Former Loan Officer Michael Pahutski sentenced to 19 years in Prison for Mortgage Fraud Scheme

July 9, 2011

As you look over the reported facts of this case, it’s sad to see that so many could conspire to defraud.  Do I blame the perpetrators – Yes!  But, when you look more closely we have to evaluate what was happening at the time and how the environment created the opportunity to join together to create such a widespread fraud.

As a business ethics and fraud prevention speaker, I see, all to often, that when three things come together: (1) Need; (2) Opportunity and (3) Rationalization – it creates the PERFECT STORM for fraud.  To be clear, just because those three things are present does not mean that Fraud will occur, rather it means that the conditions are right for the ethical person to make the unethical choice that can lead to illegal activities and fraud.

Read the US Attorney’s news release below for more details…

DEPARTMENT OF JUSTICE

United States Attorney Anne M. Tompkins
Western District of North Carolina

FOR IMMEDIATE RELEASE
FRIDAY, MAY 6, 2011

CONTACT: Lia Bantavani
704.338.3140
Fax: 704.227.0264

LOAN OFFICER SENTENCED TO 19 YEARS IN PRISON CHARLOTTE, NC—Today, the United States Attorney’s Office for the Western District of North Carolina announced that Michael Pahutski, 48, of Gastonia, was sentenced to 19 years imprisonment to be followed by five years of supervised release. Pahutski was also ordered to perform 200 hours of community service and pay restitution of approximately $3.5 million. The sentence is the latest step in an ongoing investigation of mortgage fraud schemes carried out around the Charlotte area, which led to the charging of eight individuals with mail, wire and bank fraud conspiracy, money laundering conspiracy, and related charges in March 2008. The investigation also resulted in the trial of closing attorney and co-defendant Victoria Sprouse in March 2009. Pahutski pled guilty prior to trial, without the benefit of a plea agreement, to all twenty-one counts in the indictment then pending against him.

Joining the U.S. Attorney’s Office in making today’s announcement are Jeannine Hammett, Special Agent in Charge of IRS-Criminal Investigation Division; Chris Briese, Special Agent in Charge of the Federal Bureau of Investigation, Charlotte Division; Inspector In Charge of the U.S. Postal Inspection Service, Keith Fixel; and Wayne Goodwin, Commissioner, North Carolina Department of Insurance.

A federal indictment charging Michael Pahutski with mortgage-fraud- related offenses was originally filed in August 2007, followed by a superseding indictment adding charges and five other defendants in March 2008. To date, all six of those defendants have been either convicted at trial or have entered pleas of guilty. The charges represent the results of a local investigation which stemmed from the detection of an original mortgage fraud scheme in September 2002, and focused on a group operating in and around the Charlotte area. The indictment alleged, and the evidence presented at the sentencing hearing and elsewhere, showed that all the defendants participated in a series of mortgage fraud schemes involving more than $20 million in mortgage loans and hundreds of houses in Charlotte-area neighborhoods. The defendants included Pahutski who served as a loan officer, as well as a closing attorney, a real estate appraiser, another mortgage broker, and two realtors. The indictment also identified two other attorneys, three home builders (including one national homebuilder), and several real estate investors as co-conspirators in these schemes. One of the banks victimized by the schemes closed its doors in mid-2007 after 103 years of business in large part due to the scheme.

The indictment alleged that Pahutski participated in a “flip” mortgage fraud scheme where houses were purchased through fraudulent mortgage applications and use of other false documents. Pahutski was originally indicted in this case in connection with a scheme involving closing attorney Victoria Sprouse and real estate investor Stephen Hawfield, in which approximately 210 houses were purchased in a “flip scheme” through fraudulent mortgage applications to nBank for more than $15 million.

U.S. District Judge Martin Reidinger pronounced the 19 year sentence. In doing so, Judge Reidinger explained that he hoped others would note the sentence, and “see that they do not want to become mortgage fraudsters.” The Judge noted that the offense had caused substantial damage to nBank, which failed, and also had caused substantial damage to our financial system. Judge Reidinger said that the heavy sentence was based in part on the fact that Pahutski had been entrusted by the state of North Carolina with a license, and “was supposed to have been part of the firewall to prevent this [mortgage fraud] from happening, but instead became part of the problem.” Following the sentencing hearing, Judge Reidinger ordered that Pahutski be immediately taken into custody and
detained as a flight risk.

The case was investigated by Special Agents of the FBI, Charlotte, Special Agents of the IRS-CI, U.S. Postal Inspectors, and criminal investigative personnel of the NC Insurance Commission. The case was prosecuted by Assistant U.S. Attorneys Kurt W. Meyers and Jenny Sugar of the U.S. Attorney’s Office, Criminal Division, Charlotte, NC, as well as former Assistant U.S. Attorney Matthew Martens.

United States v. Pahutski, et al
Docket Number: 3:07CR211
Michael D. Pahutski, 48 (Loan Officer)
Charlotte, NC
Guilty plea entered 3/3/09
Sentenced 5/6/11 to 228 months imprisonment to be followed by a five-year term of supervised release, 200 hours of community service, and ordered to pay $3,563,125.27 in restitution

Victoria L. Sprouse, 40 (Closing Attorney)
Charlotte, NC
Jury trial 3/23/09 – 4/1/09
Guilty verdict by jury 4/1/09
Awaiting sentencing

Michael Gee, 61 (Appraiser)
Hilton Head, SC
Guilty plea entered 3/10/2009
Sentenced 6/24/10 to 24 months imprisonment to be followed by a three-year term of supervised release and ordered to pay $3,563,125.27 in restitution

Gregory A. Mascaro, 44 (Real Estate Agent)
Harrisburg, NC
Guilty plea entered 6/9/08
Sentenced 2/27/09 to 24 months imprisonment to be followed by a three-year term of supervised release and ordered to pay $62,361.21 in restitution

Jules Springs, 43 (Loan Officer)
Charlotte, NC
Guilty plea entered 7/7/08
Sentenced 5/19/09 to 24 months imprisonment to be followed by a three-year term of supervised release and ordered to pay $62,361.21 in restitution

Gregory D. Rankin, 36 (Real Estate Agent)
Charlotte, NC
Guilty plea entered 6/25/08
Sentenced 2/27/09 to five years probation, first 23 months under home confinement

If you have knowledge of any of these who were involved in this massive scheme…please feel free to share your insights.

YOUR COMMENTS ARE WELCOME!

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Prison for Real Estate Appraiser! Lila Rizk faces 3 years in prison and $46 Million in Restitution

February 4, 2010

Having been there (not proud of what I’m getting ready to say), but prison is no fun.  But, being ordered to pay $46 million in restitution – well…that’s a sentence that is impossible.

According to the US Attorney’s office, Lila Rizk, a former state-licensed real estate appraiser was sentenced to three years in federal prison and ordered to pay more than $46 million in restitution for her role in a massive mortgage fraud scheme that caused tens of millions of dollars in losses to federally insured banks.

Lila Rizk, 43, of Rancho Santa Margarita, received the three-year prison term after her conviction last summer on conspiracy, bank fraud and numerous loan fraud charges.

Rizk was sentenced by United States District Judge Dean D. Pregerson, who warned that other professional real estate appraisers should know that if they inflate appraisals and lie about the value of homes, “there is an overwhelming likelihood that they will be caught and go to prison.”

The evidence presented at Rizk’s trial last summer showed that she was part of a wide-ranging and sophisticated scheme that obtained inflated mortgage loans on homes in some of California’s most expensive neighborhoods, including Beverly Hills, Bel Air, Holmby Hills, Malibu, Carmel, Mill Valley, Pebble Beach and La Jolla. Members of the conspiracy sent false documentation, including bogus purchase contracts and appraisals, to the victim banks to deceive them into unwittingly funding mortgage loans that were hundreds of thousands of dollars more than the homes actually cost. Lehman Brothers Bank alone was deceived into funding more than 80 such inflated loans from 2000 into 2003, resulting in tens of millions of dollars in losses.

The evidence presented at trial showed that Rizk profited by collecting hundreds of thousands of dollars in fees for providing inflated appraisals in the scheme.

STOP – TAKE NOTE:  Crime doesn’t pay.  Rizk gained hundreds of thousands of dollars in fees – but now she’d ordered to pay $46 million in restitution.  OUCH!

Her appraisals typically valued the homes three times higher than what the homes really cost. In order to supposedly justify these inflated values, Rizk used “comps,” or comparable homes, that were far bigger, more luxurious, and in better neighborhoods than the homes she appraised. Once she had inflated a few dozen homes, she then used those homes as “comps” to supposedly justify inflated prices for homes later in the scheme.

Ten other real estate professionals have been convicted of federal charges related to the scheme. They are:

scheme leader Charles Elliott Fitzgerald, a developer formerly of Newbury Park and Beverly Hills, who previously was sentenced to 14 years in prison;

Mark Alan Abrams, of Los Angeles, a mortgage broker who along with Fitzgerald orchestrated the scheme, who is scheduled to be sentenced on April 12;

Nicole LaViolette, of Palm Springs, a loan processor, who is scheduled to be sentenced on June 14;

Jamieson Matykowski, of Laguna Niguel, who found houses for the scheme, is scheduled to be sentenced on March 29;

Timothy Holland, of Santa Ana, an escrow officer, who is scheduled to be sentenced on July 19;

Richard Maize, of Beverly Hills, a mortgage banker, who is scheduled to be sentenced on June 28;

Thomas R. Schiff, of Brentwood, a mortgage banker, who was previously sentenced to 6 months in prison;

L. Scott Robinson, of Dana Point, an appraiser, who is scheduled to be sentenced on April 2;

Kyle Grasso, formerly of Santa Monica, a real estate agent, who is scheduled to be sentenced on February 19; and

Joseph Babajian, of Los Angeles, a real estate agent, who is scheduled to be sentenced on February 22.

FINAL NOTE:  You have to know that those who are awaiting prison must be quaking in their boots…as the restitution factor precludes the practicality of any reasonable life following prison.

YOUR COMMENTS ARE WELCOME!


Fredric “Rick” Dryer – Ponzi Scheme Fraudster Sentenced to 132 Years in Prison. Ethics and Fraud Prevention Expert Chuck Gallagher Comments

February 22, 2009

Forty-four felon counts faced Fredric “Rick” Dryer as the judge prounced his sentence.  fredric_dryer_t220

“Thinking about this case last night, I wondered what makes you different than the people who put guns to victims’ heads?”  Judge Mansfield said prior to giving out the sentence. “Are the victims any less hurt?”

That question is being asked alot these days.  “Are victims any less hurt?”  In one sense yes and the other no.  Yes, there was not a physical violation, but the emotional toll that theft creates is significant.  I know.  I unfortunately created that pain in people I victimized many years ago.  And just like Dryer, I faced a judge and was sentenced…to prison.

Today, things are not that different than in 1986 when my crime was committed.  But for a moment let’s look at what Dryer did and why.

Ordered to pay $3.4 million in restitution, Dryer was sentenced to 132 years in state prison.  Now, practically speaking the restitution is moot.  Dryer, with a sentence like that, will more than likely die in prison.  There is little to no chance that any restitution will be made.

According to the Denver Business Journal:

Mile High Capital Group, a real estate investment group,  purported to sell duplex rental units to investors, who could then resell them for a profit. The company also had several sister companies that specialized in tax-deferred real estate transactions and rental property management.

Dryer and his associates promoted Mile High and its offshoots at heavily promoted events at high-end hotels throughout the United States.

But despite generating more than 1,000 contracts and $44 million in sales, the Greenwood Village-based company completed only about 32 duplex rental units, prosecutors said.

The scheme cost some investors their life savings. Investors ranged from blue-collar workers and Chinese immigrants to flight attendants and Harvard-educated attorneys.

While Dryer’s attorney said he will appeal his sentence, Dryer is a convicted felon, who was charged with a bank robbery in 1971 and two other securities fraud cases in the early 1980s, he’s not eligible for probation.  While it is not my intend to be judgemental, as I’ve been in his shoes, it does appear that Dryer didn’t learn from his past choices.

Every choice has a consequence.  As humans we all make choices daily and the choices that we make today will determine our future tomorrow.  Dryer had the opportunity on, what appears to be several occasions, to make better choices.  He elected no to and the price or consequence for his most recent set of choices – life and/or death in prison.  Not what most would call a pretty end.

SO HOW DOES ONE GET SCAMMED BY A PONZI SCHEME?

Reality check is – it is easy.  The fraudster just sucks you into the PIT.  Now for those of you who follow my blog, I have reported on this before in entries related to Bernie Madoff.  But if you have not read those let me help you with understanding the PIT.

The first part of most any financial fraud starts with the PROMISE ( P ).  Fortunately I was not a Dryer investor, but in all cases the PROMISE is a return better than what the average investor could gain if investing in the open market.

Now think of it, if someone told you that he/she could get you a return that practically no one else could get and get that return for you consistently year after year, wouldn’t you be interested?  Sure you would!  So POINT OF ADVICE:  If you wish to avoid being scammed, understand – if it sounds to good to be true – it LIKELY ISN’T TRUE!

The second part of the fraud triangle is the ILLUSION ( I ).  Promoted at high end hotels, investors though that they were investing in real estate ventures that for all practical purposes didn’t exist.  The illusion was created by the marketing and promotion.  For real estate the setting created – the perfect ILLUSION.

This second component of being defrauded is actually the hardest to crack.  Why?  Well, think of it, if you were that good at investing you wouldn’t need someone like Dryer and his team.  That said, a great ILLUSIONIST should be able to fool you.  Dryers clients were fooled and my of them were experienced investors.

That leads to the third and final component of fraud – TRUST ( T ).  In order to effectively pull a fraud off, someone has to trust the fraudster.  Now, having been a fraudster (not something I am proud of), I understand the mentality.  It is much easier to defraud someone who is close to you and trusts you than it is to defraud a stranger.  It isn’t that fraudsters want to hurt those closest to them, rather, it is just easier to convince someone who is close to you to trust you.  Trust here was established by the sheer number of investors.  Once there were contracts, there was the illusion that if one or a hundred made the leap then – “so should I.”

To illustrate this point – TRUST

Among the victims listed in the superseded indictment were Lori Fuller, Dietz’s sister, who invested $680,000 into Mile High and invested in two Mile High duplexes in Milliken, which were never built, according to the indictment.

According to the indictment, Fuller was promised returns of up to 12 percent on her investments. While Fuller received monthly payments for a “period of time,” the indictment states Dryer and Mile High didn’t return her principle.

Again, according to the Denver Business Journal:

While 35 investors are named in the indictment, records relating to Mile High’s Chapter 11 bankruptcy indicate that as many as 1,000 people nationwide could have lost as much as $35 million in the case.

AS A SIDE NOTE:

I have received many calls from investors who have been defrauded in other cases now being investigated or coming to light.  The investigators do not follow every lead and every person who has been defrauded.  They gain enough evidence to win the case.  Beyond that they understand that the likelyhood of loss recovery is slim and their role is to prosecute – not to make victims whole.

QUESTIONS:

  1. If you were defrauded by Dryer and his partners, would you contact me please.  I am writing a book and would like to interview you about how you were scammed.
  2. If you were scammed by Dryer, have you been advised that there is a provision of the Internal Revenue Code – Section 165(c)(2) which might help in your loss recovery?
  3. If you were scammed, would you consider commenting on this blog regarding how you feel about Dryer’s sentence?

AS ALWAYS YOUR COMMENTS ARE WELCOME!