Out of court

Monday, December 13, 2010

The Advantage of the Well Connected Snitch.

Recently I had a client go before a federal judge for sentencing on a mortgage fraud case. He was sentenced to 15 months in prison. Here was a guy who had no prior record whatsoever. Everyone who knew him liked and trusted him. Since the crime was completed several years ago, he found a new job and his boss loved him. And yet, despite my best effort to save him from prison, and to save his job, the judge sent him away. The judge relied on the seriousness of the crime to deny a lesser sentence. No question it was serious: he may have to pay back as much as $915,000 to the original lenders for his involvement.

The fraud worked this way: the con artist/businessman leader of the fraud originally convinced his friends and relatives he had a way to make money in the exploding real estate market of the early part of this decade. He would have them 'invest' in real estate by agreeing to sign loan papers indicating they were going to buy and occupy a home. This would enable them to get the lowest possible loan rate, as banks historically believed that owner/occupants were the safest borrowers. The catch (and the big lie on all the loan applications) was that they were not really owner/occupants. Instead the con artist would actually pay them to just use their name and good credit. They were "straw buyers." Then the con artist would pay more than the asking price to the seller, claiming it went to a fund to improve the property and pay the mortgage. But he actually siphoned off the money for his own use.

When this 'fund' began to dwindle, he would recruit another person to "buy" the property at a higher price. Up to 2008, the spiralling market permitted such quick flips. Many people made a lot of money this way. And the banks and lenders never seemed to scrutinize the borrowers or their applications much. Since real estate prices were always going up, it was all about the property and not the borrower. And anyway, the lenders did not hold onto the loans, but sold them off to other investors. These were then sold in bulk as collaterized debt obligations to other investors. So the lenders were recklessly indifferent. (Hence a lot of bank and mortgage company failures.)

Originally my client loaned money to the con artist and was initially paid back. Then he was asked to be a buyer for two properties, knowing full well that he was lying on the loan applications because he was not occupying the property. And then he recruited two more people to be "straw buyers." He helped one "straw buyer" lie on the application form by agreeing to corroborate falsely inflated income. This was probably his worst sin. Later, when he was confronted by the feds, he confessed and told the truth.

Now many of you may say that this type of fraud has hurt our economy. And people who engage in this should be punished hard. Examples must be made and messages sent to the community that this type of fraud cannot go unpunished. This is all true but. . . why does prison have to be the answer for a serious crime? Particularly where the individual involved is remorseful, rehabilitated and has been positively contributing to society for nearly three years since the crime? We proposed a combination of community service work, 6 months of home detention and 30 days in jail. The judge rejected this for a 15 month prison sentence. Aren't we punishing ourselves by locking up positive contributors? And anyway, don't we have too many people in prison already?

Even more galling, and typical of the 'logic' of federal sentencing is the 8 month sentence of a codefendant. A codefendant the government lawyer told the judge was equally culpable with my client. That codefendant worked for a lender, was an insider and betrayed that trust. And yet because he was able to cooperate and name names at his bank (whom the government will probably charge separately) he got a lighter sentence.

That is the ultimate 'message' the court sends: If you're caught and you are sufficiently intertwined with other lawbreakers, you can optimize your position by turning on them. You will do better than less knowledgeable but equally culpable lawbreakers. Sometimes people higher up in the criminal hierarchy get lower sentences than people near the bottom who aren't as involved.

What does that have to do with punishment and rehabilitation? Actually, it has more to do with law enforcement. Since the Supreme Court reinstated judicial discretion and did away with mandatory guideline sentences, the courts look to the "purposes" of sentencing. Helping the government prosecute other people is not a "purpose" of sentencing but it is a goal of law enforcement. So in this instance, the federal judge gave the ability to help law enforcement a greater reward than rehabilitation.

Is that justice?

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