PREET BHARARA, the United States Attorney for the Southern District of New York, announced that STEVEN BYERS, the former president and chief executive officer of the private equity firm WexTrust Capital, LLC (“WexTrust Capital”), was sentenced today to 160 months in prison on charges stemming from a fraud that raised more than $9 million from investors in private placement real estate offerings. BYERS, 48, was sentenced in Manhattan federal court by U.S. Court of Appeals Judge DENNY CHIN.

Manhattan U.S. Attorney PREET BHARARA said: “Steven Byers used smoke and mirrors to defraud his investors out of millions of dollars. But his scheme was ultimately exposed for the sham that it was, and now he will be punished severely for his crimes.”

According to the indictment and other documents previously filed in Manhattan federal court:

From 2003 to 2008, WexTrust Capital was a globally diversified private equity company specializing in investments in real estate and specialty finance opportunities. It was affiliated with several companies of a similar name, including WexTrust Securities, LLC, a broker-dealer registered with the United States Securities and Exchange Commission (“SEC”).

Beginning in 2003, BYERS, along with co-defendant JOSEPH SHERESHEVSKY and others, raised money from investors pursuant to private placement offerings, and then used material amounts of that money for other purposes without disclosing the diversion of funds to investors. In one such private placement, BYERS and others raised approximately $9.2 million in investor funds by representing that the funds would be used to purchase and operate seven commercial properties that were leased to the United States General Services Administration (“GSA”). According to the GSA private placement memorandum issued to investors by WexTrust Capital, the $9.2 million raised from investors, together with a mortgage of approximately $21 million, would be used to purchase the seven GSA properties and cover related acquisition expenses. The seven GSA properties, however, were never purchased. Instead, funds raised from investors were diverted for other purposes, none of which was disclosed to investors. BYERS and others later agreed to make up a story that they would then tell the GSA investors regarding what happened to their investment.

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BYERS, of Oakbrook, Illinois, previously pled guilty to conspiracy to commit securities fraud and securities fraud. In addition to his prison term, Judge CHIN sentenced BYERS to three years of supervised release and ordered him to pay $7,700,630.35 in restitution and to forfeit $9.2 million in proceeds from his crimes.

BYERS’ co-defendant, JOSEPH SHERESHEVSKY, 54, of Brooklyn, New York, and Norfolk, Virginia, pled guilty to similar charges on February 3, 2011, and is scheduled to be sentenced on May 13, 2011, at 10:30 a.m., before Judge CHIN.

Mr. BHARARA praised the work of the Federal Bureau of Investigation in this case. Mr. BHARARA also thanked the U.S. Securities and Exchange Commission for its assistance in the investigation.

This case was brought in coordination with President BARACK OBAMA’s Financial Fraud Enforcement Task Force, on which Mr. BHARARA serves as a co-chair of the Securities and Commodities Fraud Working Group. President OBAMA established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

Assistant United States Attorneys VIRGINIA CHAVEZ ROMANO and JILLIAN B. BERMAN are in charge of the prosecution.

From industry insiders to straw buyers, nearly 500 people have been arrested in a nationwide mortgage fraud takedown that reflects the coordinated efforts of law enforcement to address the growing problem of crime in the housing industry.
“Mortgage fraud ruins lives, destroys families, and devastates whole communities,” Attorney General Eric Holder said this morning at a press conference to announce the results of “Operation Stolen Dreams.” Launched on March 1, 2010, the multi-agency initiative has led to a total of 485 arrests. More than 330 convictions have been obtained, and nearly $11 million has been recovered. Losses from a variety of fraud schemes are estimated to exceed $2 billion.

Operation Stolen Dreams is the government’s largest mortgage fraud takedown to date. But FBI Director Robert S. Mueller cautioned that there is still much work to be done. The Bureau is currently pursuing more than 3,000 mortgage fraud cases, he said, which is almost double the number from the last fiscal year.
“The staggering totals from this sweep highlight the mortgage fraud trends we are seeing around the country,” Attorney General Holder said. “We have seen mortgage fraud take on all shapes and sizes—from schemes that ensnared the elderly to fraudsters who targeted immigrant communities.”
A few examples:
• In Miami yesterday, two people were arrested for targeting the Haitian-American community, claiming they would assist them with immigration and housing issues. Instead, they used victims’ personal information to produce false documents to obtain mortgage loans.
• In California, a prominent home builder used straw buyers to sell his houses at inflated prices. The scheme inflated prices on other homes in the area, creating artificially high comparable sales and affecting the overall new-home market.
• And in Detroit yesterday, FBI agents arrested several individuals in a $130 million scheme orchestrated by the local chapter of a motorcycle gang. The conspirators posed as mortgage brokers, appraisers, real estate agents, and title agents and used straw buyers to obtain around 500 mortgages on only 180 properties.
To combat the problem, the Bureau’s National Mortgage Fraud Task Force helps identify mortgage frauds such as loan origination schemes, short sales, property flipping, and equity skimming.

2009 Mortgage Fraud Report

In addition, we have 23 mortgage fraud task forces in “hot spots” around the country, from California and Texas to Florida and New York. Our investigators and analysts also participate in 67 working groups nationwide that share intelligence and industry data to identify emerging threats.
“FBI agents and analysts are using intelligence, enhanced surveillance, and undercover operations to identify emerging trends and to find the key players behind large-scale fraud,” Mueller said.
Unlike previous mortgage fraud sweeps, Operation Stolen Dreams focused not only on federal criminal cases, but also on civil enforcement and restitution for victims. Federal agencies participating included the Department of Housing and Urban Development, the Treasury Department, the Federal Trade Commission, the Internal Revenue Service, the U.S. Postal Inspection Service, and the U.S. Secret Service. Many state and local agencies were also involved in the operation.
“From home buyers to lenders, mortgage fraud has had a resounding impact on the nation’s economy,” Mueller added. “Those who prey on the housing market should know that hundreds of FBI agents on task forces and their law enforcement partners are tracking down your schemes, and you will be brought to justice.”

Equity skimming. Property flipping. Straw buyers. Inflated appraisals. These are some of the fraud schemes criminals are using to take advantage of a $2.37 trillion mortgage market in the United States.

To fight this growing scourge, we announced a partnership on March 8 with the Mortgage Bankers Association, which represents an industry hit by fraud costs last year of between $946 million and $4.2 billion.

First, some basics. There are two kinds mortgage fraud: fraud for property and fraud for profit. In general, fraud for property is when a home buyer lies about income, debt, or other information in order to buy a home. This type of fraud accounts for about 20 percent of mortgage fraud cases.

Then there’s fraud for profit. These crimes involve industry insiders, and generally include multiple loan transactions with several financial institutions. There are numerous kinds of for-profit mortgage fraud:

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Property flipping: the property is bought, falsely appraised at a higher value and quickly sold, sometimes several times in rapid succession. Eventually, the mortgage goes into default. The profits, of course, disappear with the criminal.
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Nominee loans/Straw buyers: the identity of the borrower is concealed by using the name and credit history of a willing accomplice.
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Fake/Stolen identity: stolen identities—along with credit histories—are used on a loan application.
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Inflated appraisals: an appraiser agrees to inflate the property of the house.
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Equity skimming: One of the more complicated schemes, an investor uses a straw buyer to get a mortgage. Prior to closing, the straw buyer signs the property over to the investor, who in turn rents the property out without making any mortgage payments.

The problem is growing: in September of 2002, the FBI had 436 mortgage fraud investigations. Currently, we have more than 1,036. That’s an increase of 237 percent in less than five years.

And of the 1,036 current cases, more than half have expected losses of more than $1 million. Of the victims, about 57 percent are federally insured financial institutions; 8 percent are government entities like the Department of Housing and Urban Development; and 35 percent are investors.

Here’s what we’re doing about it. We’re working with the Mortgage Bankers Association by providing their members with an advisory for their customers outlining federal mortgage fraud laws—and penalties. It comes with an assurance that we will aggressively investigate fraud claims.

“This is clearly a crime problem in need of a real answer. That answer is team work,” says Special Agent Karen Spangenberg, chief of the Financial Crimes Section of the FBI’s Criminal Investigative Division. “The newly developed Mortgage Fraud Warning enhances our joint effort to combat this financial crime problem by putting would-be wrong-doers on notice, and potentially stopping the crime before it is committed.”

Read the Mortgage Fraud section of our 2006 Financial Crimes Report to the Public for more details about mortgage fraud, including more types of schemes, successful investigations, and common indicators that a borrower may be attempting to defraud a lender.

Equity skimming, illegal property flipping, foreclosure rescue scams.
And now, say hello to the newcomer on the fraud block, the home loan modification scam.

“There’s no evidence that the same companies or the same people are involved,” said Deborah Bortner, director of consumer services for the Washington State Department of Financial Institutions. “But the intent is about the same: They are looking to take people’s money.”

State agencies like DFI were established to regulate and examine a variety of state-chartered financial services. The agencies also provide education and outreach to protect consumers from financial fraud. Given the peaks and valleys of real estate and mortgage banking, the agency has had its hands full.

“We proposed a new loan servicer bill because we received so many complaints from homeowners who lost their dreams – their homes – to questionable third-party loan servicing practices,” Bortner said. “Throughout the foreclosure crisis, homeowners desperately hoping to avoid losing their homes have fallen victim to companies offering to help, for a substantial fee. In many cases, the homeowner pays several thousand dollars, receives no loan modification and loses their home to foreclosure anyway.”

All servicers now must explain all fees, credit all payments within one business day of receipt, make reasonable attempts to comply with requests for information from the borrower, and promptly correct errors and refund invalid fees.

A typical loan modification is a permanent change in one or more of the terms of a borrower’s loan. It allows the loan to be reinstated and results in a payment the borrower can afford. This can mean a lower interest rate or an adjustment in loan term or monthly payment.

While there are legitimate loan modification companies, there are many more which charge fees for services never rendered.

New loan servicing/modification laws require licensure of loan servicers and create prohibited practices. They also compel all servicers to comply with many of the laws applicable to loan originators and demand them to maintain a surety bond.

Other guidelines address escrow shortcomings and require an escrow agent’s bond to cover the owner, a director or an officer in addition to all employees.

Investigators and regulators see all kinds of deceptive pitches. In every case, the program offers a desperate consumer hope of escaping a deep, dark hole. Three years ago, the big play was “foreclosure rescue,” where scammers peruse county records to find properties that face foreclosure for nonpayment of mortgages or taxes. And, like loan modification programs, these companies would charge questionable upfront fees and then not do any work.

Consumers who think they are being scammed should not sign anything until they have a neutral party look over the documents. They should contact the consumer protection division of their state attorney general’s office to get information about who would be an appropriate neutral party to review the documents.

Tom Kelly is a former real estate editor for the Seattle Times.