How a bank fell victim to loan fraud

By Diane Wedner and Kim Christensen

Dec. 31, 2007 12 AM PT

Times Staff Writers

Kathy Moore’s loan application sailed through the mortgage desk at Lehman Bros. Bank, and little wonder.

With sterling credit, deep pockets and two appraisals pegging the value of the Benedict Canyon house she wanted to buy at $2.5 million, she seemed a perfect fit for a $1.47-million loan.

Had the bankers taken a closer look, they might have discovered that the home was worth just $775,000 and that Moore’s borrowing power existed only on paper.

They also might have derailed a burgeoning real estate fraud that authorities say grew into one of the biggest and boldest in California history, and one that sheds light on the wave of foreclosures now sweeping the country.

As home values skyrocketed earlier this decade, “banks gave money to anybody with a pulse,” said UCLA economist Ryan Ratcliff.

That included first-time buyers who couldn’t afford the payments, speculators looking to flip property for a fast profit and, as authorities are increasingly discovering, con artists.

“Everything was more lax,” said Jack Guttentag, a finance professor emeritus at the University of Pennsylvania’s Wharton School. “It was just easier to commit fraud.”

Evidence of that can be found in FBI reports of mortgage fraud, which increased eightfold from 5,623 in 2002 to 46,717 this year. But of all those cases, few compare with an alleged three-year scam that used trumped-up appraisals to fraudulently secure $142 million in loans from Lehman Bros. and another lender.

The Beverly Hills-based ring followed a simple plan: Buy inexpensive houses in exclusive areas at market value, fabricate paperwork showing them to be worth two or three times as much, and then secure loans based on the inflated numbers, authorities say.

The masterminds were developers Mark Alan Abrams, 46, who had a previous $2-million civil fraud judgment against him, and Charles Elliott Fitzgerald, 47, a bigamist who fled the country in 2003 and was later arrested in Samoa, according to interviews, federal prosecutors and a civil lawsuit filed by Lehman Bros. Bank.

They allegedly were assisted by star real estate agents Joseph Babajian, 54, and Kyle Grasso, 36, who earlier this year shared the listing for a $22-million Beverly Hills mansion bought by soccer star David Beckham and his wife, Spice Girl Victoria Beckham.

Abrams and Fitzgerald are accused of reaping millions, spending some of the cash on private jet flights and vintage wines -- and much of the rest to buy more houses to keep the alleged scam alive from 2000 to 2003.

Five people, including Abrams, await sentencing after pleading guilty to bank fraud and other charges. Fitzgerald, Babajian, Grasso and two others pleaded not guilty and are slated for trial next year.

Lehman sued them all in U.S. District Court in Los Angeles, but the lawsuit is on hold while the criminal cases play out. The bank, a subsidiary of the New York-based investment house, declined to comment.

Fitzgerald and Abrams popped onto the Beverly Hills real estate scene as the 1990s ended and the Westside market took off again after a long downturn. The median home price in the 90210 ZIP Code -- which includes most of Beverly Hills and the canyons to the north -- was $310,000 in 1992. A decade later, at the height of Abrams and Fitzgerald’s alleged scam, it had shot to $1.16 million.

Houses were snatched up within days. Interest rates fell and lenders capitalized on the frenzy by writing anything-goes loans, some requiring no proof of borrowers’ ability to repay them.

“The market was starting to levitate,” recalled Christian Stevens, a Brentwood real estate agent. “We all did really well.”

That included Fitzgerald, whose sister called him “the crowning jewel” of their large Utah family, and Abrams, who made headlines in 1979 as a Los Alamitos High School senior elected to the local school board.

Fitzgerald had moved to Southern California from Utah in the 1980s and later launched a residential development business in the Beverly Hills area.

Abrams also had gone into real estate, his early efforts culminating in a 1989 liquidation bankruptcy that listed 700 creditors with more than $30 million in claims. One creditor won a $2-million civil fraud judgment against Abrams in 1997 but recently said he had yet to be paid any of it.

In 1999, Fitzgerald and Abrams met through Babajian, whose big-name clients have included Ryan Seacrest, Oscar De La Hoya and British pop star Seal.

The two developers hit it off and became partners. They founded Beverly Hills Estates Funding Inc. in 2001 and “came to control various trusts, partnerships and corporations,” according to records in the criminal case.

They based their companies in the heart of Beverly Hills, in a suite of offices at 9595 Wilshire Blvd., where other tenants remember them as low-key and cordial.

“They did not look ostentatious at all, except for the cars they drove,” said real estate investor Max Baril, whose offices were next door.

Prosecutors say the pair recruited real estate agents, including Babajian and Grasso, to find properties, negotiate sales, falsify listings and jack up the “comps,” or comparable sales figures, from other transactions in the area.

They allegedly enlisted two appraisers to inflate houses’ values, and an Americorp Funding broker to package fraudulent applications for 40 loans directly funded by Lehman, according to the bank’s lawsuit.

“In addition to the direct funded loans, Lehman also acquired an additional 44 loans from other lenders, which appear to show the same pattern,” the lawsuit states.

The two men used their own escrow companies to crank out fake settlement documents and their own notary to validate them, prosecutors say. They relied on Babajian and Grasso to get title insurance for the homes’ inflated values, the government claims, and they installed renters in some of the houses to help cover the payments.

Crucial to the alleged chain of fraud were “straw buyers” -- some of them unwitting players whose identities had been stolen -- who prosecutors say appeared legitimate but were not.

Kathy Moore “bought” her two-bedroom, three-bath house on Portola Drive in the fall of 2002.

The 1,300-square-foot dwelling is set against a steep hillside on a narrow street off Benedict Canyon Drive. At the time, homes on Portola sold in the $700,000 range, sales data show, and the civil suit alleges the conspirators paid about that much for it.

Just a month later, Moore sought a $1.47-million loan to buy the same house. Her application included two appraisals valuing it at $2.5 million and records showing comparable sales prices for properties nearby.

“When you drive through ‘Beverly Hills post office’ streets like Portola Drive, you see a nice little ranch, a nice little ranch, then a drop-dead house for $8 million,” said Stevens, the agent. “But if the loan officer is back East going over these numbers, they have no idea. The comps are easy to skew.”

To prove she qualified, Moore’s papers included a document reflecting closed mortgage accounts of $847,200 and $946,400 -- amounts that Lehman contends were inflated by at least $800,000 each. Her application also claimed that she paid $8,500 a month for a Beverly Hills rental listed as her home address, the civil suit alleges.

When a private investigator hired by Lehman Bros. later called her, Moore said she got into the deal through a relative and “didn’t know too much” about it. Nor did she rent in Beverly Hills.

“Moore stated that she signed the purchase documents in Utah, where she lives, and then sent them back to California,” investigator Ann Cochran said in a declaration in the civil suit. “She never lived in the house on Portola.”

Moore was neither charged in the criminal case nor named in the civil suit. Reached by telephone recently, she would not discuss her role.

“I was a victim,” she said. “It was a horrible thing, and I don’t want to talk about it.”

In all, a dozen straw buyers told Cochran the same story: that they had been solicited by friends, relatives or others to sell the use of their names and credit histories for up to $15,000.

Assistant U.S. Atty. Jeremy D. Matz said lenders could not have known that straw buyers’ applications or other aspects of the deals were bogus.

“It’s not surprising that lenders were fooled when every level of the real estate transaction was compromised like it was here,” the prosecutor said. “These lenders did due diligence and did push back sometimes. At a certain point, lenders rely on the honor process.”

How the fraud unraveled is an open question. In interviews, real estate agents in Monterey and Beverly Hills told The Times that in the spring of 2003 they became suspicious of some of the sales prices reported by the Abrams-Fitzgerald team.

Veteran Carmel agent Fred Noseworthy said that after a colleague in his office pointed out a house that sold for an exorbitant sum, he combed through sales records and found a string of fishy deals.

“In the process of noticing these weird situations -- properties selling at twice their worth -- I noticed the same buyer or firm in L.A., and the same title company,” he recalled. “I thought it was weird. Something is going on here.”

Brentwood agent Stevens had the same reaction when he looked into the sales history of a house in tear-down condition in his area. It had sold for $759,000 in November 2000 but just two months later sold again for $2.2 million.

Stevens said he called Lehman Bros. and a company that brokered some of the loans, but neither seemed worried.

“The banks said they had appraisals and payment records that were current,” Stevens recalled. “So they said, ‘Where’s the wolf ?’ ”

Noseworthy took his concerns to the Monterey County assessor, who alerted the district attorney’s office there, according to interviews. But when an investigator from the office started to look into it, she discovered that the FBI was already investigating, said Terry Spitz, chief assistant district attorney.

Matz, the federal prosecutor, said Lehman brought the case to the attention of federal authorities, but he did not know how the bank learned of the fraud.

Lehman declined to comment, but according to its civil suit, a series of audits and reappraisals it ordered revealed the suspect properties’ actual values. On April 17, 2003, it sued Abrams, Fitzgerald, Babajian, Grasso and a cast of appraisers, escrow officers and others for fraud.

At the time, Lehman literally didn’t know the half of it.

The bank’s original complaint cited 38 loans totaling about $62 million. Not until it reviewed documents obtained by a court-appointed receiver did it learn it had been stuck with 43 others totaling $80 million -- $142 million in all, according to an amended complaint filed three months later.

Although the alleged fraud ring initially kept up payments on the properties, many of the loans were in default by August 2003 and were headed for foreclosure.

RBC Mortgage Co. of California joined the suit after Lehman forced it to buy back fraudulent loans brokered by Americorp, which RBC acquired while the alleged scam was occurring.

The day the original complaint was filed, a judge appointed receiver David Pasternak and barred defendants from moving assets or destroying records. Prosecutors say the two developers promptly made off with incriminating evidence, alleging among other things that Fitzgerald took a sledgehammer to computer hard drives in his backyard.

When Pasternak and his staff searched a Wilshire Boulevard condo where Abrams lived in July 2003, they found “sculptures, artwork of Miro and Chagall, gold coins, guns, jewelry” and $100,000 in cash, the Lehman suit alleges. A second search yielded $85,000 more in cash hidden in a stereo, the battery compartment of a bullhorn and Abrams’ pockets.

By then his partner, Fitzgerald, had skipped the country with his wife and five children -- leaving behind a second woman he married in Las Vegas in 1999, when she was 20, and their young son, court records state. Fitzgerald had told relatives he was taking his family on a Caribbean cruise, one last trip before “going to jail,” his sister, Neldene Stoddard, said in an interview.

He later turned up in Western Samoa, where he was arrested in December 2006 and deported to the U.S. He has been held without bail ever since in Los Angeles and is scheduled for trial in May. His attorney, Bernard Rosen, said he was still reviewing the case and declined to comment.

Abrams, who was fined a record $270,000 in 2005 for violating campaign finance laws while raising cash for then-Los Angeles Mayor James Hahn’s 2001 campaign, has pleaded guilty to charges of conspiracy, bank fraud, making a false statement on a tax return and obstruction of justice in the real estate fraud case. He will be sentenced after the others’ trials.

He declined to comment through his attorney, Nathan Hochman.

“Mr. Abrams has fully and completely cooperated with the receiver and the federal government in its ongoing investigation and prosecutions in this matter,” Hochman said.

Babajian and Grasso are to be tried in July. Prosecutors say they reaped hundreds of thousands of dollars in ill-gotten gains from commissions and other payments.

Since 2001, the pair had worked in the Beverly Hills office of Prudential California Realty and were top sellers for the company nationally, their indictment says. Babajian’s website said he sold $182 million worth in 2006 alone. Why such prosperous agents might get caught up in an alleged fraud scheme has even some of their competitors wondering.

“Over all the years I’ve known them, they were competent, qualified and professional,” said Stephen Shapiro, a top Beverly Hills agent.

Prudential suspended the agents in August and ordered them to halt all real estate business until their cases were resolved.

That affected not only $65 million in listings they had at the time but also one other that Babajian might have handled: his own three-bedroom, 4 1/2 -bath classic contemporary in Beverly Hills’ Trousdale Estates. With 180-degree ocean and city views, the 3,400-square-foot home is now for sale by another Prudential agent, for a shade under $7 million.

Neither responded to requests for comment. Their lawyers said they would be exonerated.

“He’s absolutely innocent and he will be completely vindicated at trial,” said Babajian’s attorney, Thomas Mesereau.

Grasso “fully expects to be acquitted at trial and vindicated,” said his lawyer, Marc S. Harris.

Lehman Bros. and RBC, meanwhile, recouped some of their money by selling homes bought by the alleged ring. The receiver, Pasternak, seized and sold about 50 of the properties while Lehman foreclosed on others and sold them itself.

But because loan values far exceeded the homes’ actual worth, each lender still stands to lose about $20 million, Pasternak said.

Like other large investment banks, Lehman has been rocked by rising defaults on loans -- those it made directly and others it sold to investors as mortgage-backed securities. The lender’s shares have fallen nearly 20% this year.

Baril, the veteran real estate investor, said the lender should have seen it coming.

“I think the bankers deserve what they got. They were incompetent,” he said. “You have to do more than just keep opening the mail and depositing the checks.”

[email protected]

Times researcher Scott Wilson contributed to this report.

(BEGIN TEXT OF INFOBOX)

Extreme home markup

A mortgage fraud ring led by Charles Elliott Fitzgerald and Mark Alan Abrams obtained inflated loans on more than 80 California properties from 2000 to 2003, according to federal prosecutors and a civil suit filed by Lehman Bros. Bank. The map shows more than 50 homes allegedly bought by the ring in Los Angeles County.

Six homes in detail

9373 Claircrest Drive,

Los Angeles

Actual price: $850,000

Inflated price: $2.43 million

Loan amount: $1.46 million

805 N. Alta Drive,

Beverly Hills

Actual price: $2 million

Inflated price: $4.40 million

Loan amount: $2.86 million

2074 Benedict Canyon Drive, Los Angeles

Actual price: $869,000

Inflated price: $2.45 million

Loan amount: $1.47 million

9661 Yoakum Drive,

Los Angeles

Actual price: $940,000

Inflated price: $2.49 million

Loan amount: $1.49 million

9849 Easton Drive,

Los Angeles

Actual price: $799,000

Inflated price: $2.49 million

Loan amount: $1.49 million

2155 Roscomare Road,

Bel Air

Actual price: $735,000

Inflated price: $2.37 million

Loan amount: $1.42 million

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The defendants

The U.S. attorney’s office in Los Angeles has charged 10 people in an alleged scheme to obtain $142 million in fraudulent mortgage loans. They are:

Mark Alan Abrams,

46, real estate developer

Charges: Conspiracy, bank fraud, false statement on tax return, obstruction of justice

Status: Pleaded guilty, awaiting sentencing

Charles Elliott Fitzgerald, 47, real estate developer

Charges: Conspiracy, bank fraud, loan fraud, continuing financial crimes enterprise, money laundering, obstruction of justice