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Hundreds indicted in US mortgage fraud

Latest update : 2008-06-22

More than 400 people have been indicted in a major operation aiming to thwart mortgage fraud, according to FBI chief Robert Muller (on left). Two senior managers at Bear Stearns were charged with conspiracy and securities fraud.

Two ex-Bear Stearns executives were indicted Thursday as officials unveiled charges against 406 people in a huge probe into fraud, which helped fuel the housing crisis and infect the global economy.
The announcement was the biggest indication yet of criminal charges in response to what some say was rampant fraud aimed at cashing in on a sizzling market before last year's meltdown.
In an indictment unsealed in New York, former Bear Stearns hedge fund managers Ralph Cioffi and Mathew Tannin were charged with conspiracy, securities fraud and wire fraud. Cioffi was also charged with insider trading.
The pair told investors that their two funds were designed "to provide a modest, safe and steady source of returns," the indictment said.
But they failed to inform investors that the funds were "in grave condition" and at risk of collapse in March 2007.
The funds collapsed in the summer of 2007 resulting in some 1.4 billion dollars in losses to investors and triggering widespread panic in financial markets about the global financial system.
According to the indictment, the two had "marketed the two funds as a low-risk strategy, backed by a pool of debt securities such as mortgages" and "made misrepresentations to stave off investor withdrawal" even as the funds neared collapse.
But Edward Little, a lawyer for Cioffi, said the two men were being blamed in a crisis that was not their fault.
"The subprime crisis took everyone by surprise, including the Fed and Treasury, and dozens of the largest financial institutions have lost over 300 billion dollars to date on the same investments," the lawyer said in a statement.
"We are shocked and disappointed that the government has seen fit to fix blame on these two decent men. The good news though is that there will be a trial, and we look forward to the day they will be vindicated."
Tannin's attorney Susan Brune said: "Matt Tannin is innocent. He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal."
Meanwhile the Department of Justice and the Federal Bureau of Investigation (FBI) said they had charged 406 people from March 1 to June 18 in a national probe called "Operation Malicious Mortgage" in a variety of schemes related to housing fraud.
Some 60 arrests were made in mortgage fraud-related cases on Wednesday, in 144 separate cases. The FBI estimates that the cases resulted in one billion dollars in losses.
"Operation Malicious Mortgage and the Bear Stearns case demonstrate that the Department of Justice is determined to detect and to punish mortgage fraud and to help restore stability and confidence in our housing and credit markets," said Deputy Attorney General Mark Filip.
"The cases announced today represent the ongoing enforcement work of federal investors and prosecutors from across the country who are working with more than 40 task forces, that they, along with our state and local counterparts, have formed to combat this sort of fraud and related abuses."
The collapse of the hedge funds at Bear Stearns played a role in a global credit crunch as banks and investment funds scrambled to identify investments tied to risky mortgage bets.
Bear Stearns, a prestigious 85-year-old Wall Street investment firm, went into a downward spiral after that news and was on the brink of collapse itself when a rescue engineered by the Federal Reserve in March 2008 resulted in its sale to JPMorgan Chase.
The Operation Malicious Mortgage task force is probing a variety of tactics including lending fraud, foreclosure rescue scams and mortgage-related bankruptcy schemes.
Some cases involve fraudulent misrepresentations about the borrower's financial status, the use of false or fictitious employment records or the inflation of property values, according to officials.
Foreclosure schemes involve criminals who target legitimate homeowners in dire circumstances and collect fees for supposed foreclosure prevention services.

Date created : 2008-06-20