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FRAUDBARON.com
The Anti-Fraud Professionals'
Source for Fraud News
#506 Updated: 11/14/07 10:11 a.m.

MBA Study Examines Fraud Committed Against Mortgage Lenders
nationalmortgagenews.com | 11/13/07 | James Comtois
According to the Mortgage Bankers Association, the mortgage lending industry has lost
billions of dollars as a result of fraud and the sum is steadily rising.  Although the lender is
the direct victim of mortgage fraud, fraud harms honest homeowners and homebuyers as
well, through increased housing costs.  Schemes that involve artificially inflated appraisals,
for example, drive up property tax assessments and foreclosures resulting from fraud
depress surrounding home prices. Steps need to be taken to make the prosecution and
prevention of mortgage fraud more effective. To date, however, there has been little
agreement within the industry on which steps need to be taken.  In order to shape the
debate surrounding important fraud issues affecting the real estate finance industry, the
MBA released “Mortgage Fraud: Strengthening Federal and State Mortgage Fraud
Prevention Efforts,” the next in a series of policy papers.  The paper takes a comprehensive
look at the policy discussion surrounding fraud against lenders, a critical issue in today’s
mortgage market. “President Bush reiterated his administration’s commitment to pursuing
fraud and wrongdoing throughout the mortgage lending process,” said Jonathan L.
Kempner, president and CEO of the MBA. “Whether it’s fraud for housing or the more
serious fraud for profit, people are deceiving lenders at an alarming rate, and more must be
done to combat this problem.”  The FBI has estimated that fraud cost mortgage lenders as
much as $4.2 billion in 2006 alone. This growing trend is troubling for many reasons, but
most significantly because fraud-related costs and losses incurred by lenders are ultimately
passed on to their customers, increasing the cost of homeownership for all borrowers. The
Financial Crimes Enforcement Network, a bureau under the Treasury Department, reported
that the number of mortgage-related Suspicious Activity Reports filed has increased an
average of nearly 60% per year over the past four years. MBA’s policy paper seeks to
separate the issue of mortgage fraud from predatory lending and to provide policymakers
with a roadmap to effectively combat the growing incidence of mortgage fraud. In the
paper, the MBA discourages adding to or modifying the already comprehensive list of
federal fraud statutes and instead recommends that Congress increase resources available
to law enforcement and help facilitate the coordination of federal and state law
enforcement of financial crimes. Rather than drafting new legislation, the MBA believes that
the focus should be on providing the structure and resources needed by law enforcement
officials to combat mortgage fraud. While law enforcement has all the legal tools it needs
at its disposal, it requires more resources and a more efficient framework to use those tools
effectively. According to the paper, this can be accomplished by providing more funding for
mortgage fraud prevention and prosecution efforts, assuring that investigative and
prosecutorial resources are committed to mortgage fraud prevention, placing responsibility
for enforcement in a dedicated office within the Department of Justice and providing for
intergovernmental cooperation in prosecuting mortgage fraud.  “We do not need more
federal laws to combat fraud. Instead, we need a more coordinated effort and more
resources to investigate and prosecute,” Mr. Kempner added. “In addition to being illegal
and costly, we know that fraud has also contributed to the recent rise in delinquencies and
foreclosures, and the industry and government must step up our anti-fraud efforts to help
curtail these related problems.”

Defunct local company sanctioned for fraud
bizjournals.com | 11/14/07 | South Florida Business Journal
A federal court imposed more than $20 million in sanctions against a South Florida man, his
now-defunct company and several employees for fraudulently soliciting customers to
purchase options contracts on commodity futures contracts.  An Oct. 27 order issued by the
U.S. District Court of the Southern District of Florida found that, from at least Jan. 1, 2002,
through December 2003, employees of Deerfield Beach resident Philip Tuccelli and his
company, Cromwell Financial Services, used false and misleading sales presentations to
solicit at least 900 people to trade options on commodity futures contracts in accounts held
at two futures commission merchants. For example, it says Cromwell's employees
exaggerated the magnitude and likelihood of potential profits and failed to advise
customers that more than 85 percent of Cromwell's customers lost money trading.
The order found Cromwell liable for the fraud, which was committed by Cromwell's
employees acting within the scope of their employment. The order also found Tuccelli;
branch managers Dennis Gee, Richard Peluchette and Richard Astern; and compliance
officer Michael Staryk III liable for their failure to diligently supervise Cromwell's employees.
Finally, it found Tuccelli liable as a controlling person of Cromwell for the fraud and failure to
supervise violations.  As a result, Tuccelli and his company must pay Cromwell's customers
restitution of $9.2 million with Tuccelli's obligation capped at $2 million to settle the charges.
Gee is liable for $523,000, Astern for $285,000, Staryk for $130,000 and Peluchette for
$241,000.  Civil penalties were also levied against the defendants. Cromwell was ordered
to pay $9.2 million; Tuccelli ,$250,000; Gee, $120,000; Astern, $120,000; Staryk, $50,000;
and Peluchette, $120,000.  The order also permanently prohibits the defendants from
engaging in any business activities related to commodity interest trading.  The order came
out of a complaint filed by the U.S. Commodity Futures Trading Commission and New
Hampshire on June 12, 2005.

Employee sentenced for stealing $7M
Business Week | 11/13/07 | Associated Press
A Sumter woman who embezzled $7 million from her job to buy vehicles, boats, land and
jewelry was sentenced Tuesday to nearly seven years in federal prison, authorities said.
Angela Timmons, 45, must pay back the money she stole from Peace Textile, where she
worked as an account manager and finance director from 1997 through 2006, U.S. Attorney
Reggie Lloyd said in a news release.  Along with spending 70 months in prison, Timmons
must also transfer to the company around $2.8 million in cash and personal property she
bought with the money she stole, Lloyd said. Timmons' attorney, Chip McMillan, did not
immediately return a phone call after business hours Tuesday.  Timmons used the money
she took from 2003 to 2006 to buy at least 19 pieces of property in Sumter County.
She also bought 44 vehicles, including a Porsche, two Mercedes, three Hummers, a BMW, a
Jaguar, a Corvette and an all-terrain vehicle; 22 watercraft including boats, boat motors,
trailers and personal watercraft; more than $700,000 in jewelry; golf carts; a tanning bed;
and a camper, according to a lawsuit against her filed by Peace Textile.  Timmons would
forge checks to herself or wire money into her own bank accounts or accounts set up for
her by other people. She then altered or omitted financial records to hide the thefts,
prosecutors said.

Prosecutors ask court to uphold Skilling conviction
Houston Chronicle | 11/13/07 | Mary Flood
Prosecutors want to keep former Enron CEO Jeff Skilling behind bars, without retrying any
part of his case, and did not give an inch in the reply they filed to Skilling's appeal today.
The Department of Justice filed a 218-page reply to the appeal of Skilling, who is serving a
24- year prison sentence in Minnesota on 19 convictions of conspiracy, securities fraud,
insider trading and lying to auditors at Enron.  "The jury had ample evidence to hold Skilling
responsible for the pervasive fraudulent conduct at Enron," the government argues. "The
record demonstrates, moreover, that Skilling had a fair trial before an impartial jury and
that he received a reasonable sentence for his multiple crimes.  This court should affirm his
conviction and sentence."  Skilling was found guilty by a Houston jury in 2006 and appealed
his conviction to the 5th U.S. Circuit Court of Appeals in September. He argued that
prosecutors sought to criminalize normal business practices and overreached in
prosecutions relating to the fall of Enron.  Skilling's multi-faceted appeal included arguments
that the government had a faulty theory in claiming Skilling denied Enron his "honest
services," that the judge gave improper jury instructions, that the sentence is excessive
and that the case should not have been tried in Houston, where the company imploded.
The Justice Department's fraud section disagreed with all those contentions in its response
today, written by San Francisco-based prosecutor Douglas Wilson. The government argued
that a court decision on "honest services" in another case does not mean Skilling's
convictions should be reversed.  Experts have said Skilling's strongest argument was that
he did not deprive Enron of his "honest services," an allegation that was part of the
government's count of conspiracy to commit securities and wire fraud. This same appellate
court rejected that prosecution theory in a case involving Enron's questionable deals with
Merrill Lynch involving Nigerian barges.  If the appeals court agrees with Skilling's
arguments against the "honest services" theory, it could send 14 of Skilling's 19 charges
back to trial, as occurred in the Nigerian barge case. But it is unclear how much it would
lower Skilling's sentence even if a number of his charges are retried.  Prosecutors argued
today that the Nigerian barge decision does not require reversal of any Skilling convictions.
But the prosecutors said that even if the conspiracy count against Skilling were to be
covered by the prior ruling, none of the other charges should be reversed.  The government
says that unlike the defendants in the Nigerian barge case, "Skilling was no mere employee
carrying out perceived goals imposed from above. Skilling set an improper corporate goal
and then schemed to achieve that goal by committing and causing others to commit a
series of fraudulent actions that Skilling could not have perceived as being consistent
with any legitimate corporate interest."

Heavy debit card use raises fraud alerts
Boston Globe | 11/13/07 | Ross Kerber
Debit card use has soared in recent years, raising security questions for banks that
promote the popular plastic.  For every $1 they spend, customers of Citizens Bank and TD
Banknorth who tap the "credit" button at the cash register or sign a receipt get one reward
point that can be redeemed for car rental discounts, clock radios, or other goods. But they
don't get points if they tap the "debit" button and enter a personal identification number, or
PIN. Banks prefer the credit option for debit cards because they make more money in fees.
For a $200 transaction, for example, they make $1.99 if the customer chooses "credit" and
signs his or her name, according to one estimate, more than three times the 60 cents they
make from customers who choose "debit" and enter a PIN.  Partly as a result of these
incentives, signature transactions account for about 60 percent of all debit card us
age.  But these credit transactions generate much more fraud than PIN purchases, studies
show, since it's easy to fake a signature but hard to steal a PIN electronically. One study by
Dove Consulting in Boston this year put fraud losses from signature debit card purchases at
more than 12 times losses from PIN transactions - $245 million vs. $20 million.  The
increasing fraud is drawing attention among analysts who follow the payment industry,
following a growing number of cases in which hackers have accessed large batches of
payment card information.  Banks and the two major card networks, Visa Inc. and
MasterCard Inc., have been increasingly vocal about getting merchants to comply with
security rules. Following a record-setting data breach at Framingham retailer
TJX Cos., the Massachusetts Bankers Association, a trade group, filed a lawsuit in federal
District Court in Boston alleging the company didn't take enough precautions against
hackers.  But several security analysts say there's something to a TJX counterargument in a
court filing recently that plaintiffs themselves are to blame for not pressing for tougher
security rules. TJX didn't give many specifics, but outsiders say the filing is a reference to
complaints retailers have made about the payment system in the past, such as the fees
they pay when customers use payment cards. "Banks are pushing for signatures where
they can make more money, and at the same time they're saying TJX didn't do enough,"
said Aite Group's Gwenn Bezard, whose clients include many banks. Gartner Inc. analyst
Avivah Litan said many banks "really are not that interested in secure payments" but rather
are more focused on driving up fees by promoting signature transactions. Credit cards lend
consumers money for purchases and send them a bill at the end of each month. Debit cards
subtract money directly from a customer's checking account for each transaction. Many
consumers prefer debit cards as a budgeting tool, boosting debit card usage 12 percent
annually. Bankrate.com counted 26.6 billion debit card transactions last year in the United
States, versus 24.4 billion credit card transactions. Merchants pay interchange fees to
banks and other institutions that process purchases. Bezard estimates that
in debit purchases verified with a customer's PIN, a merchant typically would pay 0.65
percent of the purchase price to the bank that issued the consumers' debit card, plus 12
cents, up to a maximum of 60 cents. If the consumer punched the "credit" button and
signed for the deal, however, the fee rises to 0.92 percent of the transaction, plus 15
cents, with no maximum on the deal. "At the end of the day, the financial risk of fraud falls
mainly on the institution, so we have a financial interest in trying to minimize fraud," he
said. "The notion we're encouraging people to use a riskier form of payment in order to
generate revenue, we fundamentally don't believe that," he said. (Excerpt)
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