State of NY Pursues Real Estate Fraudsters

New York State Attorney General Eliot Spitzer last week announced that his office had filed a lawsuit alleging that a group of real estate industry insiders, including mortgage brokers, attorneys, and appraisers, pursued a fraudulent real estate flipping scheme targeting minority neighborhoods in Brooklyn, NY. In addition, Spitzer’s office announced that it has entered into consent decrees with some of the defendants that will provide substantial monetary relief to victims and stringent oversight of future real estate activities by the settling defendants.
According to the lawsuit, defendants Isaac Katz and Yoel Silberstein devised a scheme in which they purchased distressed properties in the Brooklyn neighborhoods of Crown Heights, Bedford-Stuyvesant, East Flatbush, East New York and Bushwick, and then enlisted the services of a front-man, mortgage brokers, and real estate lawyers to dupe purchasers and lending institutions in order to obtain significant resale profits.
The lawsuit alleges that defendant Amenophis Alleyne found prospective minority buyers with excellent credit to purchase the properties. The minority buyers, many of whom were Alleyne’s family and friends, were told that the properties were “investment opportunities” that could be purchased with no money down. They were also assured that rental income they would receive from prospective tenants would more than cover any mortgage payments.
According to the complaint, the mortgage brokers and defendants Theodore Welz and Shaya Saks, induced banks into issuing loans for properties by preparing loan applications that misrepresented the borrowers’ true income and assets and falsely stated that the borrowers were making significant down payments. Spitzer’s office says the banks were also provided with false appraisals, prepared by real estate appraisers including defendants Jeffery Richardson and Erik Johnson, which significantly inflated the values of the properties.
Defendants Benzion Frankel, Rephoel Weitzner, Devon Clarke, and Joseph Treff, the real estate attorneys who represented the lenders, the buyers, and the sellers at the closings, prepared loan documents and public filings (including deeds and real estate transfer tax records) that allegedly misrepresented the actual sales prices of the properties.
Katz and Silberstein stand accused of reaping substantial profits from their fraudulent scheme, which was carried out dozens of times between 2002 and early 2006. In one case identified in the suit, they purchased a property for $205,000 and sold it later the same day for $370,000. The buyers, the lawsuit alleges, were unaware that their “no money down” deals were being accomplished only by hiding the true nature of the transactions from their lenders. As a result, many buyers were saddled with large, high-interest-rate mortgages they could not afford. Some ended up in default and foreclosure, ruining their once-excellent credit. The lawsuit further alleges that the scheme artificially inflated market prices of homes in the affected neighborhoods as appraisers, sellers, real estate brokers and others seeking to value properties in those areas relied on the false sales prices reported in deeds and other public records.
The Attorney General has entered into consent decrees resolving the lawsuit against defendants Katz, Silberstein, Welz and Saks. The decrees requires:

1. Payment of nearly $1.8 million in restitution and penalties;
2. A detailed accounting of the real estate transactions conducted by the mortgage fraud ring;
3. Extensive monitoring of future real estate activities by defendants Katz and Silberstein; and
4. Significant restrictions on mortgage brokering activities by defendants Welz and Saks.

The funds remitted pursuant to the decrees will be used to compensate victims of the scheme who file complaints with the Attorney General. Any remaining funds will be retained by the State as penalties.