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Memorable cases, part 1

Pithy stories to instruct

"Tell me a story." That command probably was one of your first sentences as a toddler. You wanted word pictures in your head. Colorful characters. Plots of bad guys, suspenseful situations, and good men and women to the rescue. Now, if you're pressed to admit it, you still like a good story. Only this time you need to know how a fraudster committed a crime. And how the fraud examiner discovered evidence, investigated subjects, learned lessons and gave recommendations.

Well, we've got a few bedtime stories for you.

Fraud Magazine recently asked the members of the ACFE faculty to supply their most memorable cases.

These cases perch on many of the limbs of the ACFE Fraud Tree and some of the branches. But take note: They aren't just war stories; they're case histories you can learn from — whether you're in a classroom or board room; corner office or cramped cubie; at a Fortune 500 company or a one-person business. We'll begin with four cases and conclude with additional practical stories in the March/April issue of Fraud Magazine.

Mortgage fraud: unrealistic incentives

Many countries are emerging from the Great Recession — some slower than others. One of the roots of the nail-biting crisis — at least in the U.S. — were fraudulent mortgages. Jenny Brawley, CFE, CAMS, director – fraud, AML and OFAC governance at Freddie Mac, tells of a Florida case from 2006 through 2008 in which desperate condominium developers offered incentives to buyers in a saturated and downturned market. Cases like this one were common in markets with a concentration of conversions in resort areas, says Brawley, who teaches the ACFE's two-day Mortgage Fraud course.

"The incentives typically consisted of ‘no money down,' guaranteed rental income and cash back at closing," Brawley says. "The developers were able to control the appraisal process to inflate the values to cover the cost of the incentives.

She says the developers also worked closely with loan officers and real estate agents to conceal the incentives from the lenders. When the borrower didn't qualify, the officers and agents misrepresented income, assets and/or employment.

"The developers actually contributed the borrowers' down payments and made it appear to the lenders that it was the borrowers making the down payments." Brawley says. "The developers also pocketed loan proceeds — based on the inflated values — to make the mortgage payments for four years. The real estate agents removed incentive documentation from the purchase contracts so the lenders would not be aware of the seller-paid contributions."

She says the closing attorney also knew that the buyers didn't have any of their own funds and prepared the closing documents to mislead the lenders on the source of funds.

"Cases like this one were very typical in the mid 2000s," Brawley says. Many in the housing and lending industry thought the stabilization or increase in values within this area were indicative of a recovering market, she says. No one involved thought to question if "this is too good to be true." But the red flags were there; sustainable property values and numerous sales in a downward economy didn't make sense, she says.


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