Over five years, federal prosecutors in Pittsburgh have convicted more than 100 mortgage industry brokers, appraisers, closing agents and real estate attorneys -- but just a handful of bank employees, and all of those at the branch level.
Late last month, one attorney charged with fraud suggested in court filings that global financial giant JPMorgan Chase Bank was more complicit in the last decade's mortgage crime wave than some people who have been charged criminally.
Arthur Smith, a Downtown-based real estate attorney facing wire fraud, bank fraud, conspiracy, money laundering and tax charges, has subpoenaed the bank, whose loan losses are at the center of the indictment against him. He's demanding documentation of any federal investigations stemming from its transactions in Western Pennsylvania.
JPMorgan has been the subject of national and international investigations, and the Wall Street Journal has reported in recent weeks that the Department of Justice is negotiating a potential $11 billion settlement of a range of criminal and civil charges related to its mortgage business.
Mr. Smith's attorney, Stephen Stallings, alleged in a recent court filing that JPMorgan's local activities have also gotten prosecutors' attention. Without submitting proof, he claimed that the bank "has been and remains under criminal investigation for mortgage fraud-related activities, including activities such as those at the heart of this case.
"JPMorgan Chase has documents reflecting whether and to what extent it or its employees are under criminal investigation."
The bank filed a motion to quash the subpoena, which is the subject of a Monday hearing before U.S. District Judge Nora Barry Fischer.
Local prosecutors, meanwhile, have responded to Mr. Smith's inquiries with careful language that does not rule out an ongoing, or completed, probe of the bank.
Big investment banks made billions on mortgage trades in the run-up to the crash. Since then they have faced allegations of knowingly peddling bad loans and have paid to settle some of them.
Many brokers, appraisers, attorneys and other loan pros who referred business to banks like JPMorgan, meanwhile, are already deep into multiyear prison terms. JPMorgan and other banks -- technically, the victims of mortgage fraud -- have provided prosecutors with the documents and testimony needed to indict loan pros like Mr. Smith.
"If the government is letting JPMorgan off the hook in exchange for having them testify against the defendants in this case, then a [jury] could conclude that testimony of Morgan employees would be influenced by the agreement not to prosecute," said Wesley Oliver, a criminal law professor at Duquesne University, who is not involved in the case.
A jury might not be too sympathetic, he added, to a victim that had proved "too big to prosecute."
The phony loans
The case against Mr. Smith stems from the work of a 6-year-old Western Pennsylvania Mortgage Fraud Task Force that has followed money trails through a sprawling network of real estate lending veterans.
Those loan pros marketed their products to home buyers, some of whom were obviously unable to make loan payments. Some exaggerated the borrowers' incomes, inflated the values of the properties and ginned up fake assets and down payments to satisfy the requirements of banks that were eager to lend.
U.S. attorney David Hickton's office declined to respond to questions about the task force's progress, or about the case against Mr. Smith, claiming that the partial federal government shutdown prevented it from addressing press inquiries.
The case against Mr. Smith began with the 2011 indictments of Squirrel Hill landlord Dov Ratchkauskas and his former business partner, Verona resident George Kubini, for wire fraud conspiracy. Both have pleaded not guilty to charges that in the process of buying and selling hundreds of properties, they falsified some borrowers' information on paperwork used to get them outsized loans, mostly from JP Morgan Chase Bank.
Mr. Smith, of Point Breeze, is accused of conspiring with Mr. Ratchkauskas and Mr. Kubini by putting the legal seal of approval on documents that overstated property prices, referenced down payments that were never made and failed to disclose payments made to borrowers from loan proceeds.
Mr. Smith argued his innocence before a grand jury. But in March he was indicted anyway, along with appraiser Sandra Svaranovic, of Bethel Park, who is accused of inflating property values to justify the loans.
Both have pleaded not guilty, and a pretrial conference is set for Nov. 8.
Suspicious Activities Report
First, though, Mr. Smith is asking: What did JPMorgan know, and when did it know it?
His attorney's curiosity was spurred by a single document found deep in "two rooms" full of paperwork provided by the prosecution in response to a standard discovery request, according to court filings.
The document is a Suspicious Activities Report, or SAR, from 2007, in which a JPMorgan employee questioned a proposed loan on a Manchester property. The property was deemed by one since-convicted appraiser to be worth $99,000, while another appraiser valued it at $67,500.
"The value of the subject property was inflated in order to qualify for the loan," the bank employee wrote. Banks generally look to lend no more than 80 percent of a property's value, and an inflated appraisal can leave the bank overexposed in the event of foreclosure.
Chase Home Finance made the loan anyway, allowing Mr. Kubini to sell the home to the borrower for $95,000.
Suspicious Activity Reports are filed by bank employees when they detect potential federal criminal activity, and the SARs flow into a database held by the Treasury Department's Financial Crimes Enforcement Network. Law enforcement can tap that database to look for things like terrorist financing and drug money laundering.
The banks have kept the SARs out of the hands of attorneys and out of reach of Freedom of Information Act requests, for fear that plaintiffs' lawyers will use them against lenders.
Assistant U.S. attorney Brendan Conway, who is handling the case against Mr. Smith, wrote that the 2007 SAR was "erroneously made available" to Mr. Smith's attorney. Mr. Conway added that the loan made on the Manchester property isn't one referenced in the charges against the real estate lawyer, so it isn't relevant.
To Mr. Smith's attorney, though, its presence suggests that federal prosecutors have combed through JPMorgan's Suspicious Activity Reports as part of a criminal investigation. If federal prosecutors have reason to believe that JPMorgan knew about problem loans coming from the defendants in 2007, but continued to lend anyway, that suggests "that the alleged victim was not deceived, or that the alleged scheme was not criminal, or both," Mr. Stallings wrote.
Legally, if a lie is told but doesn't influence a transaction, that is not fraud.
JPMorgan attorney Andrew W. Knuth called the resulting subpoena for records of any investigations "nothing more than a fishing expedition" and moved to quash it, saying that complying with it would be too burdensome. JPMorgan spokeswoman Emily M. Smith declined comment on matters that are in litigation.
Mr. Conway confirmed in court filings that there are many investigations of lenders ongoing nationally, but only very narrowly addressed the claim that JPMorgan's loans here were a subject of scrutiny.
"The prosecution team in this case is not aware of any criminal investigation of any of the underwriters or other individuals directly associated with the loans at issue in this case," he wrote.
To Mr. Stallings, according to his court filings, that statement is far short of an exoneration of JPMorgan.
If JPMorgan was, or is, under investigation for loans made in this area, that could undermine the prosecutions of Mr. Smith and his alleged co-conspirators.
The flip side of that reality: Prosecutors might not be able to prosecute mortgage fraud cases without the help of the banks that were left holding the fraudulent loans, and thus are technically the victims.
Banks would be unlikely to cooperate if they were also targets. Mr. Oliver noted that corporations can be criminally prosecuted, but can also invoke their Fifth Amendment rights against self-incrimination if they feel threatened. So if prosecutors want a corporation's help, they may have to give it some form of immunity.
"You can absolutely imagine the government exchanging non-prosecution of JPMorgan," Mr. Oliver said, "for cooperation in prosecution of these defendants."
The big claw-back
One Suspicious Activity Report might not prove that JPMorgan knew about, and tolerated, a slew of fraudulent loans. Another court case, though, suggests that there may be many more SARs where that came from.
In 2009, the Federal Home Loan Bank of Pittsburgh sued JPMorgan Securities LLC, the unit that bundled the bank's loans for sale to investors. The Federal Home Loan Bank invested in some of those bundles, which, it claimed, were marketed as "the highest quality" but were "actually junk" and lost almost all of their value.
The case has dragged on, but late last month it took a turn that could bolster Mr. Smith's arguments.
Attorneys for the Federal Home Loan Bank wrote in motions that JPMorgan turned over "173 documents regarding JPMorgan's internal knowledge of suspected fraud within its mortgage origination line of business." The documents aren't SARs, but might refer to such reports.
But on the eve of a scheduled deposition of its fraud operations chief, JPMorgan "clawed back" the documents, claiming they were too closely related to SARs, and therefore were confidential.
Parties to litigation can "claw back" materials that are inadvertently and erroneously handed over in discovery.
The Federal Home Loan Bank's attorneys wrote that the documents were "powerful proof of JPMorgan's internal knowledge of mortgage fraud within its lines of business," and demanded them back. Allegheny County Common Pleas Judge R. Stanton Wettick Jr. hasn't yet ruled on that motion.
The local legal fights come at a time of national and global news reports of investigations into JPMorgan, which boasts assets of $2.4 trillion. Last month, for instance, the company paid $920 million to settle securities laws violations stemming from a $6.2 billion loss by out-of-control derivatives traders in its London offices.
Asked about the lack of prosecutions of big banks in the wake of the mortgage meltdown, Attorney General Eric Holder this year told the Senate Judiciary Committee that the vastness of those institutions had "an inhibiting impact."
"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," he said.
Mr. Oliver said that if prosecutors are considering the economic impact before filing charges, that "doesn't seem fair to the poor guy who did the same thing as the rich company did, and one is to be punished, and the other isn't."
Rich Lord: email@example.com, 412-263-1542 or Twitter @richelord.