Mortgage fraud assault a Pyrrhic victory

The first of two parts / Penalties here driven more by defendants' degree of cooperation

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In 2008, as the housing market dragged the world economy down, orders came from Washington, D.C., to federal prosecutors nationwide: Bust the people whose lies contributed to the mess.

Six years later, the effort by Pittsburgh's federal prosecutors to punish fraudulent mortgage brokers, appraisers, closing agents, property flippers and bank employees can claim 144 people charged, more than 100 sentenced and no acquittals.

That undefeated record, though, came at a price: Some of the worst offenders got extraordinary deals in return for their testimony against others.

A review by the Pittsburgh Post-Gazette and Duquesne University School of Law students of 100 completed cases showed that the sentences of mortgage-related criminals in the Pittsburgh area were driven more by their degree of cooperation with prosecutors than by the number of people they scammed, the dollars they reaped or the damage they did to the financial system. Some of the most prolific offenders used their central places in the fraud conspiracy to secure light sentences.

• Leniency for cooperation was doled out liberally. At least 30 of the 100 defendants were the beneficiaries of prosecutorial motions to reward "substantial assistance" to the investigation. That cooperation rate is nearly double that seen in fraud cases nationwide, suggesting that prosecutors here rewarded more defendants than normal.

• Most of the mortgage criminals who assisted prosecutors got no prison time, and the average amount of incarceration for those 30 defendants was a little more than three months. By contrast, defendants who pleaded guilty but didn't provide substantial assistance to prosecutors, got average sentences of three years in prison. Those few who went to trial faced an average of 6½ years behind bars.

PG graphics: Trial penalties, cooperation discounts and More cooperators, bigger breaks
(Click image for larger version)

• Several of the figures most central to the region's mortgage fraud problem cooperated with prosecutors, and got non-prison sentences. For instance, Kenneth C. Cowden, formerly of McKees Rocks and now of Florida, performed unlicensed appraisals that exaggerated real estate values in the region to the tune of hundreds of millions of dollars. He cooperated and got nine months in a halfway house. Jay Berger of Fox Chapel, who recruited Cowden and lived lavishly from fraudulent mortgages, was sentenced in 2012 to 15 months in prison, but died this month at age 49 without serving time.

"The general principle is you want to make deals with the little fish to catch the big fish. You also in theory want to make deals with as few people as possible to get the maximum result possible," Michael Simons, dean at St. John's University School of Law in New York City, said when told of the findings. "It's not ideal to use a big fish to make a case against a small fish. ... But it nevertheless will happen."

A way with numbers

When someone lies about a borrower's financial situation or the value of a property in order to arrange a loan, that's mortgage fraud. The partnership that drove much of the mortgage fraud unearthed in Pittsburgh was forged around 1999, when Cowden, then a tax preparer from McKees Rocks, met Berger.

"[A]s I did the tax returns for Jay Berger, he liked the way I worked with numbers, and suggested that I get into the appraising business," Cowden, now 62, said at a 2011 hearing.

Cowden testified that rather than taking the time to get an appraisal license, he used the names of licensed appraisers, paying them monthly stipends for that illegal privilege. He began placing values on homes to support mortgages brokered by Berger and his then-girlfriend, Vasilia Klimantis.

Berger ran 1st Federated Mortgage, while Klimantis led Steel City Mortgage. In 2001, they married in Acapulco, Mexico, and bought a four-bedroom Fox Chapel home for $666,000. They sold it in 2008 for $1.2 million.

Cowden exaggerated the worth of properties he appraised by an average of about $40,000 each, he testified. For that, the couple paid him $300 per appraisal, for a total during 2001 of $130,000, he said. He paid taxes on none of it, bilking the IRS of $345,000 over several years. Eventually, Cowden said, he stopped bothering to visit the homes he was evaluating. When state regulators fined him $15,000 for appraising without a license, he testified, Berger and Klimantis paid it. Unfazed, he branched out, serving numerous mortgage businesses, including those run by Klimantis' sister and the sister's husband.

Efforts to interview Klimantis, Cowden and Berger, prior to his May 7 death, were unsuccessful.

When FBI agents executed a search warrant at Cowden's home in 2005, they found detailed records showing inflated appraisals backing mortgages totaling more than $300 million. He promptly began assisting investigators.

After the Justice Department told all U.S. attorneys to crack down on mortgage fraud, Cowden became the key to Pittsburgh prosecutors' probe into a web of professionals in the haywire housing market.

"He made recorded telephone calls of tremendous value, for instance, to the people at Steel City Mortgage," said assistant U.S. attorney Brendan Conway, the prosecutor on most of the mortgage crime cases. "What you'd love to do, of course, is cooperate [with] the lowest level, the least culpable people. But the reality is, often times, that is not the way it has worked out."

At Cowden's 2009 sentencing, U.S. District Judge Joy Flowers Conti -- now the chief judge -- found that federal guidelines suggested a prison sentence of at least three years and five months. In recognition for his cooperation, though, she sentenced him instead to nine months in a halfway house, followed by three years of probation.

Mr. Conway said the sentence struck him as light, but justifiable.

"He got probation, much to my angst," the prosecutor said. "Why? Because he cooperated and provided us sufficient evidence that led to indictments of some 20 people."

More than a job

A decade of loose -- some say predatory -- lending hurt Pittsburgh, but not as badly as it hit some other regions. The region's mortgage professionals, though, paid a steeper penalty than most.

Pittsburgh's housing market is among the nation's healthiest, an indicator that it didn't fall nearly as far as most, according to RealtyTRAC, based in Irvine, Calif.

"It's not to say that the fraud wasn't present in Pittsburgh," said Daren Blomquist, vice president of RealtyTRAC, "but it didn't have, on the macro market at least, quite the inflammatory or inflationary effect on home prices that we saw in many other markets."

The pain was real for many borrowers who got overextended and lost their homes, for their neighbors who found themselves next door to abandoned properties, and for legitimate professionals who lost their jobs in the meltdown, said Mr. Conway.

At seven mortgage fraud trials, Mr. Conway brought witnesses whose lives were derailed when brokers lured them into loans they could never presume to repay, sometimes tied to tumbledown homes they couldn't hope to sell. For those who sign on to a bad mortgage, he said, "every single financial decision [they] make ... for 30 years, is going to be impacted by this fraud, even if they keep the house."

His role prosecuting mortgage fraud, he said, "started off just as a job. But once you sort of get into it, and you're preparing for trial, and you go out into these people's neighborhoods, and you see the houses they got, it becomes more than a job."

Mr. Conway led the Western Pennsylvania Mortgage Fraud Task Force, including agents from the U.S. Secret Service, IRS Criminal Investigations, FBI, state Department of Banking, attorney general and other agencies.

U.S. Attorney David Hickton credited the task force and Mr. Conway with "bringing offenders to justice, deterring future fraud, educating the public and helping to ensure that mortgage loans are available through legitimate means at a fair interest rate. Our successful prosecution of dozens of mortgage fraud defendants is having a discernible and positive impact upon the housing market in Western Pennsylvania."

The 144 people charged with mortgage-related crimes include six accused in just the past month.

By comparison, the Northern District of Ohio, which includes Cleveland -- called "one of the epicenters of the housing crisis" by Mr. Blomquist -- filed mortgage-related charges against 90 people.

Syracuse University's Transactional Records Access Clearinghouse in 2011 analyzed 2,015 mortgage-related federal prosecutions nationally. TRAC ranked Western Pennsylvania's U.S. attorneys as the third-most-vigorous prosecutors of mortgage fraud among the 93 federal court districts. Only Southern Florida and Nevada had higher rates of mortgage fraud prosecution.

"I've never heard of Pennsylvania being a hotbed of fraud," said Michael J. Seiler, a professor of real estate and finance at The College of William & Mary and president-elect of the American Real Estate Society. "I would say in defense of the people who are being prosecuted, it was just the way business was being done, and if you didn't do business that way, you went out of business."

His read on the numbers: "You had a prosecutor who decided to go after it." If prosecutions like those seen in Pittsburgh had occurred nationwide, just a few years earlier, the housing crash might not have been so severe, he added.

"To look at the numbers that have come out of this district, it was the biggest criminal conspiracy in history," said Stephen Stallings, a former federal prosecutor who is now a defense attorney and has fiercely contested some local mortgage fraud cases. Mr. Conway, he said, is "diligent, and he's smart, and he's a really effective lawyer, and that makes him incredibly dangerous."

Big fish, big assistance

Though federal prosecutors like Mr. Conway have many tools to punish, their most powerful lever may be a reward -- and it was used with unusual regularity in dismantling the region's mortgage fraud network.

Only prosecutors, and not defense attorneys or judges, can file motions for leniency to reward a defendant's "substantial assistance" to investigators.

Nationally, federal prosecutors extend such leniency motions to 15 percent to 18 percent of fraud defendants, based on U.S. Sentencing Commission data on cases completed from 2008 through 2013. In Western Pennsylvania's federal courts across all cases -- from drugs to fraud to child pornography -- 11 percent to 18 percent of defendants have gotten such motions in recent years. So the 30 Pittsburgh-area mortgage fraud defendants getting leniency for substantial assistance, out of 100 studied, represents roughly double the normal prevalence of such motions.

"The prosecutor wants the conviction, but there is a real cost to having a lot of cooperators, and if the rate in this area is one-third, it is very costly," said Stephanos Bibas, a professor at the University of Pennsylvania Law School, whose research focuses on plea bargaining. "The public feels like you're getting into bed with some dirty people."

"In virtually every mortgage fraud case I've been involved in, they've leaned and pressured my client to cooperate," said Marty Dietz, who has defended around 10 such defendants. The defense attorney said that Mr. Conway "believes in his mission. But I'll tell you this: If you cooperate, he'll reward you."

Justice Department rules governing federal prosecutors don't say much about how cooperators should be chosen, other than to require supervisory approval and written documentation of decisions to seek leniency for defendants who play ball.

"The government will argue that without cooperation benefits, you cannot make these cases," said Mr. Stallings. "I don't believe that to be true," he said, noting that federal investigators can get wiretaps and search warrants and can compel testimony by giving witnesses limited immunity.

Early in the case against Berger and Klimantis, the prosecution wrote to the attorney who then represented them both, calling them "major targets of the Mortgage Fraud Task Force."

That letter also indicated that if one of them wrote "a 50-page, single-spaced document" outlining transactions and conversations, and provided "a box" of relevant documents detailing wrongdoing by others, they might be considered for cooperation. It noted, though, that there would be no "package deal," and that each would have to cooperate independently.

While Klimantis tested the waters, Berger jumped in with both feet.

Berger cost the banks and borrowers somewhere between $2.5 million and $7 million, Judge Conti eventually found. During Berger's 2012 sentencing process, his attorneys argued that he had both suffered for his crimes and helped atone for them.

"His net worth is zero," wrote his initial attorney, Stanton Levenson, in a court filing. "Gone is his Fox Chapel mansion and his Aspinwall office building. His marriage has been destroyed." His divorce from Klimantis was finalized late last year.

Berger provided "information that led to 13 indictments and 11 convictions, he acted as an informant wearing wires [approximately 61 times], surreptitiously obtaining fingerprints and testifying in court," his second attorney, Lourdes Sanchez Ridge, wrote in a September brief seeking a postponement of his prison term. Ms. Sanchez Ridge became Pittsburgh's city solicitor this year.

Ms. Sanchez Ridge wrote that Berger had advanced kidney cancer and should not be imprisoned on grounds of compassion. His sentence was repeatedly delayed until his death.

Klimantis did not get a leniency motion and has until June 13 to report to prison for 6½ years.

Judge Conti found that Klimantis, now 42, cost lenders $6.8 million. At her 2013 sentencing hearing, Mr. Conway argued that federal guidelines -- including several sentencing enhancements that were not contemplated in Berger's case -- suggested a prison term in the range of 24 to 30 years.

Klimantis' attorney, Meagan F. Temple, countered that it would be unjust to sentence Klimantis to decades when Berger got 15 months for the same crimes.

"She would have cooperated with the government but for their decision to deny her the opportunity to do so," said Ms. Temple.

"She didn't even begin the [cooperation] process until over two years after her search warrant," Mr. Conway countered. "We gave her a number of months to actually display that commitment to the process and she failed miserably to even come close to warranting further discussions with her."

Mr. Conway added that Klimantis' team contested many matters, including the amount she cost her victims. "How many more people could we have prosecuted if [Klimantis] had agreed to the loss amount?" he asked. "Another 10?"

Judge Conti called it "very troubling that [Cowden] is given such a big break by the government" that then targets Klimantis for decades in prison. She said that the federal sentencing system "transferred much discretion in the sentencing process from the courts to the prosecution," but she added that giving Klimantis a sentence many times longer than Berger's wasn't appropriate.

"What is the difference between Mr. Jay Berger and Ms. Vasilia [Klimantis] in terms of the offense conduct warranting the dramatic increase in [sentencing] enhancements?" the judge asked. "I could see none."

• • • • 

How we did it

The Pittsburgh Post-Gazette and the Duquesne University School of Law collaborated on an innovative Fact Investigations class, led by associate professor and Criminal Justice Program director Wesley Oliver. Four law students -- Staci Fonner, Todd Fine, Kyle Thomas and Marika Stettner -- teamed with the Post-Gazette's Rich Lord to study the response of Western Pennsylvania's federal prosecutors to fraud in the mortgage industry.

The team identified 144 prosecutions alleging mortgage-related crimes in the Pittsburgh area, created extensive spreadsheets and downloaded 700 court documents into an e-discovery system provided by the Mt. Lebanon firm Crivella West.

The team analyzed 100 prosecutions in which sentence had been pronounced and for which the federal sentencing guidelines could be discerned. The team then interviewed attorneys, defendants and national experts on federal prosecution.

Rich Lord: rlord@post-gazette.com or 412-263-1542. Twitter @richelord


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