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What Happened When the FBI Investigated Foreclosure Fraud in Florida

Six years ago, FBI agents in Jacksonville, Florida, wrote a
memo to their bosses in Washington, DC, that could have unraveled the largest consumer fraud in American history. It went
to the heart of the shady mortgage industry that precipitated the financial
crisis, and the case promised to involve nearly every major bank in the
country, honing in on the despicable practice of using bogus documents to
illegally kick people out of their homes.

But despite impaneling a grand jury, calling in dozens of
agents and forensic examiners, doing 75 interviews, issuing hundreds of
subpoenas, and reviewing millions of documents, the criminal investigation resulted
in just one conviction. And that convict—Lorraine Brown, CEO of the third-party
company DocX that facilitated the fraud scheme—was sent to prison for duping
the banks.

Thanks to a Freedom of Information Act request, VICE has
obtained some 600 pages of documents from the Jacksonville FBI field office
showing how agents conducted a sprawling investigation. The documents suggest the feds gained a detailed understanding of how and why the mortgage industry
enlisted third-party companies to create false documents they presented to
courts, as detailed in the 2012
National Mortgage Settlement, for which the big banks paid billions
in civil fines. The banks’ conduct is described in the settlement documents as
“unlawful,” and the Jacksonville FBI had it nailed almost two years earlier.

In these case files, you can see the seeds of an alternative
history, one where dedicated law enforcement officials take on some of the
country’s most powerful financial institutions with criminal
prosecutions.

So why didn’t they?

“Given everything I see here, you’d have thought there would
be many more convictions,” said Timothy Crino, a now-retired FBI forensic
accountant who reviewed case file documents. “If I was the case agent, I would
be devastated.”


At the center of the FBI investigation were the documents
required to turn ordinary mortgages into mortgage-backed securities (MBS). During the housing bubble, banks bought up
mortgages and packaged thousands of them at a time into MBS; this was known as
securitization. The mortgages were transferred through a series of
intermediaries into a trust, and the trust paid out investors with the
revenue stream from homeowners’ monthly payments.

In the end, of course, an upswing in the number of homeowner defaults led the MBS market to collapse disastrously, nearly taking down the worldwide financial system along with it. But there was another problem. In order to legally foreclose on homeowners, the financial institutions doing the foreclosing must produce documents proving the mortgages were properly transferred from their originators through intermediaries and on to the trusts, detailing every step along that chain.

“If evidence collected shows intent to defraud investors by the real estate trusts, this matter has the potential to be a top ten Corporate Fraud case.” —FBI Criminal Investigative Division memo, June 2010

This
is common sense: If you accuse someone of stealing your car, you have to
establish that you actually owned it in the first place.

This chain of
ownership was at the heart of the FBI investigation, according to a “request for resource
enhancement” sent on May 25, 2010, from the Jacksonville office to Sharon
Ormsby, then chief of the FBI Financial Crimes Section in Washington. (Ormsby no
longer works for the Bureau, and an attempt to contact her through the Society
of Retired Special Agents of the FBI was unsuccessful.)

“The fraud in this matter was the result of negligence in
the process of creating Mortgage Backed Securities (MBS),” the memo reads.

The Jacksonville
FBI agents cite three reasons why the banks didn’t properly transfer the
mortgages. First, the sheer volume—millions of loans—would have made it too
time-consuming to file each transfer in county courts in advance. Second, it would have been too costly, as each transfer triggers a recording fee of
somewhere between $35 to $50. And finally, “during a booming market the trusts
did not recognize the need to secure the loans,” because they didn’t believe it
would ever be called into question in the courts.

The Jacksonville
FBI memo claims the trusts committed fraud by reporting to the Securities and Exchange Commission (SEC), the credit
rating agencies, and investors that they had clear title to the
properties when they actually didn’t. And agents present evidence that mortgage-servicing companies and their law firms hired third-party
outfits to falsify the mortgage documents needed to foreclose after the fact.

Among those
companies was DocX in
Alpharetta, Georgia, which provided “default services” for mortgage-servicing
companies and their law firms; when a loan went into default, they came to DocX
for assistance. Because the company was a subsidiary of Jacksonville-based Lender Processing Services (LPS), the primary default services provider
in the United States, the Jacksonville FBI office had jurisdiction over the
case.

It used to be fun to work at DocX, one employee said in an FBI interview. Now, it was more like a “sweat shop.”

“LPS and
other default services created false and fraudulent documents which appeared to
support their foreclosure positions,” the memo reads. “LPS and the associated foreclosure mills utilized these false and fictitious docs in Courts across the nation to foreclose on homeowners.”

It wasn’t even that
difficult to discover the falsehoods when you actually looked at the documents.
Lynn
Szymoniak,
a West Palm Beach attorney who
specialized in white-collar insurance fraud, fell
into foreclosure in July 2008, and got sued by the trustee of her mortgage,
Deutsche Bank. But when she finally received her mortgage assignment, it was
dated October 17, 2008, three months
after Deutsche Bank
filed for foreclosure. So at the time of the foreclosure filing, Deutsche Bank
didn’t legally own the loan over which they sued her.

Adding to the chaos, one of the so-called witnesses on Szymoniak’s
mortgage assignment, Korell Harp, was in state prison in Oklahoma at the time he supposedly signed the
document. (Ironically, Harp was in prison for identity theft, even as his own
identity was being stolen for use in foreclosure documentation.) The copy of
the promissory note was a hastily executed cut-and-paste job, fabricated after
the fact. A woman named Linda Green signed the mortgage assignment in Szymoniak’s
case in her capacity as the vice president of American Home Mortgage Servicing
Inc.; she also signed as the vice president of at least 20 other
financial institutions, according to public records Szymoniak compiled. And Green’s
signatures all featured different handwriting, meaning they weren’t just
fabricated, but forged.

It was Szymoniak,
based on weeks of public records searches, who wrote the first official fraud
report to the US attorney’s office in Jacksonville. She had several friends in
that office, prosecutors she’d partnered with on insurance fraud cases. So she
sent a complaint to Assistant US Attorney Mark Devereaux and FBI Special Agent
Doug Matthews, who managed mortgage fraud cases. The
result was the Jacksonville grand jury investigation.

Szymoniak filed
her own whistleblower lawsuits detailing foreclosure fraud and eventually won
$95 million for the government under the False Claims Act. For bringing the
case to the government’s attention, she
received a share of that award,
totaling $18 million.

The banks
had foreclosed on exactly the wrong person.

FBI agents visited people across America who endured illegal foreclosure after the financial crash. Illustration by Dola Sun

According to dozens of interviews conducted by the FBI, DocX originally
created lien releases, signifying when mortgages got paid off. But as the
housing bubble collapsed and trustees suddenly needed evidence for their
foreclosure cases, the business model shifted to pumping out mortgage assignments.
Temporary and low-wage workers hired by DocX were now posing as bank vice
presidents, working long hours signing documents at two long tables.

It used to be fun to work at DocX, one employee said in an FBI
interview. Now it was more like a “sweat shop.”

The documents coming out of DocX were sloppy at best. Several mortgage
assignments were filed with courthouses that listed the recipient of the
mortgage as “BOGUS ASSIGNEE.” This was apparently a placeholder on a DocX template
assignment that employees habitually forgot to change. At other times, employees appear to have forgotten to change the date, executing
assignments effective “9/9/9999.”

“When I joined the Bureau, white-collar crime was the number one priority in the country.” —David Gomez, former FBI agent

In the Jacksonville FBI files, DocX employees said that they were constantly
pushed to process more documents. Eventually, the company hit on a concept
called “surrogate signing.” Only one individual was identified on corporate
resolutions as the officer authorized to sign on clients’ behalf, but under
surrogate signing, other employees at DocX would sign
for that authorized
individual. Employees would sign as many as 2,100 documents per day, and each
surrogate signer would double the workflow. In early 2009, DocX management hung
a banner in the office proudly displaying their successful document production
to superiors visiting from LPS.

It read: “Two Million Assignments.”

The employees don’t appear to have ever seen any official documents authorizing them to sign
on behalf of financial institutions where they did not actually work. Indeed, when the
Jacksonville FBI office subpoenaed them, agents found that the “corporate
resolutions do not give DocX/LPS employees the authority to sign on behalf of
the institution.”

But while many people working at DocX believed the scheme to be fraudulent,
according to the memo, none of them questioned the practice for fear of losing their jobs. They were
reassured repeatedly that everything was legitimate. Some managers apparently told
employees to keep quiet for “the good of the company.” Even the managers
professed that they were trying to meet LPS demands and accomplish an
impossible task of completing millions of mortgage assignments.

One manager stated in an FBI interview that if she “was guilty
of anything, she was guilty of being ignorant.”

LPS management in Jacksonville broke up the surrogate-signing party in November 2009, after a foreclosure defense attorney
began questioning their practices. Executives at LPS fired Brown,
founder and CEO of DocX, claiming she began surrogate signing without their knowledge. But DocX continued to sign on behalf of corporate officers at defunct companies for months afterward, according to the memo. And because the
trusts had to receive mortgage assignments within 90 days of their establishment and not years later, the document production itself was fraudulent, the Jacksonville FBI
alleged, whether the signatures were forged or not.

(LPS, now known as Black Knight Financial Services after a series of corporate mergers,
did not respond to a request for comment for this story.)

Between February and May 2010, Jacksonville FBI agents met with state and
federal officials, including members of the SEC, Federal Deposit Insurance Corporation (FDIC), and Florida’s Department
of Financial Services. They issued hundreds of subpoenas and prepared to seize over
$100 million in assets in the case. On May 17, they met with officials from FBI
Headquarters’ Economic Crimes Unit, which is responsible for overseeing financial fraud investigations in
the field like Jacksonville’s, to
discuss the case and explain what they needed.

A week later, Jacksonville agents
made the formal request for help to FBI headquarters in Washington.

“Jacksonville is a
small field office with a White Collar Crime Squad of nine agents,” the memo
reads, explaining that six of the nine were committed to other cases. “In
short, Jacksonville does not have the necessary resources to begin addressing
this matter.”

Jacksonville wanted
the Economic Crimes Unit to activate the “Corporate Fly Team,” a group of
experienced agents with backgrounds in white-collar crime who travel to work on
big cases. The extra bodies would help conduct interviews with officials at
loan servicers, foreclosure law firms, trustees, and document custodians around
the country. In addition, Jacksonville’s office wanted an investigative team of
12 agents and two forensic accountants. Six agents and one forensic accountant
would come from FBI headquarters, the Florida Department of Financial Services
and the IRS would supply a few agents, and Jacksonville would provide the rest,
including the second accountant. The agents from headquarters would have a
90-day “temporary duty” (TDY) assignment. After that, Jacksonville wanted to
augment their “Funded Staffing Level” (FSL) with eight additional white-collar
crime agents “to permanently address this matter.” Jacksonville also wanted to
rent an off-site facility for the storage and review of documents.

“It’s a typical
bureau request,” retired FBI agent Timothy Crino told me. “You ask for
everything you can possibly ask for and hope you get half of it.”

And they did get about half, at least at first. The Criminal
Investigative Division (CID)—the FBI’s single biggest department—replied to the
Jacksonville request on June 24. “If evidence collected shows intent to defraud
investors by the real estate trusts, this matter has the potential to be a top
ten Corporate Fraud case,” the reply reads. CID agreed to pony up the Corporate
Fraud Response Team for assistance with interviews, and offered two TDY
Forensic Accountants for at least 90 days. They requested a detailed estimate
for the off-site facility, and expressed a preference for obtaining records in
digital format to reduce storage needs. But CID did not agree to the additional
agents or FSL request “until a further evaluation of the case is completed.”

Shuffling around resources and prioritizing investigations
is always tricky and involves layers of FBI office politics. “The guy running the
Jacksonville desk must sell it to the unit chief,” said David Gomez, a retired
FBI agent with the Center for Cyber and Homeland Security at George Washington
University. “The unit chief is fighting with other unit chiefs to sell it to
the section chief.” And after 9/11, the FBI shifted attention to fighting terrorism,
making the funds and bodies dedicated to financial crime even more
scarce. “When I joined the Bureau [in 1984], white-collar crime was the number
one priority in the country,” Gomez added. “Now people come in expecting and
wanting to work on terrorism.”

But proper resources can make or break a case. “If you don’t
get everything you want, you have to pick your battles,” said former Agent Crino.
“You can’t work the whole thing, can’t go after the biggest targets.”

In
this case, that would mean not going up the chain, from the companies like DocX that created the false mortgage assignments to the trustees and mortgage-servicing
companies who were their clients. That chain could have implicated some of
America’s biggest and most powerful banks and bankers; the practice was systemic, as
Jacksonville agents recognized. But a small FBI office can only do so much.


Check out the VICE News documentary about houses being demolished in the name of public safety and the local economy in Detroit.


Before the end of the 90-day temporary agent assignment in
Jacksonville, stories about foreclosure fraud began appearing in the news.
“Robo-signers” who signed thousands of documents with no understanding of their
contents were
exposed through depositions placed on the internet. GMAC
Mortgage, JPMorgan Chase, and eventually every major mortgage servicer in the
country
paused their foreclosure operations, because they were shown to be illegitimate.

The Jacksonville FBI
office made a second request for resources on January 20, 2011. Agents said the
local US attorney was considering indicting unidentified members of LPS for their role in the fraud,
and also “identified Deutsche Bank as a subject trustee… who provided
services in the conspiracy and made material misrepresentations to the SEC and
the investing public.” (Deutsche Bank spokesman Oksana Poltavets declined to
comment on the case.) The FBI in Jacksonville also said the US attorney there had
the commitment of the main Justice Department in Washington for the case going
forward, bolstering the agents’ contention that they needed more resources.

Agents in Jacksonville made a bevy of new asks, from additional use
of the Corporate Fly Team to conduct interviews and review three million
documents—produced by LPS after a subpoena—to help from other field offices for
interviews in their own jurisdictions with
homeowners evicted based on false documents. Finally, agents in Jacksonville
wanted the Minneapolis FBI office to look into another LPS facility in Minnesota
to see if employees had created false documents there, as well.

The FBI bosses in DC honored several of these
requests. Fly Team members helped review the documents. Field offices pitched
in on homeowner interviews. The investigation seemed to be making headway.

And then the trail went cold.

It is still difficult to pinpoint why, given that all the major
players won’t comment on the investigation. That includes the FBI’s field
office in Jacksonville, the FBI’s Economic Crimes Unit in Washington, and the
Justice Department. The last document in the FOIA file is dated June 28, 2012,
describing planned travel from Jacksonville to Atlanta to interview “at least six”
witnesses.

After that, there’s nothing.

The grand summary
of the investigation, which would typically be written up at the end, is not
included in the FOIA documents. “It’s just such a huge question mark,” former FBI Agent Crino told me, “how this could have gone so horribly wrong.”


The only person ultimately convicted in the Jacksonville case was Lorraine Brown, who was
sentenced in June 2013 to five years in
prison
after pleading guilty
to conspiracy to commit mail and wire fraud. The indictment claimed she directed the document forgery and fabrication scheme “unbeknownst to DocX’s
clients.” In other words, according to prosecutors, mortgage servicers
contracted Brown to provide evidence so
they could prove standing to foreclose, but didn’t know
the resulting evidence was faked.

But the Jacksonville
FBI agents stated in their reports that
any
mortgage documents created after the closure of the trusts would have to have been fabricated. As
recently as the January 20, 2011, request for resources, agents wrote, “When
the notes were bundled, an assignment of mortgage should have been prepared and
filed at the county court level… to ensure clear title in the event of sale
and/or foreclosure.” And they explained how and why the trusts failed to do so,
necessitating the creation of documents after foreclosure had already begun.

So the charging
documents in the Brown case positions
the banks as unwitting dupes of the scheme, a reversal from the consistent
determination by agents in the field that they were fully aware of and in
fact responsible for the situation.

“I thought, Well, this is one friend saying to another friend: ‘This is over,’”—Lynn Szymoniak

In the
sentencing phase, the feds turned to county registers, the public officeholders
who track and manage mortgage documents, to provide horror stories about DocX. One of them was John O’Brien, county register in
Essex County, Massachusetts. He was determined to recoup $1.28 million from Brown to
clean up falsified DocX land records filed with his office.

When Assistant
US Attorney Mark Devereaux asked him to testify, however, O’Brien recalled the
prosecutor insisting the judge wouldn’t accept the claim, because registers—a.k.a. the public—were not victims.

“What
do you mean, we’re not a victim?” O’Brien exclaimed. “We’re the ones with all
these false documents!”

“No, the bank is the victim,” Devereaux
replied, according to O’Brien.

(The US Attorney’s office in Jacksonville,
where Devereaux still serves as a prosecutor, declined to comment on the case.)

Lynn Szymoniak, whose complaint triggered the Jacksonville
FBI probe, believes that officials at the Justice Department, determined to stage-manage their own
resolution to the scandal, stonewalled the agents on the case. She told me
about one moment when she sensed the whole thing was rigged, sometime in the
middle of 2011, well over a year after the investigation got underway.

Szymoniak had been unofficially assisting the Jacksonville team
with research. US attorneys there would ask for 200 examples of a law firm signing mortgage assignments after they filed
their foreclosure case, or 30 Linda Green documents in a certain region of the
country. Szymoniak spent hours on these projects, feeling like she couldn’t say
no. But she wondered why the requests kept coming, even after she went public
and
appeared on 60 Minutes in April 2011,
detailing the false document scheme. “I really thought that in response they would have to
file [an indictment],” Szymoniak said.
“When they decided to hold tight and it would go away, I realized I had no
cards left to play.”

At one point, the
assistant US attorney requested a massive set of files. Szymoniak emailed her friend Henry
“Tommy” Clark, a detective with the Florida Department of Financial Services’
Division of Insurance Fraud, who also partnered with the FBI on cases. She
complained to him that the file request was going to take her 14 hours to assemble. Clark
called her within a few minutes, and didn’t even say hello.

“Don’t waste
your time,” he said.

Clark worked with
the Jacksonville FBI field office for a long time, and saw the agents there as
honorable people willing to follow the evidence wherever it led, Szymoniak recalled.
So when Clark said, “I’m not working on it anymore, I’ve got a whole lot of other
cases where I can file,” he seemed to validate the eerie feeling she had about the case. Their shared recognition was that someone
seemed to be preventing Jacksonville from completing the investigation, and the
two knew each other well enough to broach that fear in just a few words.

“I thought, Well, this is one friend saying to another friend: ‘This is over,’” she told me.

In a phone conversation, Detective Clark, who has since retired, confirmed that he worked on the FBI case but declined to comment for this story.


The FOIA
documents detail an intense investigation in the aftermath of economic disaster,
with Jacksonville agents and US attorneys going all-out for the public interest. They spent years running down leads and cultivating information,
with the national office in Washington accommodating many of their resource
requests. But all that work amounted solely to putting one non-banker in prison.

In February 2012,
the Justice Department and 49 state attorneys general reached their
civil settlement with the five biggest mortgage servicers
over a host of allegations of deceptive and unlawful conduct, including “preparing, executing, notarizing or
presenting false and misleading documents… or otherwise using false or
misleading documents as part of the foreclosure process.” The feds
boasted that the settlement was for
$25 billion, but only $5 billion of that was in hard dollars, with the rest in
credits for activities that included bulldozing homes and donating others to
charity. Homeowners wrongfully foreclosed upon received about $1,480. The
Justice Department claimed it reserved the right to criminally prosecute anyone
suspected of wrongdoing. That still hasn’t happened.

After Brown’s
sentencing, Szymoniak called up one of the FBI investigators and thanked him
for at least snagging the one conviction—for proving real crimes were
committed by some of the most powerful economic players in America, crimes
theoretically punishable with prison time.

There was a
long pause.

According to
Szymoniak, when the agent finally broke the silence, he said, “I don’t think
the taxpayers were very well served.”

This story expands on David Dayen’s new book Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, the winner of the Studs and Ida Terkel Prize out this month from The New Press. Follow David Dayen on Twitter.

Article source: http://www.vice.com/read/what-happened-when-the-fbi-investigated-foreclosure-fraud-in-florida

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