RICO Lawyer & Attorney : Thomas Walker : Cosho Humphrey Law Firm : RICO Act, Federal and State Racketeering Litigation, Boise Idaho

San Diego, Calif.- (April 7, 2009) U.S. Attorney Karen P. Hewitt announced today the unsealing of an indictment charging 24 individuals with conspiracy to conduct enterprise affairs through a pattern of racketeering activity under the Racketeer Influenced and Corrupt Organizations Act (RICO). Specifically, the defendants are charged with using a corrupt enterprise to conduct a pattern of racketeering activity, namely, wire fraud, bank fraud, and money laundering. The charged racketeering activity all stems from an extensive mortgage fraud scheme based in San Diego, that involved 220 properties with a total sales price of more than $100 million dollars.

According to Assistant U.S. Attorneys Todd W. Robinson and Nicole Acton Jones, who are prosecuting the case, the lead defendants charged with running the corrupt enterprise are: Darnell Bell, aka D-Bell, Michael Ivy, Stanley Gentry and Billie Bishop. The indictment alleges that Darnell Bell, a documented member of the Lincoln Park street gang, was the leader of the corrupt enterprise and that he received at least $9 million in proceeds from the racketeering conspiracy. Michael Ivy was primarily responsible for negotiating the purchase of real estate on behalf of the enterprise. Stanley Gentry, a licensed real estate broker, allowed the corrupt enterprise to use his broker's license to facilitate the fraudulent purchase of property in exchange for a $10,000 monthly payment and a percentage of the real estate commission and broker's fees associated with each fraudulent purchase. Billie Bishop was an escrow officer who facilitated the fraudulent purchase of more than 100 properties on behalf of the enterprise.

The indictment alleges that the defendants devised a scheme to defraud mortgage lenders and to obtain money and property by false and fraudulent means. According to the indictment, between January 2005 and at least April 2008, the defendants used multiple real estate businesses, including the Ivy House, Inc., the Real Estate Center of Southern California, and the Real Estate Center of La Mesa, to facilitate the fraudulent purchase of real estate. In general terms, the scheme charged in the indictment worked as follows:

• Defendants identified properties for sale throughout Southern California that had been on the market for an extended period of time and for which the original asking price had been reduced.
• Defendants then recruited "straw buyers" who allowed their names and credit histories to be used to obtain mortgage loans and purchase properties in name only on behalf of the racketeering enterprise.
• Defendants prepared and submitted offers to purchase the identified properties that substantially exceeded the asking price for those properties.
• Defendants hired real estate appraisers, including co-defendant Esteban Valenzuela, to prepare inflated appraisals for the identified properties; the inflated appraisals were then used to fraudulently induce lenders to believe that the loans being given to the "straw buyers" would be fully secured by the value of the properties being purchased.
• Defendants prepared and submitted false loan applications for the "straw buyers" in order to induce lenders to make loans to persons and at terms that the lenders otherwise would not have funded.
• Defendants prepared and submitted false documents and information in response to lender verification inquiries, including "CPA letters," verification of employment forms, verification of rent forms and "discrepancy letters."
• Members of the Enterprise ensured that the "straw buyers" purchased the identified properties with mortgages amounting to 100 percent of the purchase price of the property, thus ensuring that the defendants did not have any money at risk in the fraudulent transactions.
• Defendants arranged to have the amount of money that exceeded the asking price (i.e., the "kickback amount") paid at the close of escrow to a shell construction company maintained by the racketeering enterprise.
• Defendants falsely informed the lenders that the "kickback amount" would be used to pay for handicap accessing and property upgrades to the identified properties, thereby falsely inducing the lenders to believe that the entire loan amount would be secured by the value of the identified properties.
• Based upon the investigation to date, none of the properties that were purchased as part of the enterprise had any handicap accessibility or property upgrades performed by the defendants' shell firm, Bell Construction.
• Defendants disbursed the "kickback amount" to members and associates of the racketeering enterprise as payment for those individuals' participation in the fraudulent scheme.

The "straw buyers" subsequently failed to make the required mortgage payments for the fraudulently purchased properties, which ultimately resulted in the properties being foreclosed and the lenders suffering severe financial losses.

The indictment also charges that several real estate professionals were members of the racketeering conspiracy, including: Diana Jaime, a public notary; Jorge Cortez, a licensed real estate agent; Esteban Valenzuela, a licensed real estate appraiser; Anton Ewing, a Certified Public Accountant; and Randolph Hirsch and Dennis Tapia, registered tax preparers. Latashia McKinney and Marcus Dozzell, aka Kali, recruited individuals to obtain fraudulent mortgage loans and purchase properties on behalf of the corrupt enterprise. Lorena Callu was employed by the corrupt enterprise and facilitated the fraudulent purchase of real estate by, among other things, preparing and submitting false loan applications. Desiree Holiday, Dexter Holiday, Keith Holiday, Gerard Holiday, Ray Logan, aka Jack Nasty, David Lewis, Joseph Lewis, Stevie Frazier, Jorge Magana, Nicoele Watson and Daniel Williams are all alleged to have fraudulently obtained mortgage loans and purchased properties on behalf of the corrupt enterprise.

An indictment itself is not evidence that the defendants committed the crimes charged. The defendants are presumed innocent until the Government meets its burden in court of proving guilt beyond a reasonable doubt.

U.S. Attorney Hewitt said, "This indictment represents the largest mortgage fraud case ever prosecuted in the history of the Southern District of California. Although this case marks an important milestone for the U.S. Attorney's Office, the FBI and the IRS, we have much additional investigative work ahead of us to hold accountable those individuals who engaged in similar mortgage fraud schemes throughout San Diego and Imperial counties."

FBI Special Agent-in-Charge Keith Slotter commented, "The individuals charged in this indictment have one thing in common: greed. They represent precisely those who have undermined our country's financial system by perpetuating such egregious schemes. The FBI and our law enforcement partners remain vigilant and will pursue those who engage in this type of criminal activity. The extent to which this group of people went to defraud lenders should also serve as a warning to the public. We urge people to come forward with information of suspicious activities they may encounter when engaged in real estate and mortgage transactions."

"Today's indictment of this criminal enterprise spearheaded by Darnell Bell speaks volumes to those who choose to engage in organized criminal activity that undermines the financial health of our communities," said Thomas J. Holloman, Acting Special Agent-in-Charge, IRS Criminal Investigation, Los Angeles Field Office. "The racketeering, forfeiture, and money laundering charges are indicative of the joint-agency law enforcement effort that has focused on dismantling this criminal organization that has grossly profited from mortgage fraud."

The case is the product of an investigation by agents of the FBI and IRS Criminal Investigation and is being prosecuted in San Diego federal court by Assistant U.S. Attorneys Todd W. Robinson and Nicole Acton Jones.

SOURCE: U.S. Department of Justice

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Peter J. Henning, a professor at Wayne State Law School, occasionally writes as a guest blogger for The Deal Professor. Mr. Henning specializes in issues related to white-collar crime and is a former editor of the White Collar Crime Law Prof Blog. Here are Professor Henning’s comments on the possible forfeiture of Ruth Madoff’s assets.

Lawyers for Bernard L. Madoff, the alleged Ponzi scheme operator, have asked that assets worth almost $70 million be exempt from his case because they are actually owned by his wife, Ruth, and have no connection to the fraud. While numerous victims were destroyed financially by the multibillion-dollar scheme, if Mr. Madoff’s legal team gets their way, Ms. Madoff would be allowed to keep the apartment in New York’s Upper East Side, $45 million of municipal bonds, and $17 million in cash held at Wachovia bank.

This has to be a better joke than any ever told by Henny Youngman.

The assets appear to be in Ms. Madoff’s name, and in a legal filing, Mr. Madoff’s lawyers claim that the money is distinct from the Ponzi scheme that prosecutors say he operated for years before confessing in December 2008.

However, simply putting assets into another person’s name, or giving them as a gift, does not necessarily shield them when they are the proceeds of criminal activity.

The government has not yet filed a complete set of criminal charges against Mr. Madoff, and the current deadline for seeking an indictment is March 11. Federal prosecutors can pursue criminal asset forfeiture under a range of statutes that could authorize the seizure of the assets claimed by Ms. Madoff if they are considered to be the product of his crimes.

Criminal asset forfeiture is a fairly recent phenomenon, first adopted as part of the Racketeer Influenced and Corrupt Organizations statute, known as RICO, which was enacted in 1970. While that law was designed to reach criminal organizations like the Mafia, its terms are much broader and can be used in a wide variety of cases. For example, former Illinois Gov. George Ryan was convicted under RICO for taking bribes.

One provision of RICO, Section 1963(a)(3), allows prosecutors to seek the forfeiture of “any property constituting, or derived from, any proceeds which the person obtained, directly or indirectly, from racketeering activity” engaged in by the defendant. Among the crimes that can constitute the “racketeering activity” in violation of RICO is mail and wire fraud.

It would be fairly easy to charge Mr. Madoff with a RICO violation under Section 1962(c), which requires proof that he conducted an enterprise, like his investment advisory business, through a pattern of mail and wire fraud. The mailing of falsified account statements and the receipt of customer wire transfers over the years that he operated the Ponzi scheme would establish a RICO violation in fairly short order.

If he were convicted under RICO, the government could then seek the forfeiture of all proceeds of his criminal activity. One might think that giving the property away or putting it in his wife’s name might insulate Mr. Madoff from the forfeiture provision, but that is not necessarily the case.

The power of the criminal asset forfeiture provision is through the “relation back” doctrine. Under Section 1963(c), all “right, title, and interest” in property that is traceable to the RICO violation “vests in the United States upon the commission of the act giving rise to forfeiture under this section.” In other words, when the crime took place, the government immediately became the owner of any property that was the product of the mail and wire fraud scheme. It appears that Mr. Madoff’s entire investment advisory business was a scam, so any money derived from that operation would be subject to forfeiture.

The “relation back” doctrine prevents a defendant from simply transferring legal ownership of property acquired through the criminal activity. Thus, if the Upper East Side apartment where he currently resides came from money generated by the Ponzi scheme, then it belongs to the government as of the moment the crime occurred.

The key issue is tracing the proceeds of the fraud to determine what is subject to the “relation back” principle. Mr. Madoff operated two firms, one the investment advisory business that defrauded so many investors, the other a brokerage business that, to all outward appearances, was legitimate. But to the extent proceeds from the Ponzi scheme were used to fund or expand the brokerage business, then that operation would itself be subject to forfeiture because the government owns the proceeds from the crime, including any business acquired or expanded with tainted money.

To argue that the assets in Ms. Madoff’s name are in fact separate, it will be necessary for her to show they were acquired by untainted money. That may be difficult to prove because the records from Mr. Madoff’s investment advisory business do not appear to be very clear. If the government is able to show the brokerage operation was supported by the Ponzi scheme, then money taken from that business may not be immune to forfeiture.

The fact that Ms. Madoff did not know the money she received from him was the proceeds of unlawful activity — a point the government may well contest — would not insulate the property and accounts in her name. Under the asset forfeiture laws, ignorance of the source of the tainted money is not a defense. Instead, the only basis to resist a criminal asset forfeiture claim to property traceable to the crime is if the purported owner acquired the interest before any criminal activity generated the proceeds, or if the person is a bona fide purchaser for value of the property.

Given that the government believes Mr. Madoff operated his Ponzi scheme for a number of years, perhaps as far back as the 1970s, it will be difficult for Ms. Madoff to show she acquired the assets before the fraud began. To qualify as a “purchaser,” a gift from one spouse to another, or even the sharing of marital assets, would not be sufficient to insulate the assets: One must furnish actual value in an arm’s-length exchange.

Even if Ms. Madoff amassed her fortune by using the household money provided by Mr. Madoff, if that money is traceable to his fraud, then it would not be shielded from an asset forfeiture order.

Another weapon in the government’s forfeiture arsenal is the power to take what are known as “substitute assets.” If there is a forfeiture order but the government cannot find enough money or assets traceable to the crime, then it can take other assets owned by the defendant even if they are unconnected to the criminal activity. The assets could be perfectly legitimate, but criminal asset forfeiture is a punishment so anything else held by a defendant can be used to comply with a forfeiture order.

The courts are divided on whether the “relation back” doctrine applies to substitute assets. If the government were to acquire title to substitute assets at the time of the crime, then any untainted money given by Mr. Madoff could still be reached. That is a bit of a stretch, to be sure, but may be a means to get to the $70 million in Ms. Madoff’s name if the assets in her name cannot be traced to his fraud.

Putting assets in a spouse’s name sounds like a convenient way to hide money if you are engaged in criminal conduct. Mr. Madoff’s fraud was of astounding proportions, and it may be that part of his plan was to ensure his wife was taken care of if he were ever caught. The criminal asset forfeiture laws may well cut him off at the pass, however, if the government can show that the assets in her name were the proceeds of his criminal activity.

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Brian Mann posted the following interesting article on The In Box Blog today. Here it is.

For nearly thirty years, Federal prosecutors have wielded a powerful tool for clamping down on organized crime.

The "RICO" law -- the Racketeer Influenced and Corrupt Organizations Act -- has devastated criminal operations ranging from the Hells Angels to the Gambino crime family.

Maybe it's time to dust off RICO and use it against America's financiers? It now appears that many banking executives were simply robbing their corporations, their shareholders and the taxpayers.

Consider this dispatch from the Wall Street Journal:

As bad as 2008 was for Merrill Lynch & Co., it was very good for Andrea Orcel, the firm's top investment banker. Although Merrill's net loss ballooned to $27.6 billion last year, Mr. Orcel, 45 years old, was paid $33.8 million in cash and stock, just shy of his pay in 2007.

While Merrill staggered, 11 top executives were paid more than $10 million in cash and stock last year, say people familiar with the situation. An additional 149 received $3 million or more.

Meanwhile, former executives from Countrywide Financial -- the geniuses who helped inflate the devastating housing bubble -- are now profiting from the implosion. Here are the details from the New York Times.

Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.
“It has been very successful — very strong,” John Lawrence, the company’s head of loan servicing, told Mr. Kurland one recent morning in a glass-walled boardroom here at PennyMac’s spacious headquarters, opened last year in the same Los Angeles suburb where Countrywide once flourished.
“In fact, it’s off-the-charts good,” he told Mr. Kurland, who was leaning back comfortably in his leather boardroom chair, even as the financial markets in New York were plunging.

Is profiteering criminal? Probably not.

But the RICO laws give prosecutors wide leeway to seize assets built through the commission of dozens of federal and state crimes, including bankruptcy fraud, embezzlement, racketeering, insider trading, and money laundering.

As we pour billions in taxpayer dollars into the financial system, the Feds need to move aggressively to identify and punish those who behaved criminally.

Good job, Brian!
 

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The Bloomberg News (1/2, Scheer, Frank) reports, "The U.S. Securities and Exchange Commission, which sued Bernard Madoff last month for allegedly directing a $50 billion fraud, won't make public a list of his assets filed yesterday, the regulator said." A "Columbia Law School Professor John Coffee told Bloomberg Television, adding that the SEC wants to keep the assets secret to protect them" said, "I think one of the fears here is that much of this money may be in offshore funds." He added, "There is the danger that foreign regulators and foreign creditors may seek to seize that money if the names and sources are made public." While "a federal judge ordered Madoff to provide the SEC an accounting of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings, the court hasn't authorized its public disclosure, said SEC enforcement official Andrew Calamari, who confirmed receipt of the list." The AP (1/1, Bernard, Caruso) also reported the story.

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