With a population of 41,000, Dublin, Ohio, is big enough that its residents do not know every little thing about each other. But people there did notice when local residential builder Thomas E. Parenteau moved his real estate agent/mistress and their two children into the luxury home he had until then shared only with his wife. The house was 27,000 square feet, but still …
How did Parenteau orchestrate this self-serving arrangement and a host of multimillion-dollar mortgage and tax frauds that grew out of it?
"By fabricating an illusion of success to fulfill the particular wishes of each individual or organization he manipulated," says James Whitaker, CFE, CPP, CIFI, principal of a Cincinnati, Ohio, investigation, security and management consultancy and an adjunct member of the ACFE faculty. "That's typically how fraudsters like him pull together the key people and other resources they need for a successful conspiracy."
Eventually, the IRS Criminal Investigation Division and the Department of Justice (DOJ) brought Parenteau to account. But before he was arrested, he recruited numerous co-conspirators into his fraud schemes. In addition to his wife, Marsha, participants included Parenteau's accountant, Dennis Sartain, and several real estate agents — his mistress, Pamela McCarty, among them — who eagerly pursued the illicit wealth he said would be theirs if they joined him.
Ultimately, the plan didn't work out as they had hoped. All 11 defendants have been convicted on various charges. These included conspiracy, bank fraud, tax fraud, wire fraud, obstruction of justice, witness tampering and giving or taking kickbacks in connection with straw-buyer purchases of fraudulently overpriced properties. At press time, government prosecutors who worked on the case were not available to discuss it.
These offenses violated Title 18, United States Code, Sections 371, 1503 and 1512. Ten conspirators, including Marsha Parenteau, McCarty and Sartain, have begun serving terms ranging from two to 11 years. Parenteau is awaiting his sentence; as their ringleader, most likely his will be longer.
According to The Columbus Dispatch's Kathy Lynn Gray and John Futty, who reported extensively on the case, a date has not yet been set for the sentencing of the 47-year-old, latter-day Svengali in U.S. district court. Parenteau might spend the rest of his life behind bars.
IN PLAIN VIEW
Parenteau, an enterprising man, wanted to take out a $12 million loan on the enormous house, which he had bought for $1.8 million four years earlier through a trust, with McCarty as trustee. Parenteau knew getting another loan on the property wouldn't be easy because under his direction the conspiracy had already used the dwelling as collateral to borrow $6 million.
"Anyone on the lookout for fraud would have seen red flags all over Parenteau and his associates," Whitaker says. "He resided at the same address as a real estate agent through whom Parenteau held title to his home. Plus, they had the same accountant. This situation could have been innocuous, but it demanded careful inquiries by anyone considering doing business with them."
So Parenteau did what any other resourceful fraudster would do: look for a soft target. Soon, he had his wife incorporate in Florida one of the four home-building companies he had set up in her name but that were fully under his control. And then he directed her to seek the loan from Century Bank of Sarasota, Fla.
Tolerant of risk and eager to earn high fees, Century accepted Marsha Parenteau's untruthful explanations of how "improvements" had raised the home's value so much, so soon.
In fact, the Parenteaus, McCarty and Sartain together falsified home improvement work orders and other documents supporting the fraudulent loan application. Parenteau wasn't overly concerned with how high Century's rates might be; after all, he planned to use other people's money to make the payments.
Century approved the loan in 2007. One year later, the Parenteaus defaulted on it after federal prosecutors indicted them.
Many such irresponsible transactions had greatly reduced Century's capital, which made it unsafe for business. So in 2009, the U.S. Department of Treasury's Office of Thrift Supervision closed it, and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
Soon thereafter, Iberia Bank of Louisiana bought Century from the FDIC at a discount. Federal taxpayers suffered a $344 million loss on the deal because Century's management gambled on making big profits on risky loans. Parenteau recognized the illusion of success Century's underwriters desired, and, with his accomplices' technical guidance, he gave it to them.
"Regardless of how uncertain Parenteau's qualifications were, he persuaded Century Bank that he was willing and able to cover the mortgage payments," Whitaker said. "Several years ago, lenders would evaluate the riskiness of their loan portfolios after they had already grown to dangerous levels. What they should have done, and are beginning to do now, is identify their risk appetite and set a threshold well before they approach it."
Whitaker recommends several best practices for loan officers and others attempting to verify information on loan applications:
If the applicant faxes documents to you, make sure you get a home or work phone number where you can reach him or her. Don't assume the number(s) are correct; verify them.
If the applicant owns a business, search civil court records for potential signs of trouble. For example, if the borrower asserts he has adequate assets, but civil court records indicate recent default judgment(s) or pending litigation against the borrower or his business, more detailed inquiries are necessary.
Check the state's secretary of state website to see whether the applicant's business is still active or has recently changed its name, address or business principal(s).
Check the court of common pleas, which handles all criminal cases.
In most states, this information is available online at little or no cost, and no authorization is needed to make such inquiries.
Whitaker says that a fraudster trying to attract accomplices puts on a show for them: He drives an expensive car, dresses well and picks up the tab at top-ranked restaurants. Targeted recruits observe this, and they often become envious of the cash flow.
The ringleader reinforces these perceptions and downplays any moral or legal concerns the targeted recruits might have. For example, Whitaker says, he or she will claim, "I've been doing this for years. I know how it works, and it's not really illegal. It's just a business tactic."
"The potential draftees know this isn't true," Whitaker notes. "But greed and ambition overcome their reluctance. And once they actually participate in the fraud and benefit from it, they rationalize any ethical concerns and persuade themselves they won't or can't be caught."
Originally, McCarty was a successful real estate agent for one of Parenteau's competitors, who fired her in 2003 after learning she had invested in Parenteau's firm. Parenteau's relationship with McCarty had grown beyond business, and their first child was born in 2004.
"Two key factors kept this conspiracy going for a while," Whitaker says. "First, Parenteau recruited people he could manipulate into helping him commit fraud. Second, their collective tax, finance, and real estate expertise made his schemes workable."
Soon after meeting McCarty in 2000, Parenteau got CPA Sartain to prepare her tax returns, and she reported fictitious business losses, which resulted in more than $800,000 in fraudulent tax refunds from 2000 through 2003. According to the IRS, Sartain also created false payrolls' stubs to help falsify McCarty's application for the first $6 million borrowed on the Parenteau home.
McCarty shared the proceeds of these frauds with Parenteau, who used them to pay $85,000 a month for $20 million in life insurance on his ailing, elderly father. To keep Sartain under his control, Parenteau promised him a million-dollar share in the imminent death benefit.
Their tax fraud was the conspirators' undoing. In 2005, the IRS's Criminal Investigation Division notified McCarty it was investigating the accuracy and legitimacy of her returns. The shock plunged McCarty into alcohol abuse. When she sought treatment, Parenteau became wary, and, she said, threatened her life if she betrayed him.
Meanwhile, IRS investigators kept up the pressure. They searched a trash can outside Sartain's home and found shredded papers, which they re-assembled into evidence of his role in the tax fraud. Armed with a search warrant, IRS investigators also discovered incriminating data on a flash drive in Sartain's home.
Concurrently, IRS investigators persuaded McCarty to wear a recording device when she spoke with Parenteau and Sartain about the ongoing investigation. Parenteau arranged meetings with McCarty and Sartain to agree on an exculpatory narrative they all would tell investigators.
Sometimes they gathered in closets at the Parenteau-McCarty residence; other times, they rendezvoused at a nearby store. But their efforts were fruitless because McCarty's wire captured everything they said about destroying evidence and lying to investigators.
Based on the recordings, DOJ prosecutors obtained grand jury indictments of Sartain in 2007 and both Parenteaus in 2008.
In separate discussions with investigators, Sartain denied involvement in any fraud and refused to cooperate. He even turned down a deal that would have limited his jail time to two years.
Later, overwhelmed by the proof against him, Sartain pleaded guilty to seven felonies related to the fraudulent tax returns he prepared for McCarty. Anticipating his cut of the life insurance payout, Sartain persisted in refusing to testify against Parenteau, who blamed the frauds on McCarty.
But since the death of Parenteau's father in 2009, the DOJ and the life insurer have fought to prevent payment of benefits to Parenteau. So things have worked out poorly for Sartain. He's serving an 11-year prison sentence that could have been two years. And when he gets out of jail at age 64, there won't be a $1 million payoff waiting for him.
"Prosecutors present a long list of charges and potential sentences as a means of inducing defendants to cooperate," Whitaker says. "Their theme is that cooperation is the surest way to avoid a long sentence."
He notes that prosecutors tailor their approach to the criminal history, if any, of each defendant. "Under federal sentencing guidelines," he says, "a first-time offender who is remorseful, cooperative and willing to make restitution is eligible for a shorter sentence."
That incentive is not available to repeat offenders. For them and other jaded interviewees, Whitaker recommends an alternative.
"People who orchestrate conspiracies of this nature often think they're smarter than whoever it is they're talking to — a potential co-conspirator, a lender, or an investigator. And they like to demonstrate this by dominating the conversation. That plays right into an investigator's hands," he says. "Many such suspects' favorite topic of conversation is themselves. Listen carefully to what they say about their education and their business experience."
As a former police detective and division commander, another method Whitaker has found effective is to pose an apparently innocent question.
"For example, ask the suspect what kind of professional training or college courses he has taken," he says.
"Later, if charged, the suspect may plead ignorance of the law," Whitaker adds. Most criminal statutes base guilt on knowingly committing a violation. In such cases, the investigator can counter a claim of ignorance with the defendant's earlier admission of relevant training or education. Sometimes the investigator may be able to introduce a syllabus or test(s) from those classes as proof the offender knew exactly what he was doing."
WORKING WITH PROSECUTORS
Whitaker recommends that investigators approach the prosecutor as soon as they get a promising case.
"The prosecutor can help you determine what to focus on, based on what you already have and what they think they can accomplish with it," he says. "Then go back to work on the case, and gather whatever evidence is available to support the strongest charges."
In Whitaker's view, presenting a disorganized case is one of the worst mistakes an investigator can make with prosecutors.
"You may have a lot of strong evidence. But if too much of it is solely in your mind or in disarrayed paperwork, that's a problem. Sometimes, an investigator will approach a prosecutor and literally say, ‘I have a lot of evidence, but I haven't organized it yet. What exactly do you need?' That's a bad start.
"When I visit a prosecutor, I lay my evidence out in one or more tabbed binders," Whitaker says. "That makes it easy for the prosecutor to see what I already have and what I still need. Plus, it sends a strong message that you really can help the prosecutor prove the case."
Whitaker also recommends that investigators proactively establish working relationships with prosecutors well before bringing them a case. In that way, the investigator will know in advance how the prosecutor prefers to work.
Whitaker says corporate in-house investigators should not hesitate to seek or recommend the engagement of external investigative specialists when necessary.
"The CEO and CFO should make it clear that the objective is a fully effective investigation and, if appropriate, prosecution," Whitaker says.
With reassurance from top management that such a strategy does not reflect negatively on them, internal investigators should be more comfortable seeking outside specialized help when they need it.
"One of the best ways to find qualified external investigators is to search the ACFE website to find independent CFEs in your locality," Whitaker says. "Another method is to call the prosecutor's office and ask for the names of investigators who have brought to them well-presented cases of the kind you're working on."
MORTAGE FRAUD RESOURCES
"Mortgage Fraud," ACFE course, Denver, July 25-26
"Summary of Mortgage Related Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act", Mortgage Bankers Association of America
Robert Tie is a New York business writer.
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