Subprime CEO’s Escape Prosecution

The Chief Executive Officers of Subprime Lending Institutions seem to have escaped prosecution in regard to fraud in the mortgage industry.  Attorney Generals across the Nation seem to be doing the “perp walk” for the lower level fraudsters in the mortgage industry but we have yet to see the upper lever executives. The very individuals that contributed to the subprime mortgage market crisis.

The abuses in the industry are staggering with plenty to investigate from the financial institutions that participated in crashing the mortgage industry with subprime loan schemes. The abuses caused billions of dollars in shareholders and taxpayer money yet few Chief Executive Officers of these subprime companies have been prosecuted for the markets fall.

The Federal Bureau of Investigation provided a report back in 2007 that shows that several lenders where actively doctoring the books before the collapsed of the mortgage market while the Chief Executive Officers were bringing home immense paychecks and proceeds from stock sales.The word from Attorney Generals is that investigations regarding corporate fraud cases can take years to assemble due to the complexity and the limited resources available.  They stress that it’s too early to judge the current response while cases are still being probed into to find all the players involved.  Federal Bureau of Investigation reports show that mortgage fraud has quadrupled since 2004. The agency reports also show that over eighty percent of mortgage fraud losses are due to mortgage industry insiders. The cost of cases the agency tracked over the course of last year exceeded one billion.

The Federal Bureau of Investigation and the United State Justice Department have had success in prosecuting lower level fraudsters in the mortgage industry. Prosecutors in California last year indicted six defendants in a scheme involving the Long Beach Mortgage. Long Beach Mortgage was a subprime mortgage lender and a subsidiary of Washington Mutual. The mega mortgage company was based out of Seattle and bought out by JP Morgan Chase last year. The prosecution has sentenced one defendant in the case to fifteen months in prison and four other individuals in the case have pleaded guilty. One defendant in the scheme who was a Long Beach Mortgage employee was paid over one hundred thousand dollars to ensure the firm funded loans that were fraudulent according to documents from the justice department.

Educated observers of white collar crime are doubtful that the immense subprime lenders were merely victims of mortgage fraud. They believe that prosecuting the low level perpetrators and not the upper level chief executives is simply trivializing the issue. They contend it will simply pave the way for future white collar crime schemes.

Henry Pontell, a criminology professor at the University of California at Irvine, noted that we really have not learned any lessons from the Savings and Loan Crisis back in the 1980s. The Savings and Loan Crisis of the 1980 brought on several high profile fraud convictions. The most relevant lesson to be learned from that crisis was that fraud definitely plays an enormous role in this type of crisis and acts as an accelerant for future crises.

The case against two Bear Stearns hedge fund managers which is schedule for trail next month and thus far seems to be the most major criminal prosecution to come out of this mortgage fraud crisis. The hedge fund managers are accused of securities fraud.

The Securities and Exchange Commission brought the largest civil action in regard the mortgage fraud crisis against Angelo Mozilo back in June. Angelo Mozilo is the former Chief Executive Officer of Countrywide Home Loans. Mr. Mozilo has been accused along with two other Countrywide executives of securities fraud and insider trading. The Securities and Exchange Commission alleged that Mozilo and his co-defendants misled investors by claiming Countrywide was lending sensibly while it in fact according to an internal email from Mozilo the lending was toxic. Mr. Mozilos lawyer has stated the allegations to be false.

Professor Pontell however believes the on deniable proof is in the subprime mortgage giants files themselves. The documents will prove that questions in regard to borrower income and assets were answered by using computer generated figures to pre-sign the documents. The fraudsters were so bold that they never took the cut and paste documents out of the mortgage loan file. Catching these fraudsters is like having the fish jump into the boat before you cast your line out. 

The fraud has been brazen however tracing back the fraud and corruption to the executive levels in the industry isn’t as easy as one would think. It is almost impossible to trace a consumer file back to a top level executive. Mr. Mozilo may have set the tone of his companies actions however proving he was involved in a particular customer file or files is not going to happen.

Subprime lenders are now dealing with the flourishing private civil suits that are being bought against them. New Century Financial once the number two subprime originator filed for bankruptcy back in April of 2007. The company at the time disclosed that its financial statements were fraudulent.  A class action securities fraud was brought against the company and a judge last year allow the action to continue against it. The judge noted that it was a staggering race to the bottom of loan quality and underwriting standards.

New Century Financials three co-founders reap millions selling off shares prior to the company’s bankruptcy. Brad Morrice, who was the Chief Executive Officer at the time of the company filed for bankruptcy made eight million three hundred thousand dollars in salary and received bonuses for fiscal years 2003 and 2005. Mr. Morrice is currently the managing partner at Cypress Strategy Group. The slogan on the Cypress Strategy Groups website is “I’m mad as hell and I’m not going to take it anymore.”

The Justice Department since the September eleventh attacks on the Wall Trade Center and the Pentagon have complicated matters for prosecutors as the demands on them has increased. Corporate fraud fell by over two thirds after the attacks happened.

Law Professor, Ramirez stated that he was stocked that the Obama Administration isn’t more aggressive in prosecuting these financial white collar crimes. The Justice Department however rejects Mr. Ramirez claims and point out the cases against Bernie Madoff and Allen Stanford.

Mortgage Industry observers such as Steven Ramirez, a law professor at Loyola University in Chicago, are finding it hard to believe the lack of high profile prosecutions and notes the he doesn’t believe that it’s for lack of white collar criminal activity.  He notes the lack of the “perp walks”; which is the practice of showing off a criminal defendant before the press on the way to court.