Asset Backed Fund to convince them to provide the funding. They were successful. Parkview and Stillwater entered into an agreement whereby Stillwater would provide the funding for Parkview's deals.
Rather than abide by the agreement and locate legitimate investors, Schottenstein used Griffin to recruit straw-buyers to pose as real estate investors. Using straw-buyers was quicker and easier than locating legitimate real estate investors thereby making it easier to generate more loan origination fees. The straw-buyers were told by Griffin they did not need to renovate the houses or make monthly interest payments. Griffin assured them he would take care of all the details.
Griffin also recruited straw buyers in 2002 and 2003 for Jeff Pearson, now deceased. Pearson bought dozens of low-income distressed houses in Columbus for amounts at or near their fair market value. The houses were in need of renovation. Very little if any renovation was done to the houses. The houses were sold to Griffin=s straw-buyers for two to three times the amounts Pearson had paid only a few weeks or months earlier. Despite having good credit, the straw-buyers usually had little income. At the closing on the straw-buyers= purchases of the houses, the title companies issued large checks payable to Pearson as proceeds from the sales.
Green pleaded guilty on April 11. Lieberman and Jordan pleaded guilty on April 24. All are free pending sentencing. Judge Marbley will set a date for sentencing. Conspiracy to commit wire fraud is punishable by up to five years in prison and the money laundering charges carry a maximum sentence of ten years in prison. Lockhart commended the investigation by IRS and FBI agents and Assistant U.S. Attorneys Daniel A. Brown and Deborah Sanders, who are prosecuting the case.
Ways to protect yourself from Real Estate Scams
The first thing to remember is Caveat Emptor, and don’t forget it. If you are presented with a prospectus or something that looks like one, read the disclosure statement. This will tell you how much of your money is at risk. And if there isn't a disclosure and in its place is an income guarantee, then that should be a pretty good sign that you're headed for trouble. Experienced, honest people don't mind telling you the amount of risk involved, and they should tell you to only invest money that you can afford to lose. Somebody who is afraid to tell you has something to hide, and that's not a good thing.
Unfortunately even mortgage and real estate pros get scammed, but that doesn’t mean it’s hopeless. And take comfort in the fact that most deals are legitimate and are designed to expose fraud. The next time your mortgage lender is asking for proof of something that you find offensive, don’t blame them, blame the criminals like the ones above for making it necessary. So if you are going to think about investing in real estate, especially in a renovation, then take full and complete advantage of the information available through public records. Then research.
Check with the license boards on the broker’s license, and ask him questions about the transaction. Like how much experience he has had, who has he worked with, and which third party vendors will be involved in the transaction, vendors like Title, Escrow, or closing attorneys. Check them out too, and ask other members in the real estate community if they have heard of these vendors. If the group is buying and selling, ask for the HUD Finals on the last 5 transactions. This is a federally required document due within three days of closing. Here you can tell a lot about the transactions, including the frequency of the purchases, market price, financing and much more. Go to an independent resource to check on the transactions, like what was it worth before purchase, were the renovations done (a site check should tell you that), and which bank did the financing.
Then go to a party such as a local bank and talk to them about a proposed transaction and whether or not they can offer alternatives to what the broker is proposing, especially in the way of financing. Experienced loan officers will have access to information on the properties that could be helpful and it is free. They can also talk with you in-depth about the type of financing that is available, and sometimes through their line of questioning and the broker’s lack of answers you might uncover a bad deal. Banks are naturally suspicious because of the scammers who try and come through them, so you can use that to your advantage. And if you find a scam in process, notify the authorities. I have helped uncover at least four and two resulted in jail time, I can tell you that it is a satisfying feeling indeed.
My last suggestion is to get a license. Many states now allow online real estate schools for people to get prepared for real estate licenses. If you can afford the time, I would highly recommend going through the course. You may not want to use it to buy or sell real estate, but it will sure help you see when someone is trying to pull a wool over your eyes.