The Potential Criminal Consequences In Real Estate Transactions
The real estate industry is in a state of flux. There is a prediction that housing will become more affordable as buyers and sellers go at it alone. But engaging in real estate transactions as a business venture without proper guidance, particularly through the internet with little person-to-person contact, can land someone into a catastrophic house of cards. Just as the ease of digital financial transactions makes “dabbling” in real estate a bright new shiny object, the flip side is a greater risk to the novice of becoming an unwitting accomplice to the fraudulent activities of others. Without sufficient knowledge and adequate due diligence, it is possible to become entangled with individuals who are not who they claim to be, use false identities and fabricated documents, or who steal money from customers without the possibility of recovery. The sad truth is that anyone with a keyboard and an internet connection can create an impression that might be a complete fabrication.
Actual Lack Of Knowledge Of Fraud Might Not Prevent A Criminal Prosecution
For an accused in a criminal prosecution, the reputational damage and financial loss, as well possible incarceration, can be life changing. Even witnesses can suffer, particularly if there is uncertainty of prosecution, a loss of employment, or they are otherwise cast publicly in a bad light. Those who might not have actual knowledge of fraud are also subject to prosecution if there have been efforts to avoid learning the truth.
Illinois attorney Lorie Westerfield, as an example, handled a few real estate closings that were part of a much larger, multi-defendant fraudulent scheme. Westerfield argued on appeal that she merely performed the typical actions of a real estate lawyer, and the government therefore failed to show that she had the necessary intent to defraud. At trial the Government presented evidence that Westerfield made sure she met the fake buyers and sellers only on limited occasions and that for the last closing she drafted powers of attorney so that she did not have to meet the fake sellers. Westerfield also arranged to have the proceeds from the transactions transferred to a third party that was otherwise not involved. The organizer of the scheme, Freddie Johnson, testified against Westerfield.
“Overall, the jury learned that Westerfield had helped two individuals purchase five homes in a short period of time with financing from different lenders at high loan-to-value ratios. She rushed the buyers and sellers—who were clueless and obviously fake—through the closing process and then gave the mortgage proceeds to a third party. Based on this evidence, a reasonable jury could conclude that if Westerfield had been unaware that she was facilitating an illegal scheme, she only lacked such knowledge because she was deliberately ignorant.”
United States v. Westerfield, 714 F.3d 480 (7th Cir. 2013)
Partnerships, LLCs With Multiple Actors Do Not Protect Against Civil And Even Criminal Liability
Areas rife with potential civil and criminal liability are those with multiple players and convoluted strategies for unconventional financing. A business partner today might tomorrow become a cooperating witness for the Government, as happened in the case of husband and wife Adrian and Daniela Tartareanu who went into business with Minas Litos. Adrian first met co-defendant Litos while playing in a recreational soccer league. The wholesome beginning of their relationship did not forestall Litos from testifying against his former friends. Their real estate scheme relied on falsified mortgage loan applications and “involved sucking in investors on the notion that they would turn a quick risk-free profit,” according to the trial judge. United States v. Tartareanu, 2:12-CR-175-PPS (N.D. Ind. Sep 17, 2020)
A criminal case still pending is that of Cesar Pina, who operated his business as FlippinNJ. Pina has been charged with federal wire fraud, based on allegations that he defrauded innocent investors of millions of dollars. He’s accused of offering a ridiculously high rate of return, taking investors’ money and then failing completely to fulfill promises. United States v Pina, 2:23-mj-13255-LDW. https://www.justice.gov/usao-nj/pr/new-jersey-real-estate-investor-and-online-influencer-charged-multimillion-dollar
These accusations have also caused reputational harm to popular radio show host Raashaun Casey known professionally as DJ Envy. Casey co-hosted, with Pina, real-estate seminars, where aspiring investors could learn how to get ahead in an era of low-interest rates. Casey himself has not been criminally charged, but besides the negative press, he is now having to defend against civil claims that will likely require substantial sums in attorney fees. Some investors claim they relied on the participation of Casey in promoting Pina. “The numbers sounded too good to be true, but many say they were swayed by the guiding presence of DJ Envy, who swore by Pina’s investment advice in public — and did most of the talking for Pina in their joint appearances.” https://nymag.com/intelligencer/article/breakfast-club-dj-envy-cesar-pina-ponzi-scheme-allegations.html
Advance Due Diligence Is Key
Anyone engaging in real estate investment will want to make sure that they understand the process as well as the requirements for certification, licensing and insurance. Real estate sales agents, mortgage brokers, property appraisers, home Inspectors, closing attorneys, and title insurance companies are typically regulated and licensed by state agencies. There are ways to verify this information independent of what an individual or firm represents, for example by contacting the agency directly or searching their website databases.
But licensing for some purposes is not licensing for all. While not a real estate case, the case of Sven Eric Marshall is worth mentioning on the degree to which a lack of due diligence can result in significant financial losses. Marshall was a licensed attorney and a CPA during the fourteen years during which he also operated an investment business, Trust & Investment Advisory Services of Indiana, Inc. (TIAS). Marshall told clients that they were going to make high rates of return– 4-8.% on investments. In fact, these “returns” did not exist and were either on paper or funded by new client funds, a strategy often called a Ponzi scheme. Neither Marshall nor TIAS were registered with the SEC or the state, a fact never disclosed to investors. His victims were numerous and the results often economically catastrophic. After his arrest in Florida, Marshall was later sentenced to 10 years prison. United States v. Marshall, 3:18-CR-138 JD (N.D. Ind. Jan 24, 2022)
While arguably no one could have expected that an established attorney who also owned an accounting firm would be capable of stealing money for years, due diligence is fundamental in the age of electronic fund transfers where funds are known to disappear. Someone entrusted with funds that were disbursed to fraudsters and cannot later be recovered, could be subject to civil if not criminal liability.
This is also true for the transmission of sensitive personal and financial data. For those new to the real estate business, it might be easy to accept at face value a request to forward financial information that includes social security numbers, bank account information, etc. Fraudsters will go to great lengths to create the appearance of legitimacy, including and even establishing a fake verification process as explained in this multi-defendant scheme:
Hill and Kelske then coordinated with multiple document fabricators, including defendants Fawziyyah Connor and Stephanie Hogan, who altered the homebuyers’ bank statements to inflate their assets and to create bank entries reflecting false direct deposits from an employer selected by the real estate agent. The document fabricators also generated fake earnings statements that matched the direct deposit entries to make it appear that the homebuyer was employed, and earning income, from a fake employer. Other participants in the scheme then acted as employment verifiers and responded to phone calls or emails from lenders to falsely verify the homebuyers’ employment. https://www.justice.gov/usao-ndga/pr/real-estate-agent-sentenced-running-multi-year-mortgage-and-real-estate-commission
Prosecutions For Wire Fraud And Money Laundering With Sentences Tied To Financial Loss
Criminal prosecutions for real estate fraud are common and are predominantly for wire fraud and money laundering, 18 USC 1341 and 18 USC 1956 respectively, with sentences tied to the amount of funds or losses to victims. Other factors that can be considered by a sentencing judge include the degree of hardship to victims, the level of sophistication of the scheme, and the individual’s role in the offense. Any statements or representations made to any customers, lenders, regulatory or investigative agency can be used in a criminal prosecution, and that an individual’s lies to law enforcement, attempts to influence witnesses or to destroy evidence can enhance a potential sentence. Often the government will prosecute the lie if the evidence of the underlying crime is uncertain. 18 US 1001.
Closing
Real estate might be a tempting new business, but caution and due diligence are in order. Amateurs who don’t want to miss out on the next big deal are at risk of getting involved with illegitimate business deals. Unfortunately, a prosecutor will have little or no sympathy for someone who even unwittingly facilitates losses to innocent victims. Attorneys have an important role in advising a new business venture, helping vet potential partners, and representing an individual who might be in the cross hairs of an investigation.