Michael Hudson stories from The Center for Public Integrity

Release of offshore records draws worldwide response

2013-05-22T15:23:49-04:00

ICIJ’s investigative series on offshore secrecy – which draws from a cache of 2.5 million secret records – has ignited reactions around the globe.

Since the initial release of stories by the ICIJ and its media partners across the world, public officials have issued statements, governments have launched investigations, and politicians and journalists have been debating the implications of the records and the reporting.

Among the latest reactions and responses:

European Council President Herman Van Rompuy says there has been a "real breakthrough" in the EU's efforts to combat offshore tax evasion.At the council's May 22 meeting, Reuters reports, Rompuy said the current aggressiveness of the EU's push is "unprecedented. We couldn't speak in those terms on those issues, let's say, a month or two months ago. . . . There is a strong political will by the leaders, not only the Europeans but also on a global level, to go forward in attacking tax fraud and tax evasion."
The Luxembourg finance ministry announced they would automatically exchange information with United States tax authorities about the bank accounts held by U.S. citizens and residents. The tiny nation, one of the biggest financial centers in Europe, announced in April they would "follow a global movement" and end decades of banking secrecy in regards to EU citizens. The move came on the eve of European leaders meeting to discuss sharing more data on citizens who park wealth across borders, in an effort to limit tax evasion.
The Council of the European Union issued a statement May 14 calling for efforts at the national, EU and international levels “to combat tax fraud and tax evasion” and “aggressive tax planning.” The statement noted that the council’s presidency plans to ask ICIJ to supply EU member states “with the names and details regarding all EU citizens on the ‘offshore leaks’ list.” ICIJ has said that it will not turn over the data to government agencies, but that it is exploring the possibility of publicly releasing some entity ownership data.
After meeting with President Barack Obama at the White House, British Prime Minister David Cameron made a strong call to tackle what he called “the scourge of tax evasion,” one of the key topics in next month’s G8 meeting in Ireland. “We need to know who really owns a company, who profits from it, whether taxes are paid. And we need a new mechanism to track where multinationals make their money and where they pay their taxes so we can stop those that are manipulating the system unfairly,” Cameron said.
British, U.S. and Australian tax authorities announced that they are pursuing tax evasion investigations based on a cache of offshore documents that link to the Cook Islands, Singapore and the Cayman Islands, among other jurisdictions. The secret records are believed to include those obtained by ICIJ and that are the basis of the Offshore Leaks investigation. British tax authorities said the files “reveal extensive use of complex offshore structures to conceal assets by wealthy individuals and companies.” The three agencies plan to share the information with their counterparts from other countries in what could be the beginnings of one of the largest tax investigations in history.
Canada's revenue minister Gail Shea announced a $30 million commitment to fight tax evasion and target the practice of hiding money in offshore accounts, and the formation of an international tax expert "SWAT team". Asked if her department now has the list of 450 Canadian names contained within the documents obtained by ICIJ, Shea said: "We currently don’t have the list and I can assure you that we’re looking at all of our options. We’re working with our international partners to get that list."
The UK Treasury announced that following the lead of the Cayman Islands, all British overseas territories – including Bermuda, the British Virgin Islands, Anguilla, Montserrat and the Turks and Caicos Islands – have agreed to share information about individuals holding bank accounts in their jurisdictions with the UK, France, Germany, Italy and Spain.
The South China Morning Post reported that the new information exchanges will have real implications for Hong Kong and China companies, which do significant business through the Cayman islands, the British Virgin Islands and other offshore locales.
European finance ministers may reach an agreement to eradicate tax havens on May 13, after a meeting in Helsinki between finance ministers from Finland, Luxembourg, Greece, Slovakia, and Lithuania as well as the European Commissioner on Taxation to discuss measures against tax evasion.
The European Commissioner on Taxation Algirdas Šemeta and Irish Finance Minister Michael Noonan sent a letter to all EU Finance Ministers, setting out 7 key areas for immediate action in improving the fight against tax fraud, evasion and avoidance. Member States were asked to agree on these actions at the ECOFIN in May. The letter credits the offshore leaks investigation with "sharpening the focus" on tax fraud, and says it will ask ICIJ to supply names and details of European citizens from its data.
Finance ministers and central bankers at the G20 meeting in Washington said in a communiqué that automatic exchange of tax-relevant bank information should be adopted as the global standard to overcome international tax evasion. Skeptical European leaders reportedly "became more enthusiastic" after the public outcry over ICIJ's offshore leaks revelations.
Bayartsogt Sangajav, deputy speaker of the Mongolian Parliament, has beendismissed from his post following ICIJ's revelations about his undeclared offshore company and bank account. In a parliamentary session he was asked to explain his actions. Several MPs called for further disciplinary action, including expelling him from Parliament entirely.
Santosh Kumar Agarwal (Kedia), a member of the board of directors for the Antwerp World Diamond Centre, has resigned from the organization after his offshore dealings were revealed. “In the interest of the integrity of the Antwerp World Diamond Centre as [an] organization and the industry as a whole, Kedia has taken the initiative to withdraw from the AWDC's board of directors, awaiting the outcome of a potential investigation,” said a statement released by the company.”
French president Francois Hollande has published the personal financial details of government ministers on the official government website, following the Jerome Cahuzac and Jean-Jacques Augier offshore assets scandals. The list of assets includes details of bank accounts, life insurance, property and other expensive items such as cars, art works and antiques. Various properties in Paris and the south of France have already been itemized by ministers, as well as designer lounge chair (Industrial Renewal Minister Arnaud Montebourg) and a David Beckham t-shirt (Culture Minister Aurelie Filippetti).
European Council president Herman Van Rompuy announced that tax evasion will be discussed at the next European Council in May, saying "we must seize the increased political momentum to address this crucial problem."
BVI government officials have announced they are opening a new business headquarters in Hong Kong, with Orlando Smith, BVI Premier and Finance Minister, confirmed to officiate the opening. Executive director of BVI International Finance Centre, Elise Donovan, said the data obtained by the ICIJ was "a small fraction" of the total number of BVI firms. She later added, "We want to reassure clients in Hong Kong and the region that this is an isolated incident. We remain committed to clients' privacy and confidentiality."
The Swiss and U.S. governments are investigating a possible solution to the dispute over wealthy Americans using Swiss banks to hide their money . These talks come at time when Switzerland’s banking sector is under increased pressure to surrender personal information about suspected tax evaders. Swiss Finance Minister Eveline Widmer-Schlumpf said all countries should be treated equally in the drive for bank transparency. "We consider it very important that rules must apply to all and are engaging ourselves for a level playing field in multilateral forums," Widmer-Schlumpf said.
German Chancellor Angela Merkel urged UK's PM David Cameron to crack down on tax havens during talks in Berlin, following a public outcry in Germany over the "offshore leaks." Sources "close to Cameron" claim he was actually the first to raise the issue, spelling out how his government was cracking down on tax avoidance in places such as Jersey and Guernsey.
Russian Deputy Prime Minister Igor Shuvalov.Russian Deputy Prime Minister Igor Shuvalov is moving his offshore assets back to Russia after ICIJ's revelations that Shuvalov's wife Olga Shuvalova was either a shareholder or owner of several secretive offshore entities. The Shuvalovs had a declared income of $12.7 million in 2011, most of which was earned by Olga.
Spanish political party Unión Progreso y Democracia submitted written questions to the Spanish Congress today in the wake of French president François Hollande's announcement that French banks had to declare their tax haven subsidiaries. The questions read: Is the government going to present in the European institutions any initiative to eradicate the tax havens within the Member States? and Is the government going to force banks to disclose the subsidiaries they have in tax havens and what are their activities?
Francois Hollande: called for tax havens to be "eradicated."French president François Hollande called for "eradication" of the world's tax havens and toldFrench banks they must declare all of their subsidiaries. He also announced the creation of a special prosecutor to pursue cases of corruption and tax fraud. French government ministers have been ordered to declare their assets publicly within days.
Luxembourg's Prime Minister Jean-Claude Juncker announced his country plans to lift bank secrecy rules for European Union citizens who have savings based in the country, ending decades of bank secrecy in Luxembourg. "We are following a global movement," Juncker told parliament in a state-of-the-nation address. The new transparency regime would begin in January 2015. Austria is now the only EU country not sharing data about bank depositors. In a recent interview, Austrian Vice Chancellor and Finance Minister Spindelegger Fekter said: “How much money someone has in the bank is a matter between the bank and the customer and is no one else’s business."
Algirdas Semeta, European Union Tax Commissioner stated in a recent interview that it istime to move “quicker and harder” against tax evasion. He said the “growing willingness to act” increases the likelihood of a more coordinated EU stance against tax havens.
Europe’s five biggest economic powers — Britain, France, Germany, Italy and Spain —announced they would begin regularly exchanging banking and tax information as a way of identifying tax dodgers and other financial wrongdoers.
Meanwhile, the British Virgin Islands (BVI) authorities are not fans of the ICIJ investigation. The BVI premier and Finance Minister Orlando Smith told the South China Morning Post that "BVI authorities are actively investigating how this private information has been illicitly obtained and used to attack the BVI financial services industry, which operates compliantly within international guidelines and the law."
Athens’ district attorney Panayota Fakou has started a preliminary probe to find out if Greeks who own offshore companies unearthed by the ICIJ investigation have evaded taxes or laundered money. According to the Greek newspaper Ta Nea, prosecutors will send information requests to British Virgin Islands’ financial authorities asking them to turn over records of 107 entities connected to Greek citizens.
An investigation by Finnish State Televisionand ICIJ exposing the offshore connections of state-owned postal company Itella has been received with surprise by the Finnish Finance Minister, Jutta Urpilainen. The minister said that “state owned companies should be an example for other companies. That is why it is especially unacceptable that Itella owns a company in a tax haven.” Urpilainen said the Finnish government should adopt clear rules on the use of offshore jurisdictions by state-owned corporations and called tax havens “one of the biggest threats to the Finnish welfare state.”
Canada's national revenue minister Gail Shea says the government may pursue the Canadian Broadcasting Corporation in court to force it to share the offshore leaks records.
Quebec Premier Pauline Marois has declared that neither she, nor any other elected officials in her government have dealings in the offshore world. Marois also supported the handover of internal documents to Canadian authorities, stating the Quebec government would not hesitate to use "all legal means" to ensure this.
French budget minister Bernard Cazeneuve joins the clamor from governments around the globe in urging ICIJ and its media partners to release the offshore tax haven files to them, to "aid justice and help them do their job." Le Monde's response: "It is up to the justice system to establish responsibilities at a time when the law might have been broken ... It is up to the press to enlighten the reader..."
Austrian Chancellor Werner Faymann says he is ready to make concessions on banking secrecy, to bring the nation in step with Switzerland and Luxembourg. "Austria should participate in talks on banking secrecy,” Austrian Chancellor Werner Faymann declared to Die Presse.
The European Commissioner for Taxation, Algirdas Šemeta, called for an automatic exchange of information between countries and a "tough common stance." "Recent developments,fuelled by the outcome of the Offshore Leaks, confirms the urgency for more and better action against tax evasion .... Now it is time to put words into action." He said he was "very pleased" to see many of the Member States reviewing where they stand on the issues and "intensifying their political will to act."
The Swiss government has distinguised itself from other world governments by publicly stating it does not want access to the offshore leaks records. Finance minister Eveline Widmer-Schlumpf said Switzerland has worked hard in recent years to curb fraud and tax evasion and that much of the activity pointed to in the leaked documents can be perfectly legal. She says the Swiss government does not want access to the data as "it was acquired illegally and Bern wants no part of that".
The Philippine Presidential Commission on Good Government probe into the disclosure that Maria Imelda Marcos Manotoc, the eldest daughter of the late dictator Ferdinand Marcos, was a beneficiary of a secret offshore trust in the British Virgin Islands, will release its report within two weeks. “We are duty bound to investigate and, depending upon informed preliminary findings, decide whether to pursue the matter,” said Andres Bautista, the chairman of the Presidential Commission on Good Government, tasked with recovering the Marcos family’s alleged ill-gotten wealth.
The president of the Association of German Banks denied that his group’s members had helped customers engage in tax evasion. “First in line are the individuals and the organizations that invest their money in tax oases,” Andreas Schmitz said."
The Berne internal revenue service authorities announced they will re-open the Gunter Sachs case after ICIJ's revelations about the former Mr. Brigitte Bardot's intricate offshore scheme.
In Canada, a Liberal senator urged his caucus colleague, Senator Pana Merchant, to answer questions in the wake of CBC News and ICIJ reports that she has been listed as beneficiary of an offshore trust created by her husband, a well-known class-action attorney. "We're all innocent until proven guilty in this country, but I want to hear her explanation," Senator Percy Downe told CBC News in an interview.
In the Philippines, two lawmakers dismissed a report by an ICIJ media partner, the Philippine Center for Investigative Journalism (PCIJ), that they had offshore holdings. Senator Manuel Villar said his offshore entity was a “1-dollar shell company” that he wasn’t required to report, because he hadn’t made any real investment in it. Villar said that he hadn’t conducted business with the British Virgin Islands company “because I decided to concentrate in the Philippines.” Congressman Joseph Victor ‘JV’ G. Ejercito suggested the story about him was politically motivated. “To the best of my knowledge, I have truthfully and accurately declared all my assets, liabilities, and net worth” on required disclosures forms for public officials, he said in a statement.
Germany's Economics Minister Philipp Rösler urged the media to pass the data on to the government, stressing that tax evasion was a "criminal act."
Luxembourg's Finance Minister Luc Frieden says he is open to greater transparency of its banks in order to cooperate further with foreign tax authorities.
The Indian Finance Minister P. Chidambaram said an inquiry had been initiated by the authorities against individuals whose names figured in the global media report. “Yes. We have taken note of the names and inquiries have been put in motion in respect of the names that have been exposed,” he told a press conference.
The Mongolian Deputy Speaker, Bayartsogt Sangajav, admitted to an "ethics failure" over his undeclared million-dollar Swiss bank account. He told a press conference: “It is true that there is 1,658 Euros or 2.9 million MNT in a Swiss bank account. I opened the account to trade in international stocks with three other acquaintances in 2008. My failure of responsibility is that I did not include the company in my declaration of income. I have admitted my ethic failure and I am ready to take responsibility."
Philippine government officials said they will investigate evidence that Maria Imelda Marcos Manotoc, a provincial governor and daughter of the late dictator Ferdinand Marcos, was the beneficiary of a secret BVI offshore trust.
George Mavraganis, the Deputy Finance Minister of Greece announced that the Greek government is moving to address offshore-driven tax dodging. Greek members of parliament asked Mavraganis what he planned to do about the 103 offshore companies that ICIJ found hadn’t been registered with Greece’s tax authorities.
George Sourlas from Greece’s Ministry of Justice said the revenue loss caused by offshore was huge. “By the actions of offshore companies in Greece, the revenue loss to the Greek government is in the order of 40% or more of the debt of our country,” Sourlas said. “The offshore companies cast a shadow at this time of great crisis, when some get rich and many get poor.”
In France, President Francois Hollande denied knowledge of the offshore accounts held by his 2012 campaign manager, Jean-Jacques Augier, asserting that it’s up to the tax administration to monitor Augier’s private activities. Reports about Augier’s offshore dealings by Le Monde, the BBC and other ICIJ partners came in the wake of news about tax fraud charges against Hollande’s ex-budget Minister, Jerome Cahuzac.
The office of Azerbaijani President Ilham Aliyev asserted there was nothing unusual about the information in the leak – which showed that his two daughters were shareholders of three offshore companies. The statement said the President’s daughters “are grown up and have the right to do business.” A spokesperson for Azersun – a holding company controlled by Hasan Gozal, a corporate mogul who was listed as the director of the daughters’ companies – said the report was biased and based on inaccurate information. “I regret that authority of Press Council doesn't go beyond Azerbaijan and there is no such institution worldwide to fight racketeer journalists,” the spokesman said.
Ex-Colombian President Álvaro Uribe Vélez publicly defended his sons’ involvement in offshore business. Uribe stated that his sons Tomás and Jerónimo are entrepreneurs and “have participated in business dealings since they were children” and “they are not tax evaders.”
In the UK, David Cameron is facing renewed pressure to take action over Britain’s entanglements within the offshore world. Lord Oakeshott, a senior Liberal Democrat said that the secrecy haven of the British Virgin Islands “stains the face of Britain.” Oakeshott and others are questioning whether Cameron will raise the issue in June of at the G8 summit of wealth nations. "How can David Cameron keep a straight face calling for the G8 to make big business pay tax when we let the BVI use British law and British protection to suck in billions in dirty money?" Oakeshott asked.
German Finance Minister Wolfgang Schäuble stated on public radio that he was “pleased”with the ICIJ reports. He went on to say, “I think that such things as have been made known will increase the pressure internationally, and we will be able to increase the cooperation with those who have been more reticent”, a sentiment reflected in Germany’s previous lobbying to stamp out tax avoidance.
Canadian Federal Revenue Minister Gail Shea called the released of offshore banking information as “good news” for Canadians and bad news for tax evaders. Ms. Shea urged ICIJ or anyone else with information on tax cheats to come forward.
Pascal Saint-Amans, director of the Organization of Economic Cooperation and Development, said: "Secrecy is no longer acceptable. We need to get rid of it. If the rules make it possible, then we'll change the rules.”

JPMorgan Chase’s record highlights doubts about big banks’ devotion to fighting flow of dirty money

United States — 2013-04-30T06:03:01-04:00

In the summer of 2009, Jennifer Sharkey was moving in select company. As a Manhattan-based vice president at JPMorgan Chase & Co.’s Private Wealth Management group, she juggled relationships with 75 “high net worth” clients with assets totaling more than half a billion dollars.

Things changed for her, she claims, after she raised doubts about a “suspect” foreign client who had millions stashed in various accounts at the bank.

The client was making questionable cash transfers and concealing who actually owned certain accounts, according to a lawsuit Sharkey is pursuing in federal court in Manhattan. She also found evidence, her suit claims, that the client had falsified financial statements for one of his companies and that he’d been involved in the “unexplained disappearance” of millions of dollars in merchandise in another venture.

After she warned high-level bank officials that the client might be involved in fraud and money laundering, her suit claims, JPMorgan moved to silence her — pressuring her to stop raising questions about the client, assigning her other clients to junior colleagues and, finally, firing her.

“I was just doing my job,” Sharkey said in an interview with the International Consortium of Investigative Journalists (ICIJ). But for the bank, she said, “it was more important to keep this client than to do the right thing.”

JPMorgan denies it retaliated against Sharkey for pushing the bank to exit its relationship with the client — and it denies that the customer was either a foreign client or engaged in suspect activities. The bank says it goes to great lengths to identify and block money laundering, terrorism financing and other illicit transactions.

Sharkey isn’t alone, though, in raising concerns about the largest U.S. bank’s commitment to fighting the flow of dirty money around the world.

Over the years, JPMorgan Chase and its corporate forebears have been accused of serving as conduits for money controlled by drug smugglers, mobsters and political despots and acting as magnets for “flight capital” from rich tax dodgers from Latin America and other regions. The bank also played a part, lawsuits alleged, in massive tax haven-enabled frauds in the Enron and Madoff scandals.

An examination of JPMorgan’s record in policing suspect cash and offshore deals offers a case study of how big banks deal with dirty money and transnational corruption — and a window onto the decades-long history of the banking industry’s fraught relationship with the offshore world.

When people think about secret accounts and money laundering, they often imagine the Cayman Islands or some other sultry paradise. But the enablers of cross-border corruption aren’t located only in flyspeck island havens, white-collar crime experts say.

Criminals and connivers rely on easy access to banks in the U.S., the UK and other rich nations to hide their assets from investigators and tax collectors and shift money in and out of offshore hideaways.

Without this access, their shell games wouldn’t be possible.

In 2003, New York prosecutors claimed that an unlicensed money-transfer firm in Manhattan directed $9 billion in wire transactions through three dozen accounts at JPMorgan, moving money around the world for drug dealers and other dodgy characters.

In 2011, the bank paid nearly $90 million to settle regulators’ claims that it had violated economic sanctions against Iran, Cuba and other countries under U.S. embargoes.

In January, a consent order from JPMorgan’s main federal regulator, the Office of the Comptroller of the Currency, cited the bank for “critical deficiencies” in its anti-money-laundering controls, including inadequate procedures for monitoring transactions at foreign branches.

In the 2003 case, the bank acknowledged it had been “too slow and not forceful enough” in vetting the money-transfer firm, but said it was working to tighten its money laundering safeguards. In the 2011 case, the bank said the sanction violations were isolated incidents. In the wake of the comptroller’s case, the bank told the New York Times that it has been “working hard to fully remediate the issues identified.”

Mark Kornblau, a JPMorgan spokesman, declined to answer detailed questions for this story.

In a brief written statement, he told ICIJ that complying with anti-money-laundering rules “is a top priority for us. We have already made progress addressing the issues cited in the consent orders, which contain no allegations of intentional misconduct by the firm or any of its employees.”

JPMorgan isn’t alone when it comes to taking heat for failing to do enough to stop the flow of suspect cash. Last year U.S. authorities reached settlements with HSBC, Citigroup and UK-headquartered Standard Chartered Bank over alleged money-laundering compliance failures.

HSBC agreed in December to pay more than $1.9 billion to settle an investigation into evidence it shifted cash for rogue nations, terrorists and Mexican drug lords.

U.S. Senator Carl Levin of Michigan said a “pervasively polluted” culture at HSBC allowed billions in suspect dollars to flow through the bank. Senate investigators said HSBC ignored warnings from Mexican and U.S. authorities that the gush of money flowing into the bank from Mexico was so large it could only be sustained by the proceeds from narcotics trafficking.

HSBC said in a statement last year that it was “profoundly sorry” for its “past mistakes.”

How well major banks screen customers and cash flows is important because, in a digitally connected world, dirty money no longer travels as stacks of bills stuffed into suitcases. It moves by the click of a computer key. This makes big banks crucial gatekeepers in the financial system, giving them the power to cut off the flow of corrupt cash or allow it to roam free.

The offshore system can’t be reformed, money laundering experts say, without cooperation and compliance from the banking system’s biggest players.

Dennis Lormel, former chief of the FBI’s financial crimes program, says compliance watchdogs working on the payroll of big banks strive to do the right thing, but they’re often locked in losing battles with bankers who are more concerned about booking deposits and doing deals than making sure the money coming in is clean.

“The business culture usually wins,” Lormel says. “The business people take the risks and the compliance people are left to clean up the mess.”

Offshore Players

JPMorgan and other major banks have increased their risks and rewards in the offshore world by weaving a web of branches and subsidiaries across places that have been tagged as havens for financial secrecy and criminal activity.

Secret records obtained by ICIJ reveal how many of the world’s top banks – including UBS and Clariden in Switzerland, ING and ABN Amro in the Netherlands and Deutsche Bank in Germany – have worked to set up their customers with secrecy-cloaked companies in the British Virgin Islands, the Cook Islands and other offshore locales.

The banks deny wrongdoing.

A 2008 U.S. government report found JPMorgan had 50 subsidiaries in Bermuda, the Bahamas and other places labeled as tax havens or secrecy jurisdictions, tied for 11th highest among the 100 largest U.S. companies.

Since then the bank has expanded its reach in some offshore centers. Its tally of subsidiaries in the Cayman Islands grew from seven in 2007 to 20 at the end of 2012, securities filings show. Over that span its subsidiaries in Mauritius — a tiny isle off Africa’s eastern coast that’s been called “a Cayman Islands to India” — grew from eight to 14.

While the bank helps move money around the world via its tax haven subsidiaries, JPMorgan’s international private banking network attracts large deposits to the U.S. from rich customers in Latin America and other regions. Much of this money isn’t reported to tax authorities in the depositors’ home countries, according to a study last year by James S. Henry, former chief economist at McKinsey & Company and a board member of Tax Justice Network, an advocacy group that favors tighter regulation of the offshore system.

The study estimates JPMorgan’s private banking operations boosted their assets under management from $187 billion in 2005 to $284 billion in late 2010 — ranking it among an elite group of giant private banking institutions whose mission, the report claims, is to “entice the elites of rich and poor countries alike to shelter their wealth tax-free offshore.”

Rich history

JPMorgan Chase is an amalgam of America’s two most storied banks. Historian Ron Chernow called the Morgan banking dynasty perhaps “the most formidable financial combine in history.” Chase Manhattan traced its roots to 1799 and claimed Aaron Burr, the nation’s third vice president, as its founder.

Before the mega-merger that brought the Morgan and Chase empires together at the turn of this century, both played roles in the emergence of tax havens — and in the controversies that grew out of the offshore system’s rise.

Chase and Morgan were early players, in the 1960s, in the growth of the Bahamas as an overseas financial center. Chase was one of the banks of choice for Philippine President Ferdinand Marcos and the Shah of Iran, strongmen who looted their countries’ treasuries during their decades in power. Relations between Chase officials and the Shah were so close in the 1960s and ’70s, Henry says, that Chase Chairman David Rockefeller was essentially “the Shah’s private banker.”

Chase played a cameo role in an offshore money-laundering thread of the Watergate scandal, serving as a conduit for an illegal $55,000 contribution that American Airlines laundered through a foreign source and funneled into President Nixon’s re-election campaign. Federal authorities fined the airline, but apparently took no action against Chase.

In 1973, a mobster turned informer told a congressional committee that Chase and other firms helped him cook up bogus covers for illegal transactions in stolen and counterfeit securities that had been laundered through Switzerland and Belgium and then brought back to the U.S. The witness testified Chase bankers accepted the “flimsiest of proof” as to his identity when they signed off on documents that made his transactions possible.

In another case, the infamous “Pizza Connection” heroin ring used Chase to channel cash overseas, according to an account in The Money Launderers, a book by former U.S. Treasury enforcement official Robert E. Powis. In July 1980, a bagman for the ring entered Chase Manhattan’s headquarters with four leather bags stuffed with $550,000 in fives, tens and twenties. The bank accepted the money, counted it, then transferred it to a Swiss account, according to Powis.

In June 1985, the Treasury Department fined Chase and other New York banks for ignoring one of the government’s basic safeguards against financial chicanery — the federal Bank Secrecy Act’s requirement that banks report any transactions involving $10,000 or more in cash. Chase paid a then-record fine of $360,000, based on 1,442 unreported transactions totaling $853 million.

“Some clerical people did not file reports here and there,” a Chase spokesman told The Washington Post at the time. “There was nothing willful about this thing.”

Fallen angel

Along with handling money involved in drug smuggling and other underworld activities, big U.S. banks have also attracted deposits from Third World elites who want to hide their wealth from tax collectors. For decades, anti-corruption advocates say, U.S. banks have encouraged this process by dispatching armies of private bankers to solicit flight capital from developing nations.

In the 1980s, Antonio Gebauer was J.P. Morgan & Co.’s top man South of the Border, lauded by a Morgan spokesman as “the most highly esteemed banker in Latin America.” Gebauer specialized in putting together multi-million-dollar loan deals across the region. He also oversaw covert New York bank accounts for a handful of wealthy Brazilians, among them a great-grandson of the founder of Brazilian Republic.

Brazilian authorities later questioned whether the money was unreported capital. Gebauer’s attorney said the accounts had been set up under “the unusual and Byzantine relationships that often exist between bankers and flight capitalists.”

The secret deposits might have remained secret if Gebauer hadn’t been caught embezzling more than $4 million from his clients’ accounts. In 1987, a U.S. judge sentenced him to 3½ years in prison, calling him “a fallen angel of the banking world.”

U.S. media touched on the flight capital issue briefly, and the government of Brazil filed a treaty request asking U.S. authorities to subpoena account details from Morgan officials.

The bank won a court decision blocking Brazil’s push to get more information. And Gebauer’s guilty pleas allowed the House of Morgan to avoid a messy trial that have might revealed “the seamier side” of its Latin American operations, according to Henry’s 2003 book on the dark side of global finance, Blood Bankers.

Post-9/11 World

The issue of dark money didn’t go away after J.P. Morgan & Co. and Chase Manhattan Corp. merged in late 2000, creating JPMorgan Chase & Co.

In March 2001, a U.S. Senate investigation revealed Chase Manhattan had been among big firms that had provided correspondent accounts to offshore banks involved in criminal activity. Investigators found that Antigua-licensed American International Bank moved $116 million through its account at Chase even as it was engaging in frauds in the U.S. and working hand-in-hand with convicted felons.

After the Sept. 11, 2001, terrorist attacks, tracking illicit cash became a bigger concern for U.S. authorities. Lormel, the former FBI official, says JPMorgan representatives were among the compliance specialists from various banks who pitched in after Sept. 11 and helped efforts to track terrorists.

“Whatever we wanted, within the limits of the law, the bankers were incredibly helpful,” he recalls.

JPMorgan’s post-9/11 record wasn’t spotless, however.

In January 2003, federal authorities raided a business in Brooklyn called Carnival French Ice Cream, a convenience store with a limited supply of food and sundries and two soft-serve ice cream machines. During their search, investigators found paperwork that led them to conclude that, over a six-year period, the store’s proprietor had laundered millions of dollars through a JPMorgan account on its way to Yemen, China and other places.

Some of the money, investigators believed, went to a Yemeni cleric who later pleaded guilty to charges that he had conspired to aid terrorists.

In February 2003, a month after the ice-cream shop raid, investigators for then-Manhattan District Attorney Robert Morgenthau raided an unlicensed money transfer firm, Beacon Hill Services Corp., that maintained dozens of accounts with JPMorgan.

Morgenthau said Beacon Hill was able to wire $9 billion through these accounts because the JPMorgan’s compliance unit “fell down on the job,” ignoring “numerous red flags for money laundering.” A sizeable chunk of the money, he said, came from drug dealers and tax dodgers, and some ended up in the Middle East, possibly in the hands of terrorists.

No criminal charges were filed against JPMorgan in the case.

In the wake of these cases, industry officials argued it wasn’t fair to expect banks to catch every questionable transaction amid trillions of dollars in daily cash flows.

JPMorgan’s general counsel told The Wall Street Journal: “Think if you’re running a railroad, and we say to you, ‘We want you to monitor everyone who takes your train and see if their trip is legitimate.’ ”

‘Uniquely situated’

Questions about how well JPMorgan monitors its customers persisted over the past decade, coming up in lawsuits and investigations relating to the Enron and Madoff affairs and other scandals.

Investors, insurers and federal authorities accused JPMorgan and Enron Corp. of using “special purpose vehicles” based in tax havens in the UK’s Channel Islands as part of a scheme to create disguised loans that allowed Enron to hide its debts and book sham profits. The bank, which denied wrongdoing, shelled out more than $3 billion to settle claims related to Enron’s fall.

After the Madoff case broke in 2008, a court-appointed trustee, Irving Picard, invoked Enron in attacking JPMorgan’s role in the largest Ponzi scheme in history. JPMorgan turned a blind eye to Madoff’s activities, Picard claims, despite its promises to do better after it had been caught “propping up” Enron’s frauds.

JPMorgan, Picard asserted, was “at the very center” Madoff’s Ponzi scheme. As his primary bank for more than two decades, it “provided the infrastructure for Madoff’s deception” and was “uniquely situated to see the likely fraud,” the trustee alleged in a lawsuit in federal court.

The bank held as much as $5.5 billion in Madoff-connected cash and, according to court filings by Picard, earned an estimated half-billion dollars from fees and other revenues generated by Madoff’s billions.

Any concerns within the bank about Madoff “were suppressed as the drive for fees and profits became a substitute for common sense, ethics and legal obligations,” Picard’s lawsuit said.

The suit said the bank ignored a key indicator of money laundering or other financial crimes: frequent wire activity with offshore banking centers and financial secrecy havens. Within Madoff’s main account at JPMorgan, dollar amounts of wire activity with high- and medium-risk jurisdictions increased 83 percent between 2004 and 2008.

In June 2007, a JPMorgan risk officer raised questions about whether Madoff might be running a Ponzi scheme. Other than asking a junior employee to do a Google search, JPMorgan officials did nothing to dig deeper into Madoff’s business model, Picard charged. Madoff’s main JPMorgan account was still operating without restrictions when he was arrested at the end of 2008.

The bank calls Picard’s allegations “blustering” and “preposterous.”

“The trustee’s damages claims demand the absurd inference that JPMorgan deliberately joined with Bernard Madoff in a doomed-to-fail Ponzi scheme so that it could earn conventional banking fees,” the bank said in a court filing.

A judge threw out many of Picard’s claims against JPMorgan, ruling that it’s up to individual victims rather than the trustee to sue the bank. That decision is on appeal. Other claims are still alive in bankruptcy court.

Last month, the New York Times reported that U.S. prosecutors have opened a new front in the case, investigating whether JPMorgan violated federal law by failing to fully inform authorities about suspicions about Madoff.

A bank spokesman told the Times the JPMorgan employees made “good faith” efforts “to comply with all anti-money-laundering and regulatory obligations.”

EL MORGANGATE

As the fallout from Madoff’s fraud and the 2008 financial crisis was spreading across Wall Street, JPMorgan was dealing with another scandal 5,000 miles away.

An Argentine newsmagazine, Crítica de la Argentina, had run an exposé listing the names and deposit balances of some 200 citizens with JPMorgan accounts in the U.S. — including executives associated with the country’s largest media company.

The headline: EL MORGANGATE.

The issue of flight capital flowing from Latin America to the United States had once again come to the surface. And, once again, JPMorgan was in the middle of the affair, in a case with striking parallels to the Tony Gebauer scandal two decades before.

Hernan Arbizu was a New York-based JPMorgan vice president in charge of some $200 million in accounts belonging to Argentines. Like Gebauer, he was accused of pilfering money from his clients. And as in the Gebauer case, exposure of his wrongdoing was accompanied by questions about his employer’s relationships with wealthy, tax-shy Latin Americans.

Arbizu claims he and other private bankers helped customers launder money and evade taxes in their home countries. “I became a fraudster from the minute I started working in private banking, because if you think about it, I was committing fraud against Argentina as a whole through our activities here,” he told Bloomberg News in 2009.

JPMorgan sued Arbizu in federal court in New York, accusing him of stealing money from client accounts and violating confidentiality agreements by expropriating JPMorgan documents. The bank eventually won a default judgment against him totaling nearly $3.6 million.

U.S. criminal charges pending against Arbizu may never be prosecuted. He remains out of reach in Argentina, protected from extradition by a government that has used his testimony in various legal actions.

JPMorgan declined to answer questions about Arbizu.

Model effort

In 2010, anti-money laundering specialists at JPMorgan became concerned about a series of multi-million-dollar wire transfers involving a San Antonio, Texas, businessman. When bank officials confronted the businessman, court affidavits say, he told them he was acting as a front for his brother-in-law, the former treasurer of the Mexican border state of Coahuila.

The bank alerted the U.S. Drug Enforcement Administration, helping spark official investigations of the ex-treasurer, who now stands accused in Mexico of embezzling millions of dollars from his state’s treasury.

In 2010 and 2011, anti-money laundering experts at the bank joined the U.S. Department of Homeland Security in the agency’s fight against human trafficking.

Homeland Security and JPMorgan officials developed a detailed M.O. for the banking habits of businesses involved in human smuggling for prostitution and other forms of forced labor, according to John Byrne, executive vice president of the Association of Certified Anti-Money Laundering Specialists. One of the red flags: businesses that booked lots of round-number credit card payments — say, $200 — after midnight.

Byrnes’ group honored JPMorgan and Homeland Security with its Private-Public Service Award. The collaboration, Byrnes says, was an example of good-faith effort by JPMorgan and other banks to fight corruption and money laundering.

Byrnes acknowledges big banks have made mistakes, but he believes these problems don’t add up to a picture of an industry that puts profits above compliance.

The banking industry, he says, “works very, very hard to keep illicit funds out of institutions. The commitment comes from the top — from senior management.”

‘Rare incidents’

Around the time JPMorgan was helping Homeland Security and the DEA zero in on human smugglers and the former Mexican official, it was under fire from another U.S. agency.

The Department of the Treasury was investigating evidence that JPMorgan had ignored legal bans on doing business with Cuba, Sudan, Liberia and Iran.

After the department subpoenaed information about one suspect transaction, the bank claimed, repeatedly, that it didn’t have key documents that in fact it did have, the agency said. Only after the agency provided a detailed list it had obtained from another financial institution, the agency said, did JPMorgan cough up the documents.

Treasury officials found that the bank committed multiple violations of U.S. economic embargoes between March 2005 and March 2011. Among the violations: 1,711 transfers totaling $178.5 million to Cuban citizens and the transfer of 32,000 ounces of gold bullion, worth more than $20 million, to a bank in Iran.

The agency charged that bank managers and supervisors knew about the law-breaking and but did nothing to fix the problem.

After the $88.3 million penalty in the case was announced in August 2011, a JPMorgan spokesman said the matter involved “rare incidents” that were “unrelated and isolated from each other. The firm screens hundreds of millions of transaction and customer records per day and annual error rates are a tiny fraction of a percent.”

Criminal history

That settlement hasn’t wiped the slate clean for the bank when it comes to problems over its handling of suspect transactions and clients. Other investigations and lawsuits are still in the works.

In federal court in Minnesota, JPMorgan faces claims that it allowed corporate financier Thomas Petters to run a $3.7 billion Ponzi scheme that raised money through investment funds based in the Caymans.

Petters moved more than $83 million in Ponzi cash through his JPMorgan accounts between 2002 and 2007, a court-appointed trustee, Douglas Kelley, claims in a lawsuit. JPMorgan accepted his deposits, loaned him huge sums and worked with him on his $426 million purchase of Polaroid Corp., the suit says, even though it knew or should have known that he had a shady business plan — and a shady backstory.

Petters had a record of convictions for forgery, larceny and fraud and his chief fundraiser in the Ponzi scheme had done time in prison for cocaine dealing and offshore money laundering.

In court records, JPMorgan says Kelley’s charges are “long on innuendo” and full of “largely irrelevant allegations.” It says it engaged in legitimate, arm’s-length transactions with Petters and that Kelley is trying to overcome the facts and the law “by talismanically invoking the term ‘Ponzi scheme.’ ”

Kelley, a former federal prosecutor, said in an interview that his court filings in various lawsuits relating to Petters’ frauds are “filled with specific facts” that show that JPMorgan and other banks that did business with Petters “turned their heads aside and didn’t ask questions they ought to be asking just because they were making money hand over fist.”

“If you’re a banker and start to see a number of these red flags crop up,” Kelley said, “you have a duty to ask questions — and you have a duty not to accept answers that are not facially candid.”

Caribbean go-between provided shelter for far-away frauds

2013-04-05T10:23:33-04:00

The tangled trail of the Magnitsky Affair, a case that’s strained U.S.-Russian relations and blocked American adoptions of Russian orphans, snakes through an offshore haven in the Caribbean.

The death of Moscow tax attorney Sergei Magnitsky sparked international outrage. It also fueled a push to unravel secret deals that had prompted him to claim that gangsters and government insiders had stolen $230 million from Russia’s treasury.

Magnitsky and other private attorneys investigating the affair on behalf of a major hedge fund followed a path from Russia to bank accounts in Switzerland and luxury properties in Dubai — ending up at a small firm based in the British Virgin Islands that specializes in setting up offshore companies for clients who want to remain in the shadows.

This is the story of behind-the-scenes players in the Magnitsky affair — and the tale of how an offshore go-between provided shelter to fraudsters, money launderers and other shady characters from Russia, Eastern Europe and the United States.

Click through to ICIJ.org to continue reading.

Inside the global offshore money maze

2013-04-05T12:58:00-04:00

A cache of 2.5 million files has cracked open the secrets of more than 120,000 offshore companies and trusts, exposing hidden dealings of politicians, con men and the mega-rich the world over.

The secret records obtained by the International Consortium of Investigative Journalists lay bare the names behind covert companies and private trusts in the British Virgin Islands, the Cook Islands and other offshore hideaways.

They include American doctors and dentists and middle-class Greek villagers as well as families and associates of long-time despots, Wall Street swindlers, Eastern European and Indonesian billionaires, Russian corporate executives, international arms dealers and a sham-director-fronted company that the European Union has labeled as a cog in Iran’s nuclear-development program.

The leaked files provide facts and figures — cash transfers, incorporation dates, links between companies and individuals — that illustrate how offshore financial secrecy has spread aggressively around the globe, allowing the wealthy and the well-connected to dodge taxes and fueling corruption and economic woes in rich and poor nations alike. The records detail the offshore holdings of people and companies in more than 170 countries and territories.

The hoard of documents represents the biggest stockpile of inside information about the offshore system ever obtained by a media organization. The total size of the files, measured in gigabytes, is more than 160 times larger than the leak of U.S. State Department documents by Wikileaks in 2010.

To analyze the documents, ICIJ collaborated with reporters from The Guardian and the BBC in the U.K., Le Monde in France, Süddeutsche Zeitung and Norddeutscher Rundfunk in Germany, The Washington Post, the Canadian Broadcasting Corporation (CBC) and 31 other media partners around the world.

Eighty-six journalists from 46 countries used high-tech data crunching and shoe-leather reporting to sift through emails, account ledgers and other files covering nearly 30 years.

“I’ve never seen anything like this. This secret world has finally been revealed,” said Arthur Cockfield, a law professor and tax expert at Queen’s University in Canada, who reviewed some of the documents during an interview with the CBC. He said the documents remind him of the scene in the movie classic The Wizard of Oz in which “they pull back the curtain and you see the wizard operating this secret machine.”

Click through to ICIJ.org to continue reading.

IMPACT: Pentagon, Congress probe tissue contracts

2012-09-06T12:12:31-04:00

The Pentagon has announced a new program to better oversee human cadaver tissue used in Defense Department hospitals around the world and is investigating allegations that some tissue-based medical implants provided to service members may have been obtained improperly, military officials said Wednesday.

At the same time, Congressional investigators say they are looking into government contracts between the Department of Veterans Affairs and RTI Biologics, a Florida-based manufacturer of medical implants made from human bones, skin, ligaments and other tissues. RTI is one of the world's largest players in the billion-dollar human tissue industry — processing a quarter of all material recovered from cadavers in the United States.

The International Consortium of Investigative Journalists reported in July that RTI had obtained tissues from suppliers in the U.S. and the Ukraine that have been investigated for allegedly forging documents or bullying families into signing donor consent forms.

“We are currently in the process of determining if our Military Treatment Facilities — administered by the Army, Navy, and Air Force respectively — have conducted business with RTI or its subsidiary, Tutogen,” Defense spokeswoman Cynthia Smith said in a prepared statement.

Read the rest at ICIJ.org.

Body brokers leave trail of questions, corruption

2012-07-19T13:06:42-04:00

In April 2003, Robert Ambrosino murdered his ex-fiancée — a 22-year-old aspiring actress — by shooting her in the face with a .45-caliber pistol. Then he turned the gun around and killed himself.

Soon after, Ambrosino’s corpse entered the United States’ vast tissue-donation system, his skin, bones and other body parts destined for use in the manufacture of cutting-edge medical products.

But before they entered the system, Michael Mastromarino, owner of a New Jersey-based tissue recovery firm, needed to solve a couple of problems. He didn’t want to have to report that Ambrosino had perished in a murder-suicide. And he didn’t want anyone to know that Ambrosino’s family hadn’t given permission for his body to be used for tissue donation.

Mastromarino solved both problems the same way: He lied.

Mastromarino was the leader of a now-infamous human tissue trafficking ring that fed an international trade in body parts. Along with tissues from Ambrosino’s corpse, he stole parts from grandmothers, electrical engineers, and factory workers, as well as from the remains of famed journalist Alistair Cooke.

The disgraced dental surgeon from Brooklyn supplied the raw material for products used for a host of surgical operations — from knee repair to plastic surgery and cosmetic implants. He was a ground-level player in an industry that makes its profits by harvesting human tissues mostly from the United States, but also from Slovakia, Estonia, Mexico, and other countries around the world. One of Mastromarino's top buyers was Florida-headquartered RTI Biologics, a processor of American, Canadian and Ukrainian body parts that trades among the high-tech companies on the NASDAQ stock exchange.

Years after Mastromarino was sent to prison and the publicity in his case quieted down, his story has been given new life by a lawsuit filed in a Staten Island courthouse. New York Supreme Court Judge Joseph J. Maltese has given the green light for RTI to stand trial Oct. 22 in a civil case that will delve into what the company knew — or should have known — about Mastromarino’s body snatching.

Countrywide whistleblower chosen for Ridenhour award

BANK OF AMERICA CORPORATION — 2012-07-17T12:12:35-04:00

A former Bank of America executive featured in iWatch News’ investigation of fraud and cover-ups in the mortgage industry has been honored with a national award for truth-telling.

Eileen Foster, the former top mortgage fraud investigator at Countrywide Financial Corp. and Bank of America, was one of the five people honored with Ridenhour Prizes this week. The awards are named in recognition of Ron Ridenhour, a U.S. Army veteran who exposed the 1968 My Lai massacre in Vietnam.
Foster took the opportunity during the awards ceremony at the National Press Club in Washington to call for criminal prosecutions of high-level executives who oversaw the fraud and predatory lending that helped spawn the nation’s foreclosure disaster.

“Here we are, several years after the onset of the financial crisis, caused in large part by reckless lending and risk-taking in major financial institutions and still not one executive has been charged or imprisoned,” Foster said.

If federal prosecutors can’t nail down cases for the original frauds in the banking industry, she said, they should prosecute the cover ups that helped hide these crimes — drawing on the "overwhelming evidence of perjury, witness tampering and obstruction of justice” that can be found in court cases and government documents.

The U.S. Department of Labor ruled last year that Bank of America had improperly fired Foster for leading internal investigations that “revealed widespread and pervasive wire, mail and bank fraud” at Countrywide. It ordered the bank to reinstate her and pay her some $930,000.

Foster, who worked first at Countrywide and then at Bank of America after it acquired Countrywide in 2008, claimed that Countrywide executives covered up fraud and worked to silence whistleblowers who tried to report forged documents, faked data and other illegal activity inside what was once the nation’s largest mortgage lender.

Bank of America is appealing the Labor Department’s decision. The bank claims its decision to fire Foster was “solely based on issues with the employee’s management style and in no way related to the employee’s complaints and the allegations made in the complaint.” It said never retaliates against workers who raise questions about fraud or other problems.

Feds investigating possible fraud at GE’s former subprime unit

WMC Mortgage Corporation — 2012-01-20T11:16:13-05:00

Federal authorities are investigating possible fraud at General Electric Co.’s former subprime mortgage arm amid increased public pressure to hold Wall Street accountable for its role in the financial crisis.

The FBI and the U.S. Justice Department are looking into potentially criminal business practices at Burbank, Calif.-based WMC Mortgage Corp. during the home-loan boom, according to four people with knowledge of the investigation. They declined to be identified because of the sensitivity of the investigation.

The government is asking whether WMC used falsified paperwork, overstated borrowers’ income and other tactics to push through questionable loans, two of the people said. They said the probe appears to be focusing on whether senior managers condoned improper practices that enabled fraudulent loans to be sold to investors.

“It’s mostly about: Did they knowingly sell mortgages into the secondary market that they knew were fraudulent?” said one person with direct knowledge of the investigation.

A spokesman for the FBI declined to comment, and the Justice Department did not return telephone calls.

Russell Wilkerson, a spokesman for GE, said the company “as a matter of practice” cooperates with law enforcement on inquiries but does not comment on specific investigations. However, he said any allegation that WMC sold large numbers of fraudulent loans to investors was false.

GE acquired WMC near the height of the mortgage boom in 2004, giving it a major presence in the growing subprime lending market. But by 2007 the California lender was hemorrhaging money and slicing into the conglomerate’s earnings.

The unit was shut down as the housing market buckled. Since then, investors have launched a string of civil lawsuits, and federal authorities began a criminal inquiry.

The FBI’s San Francisco office indicated that it has been looking into WMC’s business practices for nearly two years, according to one of the people who has knowledge of the investigation. The bureau has examined individual WMC loan files and has begun contacting former employees about how the lender handled the sale of mortgages to investors, this person said.

WMC recorded the second-highest number of foreclosures on higher-risk mortgages in America’s 10 hardest-hit real estate zones, according to the U.S. Treasury Department. The company was second only to now-defunct subprime lender New Century Financial Corp. of Irvine, Calif.

For instance, the Treasury report said WMC’s foreclosure rate topped 40 percent in hard-hit California areas such as Merced, Modesto and Stockton.

The FBI and Justice Department had little success in prosecuting mortgage executives after launching investigations in 2008. But there has been increasing pressure, from groups including labor unions and Occupy Wall Street, to find culprits for the devastating housing crash that triggered the financial crisis.

Subprime lenders have long been in the cross hairs.

They issued hundreds of billions of dollars in mortgages to people with shaky credit, then bundled the loans for sale to investors as highly rated securities. When the borrowers couldn’t pay their mortgages, the investments collapsed — leaving investors and lenders saddled with toxic debt.

Lawsuits in state and federal courts have charged that WMC and GE misled investors and other parties in the sale of mortgages and mortgage-backed securities.

An investor lawsuit in federal court, for example, said that a $550-million pool of mortgages originated by WMC and another subprime lender, EquiFirst Corp., included numerous examples of fraud. The lawsuit said a review found inflated borrower incomes and other “material breaches” in 75 percent of the loan files sampled.

GE said it would “vigorously defend” itself, adding that the complaint is “based upon a flawed statistical sampling of a small number of loans.”

“WMC had in place processes to detect and report fraudulent activity,” Wilkerson, the GE spokesman, said. “When any allegations of misconduct at WMC were raised to GE, they were investigated and given an appropriate response by WMC, including the termination of employees.”

WMC was a wholesale lender that issued loans through a network of independent mortgage brokers, making it a less-familiar name than giant retailers such as Ameriquest Mortgage Co. and Countrywide Financial Corp. Still, in 3½ years under GE’s ownership, WMC issued roughly $110 billion in risky home loans.

Federal prosecutors in Los Angeles have said they investigated three prominent high-risk home lenders in Southern California that melted down — Countrywide, New Century and IndyMac Bancorp — without finding clear evidence that top executives intended to defraud anyone. No criminal charges were filed.

Some settlements have been reached. Countrywide co-founder Angelo R. Mozilo paid $67.5 million — much of it covered by insurance — to resolve an SEC case.

Other executives are contesting the suits. Former IndyMac Chairman Michael W. Perry has even created a blog, nottoobigtofail.org, on which he argues he has been scapegoated with false accusations.

The Justice Department has been successful in only two major criminal investigations into the mortgage crisis. Both ended in guilty pleas to egregious fraud. One, at Taylor, Bean & Whitaker Mortgage Corp. in Florida, included the creation of fictitious loans. The other, at U.S. Mortgage Co. in New Jersey, involved selling the same loans twice — once to credit unions and then to home finance giant Fannie Mae.

Some former WMC employees say sales staffers at the lender used fraudulent practices to push through loans borrowers couldn’t afford.

Eight former employees told iWatch News that WMC managers ignored them when they flagged loans supported by misrepresentations such as fake bank statements and pay stubs.

“They didn’t want to hear what you found,” Gail Roman, who worked as a loan auditor at a WMC office in New York, said. “Even if you had enough documentation to show that there was fraud or questionable activity.”

Some ex-employees claim GE officials did too little to root out fraud at WMC, despite warnings from whistleblowers who worked inside the lender. GE disputes those allegations.

White-collar crime experts say the WMC criminal probe is unusual at this late date — more than four years after subprime lenders began to collapse.

“In that area I haven’t heard boo these days,” said Orange County defense attorney David Wiechert, a former federal prosecutor.

This story was the result of a reporting partnership between iWatch News and the Los Angeles Times. Michael Hudson is a staff writer with iWatch News and E. Scott Reckard is staff writer with the Times.

Hudson’s previous reporting on General Electric’s subprime unit can be found here.

Fraud and folly: The untold story of General Electric’s subprime debacle

WMC Mortgage Corporation — 2012-01-23T20:34:46-05:00

For General Electric Co., hawking subprime mortgages was a long way from making light bulbs and jet engines.

That didn't stop the industrial giant from jumping into the subprime business in 2004, lending blue-chip respectability to the market for risky home loans by paying roughly half a billion dollars to buy California-based WMC Mortgage Corp.

What GE got in the bargain, former WMC employees say, was a place where erstwhile shoe salesmen, ex-strippers and even a former porn actress could sign on as sales reps and make big money pushing home loans. WMC's top salespeople earned a million dollars a year or more and lived fast, swigging $1,000 bottles of Cristal and wheeling around in $100,000 Ferraris and Bentleys.

In pursuit of these riches and perks, several ex-employees claim, many WMC sales staffers embraced fraud as a tool for pushing through loans that borrowers couldn’t afford.

Dave Riedel, a former compliance manager at WMC, says sales reps intent on putting up big numbers used falsified paperwork, bogus income documentation and other tricks to get loans approved and sold off to Wall Street investors.

One WMC official, Riedel claims, went so far as to declare: “Fraud pays.”

How well did GE address WMC’s fraud problems?

GE says it did plenty to deal with the issue. Some ex-employees counter that GE officials didn’t do enough to rein in illicit practices, despite warnings from Riedel and other whistleblowers inside the lender. GE dispatched emissaries to look into the problem, the ex-employees say, but their efforts were too little, too late.

“They sent in people we thought were going to bring us back in the right direction,” Victor Argueta, a former risk analyst at WMC, says. “But it just never happened.”

By 2007, WMC was bleeding bad loans and red ink. General Electric shut the lender and reported related losses totaling more than $1 billion.

‘Everyone knew’

How could General Electric — a corporate icon voted America’s most admired company in 2006 and 2007 — have stumbled so badly?

The story of GE’s subprime misadventure has earned little attention from news media or public officials amid headlines about bank failures and mega-bailouts at other big companies. But now, with the aftershocks still being felt by GE and by WMC's borrowers, lawsuits and former employees have begun to shed light on what happened and why.

It’s a tale of a 134-year-old industrial concern that’s transformed itself into a financial services juggernaut. It’s also a story about breakdowns in corporate compliance systems amid the chase to cash in on the latest innovations in high and low finance.

In interviews with iWatch News, eight former WMC employees claim WMC’s management ignored them when they reported loans supported by falsified documents, inflated incomes or other legerdemain. Two of them say they were transferred and demoted because they pressed too hard to expose corrupt practices.

Riedel, who worked as quality-control manager for the lender’s largest production division, claims that after he informed a GE official about fraud inside the lender, WMC’s management demoted him — reorganizing him out of his job, taking away his office and his staff and forcing him to sit at a desk for months without a job title.

“I didn’t have any files,” Riedel told iWatch News during a series of interviews. “I basically stared out a window.”

Two other former WMC employees confirm Riedel’s account of his transfer. “Everyone knew,” Argueta, the former risk analyst, says. “We all knew why he’d been moved to our section, from a nice comfy office out to the cubicles.”

General Electric didn’t answer questions from iWatch News about the accounts provided by Riedel and other ex-employees. It also declined to provide detailed answers to a series of questions about how much it knew about alleged fraud at the Burbank, Calif.-based lender and what steps it took to deal with it.

In a written statement, GE says that “following its acquisition by GE, WMC strengthened and expanded its compliance programs and standards. WMC held people to those standards. In those instances where WMC learned of violations of these standards, management took disciplinary action, including terminations of employment.”

‘All kinds of crazy loans’

WMC made a name for itself long before GE came courting.

Founded in 1955, it had been known for much of its life as Weyerhaeuser Mortgage, a subsidiary of the pulp and paper giant Weyerhaeuser Co.

By the late 1990s it had a new owner — billionaire financier Leon Black’s Apollo Management LP — and it had moved into the subprime game, spurring production by rolling out a “Race to the Top” program that gave top sales performers the use of Porsche Boxsters.

The push to book mortgage deals produced a rash of bad loans around the country. WMC claimed it had been victimized by on-the-ground fraudsters who’d used bogus appraisals and other deceits to get mortgages approved.

In Minnesota’s Twin Cities, however, so many WMC loans ended up in or near foreclosure that a local newspaper, the Star Tribune, suggested WMC had “self-inflicted some of its wounds by pushing too hard and fast” to sell loans. An assistant state attorney general told the paper that the company simply didn't do "some of that due diligence” needed to ensure loan deals made sense.

“I have never seen a company that has been this aggressive,” one mortgage broker told the Star Tribune. “They were doing all kinds of crazy loans. They were doing anything they could do to push these deals through.”

Questions about WMC’s lending tactics were also raised by an academic study that looked at a pool of 5,610 loans the company had made around the country in 1998. By December 1999 almost 25 percent of the loans were facing foreclosure or were seriously delinquent — more than five times the rate for loans originated by other major subprime lenders, the study found.

GE, meet WMC

Despite these problems, WMC’s aggressive sales culture helped it survive and grow.

One of the forces behind its resurgence was Amy Brandt, who had gone from practicing law to peddling mortgages for WMC, quickly rising to become WMC’s No. 1 salesperson and then executive vice president of production. When she joined the executive team in 2000, she later told a business magazine, the company was on the verge of bankruptcy, and she helped lead what was, in her words, an “unbelievable turnaround story.”

By the end of 2003, Brandt was WMC’s president and chief operating officer, and the lender was producing $8 billion a year in subprime home loans and boasting profits of $140 million a year. It had also attracted the interest of General Electric, which was looking to grow in what, since 2001, had been a slow-moving economy.

“We’re going to have to turn up the engines to drive growth,” GE’s chairman, Jeffrey Immelt, told a TV interviewer in late 2003, explaining his company’s overall growth strategy. “The economy is not going to give you much, so what do you do?”

One of the things General Electric did was to seek profits in a home loan market that was rapidly heating up.

The big deal was announced in April 2004.

General Electric has never publicly disclosed the purchase price, but Apollo later revealed in securities filings that GE paid nearly $500 million for WMC, providing a nice profit for Black’s firm, which had paid less than $200 million for the lender seven years before.

GE asked Amy Brandt to stay on. She added CEO to her title. Internal documents obtained by iWatch News indicate GE promised the 31-year-old executive as much as $20 million in compensation over three years — including a $10 million upfront bonus at the closing of the deal.

General Electric declined to answer questions from iWatch News about the acquisition. It won’t say how much scrutiny it gave the lender before it closed the deal, or whether it was aware of WMC’s earlier fraud problems.

GE officials made it clear at the time that their regard for Brandt played a role in the company’s decision to buy WMC. “A big part of us doing the acquisition was Amy, no question about it,” a top GE executive told American Banker.

Immelt and other GE honchos thought so much of what Brandt had done with WMC, Businessweek later noted, they invited her to talk before the parent company’s top 600 executives at its annual leadership summit in Boca Raton, Fla.

As she left the stage, Immelt gave her a high five.

Tricks of the trade

Dave Riedel started at WMC soon after General Electric took over.

Riedel had experience in the banking industry as a real-estate appraiser, loan underwriter and, most recently, mortgage fraud investigations manager at Washington Mutual Bank. At WaMu, he claims, higher ups had told him to keep quiet when he’d tried to warn them about fraud-tainted loans streaming into the company’s mortgage pipeline.

With General Electric in charge, Riedel thought things would be different at WMC. He thought he’d get a chance to do his job and, he says, “catch the bad guys.”

He supervised a quality-control team of a dozen or more people who watched over WMC’s lending in a broad area of Southern California where salespeople were pushing subprime loans as well as “Alt-A” mortgages, another type of risky home loan.

The team, Riedel says, found many examples of fraud committed by in-house staffers or the independent mortgage brokers who helped bring in customers to the lender. These included faking proofs of loan applicants’ employment and faking verifications that would-be home buyers had been faithfully paying rent for years rather than, say, living with their parents.

Some employees also fabricated borrowers’ incomes by creating bogus W-2 tax forms, he says. Some, he says, did it old-school, cutting and pasting numbers from one photocopy to another. Others, he says, had software on their computers that allowed them to create W-2s from scratch.

‘Branded as a whistleblower’

In 2005, Riedel’s team became concerned about a sales manager who oversaw the funding of hundreds of loans a month. An audit of these loans, Riedel says, found that many of the deals showed evidence of fraud or other defects such as missing documents.

This wasn’t enough to get the sales manager fired. At most, Riedel says, the guy got a stern lecture.

“He became a little more shy. He wasn’t so flamboyant,” Riedel says. “But nothing changed.”

Later, during a sit down with a visiting GE compliance official, Riedel recalls, he described the audit and the response.

Over the next few days, Riedel claims, his career was thrown into tumult.

He says a WMC official countered by telling the GE representative that Riedel didn’t know what he was talking about and that the company had already been planning to demote him.

Riedel was stripped of his title, he says, and idled for months with no assignments and no staff.

A former WMC executive, who spoke on the condition of anonymity, says the fact that GE knew about Riedel’s concerns about fraud may have prevented WMC officials from firing him, but it didn’t stop them from putting him into corporate limbo.

“He was kind of branded as a whistleblower and not a team player,” the former executive says. “They didn’t exactly fire him. They just marginalized him and he didn’t really have anything to do.”

‘Business as usual’

While Dave Riedel was fighting battles inside WMC’s California headquarters, Gail Roman was losing battles on the other side of the country.

Roman worked as a loan auditor at WMC’s regional offices in Orangeburg, N.Y. She and other colleagues in quality control, she says, dug up persuasive evidence of inflated borrower incomes and other deceptions on loan applications.

It did little good. Management ignored their reports and approved the loans anyway, she says.

“They didn’t want to hear what you found,” Roman told iWatch News. “Even if you had enough documentation to show that there was fraud or questionable activity.”

If GE made any progress against fraud at WMC, Roman says, she didn’t notice it. Fraud was as bad at WMC in 2006 as it was when she started at the lender in 2004, she says.

“I didn’t really see much of a change,” Roman says.

Victor Argueta, the former risk analyst, says he didn’t see much change either.

Meetings would be held. Executives from GE would agree fraud was a problem and something needed to be done. “But the next month it was business as usual,” Argueta says.

Argueta was barely a year out of college, with an undergraduate economics degree from the University of Southern California, when he started at the lender in 2004. What he encountered, he recalls, wasn’t what he had expected to find at a branch of a top-flight Fortune 500 corporation.

Twenty-something salespeople with little education or mortgage experience ran the show, he says. They pulled in $250,000 to $350,000 a year while sales managers made $1 million or $2 million, thanks to generous production bonuses and the network of independent mortgage brokers that fed the lender business.

“We had ex-strippers working there,” Argueta says. “The whole point was to have someone attractive to talk to the brokers. One of the salespeople did porn before she worked there. When someone told me that, I couldn’t believe it. Then I saw the video and I realized it was true.”

Argueta says one top sales staffer escaped punishment even though it was common knowledge he was using his computer to create fake documents to bolster applicants’ chances of getting approved.

“Bank statements, W-2s, you name it, pretty much anything that goes into a file,” Argueta says. “Anything to make the loan look better than what was the real story.”

In one instance, Argueta says, he sniffed out salespeople who were putting down fake jobs on borrowers’ loan applications — even listing their own cell phone numbers so they could pose as the borrowers’ supervisors and “confirm” that the borrowers were working at the made-up employers.

Management gave him a pat on the back for pointing out the problem, he says, but did nothing about the salespeople he accused of using devious methods to make borrowers appear gainfully employed.

Nightmare loans

Roman and Argueta weren’t alone in their concerns, according to other ex-employees who spoke on the condition they remain anonymous, because they still work in banking and fear being blackballed within the industry.

“It was ugly,” one former fraud investigator at WMC recalls. “I would have nightmares about some of the things I’d find in a file. I’d wake up in the middle of the night going, ‘Oh my God, how did this happen?’ ”

A former manager who worked for WMC in California claims that company officials transferred and essentially demoted her after she complained about fraud, including the handiwork of a sales rep who used an X-Acto knife to create bogus documents, cutting numbers from one piece of paper and pasting them onto another, then running the mock-up through a photocopier.

“They knew I had a lot of crap on them and I wasn’t going to shut up,” she says. “And the easiest way was to pay me off. Create a job where I could just sit and collect my money.”

Both Riedel and another former WMC employee confirm the woman’s account.

Two other ex-employees say that, in their experience, WMC managers didn’t condone fraud. When he identified fraud-tainted loans, one of the two recalls, his managers killed them.

Both add, though, that the lender did push loans that were likely to land borrowers in trouble in the long run. The desire to keep sales numbers growing often trumped good judgment, the other ex-employee recalls. “It was like hitting your head against a brick wall, trying to make sure the right thing was done,” she says.

‘Fraud pays’

By early 2006, Dave Riedel had begun to rebuild his career inside WMC.

He helped put together a presentation in May 2006 aimed at giving GE officials a sense of how serious WMC’s fraud problems were. Riedel says an audit of soured loans that investors had asked WMC to repurchase indicated that 78 percent of them had been fraudulent; nearly four out of five of the loan applications backing these mortgages had contained misrepresentations about borrowers’ incomes or employment.

Riedel also helped work on a computer program designed to dig out fraud across the company’s loan portfolio. It sifted through a swarm of data, including evidence that many borrowers submitted multiple applications with income figures that mysteriously grew from one application to the next. Then it spit out a fraud alert flagging applications that appeared to have false information.

Riedel hoped that the company would use the data-tracking program on a real-time, wide-scale basis, he says.

It was at a meeting about the computer program, Riedel says, that an executive declared “fraud pays” — explaining that it didn’t make sense to slow the gush of loans going through the company’s pipeline, because losses due to fraud were small compared to the money the lender was making from selling huge volumes of loans.

The anti-fraud algorithm was never put into regular use, Riedel says.

Final days

In October 2006, Dave Riedel changed his computer password to “finaldays107!” — reflecting his expectation the company would be out of business by October 2007 (10-7).

As home values were starting to fall and subprime loan defaults were starting to rise across the industry in late 2006, Amy Brandt stepped down as WMC’s top executive. She told a trade publication that her contract with GE was ending and, rather than re-enlist, it was time for her “to move on.”

“This was really my baby, and I wanted to wrap up this era because I really love the company,” Brandt explained.

By the spring of 2007, problems in the subprime mortgage market had grown more serious. Borrower defaults and investor alarm had spun the mortgage industry into chaos. In the first half of the year, WMC lost more than a half-billion dollars.

GE officials blamed the mortgage market’s swoon for WMC’s problems. In mid-July, GE revealed it had entered what its chairman, Immelt, described as an “active exit process.” Immelt told investors his company decided to end its three-year subprime experiment because “we just had too many other better choices. And I just think we wanted to get this off the table vis-a-vis the things that investors have to think about with GE.”

Along with taking an immediate hit to its balance sheet, GE also set aside hundreds of millions of dollars to cover investors’ demands that it buy back defective WMC loans.

By October 2007 — as Riedel had predicted — WMC Mortgage was effectively out of business, dead after having pumped out roughly $110 billion in subprime and “Alt-A” loans under GE’s watch, according to industry data tracker Inside Mortgage Finance.

‘Living it up’

And Amy Brandt?

She was “living it up,” at least according to Businessweek.

WMC’s former CEO had a 30-acre ranch outside Los Angeles where she kept a dozen horses. She’d used some of the millions she’d earned at the lender, the magazine said, to start an independent record label, YMA Music Group, which signed such artists as former Limp Bizkit guitarist Wes Borland. She’d also become CEO of Vantium Capital, a private equity fund that planned to make money off distressed mortgages.

Brandt told Businessweek that, looking back, she wished she’d done more to diversify the kinds of loans WMC made.

“We were too aggressive in some areas,” she said.

Others agreed that WMC had been too aggressive in its lending practices.

A study by federal regulators, “Worst Ten in the Worst Ten,” found WMC’s loans accounted for the second-highest number of foreclosures on subprime and “Alt-A” mortgages in the nation’s 10 hardest-hit foreclosure hotspots, trailing only New Century Financial.

In the Fort Pierce-Port St. Lucie area in Florida, for example, 47 percent of the loans WMC booked from 2005 through 2007 had ended up in foreclosure as of late 2009, the study found.

Washington State banking regulators accused WMC, Brandt and two other WMC executives of “deceptive and unfair practices.” The regulators claimed the lender failed to make sure all borrowers received legally required disclosures, including paperwork that reported how much they would be paying on their loans.

WMC reached a consent order with the agency that included modest cash payments to a few borrowers. It didn’t acknowledge wrongdoing.

Brandt told iWatch News she couldn’t comment on the state regulators’ allegations or answer other questions about her time at the lender.

One former employee, who spoke on the condition her name not be used, says she believes Brandt “was so far removed from daily operations that she probably didn’t know” how bad fraud was inside the company.

‘Stunning failure rate’

Mortgage investors also are taking a closer look at WMC’s practices.

A review of a $550 million pool of mortgages booked by WMC and another subprime lender, EquiFirst, found inflated borrower incomes, missing documents and other “material breaches” in 150 loan files out of a sample of 200 — a “stunning 75 percent failure rate,” according to an investor lawsuit filed in September in federal court in Minnesota.

One of the defective WMC loans, the suit claims, was supported by paperwork that said the borrower earned almost $180,000 a year doing “account analysis.” The borrower’s tax returns, the suit says, showed he actually made less than $20,000 per year driving a taxi.

GE told iWatch News that it will “vigorously defend” itself against the lawsuit. It says the suit’s claims are “based upon a flawed statistical sampling of a small number of loans.”

The Federal Housing Finance Agency, meanwhile, charges that General Electric misled investors in the sale of hundreds of millions of dollars in securities backed by WMC mortgages.

The agency’s lawsuit claims GE didn’t tell the truth about how well WMC followed its loan underwriting guidelines, or about how much borrowers owed on their homes or whether they intended to live in them or use them as investment properties.

GE denies the allegations, and insists that Freddie Mac, which invested in the securities, made out well on the deals.

On the record

Dave Riedel no longer reads the financial news. When someone brings up the mortgage crisis at a party, offering opinions about what happened and why, he keeps his mouth shut. Talking about it makes his blood pressure rise.

After WMC closed, he spent almost two years looking for work before he found a sales job outside the banking industry. Nobody in the banking business was interested in hiring him.

Of the 40 best fraud investigators he knows, Riedel estimates that maybe four of them still have jobs in banking. Meanwhile, he says, bureaucrats without the talent or temperament for fighting corruption have snapped up choice fraud-control jobs at many big banks.

Despite his desire to put his mortgage days behind him, he says he felt an obligation, when iWatch News contacted him, to tell what he knew.

Later, he had second thoughts, worrying there might be blowback against him for talking about what happened inside WMC and GE, even if he stuck to facts rather than opinion. He asked his comments be put “off the record.” When he was told it wasn’t possible to go off the record after the fact, he made peace with going public.

“I have an ethical problem with covering things up,” Riedel says.

Given a chance, he adds, he’d be willing to talk to the FBI about what he uncovered during his time at WMC.

The feds should be turning over rocks, he believes, across the mortgage industry. People who committed or condoned fraud and helped crash the economy, he says, need to be held accountable.

“I can’t tell you who broke the law and who should or shouldn’t go to jail,” he says. “But I can tell you that these people should have to answer to somebody about what happened.”

Woman says GE-owned subprime lender deceived, defrauded her

West Virginia,United States — 2012-01-06T07:08:30-05:00

Sheila Timmons, a single mother of two from a West Virginia coal town, is fighting a legal battle against General Electric Co., one of America’s most powerful corporations.

How this happened is a story about the dream of home ownership and, Timmons claims in a lawsuit, corporate fraud.

It began one day in 1998 when she had a talk with her youngest son, Travis. He was 7 at the time.

“My baby says, ‘Mom, I want a house with a triangle roof,’” Timmons recalls. “We lived in a trailer park at the time.”

She took out a loan and paid $28,000 for a small home in Gallagher, a former coal camp where she grew up. The simple, coal company-built house — known in West Virginia’s coalfields as a “Jenny Lind” home — didn’t have much insulation. The bathroom ceiling was falling in and windows needed replacing. But it was home for Timmons and her boys and she was willing to get her hands dirty and fix up the place, doing the rehab work herself.

By 2006, she says, she decided she needed money to continue her renovations.

“I wasn’t desperate, but I was in need,” Timmons recalls.

She talked to a mortgage broker about refinancing her mortgage and pulling some cash out to make repairs and pay some debts. According to a lawsuit Timmons later filed in Kanawha County Circuit Court, she told the broker she wanted a fixed-rate loan that would roll her property insurance and taxes into her monthly payments.

She claims the broker promised her a loan with $622-a-month payment that would be fixed for two years, after which, the broker said, she could refinance and keep a fixed rate.

The appraisal was done by a West Virginia-based real-estate appraiser named Mark Greenlee. He put the value of the home at $75,000 — a figure that was double the actual market value at the time, Timmons’ lawsuit claims.

When she closed on the refinancing in November 2006, Timmons’ suit says, she didn’t receive a federally required ”settlement statement” that laid out the costs and details of her loan.

The $67,500 loan was funded by WMC Mortgage Corp., a subsidiary of General Electric since 2004.

GE shuttered WMC in 2007, but before it did, the lender booked more than $100 billion dollars in risky home loans under GE ownership. Many of them ended up going bad. One $319 million pool of mortgages funded by WMC in 2005, for example, would later show a 44 percent delinquency rate, according to a lawsuit filed against GE by federal regulators.

Timmons says she dealt with the broker and wasn’t aware that her lender was owned by the industrial giant that had made her clock radio and electric hand mixer.

About a year after Timmons signed up for her WMC loan, her suit claims, she was surprised to learn that the loan paperwork hadn’t required that money be put in escrow to cover taxes and insurance. Her loan servicer informed her that, in order to roll in the costs for insurance and taxes, her mortgage payments would have to increase to $800 a month, Timmons says.

“That was just not manageable. That was out of the question,” says Timmons, who earns about $38,000 a year working for a nonprofit agency in Charleston.

Unable to keep up with her payments, and facing the possibility of foreclosure, Timmons sought help from Mountain State Justice, a legal-aid clinic.

The suit filed by the legal clinic claims WMC engaged in a pattern of deception and predatory lending designed to land borrowers into exploitive and unfair loans. It charges that WMC “intentionally employed an appraiser to misrepresent the market value” of Timmons’ home in order to induce her into taking out the new loan.

“In West Virginia, we have so many people of modest means who own their own property,” Timmons’ lawyer, Bren Pomponio, says. In the “gold rush of the subprime explosion,” he says, many lenders used inflated appraisals to “suck them into exploitive loans” by leading them to believe their homes where worth more than they were.

A General Electric spokesman says the company denies Timmons’ allegations, but pointed to court documents for elaboration.

In court records, lawyers for WMC say Timmons received all the proper disclosures in the loan transaction. They add that any damages she may have suffered were caused by Simmons’ own actions or by others; “no part" of her alleged damages were caused by WMC, the lawyers say.

The appraiser on the deal, Mark Greenlee, pleaded guilty in September to a criminal fraud charge involving an unrelated case. Federal prosecutors said Greenlee admitted he had “prepared a false and fraudulent appraisal” in 2006 in support of a multimillion-dollar mortgage fraud scheme at a subdivision in Hurricane, W.Va.

Simmons’ own legal battle has been going on since 2008. She’d like to put it out of her mind. But she can’t.

“This has been going on for a while. It’s just a like a cloud that hangs constant,” she says. “It’s not something you can just forget.”

Ex-WaMu worker claims he was shunned for refusing to push toxic loans on borrowers

Washington Mutual, Inc. — 2012-09-30T15:20:41-04:00

In the case of the salesman who wouldn’t sell, the two sides have starkly different tales to tell.

Greg Saffer says conscience and common sense prevented him from pushing the product his bosses wanted him to sell — “Option ARM” home loans that, he says, put homeowners at risk.

“I’m not going to steer people into a loan program that might not be good for them just because it’s more profitable for the company,” he says.

JP Morgan Chase Bank counters that Saffer didn’t sell because he didn’t have the chops to close deals.

“Rather than a paragon of virtue, Saffer was simply a guy who could not sell loans in an increasingly tough market,” the bank’s lawyers say in legal papers.

JP Morgan is matched against Saffer because it bought Saffer’s ex-employer, Seattle-based Washington Mutual Bank, in September 2008, after regulators seized WaMu in what was the largest bank failure in U.S. history.

Saffer charged in a lawsuit filed in 2009 in Los Angeles Superior Court that he was forced out of his job for refusing to take part in “fraudulent schemes.” In testimony in the lawsuit and in documents in arbitration proceedings, he claims WaMu retaliated against him because he refused to push “toxic” Option ARMs and mislead borrowers about how the loans worked and how much they would cost.

A judge ordered the case into arbitration last year. It could be months before an arbitrator rules on whether Saffer’s claims are valid.

Saffer’s case is notable because, as a salesman, his job description was different from most of the ex-employees who’ve made whistleblower claims against mortgage lenders. Many were fraud investigators or loan underwriters who claim they were punished for uncovering fraud by sales reps and sales executives.

Saffer’s legal claims paint him as one of what may have been a distinct minority among the mortgage industry’s sales corps during the nation’s home-loan frenzy – a salesman who said no to the dirty tactics that became pervasive during the boom. Former industry insiders say salespeople who refused to go along were often weeded out, to make way for others who had a more pliable sense of right and wrong.

Saffer’s attorney, Carney Shegerian, represents two other former WaMu sales reps who, like Saffer, claim that WaMu fired them because they resisted pressure to engage in improper lending tactics. Their case has also been ordered into arbitration.

Shegerian says his clients not only lost their jobs because they refused to go along with the practices at the bank, “their good names were totally soiled for having been employed by WaMu.”

‘Flagship loan’

Greg Saffer put in several years as a high-earning salesman at a smaller lender in Los Angeles, Citizens Mortgage, before he took a job in mid-2007 as a mortgage sales rep at a Washington Mutual office in Ladera Ranch, Calif.

WaMu, the nation’s largest savings and loan, was putting up big numbers peddling exotic home-loan products that, just a few years before, had been on the margins of the mortgage industry.

These included subprime mortgages designed for borrowers with weak credit as well as “payment-option” adjustable-rate mortgages generally targeted at borrowers with good credit.

Option ARMs allowed borrowers to make minimum payments that didn’t keep pace with interest charges on their loans. In other words, loan balances would grow rather than drop as each month ticked by. It’s known as a negative amortization loan, or “NegAm” in industry parlance.

Option ARMs accounted for roughly half of Washington Mutual’s home-loan production during the mortgage boom years, according to federal regulators.

WaMu chief executive Kerry Killinger touted Option ARMs as the bank’s “flagship product.”

It was no wonder.

WaMu earned more than five times as much on Option ARMs as it did on fixed-rate home loans, according to internal company documents. Mortgage investors on Wall Street loved them because their growing loan balances and escalating interest rates translated into big returns.

Payment shock

Whether they were good for borrowers was another question.

As early as 2006, BusinessWeek had called them “Nightmare Mortgages,” declaring they “might be the riskiest and most complicated home loan product ever created.”

Saffer says he thought Option ARMs were dangerous for most customers. That’s because once negative amortization pushed loan balances too high, the loans would automatically readjust and monthly payments would soar.

This “payment shock,” he knew, was likely to drive many into default.

Borrowers had the option of making larger monthly payments that would cover interest and pay down their balances, but Saffer says not many could afford to do that, because their loans had been underwritten based only on whether they could afford the minimum payment.

He refused to put together NegAm loans for borrowers, he says.

That didn’t leave him many other products he could sell. Washington Mutual purposely priced traditional 30-year fixed-rate mortgages higher than what other lenders were charging, Saffer testified.

Why?

His boss, a WaMu vice president named Mark Stockton, told him it was because fixed-rate loans weren’t profitable enough and WaMu wanted to steer borrowers into NegAm loans, according to Saffer’s testimony during the L.A. Superior Court proceedings, before the case was moved to arbitration.

Stockton, Saffer testified, told him Option ARMs were the way to go “if you want to make some serious money....This is the loan that I want you to pitch.”

In his testimony in the case, Stockton denied ever talking to Saffer about which loan programs were most profitable and which weren’t.

‘Unfounded accusations’

Saffer also testified that Stockton instructed him not to give borrowers the full story on how Option ARMs worked, to emphasize the low minimum payments but not to mention that their loan balances would increase if they paid only the minimum option. And to make sure borrowers qualified for these loans, Saffer testified, Stockton encouraged him to help them overstate their incomes on their mortgage applications.

When he expressed qualms about the ethics of pushing Option ARMs, Saffer testified, Stockton told him: “Greg, we’re about profit and profit only.” Stockton told him to “get with the program” and start selling Option ARMs, or he might be out of a job, Saffer testified.

In an interview, Saffer softened his assertions about Stockton by noting that higher-ups set the agenda and chose Option ARMs as WaMu’s flagship loan.

“I believe he was getting pressure from his upper management. The pressure just trickled down from the top,” Saffer says. “Mark Stockton didn’t invent this loan. I believe he was getting it probably as bad as I was getting it.”

In response to questions from iWatch News, Stockton said he would have “no comment regarding these unfounded accusations.”

Stockton testified that Saffer and other loan officers were never told to coach borrowers about how much income they should state on their loan applications. He added that loan officers were “thoroughly trained” on how to explain to borrowers what negative amortization was and how Option ARMs worked.

Subprime time

Option ARMs weren’t the only loan product that Saffer says concerned him.

Even as the subprime loan defaults were spiking and subprime lenders were going out of business in late 2007, WaMu was pushing its sales force to peddle subprime mortgages, Saffer claims in a written declaration in the arbitration proceedings. An in-house trainer instructed salespeople to target “lower income areas” with “less sophisticated” borrowers for deals that would strip the equity out of their homes, the declaration says.

“Do not feel sorry for these people,” the trainer said, according to Saffer’s declaration.

Stockton testified that Saffer and other loan officers working under him were never encouraged to sell subprime loans.

Staying clear of subprime and payment-option loans, Saffer says he focused on marketing home equity lines of credit. He says he thought they made sense for many borrowers; they carried no closing costs, the interest rates tracked the prime rate and borrowers wouldn’t have to refinance their existing mortgages to get a little more cash out of their homes.

He understood equity lines didn’t make a lot of money for the bank, but he says he was trying to operate as he had at his previous stops in the mortgage business, building a clientele for the long haul rather than making a quick score.

“I’m not a flash in the pan, make-all-your-money-now kind of guy,” he says. “To me, business is a long-term thing.”

His refusal to push riskier home loans soured his relationship with Stockton, Saffer testified.

They had gotten along well at first, but eventually Stockton did “a complete 180,” Saffer testified, either ignoring him in the office and not returning his calls or, when they did talk, showing him “nothing but animosity.”

Stockton testified that this wasn’t so. While he did raise concerns about Saffer’s production, he said, their relationship was never strained.

Saffer resigned Jan. 4, 2008. Given all that had happened, Saffer says in legal documents, he “had no other option” but to leave.

Defending WaMu

Saffer’s legal adversary, JP Morgan, has worked to portray itself as less culpable than other big banks in the questionable practices that helped crash the U.S. economy.

Its purchase of WaMu has put JP Morgan, however, in a position of having to decide whether to stand behind the practices of a bank that’s been harshly criticized by investigators, regulators and investors.

In Saffer’s case, JP Morgan has heartily defended WaMu’s practices. Its lawyers write that the WaMu’s Option ARMs weren’t toxic products. They “complied with all disclosure laws and regulations” and provided “very flexible” terms that allowed borrowers to change their payment levels from month to month, the lawyers say.

Others hold a darker view of WaMu’s Option ARMs.

Federal regulators say the consequences of WaMu executives’ drive to sell Option ARMs include huge numbers of homeowners facing foreclosure and ruin. One $600 million pool of Option ARMs that WaMu created in 2007, for example, had a 60 percent delinquency rate by the start of last year.

In a lawsuit against former CEO Killinger and two other former senior executives, the FDIC charged that WaMu sold Option ARMs “widely and indiscriminately,” using sales tactics that enticed marginal borrowers into deals they often couldn’t afford. The executives have admitted no wrongdoing.

Media reports last week said the trio and their insurers have agreed to settle the suit for a payout in the $60 million to $70 million range, a fraction of the $900 million the agency had sought.

‘Nice conservative bank’

Along with defending WaMu’s Option ARMs, JP Morgan’s lawyers also take issue with Saffer’s assertion that working conditions had become so intolerable he had to resign.

Things weren’t so bad for him, they say, noting, for example, that “Saffer admits that no physical altercations ever took place between him and Stockton.”

Saffer replies that a lack of physical violence hardly qualifies a workplace as model employer.

Saffer is now his own boss. His company arranges “reverse mortgages” for elderly homeowners who want to tap their equity without putting their homes at risk.

He says he’s glad to be working at a job where he can follow his principles, not the dictates of Washington Mutual executives who were, in his view, intent on peddling unsafe products.

“I never would have thought this nice conservative bank from Washington State would have this boiler room, mill mentality,” Saffer says. “I never would have thought that in a million years."

Management gurus claim they were blindsided by toxic culture at Countrywide

Countrywide Financial Corporation — 2011-12-13T06:12:01-05:00

On her first day at Countrywide Financial Corp., Cynder Niemela gave a talk to a gathering of her new colleagues. Every company, she said, has its own culture. Each is a tribe with its own rituals and myths.

Niemela, a management guru who’d worked for Boeing and other big employers, told the group of executives that research showed it took 16 months for a worker to become fully part of a corporate “tribe.” That time would allow her, she added, to offer a fresh perspective on how things were done at Countrywide.

Afterwards, she recalls, one of her new colleagues introduced himself and, with a knowing smile, said, “I can’t wait to see if you’re here 16 months from now.”

She lasted 16 months, but not much longer.

Countrywide fired her, Niemela claimed, after she raised questions about fraud against customers and employee discontent with top management.

The last straw, she alleged in an arbitration claim, came after she complained that higher-ups had revised and distorted one of her PowerPoint presentations in an effort to obscure the company’s problems with employee dissatisfaction and turnover.

Niemela’s account of her struggles at Countrywide provides another perspective on the culture inside what was once the nation’s largest home lender.

Many other ex-employees who claimed they were mistreated by the company were mid- and low-level workers who worked deep inside Countrywide’s mortgage-lending machine. Niemela, by contrast, was a high-level tactician who dealt with the big picture of how Countrywide treated its employees and what that said about the company’s culture.

She was among a group of management experts brought in to help the company as it grew in a period of a few years from 11,000 employees to 55,000, with a goal of reaching 100,000 by 2010.

What they encountered was like nothing they’d seen before in corporate America, according to Niemela and three other former Countrywide management experts interviewed by iWatch News.

They found, they say, a toxic culture ruled by fear and top-down intimidation.

“Every organization has a culture, some more healthy than others,” Niemela says. “Countrywide had a very unhealthy culture.”

Niemela sued Countrywide in state court in Los Angeles in 2007, asking for reinstatement and lost pay. A judge later ordered the case into private arbitration.

Last week, Niemela and Bank of America, which bought Countrywide in 2008, reached a confidential settlement of her claims. All Niemela’s interviews with iWatch News took place before the settlement was reached.

As the case was being argued, Bank of America denied that Countrywide officials mistreated Niemela.

The bank’s lawyers hit hard against Niemela in legal documents, saying that “her interpretation of events is severely skewed.” The lawyers claimed that Niemela was fired after colleagues complained she’d “badmouthed the company” and that she was “angry, critical and difficult to work with.”

‘Not a dictator’

Former Countrywide chief executive Angelo Mozilo and other former company officials, meanwhile, have disputed allegations that senior management bullied employees.

“I always regarded myself as a CEO, not a dictator,” Mozilo testified earlier this year during a civil trial involving another Countrywide executive’s wrongful dismissal claim. “I think the jury will note that I'm a pretty frank person — straightforward, I say what I believe. But I'm also willing to listen.”

“Countrywide was about people,” Mozilo testified. “Obviously, without quality people you can't have a quality company.”

In the end, the jury in that case awarded Countrywide’s former chief leadership officer, Michael Winston, a $3.8 million verdict, upholding his claims that Mozilo and other senior officials had punished him for standing up against management misconduct.

Winston charged that he’d been retaliated against for reporting an environmental hazard that had sickened workers inside a Countrywide office complex, and for refusing to falsify a report about the lender’s corporate governance practices.

Winston says he and Niemela and other organizational change specialists clashed with a culture in which breaking the rules “was more than okay. It was incentivized.” Winston claims they were punished for speaking up about bad management practices, just as lower-level employees were harassed for reporting fraudulent lending practices.

Bank of America has appealed the jury’s decision. A spokeswoman said the verdict was “not supported by any evidence.”

‘We all know’

Niemela has worked more than 20 years as an executive coach and management consultant. She was featured in a 2000 Fortune article about executive coaches and, in 2001, published a book, “Leading High Impact Teams: The Coach Approach to Peak Performance.”

In 2005, Countrywide recruited Niemela away from Boeing, hiring her as a first vice president in the company’s human resources department.

She’d never worked in a financial company before. She got a first-hand lesson, she says, in how her new employer did business when she took out a Countrywide mortgage to purchase a new home and move her family from the San Francisco Bay area to Los Angeles.

When she sat down at the closing table, she says, she got a nasty surprise: She discovered the loan, among other unappealing features, carried a “pre-payment penalty,” meaning that she’d have to pay thousands of dollars extra if she tried to refinance within seven years. Even the worst subprime loans generally carried an early payment penalty of no longer than three years, say fair-lending advocates.

She had no choice but to sign the papers, she says, because her relocation package required that she use a Countrywide loan to buy her house. If she didn’t, she stood to lose some $50,000 in relocation money.

She did complain to an executive in the company’s risk-management unit. He listened to her story, she says, and then said nonchalantly, “Yes, we all know. We screw our employees.”

‘Mozilo was God’

While Niemela was beginning to wonder about how things were done at Countrywide, other management gurus were growing more concerned about how the company was managed.

One of them was Dave Sullivan, an executive vice president and co-author of a book on bad management, “Why Leaders Fail.” Sullivan told iWatch News that Countrywide was “definitely the most top-down company I’ve ever seen. Mozilo was God. Whatever he said went.”

Another management specialist, Sharon Doyle, likened many Countywide executives to “bullies in the schoolyard.”

Doyle says these executives saw the management experts as “very dangerous. We were enlightening people. Ideas are very powerful things, and they didn’t want anything to change.”

The main organizing principle at the company, Doyle says, was “rule by fear and manipulation.”

As Niemela immersed herself in the culture and talked to her colleagues, she says, some executives were frank about how things were run, telling her: “Angelo makes every decision. We really are not empowered to make decisions. Angelo signs every expense report. He micro-manages us.”

Many employees, Niemela adds, had been infuriated by a 2005 New York Times profile of Mozilo in which the CEO suggested that the size of workers’ cubicles didn’t matter, because “whether it's smaller or larger, they adapt, like fish to a fish tank.”

‘A reckoning’

By 2005, Countrywide’s “voluntary turnover” rate had reached 31 percent, meaning that almost one in three employees chose to leave the company that year. Within its mortgage sales force, turnover was 45 percent.

Niemela spent months working to design a survey aimed at figuring out why the company’s turnover rate was so high.

She was surprised by what she found, she says.

She’d done surveys at many companies, she says, and had never seen the level of dissatisfaction with top executives that the survey of roughly 40,000 Countrywide workers showed. The employee satisfaction levels for a few unit presidents and other big executives were mired in the 30 percent to 40 percent range, Niemela says.

Mozilo and his senior executive team got a 58 percent approval rate, according to a Power Point presentation put together by Niemela summarizing her findings. At the best-run companies, Niemela says, similar surveys generally show an 80 percent to 85 percent approval rate for senior management, “certainly never less than 70 percent.”

Along with their answers to the survey questions, some employees used the survey’s comments section to complain about unethical practices.

“There is so much fraud being committed between loan brokering, document alteration, overstating borrower's length of employment and actual income,” one employee wrote. No one was being held accountable, the worker said, because the company continued to “look the other way.”

Another employee who raised concerns about improper lending pronounced that “there will be a reckoning. … think of the cigarette industry — they know it's a slow poison but they sell them anyway.” He raised the specter of “superfunds to undo the damage.”

After reading many similar comments, Niemela says, she urged Countrywide executives to open a full-scale investigation of fraud within the company. The investigation never happened, she says. “They just shut the whole thing down. They didn’t want to hear that.”

She got the same reaction, she says, from one top official when she passed on concerns about how low-level employees were being treated by managers.

In the Loan Administration Department’s call center, Niemela says, “most people felt they were treated like animals,” with every minute of their time closely monitored by managers.

When she raised these complaints with a high-level executive who oversaw the unit, Niemela says, he told her: “I don’t really care what people think if they’re not VP level. Let’s move on.”

‘Sham investigation’

Niemela drafted a lengthy presentation spelling out the results of the survey and her findings that top management was driving worker turnover.

Before it was submitted to senior executives, Niemela says, it was revised by a high-level HR official.

In legal papers, Niemela claimed that the revision was more than an edit; the presentation was altered and cut down in a way that “concealed the survey findings that ineffective executives were the cause of the high turnover.”

Nowhere in the revised version, Niemela said in an interview with iWatch News, was the word “turnover” used.

After she complained about the changes in the survey results, she alleged in her legal claim, Countrywide officials trumped up a “sham investigation” against her, asserting that she had spoken derogatively about a colleague and had caused “upheaval” in her department.

All the interviews in the investigation were done in a single day, and Niemela wasn’t given a chance to defend herself, Niemela alleged.

Soon after, in May 2007, she was fired.

Bank of America’s lawyers maintained that Niemela had given “several different versions” of when she first raised the issue about the changes in the presentation.

The bank’s lawyers said Niemela’s only concern was that the revised presentation “somehow painted a picture that was too rosy. Nothing more.” That wasn’t enough, they argued, to show bank officials had violated any laws.

Niemela wasn’t surprised, she says, in late 2007 and early 2008 as she saw news reports about growing loan defaults and financial reversals at Countrywide. She had expected something like this to happen, she says.

The survey results, the comments about fraud and the reactions from top executives — all these had been warning signs, she says, that Countrywide Financial was doomed.

Whistleblowers ignored, punished by lenders, dozens of former employees say

Washington Mutual, Inc. — 2011-12-09T14:46:44-05:00

Darcy Parmer ran into trouble soon after she started her job as a fraud analyst at Wells Fargo Bank. Her bosses, she later claimed, were upset that she was, well, finding fraud.

Company officials, she alleged in a lawsuit, berated her for reporting that sales staffers were pushing through mortgage deals based on made-up borrower incomes and other distortions, telling her that she didn’t “see the big picture” and that “it is not your job to fix Wells Fargo.” Management, she claimed, ordered her to stop contacting the company’s ethics hotline.

In the end, she said, Wells Fargo forced her out of her job.

Parmer isn’t alone in claiming she was punished for objecting to fraud in the midst of the nation’s home-loan boom. iWatch News has identified 63 former employees at 20 financial institutions who say they were fired or demoted for reporting fraud or refusing to commit fraud. Their stories were disclosed in whistleblower claims with the U.S. Department of Labor, court documents or interviews with iWatch News.

“We did our jobs. We had integrity,” said Ed Parker, former fraud investigations manager at now-defunct Ameriquest Mortgage Co., a leading subprime lender. “But we were not welcome because we affected the bottom line.”

These ex-employees’ accounts provide evidence that the muzzling of whistleblowers played an important role in allowing corruption to flourish as mortgage lenders and their patrons on Wall Street pumped up loan volume and profits. Codes of silence at many lenders, former employees claim, helped discourage media, regulators and policymakers from taking a hard look at illegal practices that ultimately harmed borrowers, investors and the economy.

Whistleblower advocates say weak federal and state laws also helped prevent finance industry workers from being heard. Congress passed tougher laws in the wake of the financial crisis, but whistleblowers and their advocates say labor-law enforcers, securities-law cops and banking regulators need to do more to ensure that banking workers can safely report fraud and other abuses.

For their part, banking industry representatives reject the idea that employees were punished for reporting problems.

In court documents, Wells Fargo denied Parmer’s charges that management interfered with in-house fraud watchdogs. The bank said Parmer was never prohibited from calling the ethics line and that its internal investigation showed that no one retaliated against her and that “no fraudulent activity occurred.”

A Wells Fargo spokeswoman told iWatch News that the bank has extensive protections for internal whistleblowers and that it is the responsibility of all employees to raise concerns about ethics breaches or law violations.

“We have a strict code of ethics and a no-retaliation policy,” Wells Fargo spokeswoman Vickee Adams said. “We take responsibility for our actions, and when there’s evidence of a mistake and there’s something that’s needs to be corrected, we take action.”

‘Zero tolerance’

iWatch News has reported on former employees of Countrywide Financial Corp. who claimed the company retaliated against them for objecting to falsified mortgage documents and other fraud. In September the Labor Department ruled that Bank of America Corp., which bought Countrywide in 2008, had fired Eileen Foster, the mortgage lender’s fraud investigations chief, as punishment for finding widespread fraud and for trying to protect other whistleblowers within the company.

Further investigation reveals that concerns about the abuse of whistleblowers weren’t limited to Countrywide.

Most of the workers who claimed they were punished for trying to fight fraud worked at giant firms such as Wells Fargo or Washington Mutual (WaMu). Others worked at smaller lenders that joined the rush to sell home loans during the boom years.

Wherever they worked, their accounts are similar. Many claim that commission-hungry workers falsified loan applicants’ incomes and bank statements, pushed appraisers to exaggerate property values and, in some instances, forged consumers’ signatures on documents.

In many cases, the former employees say, management encouraged the fraud and protected the fraudsters.

Parker, the former Ameriquest fraud investigations chief, claims that he had few problems when he did “ones” and “twos” — investigating cases that involved an employee or two who could cause only limited damage, he said. But things changed, he said, when he tried to fight systemic fraud by focusing on branches or regions where fraud was so prevalent, workers joked that bogus documents were being produced in the “art department.”

Management instructed his unit to limit its investigations by reducing the number of loan files it pulled when it went into a branch, Parker said. He was left out of meetings and key decisions and, eventually, squeezed out of his job, he claimed.

Ameriquest later agreed to pay $325 million to settle loan-fraud allegations by authorities in 49 states and the District of Columbia. It stopped making loans in 2007.

The company said previously in a written statement that Parker was a “disgruntled former employee” who lost his wrongful dismissal claim against the company before an arbitrator. In a 2007 opinion, the arbitrator ruled Parker hadn’t been able to prove that the company’s treatment of him was connected to his reports about fraud, adding that it “stretches the imagination” to think a company would retaliate against a fraud investigator for “doing his job.”

More generally, Ameriquest said it “had a policy of zero tolerance for fraud. When problems were discovered, the company addressed them, including immediately terminating the employee or vendor and pursuing civil and criminal action against them.”

‘Fraud is fraud’

At a White House press conference in October, ABC News correspondent Jake Tapper asked President Obama why his administration hadn’t pursued criminal cases more aggressively in the aftermath of disasters at Lehman Brothers and other banks.

“I don’t think any Wall Street executives have gone to jail, despite the rampant corruption and malfeasance that did take place,” Tapper said.

Obama replied that in many instances the government might have trouble making criminal charges stick, because “a lot of that stuff wasn’t necessarily illegal. It was just immoral or inappropriate or reckless.”

Obama isn’t alone in suggesting that criminal fraud by banks wasn’t the main cause of the nation’s financial disaster. Bankers have cited unpredictable market conditions, the federal government and borrowers as being among the chief culprits.

In congressional testimony, former Washington Mutual chief executive Kerry Killinger blamed borrowers for misleading WaMu about their incomes and other details in their loan applications.

“I’m certainly very disappointed to think about my customers lying to me, because that’s fraud and it shouldn’t happen,” Killinger said. “But I think an objective look at things is that there must have been situations where people did not tell the truth on their applications."

Many whistleblowers who worked inside major banks counter that it was fraud by lenders — not borrowers — that was the driving force in the growth of toxic loans that caused the mortgage meltdown.

“Fraud is fraud,” Parker said. “It’s fraud if someone changes information in a loan file without the borrower’s knowledge or does anything deceptive to get a loan approved and passed through. How can you say those are not criminal acts?”

Parker and other former mortgage workers say some borrowers did take part in the fraud, but they usually did so with coaching from sales representatives who knew how to work the system to get deals done. And in many cases, Parker and others say, borrowers weren’t aware of the deception and were fooled by bait-and-switch salesmanship and other tactics used by the mortgage professionals who controlled the process.

A two-year U.S. Senate investigation found that senior management at Washington Mutual ignored clear evidence that bank employees were engaging in fraud.

In a report released in April, Senate investigators noted that an internal WaMu review of a high-volume loan center in Southern California found that as many as 83 percent of the loans it booked contained fraud. Despite in-house gatekeepers’ warnings about fraud at that location and other loan centers, WaMu executives took “no discernable actions” to deal with problem, the Senate report said.

Top sales managers suspected of fraud, the report said, were allowed to continue to produce huge volumes of loans and win trips to Hawaii as members of WaMu’s “President’s Club.”

WaMu collapsed in September 2008, a $300 billion institution buried in bad loans. It was the largest bank failure in American history — and one of the biggest casualties of risky practices and missed warning signs stretching back to the start of the last decade.

Early warnings

In the spring and summer of 2001, Matthew Lee was a busy man.

A fair-lending activist and blogger on innercitypress.org, Lee was fielding a growing number of emails and phone messages from people who worked at Citigroup’s subprime lending unit, CitiFinancial. The lender, they told Lee, was using slippery methods to trap borrowers in cycles of overpriced debt.

The more he reported the whistleblowers’ information on his website, the more whistleblowers contacted him. “I can’t count the number of times people called me and said: ‘It’s actually worse than you described. Let me tell you about it,’” Lee recalled.

In all, Lee estimates, he talked with three dozen current and former CitiFinancial employees.

One continued helping Lee even after he lost his job at Citi, digging through trash bins outside CitiFinancial branches around Tennessee and rescuing internal memos and other documents that, in Lee’s view, provided evidence of the lender’s “pervasive lawlessness.” The documents would arrive via overnight mail, often damp and smelling of used coffee grounds.

One former CitiFinancial employee, Steve Toomey, agreed to go on the record, signing a statement that said managers pushed workers to mislead borrowers about the costs of their loans and to falsify information in borrowers’ files. Lee filed Toomey’s affidavit and other documents with banking regulators at the Federal Reserve.

CitiFinancial immediately denied the allegations against the company, asserting, for example, that Toomey had only raised questions after “he concluded that the company would not pay him monies that he demanded to resolve an employment dispute.”

With the pressure building, Citigroup went out of its way to warn other current and former employees to keep quiet about what went on at CitiFinancial, according to Reuters news service.

Citigroup, Reuters said, hired a famed litigator “to help fight allegations of illegal lending practices and prevent former employees from bad-mouthing the financial services giant.” Mitchell Ettinger, one of Bill Clinton’s lawyers in the Paula Jones case, met with at least 15 current or former employees, reminding the ex-employees that Citigroup would enforce the “non-disparagement clauses” in their severance agreements with the company, Reuters said.

Lee charged that this was an attempt to paper over evidence of misconduct inside CitiFinancial. Why, he argued, would Citigroup dispatch a partner from Skadden Arps, described by Forbes magazine as “Wall Street’s most powerful law firm,” to talk with low-level employees?

Citigroup told Reuters the bank had acted properly. It added that the standard non-disparagement clause in the bank’s severance agreements wouldn’t prevent ex-employees from reporting illegalities.

Ettinger did not respond to requests for comment from iWatch News. A Citigroup spokesman declined to answer specific questions from iWatch News about former employees’ complaints. He said “issues from that time period” were “investigated and responded to appropriately by the company.”

The Federal Reserve eventually fined CitiFinancial $70 million for regulatory violations. Lee said that the Fed focused mainly on technical issues, however, and did nothing to protect whistleblowers from intimidation by the bank.

That, Lee said, made it less likely that more employees would come forward in the future with information about misconduct at Citi — or at other financial institutions that wanted to keep misbehavior secret.

“When people do step forward and put themselves at risk, you need to aggressively say to them, ‘If you’ve received any threats from the company, let us know,’” Lee said.

A spokeswoman said the Federal Reserve couldn’t comment on issues involving individual banks.

‘Their integrity … failed’

As whistleblowers were drawing scrutiny to Citigroup, then the nation’s largest commercial bank, others were raising questions about Washington Mutual, the nation’s largest savings and loan.

One of them was Theresa Hagman, a vice president in WaMu’s custom home-construction lending division. In 2003, Hagman spotted an increase in the number of construction loans going into default. She believed this was happening because loans were being pushed through without proper documentation, in violation of federal lending laws.

But when she pressed the issue with a high-level sales manager, Hagman later testified in a Labor Department hearing, he jumped out of his chair and charged her, screaming at her as his face purpled and veins popped in his neck. (In his testimony, the manager conceded he’d had disagreements with Hagman but denied they’d had heated confrontations.)

As an internal investigation proceeded, a senior vice president wrote: “If this wasn’t a good example of a need for a Fraud team, then I can’t find one. This poor individual is feeling like she is getting no support from her management.”

The senior executive’s concerns weren’t enough to protect her from more retaliation, Hagman said.

“I was being brutalized, and they knew it,” Hagman testified. “I was sharing the emails with everybody, pleading for protection. … We had borrowers that were being damaged and employees that were scared and crying.”

In March 2004, WaMu fired her.

Hagman filed a claim for federal whistleblower protection under the Sarbanes-Oxley Act, the corporate reform law passed in response to accounting frauds at Enron Corp. and other big companies.

Hagman told an administrative law judge that there were “senior-level people in this organization who are still there today who did not tell the truth. Their integrity and their honor … without question failed.”

WaMu maintained that there was no retaliation, only miscommunication between Hagman and her bosses. It said she hadn’t been fired, she’d simply been let go as part of a restructuring.

The judge sided with Hagman. He ordered that WaMu pay her more than $1 million.

‘Silent treatment’

The whistleblower affairs at Citigroup and WaMu came as the mortgage market was beginning to gain steam, recovering from a late 1990s credit crisis that had put dozens of subprime lenders out of business.

By 2004, mortgage industry production and profits were exploding. As the push to book loans grew to a near frenzy, industry insiders recall, the atmosphere at many mortgage-sales operations devolved into a cross between a “boiler room” operation and a frat-house blowout.

At Citizens Financial Mortgage Inc., a small Pennsylvania-headquartered lender, the out-of-control behavior included an ugly mix of sexual harassment and fraud, a lawsuit filed by a former loan processor at the company charged.

Gina La Vitola claimed one manager at her branch in Essex County, N.J., ranted and cursed and gambled on sports during office hours, even getting a visit from a bookie delivering a wad of cash. On several occasions, she said in her lawsuit, the manager picked her up, threw her over his shoulder and then used her “as a weight bar to see how many squats he could do.”

Supervisors’ behavior degenerated from vulgar to threatening, she claimed, when she started complaining about inflated property appraisals and other misconduct. Managers often forged borrowers’ signatures on loan documents and made up fake verification of employment forms, her lawsuit said. One manager, the suit said, had an arrangement with a friendly business owner who was willing to falsely claim that the manager’s loan customers were on his payroll.

After she reported the problems to Citizens’ president, she claimed, she got “the silent treatment” from coworkers and her bosses drastically changed her work hours and duties.

Finally, she said, a manager telephoned her and explained that, since her complaint, the “vibe is not there” in the office. That was a problem, he said, because he was “big about vibe, energy.”

He told her the company was letting her go, she claimed.

The company strongly denied her allegations. The case was settled on undisclosed terms. A former company official confirmed to iWatch News that Citizens was no longer in business, but said he couldn’t comment on the lawsuit.

Fraud sleuths

As mortgage salespeople embraced creative methods for pushing mortgages through the system, they were being stalked by a band of internal watchdogs.

Financial institutions keep fraud investigators and other gatekeepers on staff in part because they need to show regulators and investors that they have solid controls in place.

Many of these watchdogs took their jobs seriously.

In the spring of 2005, Darcy Parmer joined a team at Wells Fargo that was working on a plan to create a fraud detection report.

By doing queries within the bank’s computerized mortgage-application system, Parmer said, she and other fraud sleuths found a large number of duplicate credit applications submitted to various branch offices and divisions within Wells Fargo. It appeared to Parmer that loan officers were helping borrowers who’d been turned down for loans resubmit their applications elsewhere within the bank, inflating their incomes from one application to the next by as much as 100 percent.

The report, Parmer believed, was a great tool for sniffing out fraud. In 2006, however, management terminated use of the fraud detection report, Parmer said.Nothing was put in place to replace it, she said.

It wasn’t the only time that higher ups interfered with internal watchdogs’ ability to do their jobs, according to Parmer’s lawsuit in federal court in Colorado. Her court filings described many instances in which she claimed sales people and executives circumvented fraud controls or turned a blind eye to “acts of criminal fraud.”

One case involved a borrower Parmer referred to in court papers as Ms. A. According to Parmer, a loan officer had claimed in the loan-underwriting system that Ms. A earned roughly $140,000 per year, but federal tax records indicated she earned less than half that much — barely $60,000 a year.

When she tried to stop the loan from going through, Parmer said, a manager chastised her: “This is what you do every time.” He ordered her to close her investigation, she said.

After months of harassment, she said in an affidavit, she was “mentally and emotionally unable to continue working” and had to take disability leave to get treatment for distress and depression. After a time, she said, the bank informed her that her job had been filled.

Wells Fargo said in court documents that it had never fired her and that she was simply “on an unapproved leave of absence.”

The bank’s attorneys also said that Wells Fargo had refused to fund “nearly ever loan” that Parmer had complained about, and those that had funded had been handled “consistent with Wells Fargo protocol.”

Parmer and the bank settled the case in 2009. The terms were confidential.

‘In the dark’

When Congress passed Sarbanes-Oxley in 2002, it raised hopes that more workers would be emboldened to come forward with information that would help prevent future corporate scandals. One legal scholar hailed the act — which gave federal labor officials the power to order companies to swiftly reinstate whistleblowers with back pay — as “the most important whistleblower protection law in the world.”

Things haven’t worked out as whistleblower advocates had hoped. Critics claim the Labor Department hasn’t done enough to protect financial whistleblowers.

In roughly the first nine years of the law — from 2002 through May 20 of this year — the agency issued merit findings in 21 whistleblower complaints and dismissed 1,211 others.

That record is just one example, whistleblower advocates say, of the trials that corporate whistleblowers go through when they try to do the right thing.

When whistleblowers seek help from government agencies or state and federal courts, they often face long delays and find themselves outgunned by their employers’ legal teams.

At the same time, employers are often successful at preventing whistleblowers from getting the word out to the wider world. When companies and employees negotiate severance contracts and legal settlements, confidentiality clauses often permanently silence whistleblowers. Companies also frequently force ex-employees with whistleblower claims into private arbitration, ensuring that many details of their cases will remain secret.

Judges in Los Angeles, for example, have booted three former WaMu employees out of court and ordered them to go before arbitrators to press their claims that the company pushed them out of their jobs in early 2008 because they refused to participate in fraud.

Some former mortgage-industry workers contacted by iWatch News declined to talk in more detail about their legal claims because they’re gagged by secrecy agreements. Others said they couldn’t talk on the record because they still work in banking and don’t want to get in trouble with their current employers, or because they’re looking for jobs and don’t want to be blacklisted.

“Hell, we want to work,” one mortgage fraud investigator said, explaining why he and many of his colleagues haven’t gone public with what they know.

Matthew Lee, the fair lending activist who clashed with Citigroup a decade ago, believes getting whistleblowers to come forward is crucial to preventing the next financial meltdown.

Fraud thrives in secret. If regulators are serious about holding banks accountable, Lee said, they should cultivate and protect whistleblowers and serve as a counterweight to the power of big banks and their armies of lawyers.

“They need to think through how they’re going to protect people in the industry who come forward with information,” Lee said. “If you don’t, you’re going to be in the dark.”

Underwriter uncovered three frauds in one loan, suit claims

2011-11-26T18:32:06-05:00

In April 2006, Rachel Steinmetz, a senior loan underwriter at GreenPoint Mortgage Funding, flagged a loan application supported, she said, by a trio of frauds — overstated income, an overstated appraisal and a fake tenant lease agreement.

She suspended and then declined the loan.

Later she discovered that, while she’d been out of the office for Passover, someone had taken the opportunity to circumvent her decision and get the loan moving again, Steinmetz said in a lawsuit in federal court in New York.

She protested to a manager, Steinmetz said, but GreenPoint funded the loan.

This sort of cat-and-mouse game was typical in GreenPoint’s Manhattan branch, Steinmetz claimed. During the nine months she worked at the branch in 2005 and 2006, her suit alleged, managers used a variety of methods to get suspicious loans approved.

One manager’s frequent refrain, she said, was that she needed to approve a loan today because she’d declined one the day before: “You owe me.”

An operations manager, she said, told her: “Stop looking so carefully at the appraisals — just skim them! This branch has to maintain a 24-hour turn-around time on loans.”

Another manager, she claimed, told her to approve a suspicious loan because it was one of the first deals put together by a new loan officer “and she can use the encouragement.”

After Steinmetz uncovered evidence of fraud on loans submitted by a mortgage broker based in Florida, the suit said, one of her bosses became irate, telling her “you must approve these loans” because the broker was opening a New York office and he wanted to make sure it sent GreenPoint’s Manhattan branch “a lot of business. So do what needs to get done!”

The pressures became so intolerable, she charged, that she was forced into an “involuntary resignation” in June 2006.

In December 2006, as the mortgage market began to show signs of weakness, Capital One Financial Inc., snapped up GreenPoint as part of its $13.2 billion purchase of GreenPoint’s parent, North Fork Bancorporation.

Capital One’s relationship with GreenPoint didn’t last any longer than Steinmetz’s relationship with the lender. In August 2007, with the mortgage industry in full-fledged retreat, Capital One closed down GreenPoint. It estimated that it would suffer losses of some $900 million as a result.

Steinmetz sued under the whistleblower protections of the Sarbanes-Oxley corporate reform law. Capital One denied her allegations, and argued she had no case under Sarbanes-Oxley, because she failed to show how the alleged lending frauds could have hurt shareholders.

The case was ultimately settled, according to a Capital One spokeswoman. The spokeswoman declined to answer specific questions about Steinmetz’s claims, but noted that the bank has “a comprehensive ethics and governance training program” that encourages employees to bring forward any ethical or legal concerns.

GOP candidates in foreclosure capital say government not the solution to crisis

2013-01-22T15:55:48-05:00

The Republican candidates debating in the nation’s No. 1 foreclosure state of Nevada Tuesday night offered no specific policy solutions for how to resolve a crisis that has bedeviled millions of homeowners.

Instead, the four candidates who answered a question about foreclosures—which came more than an hour into the debate—promised to grow the economy and let the markets sort the problem out.

“We need to get government out of the way,” said Herman Cain.

“The right course is to let the markets work,” said former Massachussetts Gov. Mitt Romney.

Rep. Michele Bachmann of Minnesota had the most impassioned response, describing the plight of women who through no fault of their own “are at the end of the rope” because “[President] Obama failed you on this issue of housing and foreclosures.”

But her answer otherwise followed suit: “We will turn the economy around,” she said. “We will create jobs. That’s how you hold onto your house.”

Former U.S. Sen. Rick Santorum of Pennsylvania used most of his response to accuse the other candidates of supporting the Troubled Asset Relief Program, which bailed out banks during the financial meltdown.

One of every 44 homes in Nevada has been hit by a foreclosure filing in the third quarter of this year, according to Realty Trac Inc. Nevada’s foreclosures are coming at twice the rate of California, the second-hardest hit state.

Even so, the candidates have not shown a great desire to be heard on the subject thus far in the campaign.

Romney, who has visited North Las Vegas three times this year, has focused his message instead on job creation, which he suggested in one visit would help increase property values and repair foreclosed homes. Government intervention, he said, is not the answer.

The Las Vegas Sun reported that when the Republican presidential field debated economic policy in New Hampshire last week, the word “foreclosure” was mentioned – once. The Sun said, “that lone mention by former Utah Gov. Jon Huntsman accompanied no prescription for the crisis. . . . Rather, Huntsman mentioned it in a description of the pain felt by Americans.”

(Huntsman opted out of Tuesday’s debate, citing Nevada’s decision to move its primary ahead of New Hampshire’s.)

Nevada homeowners are unlikely to see positive equity in their homes for 20 or 30 years without a reduction in their loan principal, according to Diane Thompson, an attorney at the National Consumer Law Center.

"To date, the homeowners have been asked to bear the entire tab for financial crisis caused by irresponsible lending," she said. "We've bailed out the banks, but not ended the crisis, and not helped homeowners."

Nevada’s one-in-44 foreclosure rate from July through September compares to a rate of one in 88 homes in California. Arizona ranked third with one in 93 foreclosures. Nationwide, roughly 5 million homes have been hit with foreclosure actions since the start of 2010, according to RealtyTrac.

Republican leaders have generally blamed the housing crisis on government-chartered mortgage giants Fannie Mae and Freddie Mac, which have been taken over by the government and bailed out by taxpayers.

GOP.gov, the official website for Republicans in the U.S. House of Representatives, has said: “Fannie Mae and Freddie Mac were the main cause of the nation’s current financial turmoil.”

The few GOP candidates who have talked about housing on the campaign trail, such as Newt Gingrich and Rep. Ron Paul of Texas have said Fannie and Freddie were responsible for policies that drove lenders to make loans to people who couldn’t afford them.

A review of loan default data by iWatch News has indicated, however, that Fannie and Freddie contributed to the mortgage meltdown but played a secondary role to Wall Street. Wall Street firms and the mortgage lenders they bankrolled led the growth of the market for subprime loans and other risky mortgages.

Government data show mortgages backed by Wall Street from 2001 to 2008 were 4½ times more likely to be seriously delinquent than mortgages backed by Fannie and Freddie.

The candidates have not had great press on the foreclosure issue.

The Boston Globe reported that one of Romney’s top bundlers lobbied Congress on behalf of Lender Processing Services, which was reprimanded in April by the government for “unsound practices related to residential mortgage loan serving and foreclosure processing.’’

An Associated Press investigation found that Perry courted some of the nation’s leading mortgage companies to set up shop in his state, offering $35 million in grants to Countrywide Financial and now-defunct Washington Mutual Inc. and took in tens of thousands of their dollars for his gubernatorial campaign. He also downplayed early warnings of an impending mortgage crisis as alarmist.

An iWatch News investigation has detailed accounts from former Countrywide workers and executives who claim they were demoted or fired for reporting widespread fraud at the lender, which is now owned by Bank of America.

A Congressional investigation found that Washington Mutual executives created a “ mortgage time bomb ” by selling investors subprime loans they knew were likely to go bad.

Inside Countrywide, a ‘counseling meeting’ then termination

BANK OF AMERICA CORPORATION — 2011-10-31T12:34:18-04:00

Days before Mari Eisenman was to undergo cancer surgery, a senior vice president with her employer, Countrywide Financial Corp., called her in for a “counseling meeting.”

The impetus for the meeting, according to Eisenman: her complaints that workers at her branch in Colorado were falsifying documents and manipulating the home appraisal process.

The executive, Eisenman later claimed in a lawsuit, chastised her for causing trouble, complaining that one of the executive’s protégés had been suspended because of her whistleblowing.

While she was at home recovering from her surgery, her suit said, it became clear she was going to be fired.

Eisenman claimed she contacted Countrywide’s home office in California and sought intervention “from the highest officials” to provide her safe harbor as a whistleblower. The officials, her lawsuit said, “indicated that all actions taken against Mrs. Eisenman were proper and the corporation would not provide protection for her.”

Eisenman’s description of her rocky tenure at Countrywide is similar to accounts from other former employees who claimed the lender punished them for pushing back against corrupt practices. The retaliation, many of them charged, came not just from low-level mangers or coworkers, but was also carried out or condoned by upper-level executives.

A spokesman for Bank of America, which purchased Countrywide in 2008, declined to answer questions about Eisenman’s allegations. The bank has refused iWatch News’ requests to discuss specific allegations by former Countrywide employees, saying they involve allegations of problems that occurred before the bank acquired Countrywide. It has also declined to answer questions about how much investigation, prior to and after the acquisition, it conducted concerning fraud at Countrywide.

Before the merger, Countrywide chief executive Angelo Mozilo and other company officials blamed market conditions for the wave of dicey loans and defaults that weighed down the lender’s balance sheet.

“No one, including Mr. Mozilo, could have foreseen the unprecedented combination of events that led to the problems borrowers, lenders and investors face with many of these loans today,” a Countrywide spokesman told The New York Times in 2007.

‘Stay quiet’

iWatch News identified 18 former Countrywide employees who said they’d been retaliated against for trying to prevent fraud. The allegations date back as far as 2003 and as recently as 2008. They involve various Countrywide divisions operating in multiple regions, including Alabama, Arizona, California, Colorado and Texas.

Some of the former workers were non-supervisory employees who said they were fired for refusing orders to commit fraud.

Antonio Noyola claimed Countrywide fired him after he refused to falsify mortgage documents and complained that paperwork was being “routinely” doctored or backdated. Noyola, a licensed notary, said he was ordered in late 2006 and early 2007 to notarize documents “for dates that were incorrect, for persons that he did not in fact know, and to falsify his ledger accordingly,” his lawsuit in Ventura County (Calif.) Superior Court charged.

When he refused, Noyola said, managers told him to “stay quiet” and transferred him so he would no longer have access to the falsified documentation, then terminated him.

Noyola and Countrywide settled the case before Countrywide formally responded to his allegations.

Others who claimed they were punished for whistleblowing were managers with broader access to information about the company’s operations. Many of these managers claimed they were fired for trying to report fraud to higher-ups.

Hobart Curtis Sanders, who supervised more than 20 employees as the manager of a loan-sales branch in California, claimed Countrywide fired him in April 2004 for complaining about predatory lending tactics. These practices, he charged in a lawsuit in Los Angeles Superior Court, included “price gouging” and “contract knavery” — sneaking added costs and other provisions into loan contracts with the idea that, amid the small print and many pages of mortgage paperwork, borrowers would miss the add-ons.

Countrywide denied Sander’s allegations. In a court filing, it asserted that Sanders had mishandled a sexual harassment complaint against one of his employees by failing to report the issue up the chain of command until his superiors had heard about it independently. He wasn’t fired but instead left the company after he refused to accept a demotion or transfer, Countrywide said.

Sanders and Countrywide reached a confidential settlement in the case.

‘Action plan’

Eisenman, the former Countrywide employee in Colorado, said she uncovered indications of fraud soon after the company hired her as a branch operations manager at its Bergen Park, Colo., location.

She started the $200,000-a-year job in June 2004. By October 2004, her lawsuit said, she suspected that managers in the branch and beyond were either taking part in or condoning illegal practices.

The practices, she said, included inflating applicants’ incomes, misrepresenting whether customers were buying homes as residences or as investments and “securing multiple property appraisals when the original property appraisals failed to qualify the individual for a loan.”

She claimed she also observed other bad business practices, including improper disposal of borrowers’ confidential information and alcohol consumption inside the branch.

Eisenman said she forced an investigation by the company’s fraud unit by reporting the illicit activities to a regional executive. After her allegations were substantiated, her suit said, a branch manager and several loan officers were fired or forced to resign.

Instead of rewarding her for exposing the fraud, Eisenman claimed, higher-level managers began laying a trap for her. She claimed one manager hired the wife of a personal friend and encouraged her to file “false reports” against Eisenman. The woman claimed that Eisenman had made disparaging remarks about the woman’s husband, who also worked at Countrywide.

Soon after, in February 2005, a senior VP called her in for her counseling meeting and presented her with an “Action Plan” that included a 30-day “final” written warning.

Eisenman’s suit said the plan was full of fabricated information, including a made-up statement that Eisenman had previously been reprimanded for engaging in intimidating behavior and making inappropriate comments to other employees.

While she was on leave for cancer surgery, her suit said, the company moved someone else into her position. She learned that she was being fired, the suit said, through a “COBRA” notice informing her that she was entitled to continue her health insurance until she found a new job.

The lawsuit was resolved in 2008, according to the clerk’s office for Arapahoe County (Colo.) District Court. Bank of America didn’t respond to a request for a response about Eisenman’s allegations.

‘Go home'

Diana Wingard, who worked as a manager across the country in Alabama, said her career arc at the lender, like Eisenman’s, was brief and turbulent.

Wingard began working in November 2006 as a team manager at Countrywide’s regional operations center in Montgomery, Ala. Her job was to oversee the processing and underwriting of loans streaming in from various branch offices that fed the regional center.

She discovered, she later said in a lawsuit, evidence that the lender was violating federal consumer laws and putting itself at risk of big fines and big hits to its balance sheet.

Wingard claimed Countrywide was inflating borrowers’ incomes on loan applications, approving loans based on “unverifiable” borrower employment histories, and failing to provide borrowers with paperwork informing them of their right, under federal law, to change their minds within three days and cancel their loans.

Three incidents made it apparent, she claimed, that the fraud was being tolerated or encouraged by upper management:

A worker at a branch in Auburn, Ala., complained to Wingard that her supervisor was forcing her to approve loans she believed were fraudulent, declaring that if she refused to go along she “could just get in her car and go home.”
When Wingard investigated a mortgage that appeared to be backed by an inflated appraisal and murky income documentation, her immediate boss, a regional vice president, forbade her from talking to the loan underwriter who had signed off on the deal.
Later, in a meeting, her boss and a vice president of operations ordered her to discontinue her fraud audit and to stop advising employees to call the company’s “fraud hotline” when they suspected wrongdoing.

On Jan. 2, 2007, soon after Wingard’s meeting with the two executives, the company fired her, claiming she had falsified employee time cards, according to Wingard’s lawsuit. Later, when Wingard tried to collect unemployment benefits, the company changed its story, telling the unemployment office that she had been terminated for “mishandling a group of loans,” her suit said.

Wingard said both rationales were made up.

She filed a whistleblower claim with the U.S. Department of Labor under the 2002 Sarbanes-Oxley corporate reform law, then tried to move her case to U.S. District Court in Alabama. A judge dismissed the lawsuit, ruling Wingard had no right to go to court and bypass the administrative process within the Labor Department.

A spokesman for Bank of America didn’t respond to questions about Wingard’s claims.

'Occupy Wall Street' aims ire at foreclosures

2013-01-22T15:55:48-05:00

As many as a dozen "Occupy Wall Street" protestors and their allies were arrested Thursday afternoon as they tried to stop a foreclosure auction inside a courthouse in Brooklyn, N.Y.

As the auctioneer called the proceeding to order, the protestors, who had been sitting quietly in the courtroom, broke into song. “Mrs. Auctioneer, all the people here are asking you to hold all the sales right now,” they sang, in surprising harmony. “We’re hoping to survive, but we don’t know how.”

Their voices filled the courtroom and, for a while at least, brought the proceedings to a halt. After a few minutes, a court security officer warned them to stop or face arrest, but he could barely be heard over the singing. The singing continued for about a half an hour until they were led off in plastic handcuffs, still singing.

The disruption coincided with a larger protest outside the state Supreme Court building in downtown Brooklyn, across the East River from Wall Street.

“We all know there are hundreds of thousands of people who have lost their homes through nothing but outright theft,” housing activist Frank Morales told a crowd of more than 100 outside the courthouse.

The courtroom action was planned in secret by protestors linked to Occupy Wall Street and another group, "Organizing for Occupation," which had previously formed an “eviction blockade” at the home of an 82-year-old grandmother in Brooklyn. So far, the group has been able to prevent the woman's eviction, but the outcome of Thursday’s sing-in in the courtroom was less certain.

After the protestors were arrested, the courtroom was opened back up for the foreclosure auction. For sale on the courtroom docket was at least one residential home as well as two commercial properties. It is not known who owned the home, or what led to the foreclosure.

Nearly 1.8 million homes were hit with foreclosure actions during the first nine months of this year, according to RealtyTrac Inc., an industry data provider. That translates into roughly one out every 73 homes in the U.S.

The foreclosure rate is down slightly from 2010, when a record 2.9 million homes were hit with foreclosure actions, according to RealtyTrac.

RealtyTrac chief executive James Saccacio has said that U.S. foreclosure activity has been “mired down” since last October, when the “robo-signing” controversy sparked a series of state and federal investigations into lender foreclosure procedures.

It was a year ago today that 50 state attorneys general announced they were investigating big banks’ foreclosure tactics in the wake of reports that many were using questionable documentation to push families out of their homes.

Federal officials have also gotten involved in the negotiations with the banks. Some reports have said the government authorities and the banks have discussed a settlement that could total $20 billion. But some state authorities, including California Attorney General Kamala Harris, have said that the proposed deal isn’t tough enough on the banks. Harris has vowed to pursue an independent investigation.

Bob Davis, an executive vice president at the American Bankers Association, told Bloomberg News that an agreement hasn’t been reached because state and federal authorities are asking for “wildly excessive” payments from the banks.

“A settlement is not likely to be agreed to if one side is asking for remuneration or fines that the other side believes is wildly unbalanced to the proof of harm to consumers,” he said.

In addition to the attention from state and federal officials, the foreclosure process has also been slowed by a growing wave of activism from beleaguered homeowners, community activists and consumer attorneys. Foreclosure opponents have used social media to spread the word about questionable tactics by banks and to swap advice on legal maneuvers and grassroots tactics for blocking foreclosures.

Outside the Brooklyn courthouse Thursday, protestors held signs with various messages critical of the banking industry.

“Stop lootin’ start prosecutin’,” read one. Another named the chief executive of JP Morgan Chase & Co.: “The United States of Jamie Dimon? No! STOP unlawful foreclosures.”

Morales, the housing activist, told the crowd that inside the courthouse “moneychangers” were sitting behind closed doors passing properties back and forth. “They shuffle these things around like so many pieces of paper. They don’t realize that behind these numbers are real people.”

People involved in the auction sat stone-faced as the protestors inside the courtroom began to sing. After a while, the protestors began clapping as well. As more and more security officers, some wearing “special response team” vests, filed into the courtroom, the protestors stood and swayed, raising their voices even louder.

Occupying for Occupation said later Thursday afternoon that at least seven and as many as a dozen protestors were arrested inside the courthouse.

A reporter observed about a dozen people led away in handcuffs. Soon after, the court officer ushered the remaining crowd back into the courtroom and the auction resumed.

Countrywide loan underwriter found herself in ‘dangerous territory’

Countrywide Financial Corporation — 2012-04-06T18:08:43-04:00

After she lost her job in the fall of 2007, Cassandra Daniels had a word with a trio of her managers. As she recalls it, she told them she was praying that, someday, they’d learn to use their positions of power “to uplift your staff instead of destroying people.”

She cleaned out her desk and taped a handwritten sign to her computer screen, quoting one of her favorite gospel songs: “GIANTS DO FALL.”

That marked the end of Daniels’ tumultuous relationship with Countrywide Financial Corp., the nation’s largest home lender during the mortgage boom.

For Daniels, her four years as a loan underwriter inside Countrywide’s mortgage-production machine were a blur of 12- and 14-hour workdays and frequent clashes with managers and salespeople regarding loans she believed were tainted by fraud.

When she rejected loans that were based on inflated income statements or other questionable information, she says, management overruled her and pushed the deals through.

“The sad part is I lost hope in the integrity of any system,” Daniels recalled in an interview with iWatch News. “Because there were supposed to be checks and balances. But there weren’t. All these people were driven by pure greed. And they didn’t care that it was at the expense of other human beings.”

Bank of America Corp., which bought Countrywide in 2008, declined to comment on Daniels’ account of her time at the lender. However, a spokesman has dismissed the idea that Countrywide management encouraged fraud inside the company. When fraud happens, the spokesman said, “the lender is almost always a victim, even if the fraud is perpetrated by individual employees.”

‘Fast and sleazy’

Before she began working at a Countrywide branch in Chicago’s western suburbs in the summer of 2003, Daniels, a single mom, was working two jobs, as a manager at a local bank in Naperville, Ill., and as a night auditor at a Marriott hotel.

She thought going from two jobs to one was a good idea, especially with the prospect of earning $50,000 to $60,000 a year in salary and bonuses at a brand-name company that seemed to be growing bigger every day.

As an underwriter, Daniels was an important line of defense against fraud, vetting loan packages submitted by the sales department to see if they met Countrywide’s guidelines and whether the information on applications was truthful.

She says she got little training; before throwing her into the mix, her manager spent 2½ hours showing her how to underwrite Countrywide’s “Fast and Easy” loans, which required little or no documentation of borrowers’ income and assets, prompting some mortgage industry hands to dub them “Fast and Sleazy” loans.

Her branch was selling “Fast and Easy” loans and other mortgages so fast that Daniels and other underwriters had trouble keeping up. Daniels recalls tables stacked with pending loan files. Managers told her: “Just grab one and get it done.” There was no checkout procedure or safety measures to make sure no one walked out the door with a file full of sensitive financial data about loan applicants, she says.

“I wondered, ‘Where is all the security in this?’” she recalls.

The company expected her and other underwriters to get through eight to 12 loan packages a day. She’d get in early, work all morning and afternoon, then rush out to pick up her 3-year-old son at day care. She’d hit a drive-through restaurant window to pick up some food, and then head back to the office. Her son would fall asleep as she continued to work on files, sometimes as late as 11 p.m. or midnight.

The next day she’d do it all over again.

‘Making widgets’

She began tangling with managers and salespeople, she says, when she started rejecting loans that looked fishy. This earned her a derisive nickname from the sales staff: “The Decline Queen.”

Many of the disputed deals, Daniels claims, involved paperwork that listed questionable Social Security numbers or claimed applicants were making huge sums of money working in nail salons or running housecleaning or landscaping businesses.

She didn’t believe that the proprietor of a housecleaning business could be pulling in $100,000 or $120,000 a year. But when she asked for more documentation — such as copies of loan applicants’ tax returns — her managers scolded her, she says, telling her that, with “Fast and Easy” loans, such paperwork wasn’t necessary.

One borrower owned eight investment homes in the northern Chicago suburbs and had defaulted on local real-estate taxes owed against the properties, Daniels says. But Countrywide still approved a series of refinance deals that allowed the investor to suck hundreds of thousands of dollars in cash out of the properties.

“I realized I was in dangerous territory,” Daniels recalls. “I told my family: ‘You know what? The mortgage industry is nothing but legalized fraud.’”

In court records and in interviews, former employees say Countrywide executives cared little about fraud or whether borrowers could afford their loans. Most loans declined by underwriters would “come back to life” when new information supporting approval would “miraculously appear,” according to a former underwriter in Countrywide’s Jacksonville, Fla., loan-processing center who was cited as a “confidential witness” in shareholders’ litigation against the lender.

Brian Koss, who oversaw 54 loan branches in New England and upstate New York as a senior regional vice president, told Bloomberg Businessweek that company officials “approached making loans like making widgets, focusing on cost to produce and not risk or compliance. ... The fiduciary responsibility of making sure whether the loan should truly be done was not as important as getting the deal done."

To make matters worse, Daniels claims, management worked to quash investigations by her division’s internal fraud investigations unit.

At one meeting, she says, supervisors told workers they were making too many referrals to the investigations unit. The managers said that if anyone had suspicions about fraud, the matter should be referred to them, and they would decide whether it should be reported.

“They pretty much put a lid on it,” Daniels says.

Another former employee at Daniels’ branch agreed with Daniels’ assertion that management worked to paper over questionable loans and get them funded.

“There was a lot of fraud, I believe,” the former employee, who spoke on the condition her name not be used, told iWatch News. “It was all about getting the files out, making numbers for the month.”

iWatch News attempted to contact former managers at the branch but was not successful.

‘This is your last day’

Daniels acknowledges that no one ever directly threatened to fire her for reporting fraud, but says she “always felt like my job was in jeopardy. I never knew. It was uncomfortable.”

The end came in September 2007. The mortgage market was in a free fall, and Countrywide announced that it was sacking 10,000 to 12,000 workers across the country, slashing its 60,000-strong workforce by as much as 20 percent.

Managers called her into an office and told her: “This is your last day of employment at Countrywide.” She’s still not sure whether she was terminated or was included as part of the layoff, she says.

Within a few months, America’s home-loan giant had indeed fallen, gobbled up at a going-out-of-business-sale price by Bank of America.

Since she left Countrywide, Daniels has worked temporary jobs and done some consulting as a leadership development trainer. Even though she could use the money, she won’t go back into the mortgage business.

“I have no trust in the banking industry, period,” Daniels says. “All these major banks — they were major contributors to all this. They were all doing the same thing. I have no desire to be part of that.”

Mortgage industry tanks, fraud continues at Countrywide

Countrywide Financial Corporation — 2012-01-23T20:36:28-05:00

Read the first half of this story here.

The mortgage market was struggling in March 2007 when Countrywide promoted Eileen Foster to executive vice president and tapped her to take over the company’s mortgage fraud unit.

Home prices were sputtering, borrower defaults were climbing, and the industry leader, Countywide, would soon be forced to ask Bank of America for an infusion of capital to help it keep afloat.

The fraud investigation unit was also struggling. The company had laid off several experienced investigators, according to Foster. Those who remained were faced with an ever-growing number of fraud complaints.

Foster had roughly two dozen investigators working for her, but only four or five had real investigative chops, Foster says. Many of the rest had been brought over to the unit from clerical jobs, she says.

The other problem was that the company’s fraud investigation resources were balkanized. In addition to the company-wide fraud unit that Foster had taken over, many of the operating divisions, such as Countrywide’s subprime unit, had their own smaller investigative teams.

This didn’t make sense to Foster. It meant the smaller investigative teams reported to divisional sales executives who might be tempted to discourage aggressive fraud investigations in order to protect the flow of loans into the company’s production pipeline.

One of her first tasks was to oversee a fraud mitigation “reengineering” that would consolidate all fraud investigation within her unit. In June 2007, she presented the plan in a series of meetings with divisional presidents.

A few weeks later, she learned that the plan had been shelved. There was no explanation why, she says, only that it wasn’t the right time for a reorganization.

She didn’t have time to dwell on the setback. In July, her unit had fielded a call from an ex-employee who claimed he’d been fired because he’d objected to fraud at one of Countrywide’s subprime loan offices in the Boston area.

Foster arranged to have the contractor that handled the Boston branches’ shredding set aside the paperwork they hauled off site and hold it in a secure location. Then a team made up of her investigators and other company representatives headed to Boston to go through the piles of paper.

After finding evidence of “cut and paste” document forgery, the team did a full sweep of the offices in question. On top of workers’ desks, Foster says, they found an unusual number of Wite-Out dispensers. And inside their desk drawers, she says, they found folders holding blank templates for account statements from various banks and brokerage firms, such as Bank of America and Washington Mutual.

In some of the offices, investigators found more than one fax machine. During interviews with investigators, workers admitted that the extra fax machine was used to simulate faked documents being sent in by borrowers, Foster says. To eliminate a paper trail, she says, branch staffers had programmed the sending fax machine so there was no banner identifying the fax number from which the transmission originated.

The fraud seemed routine and the investigation showed “that the phony activities of these employees were known … and tolerated by management,” Foster later said in a witness statement in a Countrywide shareholders lawsuit in federal court in Los Angeles.

After the company had closed one branch and was preparing to shut five more, Lumsden, the company’s subprime lending chief, called Foster and angrily accused her of running a witch hunt, Foster claims.

Foster told iWatch News that, during a later conference call, Lumsden argued that the tactics that workers were using in the branches weren’t designed to take advantage of customers, but rather were a way of cutting red tape and speeding deals through the company’s loan-approval system.

“This is jaywalking,” Foster recalls him saying. “Not murder.”

Lumsden told iWatch News he didn’t recall the phone calls Foster describes. “I’m not able to really comment on anything she has to say,” he says. “I don’t remember Foster, and I don’t remember the conversation.”

As for the Boston investigation, Lumsden says the company handled things the way it should have. “I don’t know what else to say,” he says. “People who did things wrong were terminated.”

Roughly 44 employees in the Boston area lost their jobs.

Foster says, though, that she was blocked from establishing what responsibility upper level executives might have had for the problems in those branches.

She says her unit wasn’t allowed to interview Markopoulos, the former loan officer who had risen to executive vice president of the subprime division with supervisory authority over the Boston region. Instead, she says, Employee Relations conducted the interview, asking Markopolous a series of “tepid” questions and then allowing his boss, Lumsden, to review the transcript before it was turned over to Foster’s unit.

‘Shadow approvals’

While Foster was fighting battles within Countrywide’s corporate offices, some employees in the field were getting first-hand lessons, they say, in how far the company’s go-go sales culture was willing to go.

Lupe Manegdeg, a loan specialist at a Countrywide office in Glendale, Calif., claimed that, in early 2007, she discovered that loan officers in her branch were defrauding borrowers in a variety of ways — including forging their signatures on documents and lying to them about the type of loans they were getting.

She reported this, she said, to her supervisors, to Countrywide human-resources officials and to the company’s fraud hotline. The company responded, her lawsuit in state court in Los Angeles said, by firing her.

The case was settled last year before Countrywide had a chance to respond to Manegdeg’s allegations.

One of the highest-level employees to complain about fraud inside Countrywide was Mark Zachary.

Zachary took a job in August 2006 as a vice president in the Houston, Texas, division of Countrywide KB Home Loans. The lender was owned by Countrywide as part of a joint venture between Countrywide and KB Home, one of the nation’s largest home builders. Countrywide KB Home Loans provided the credit that allowed home buyers to purchase houses being constructed at a furious pace by KB Home.

Soon after he started, Zachary began questioning Countrywide executives about inflated property appraisals and “other grave illegal issues,” according to a lawsuit he later filed in federal court in Texas. The bogus appraisals duped both the consumers, who ended up borrowing more than the homes were actually worth, as well as the investors who bought the loans on Wall Street, Zachary said.

In April 2007, his suit said, he sent an email to Countrywide’s employee relations unit, warning that selling people overpriced homes and putting them into loans they couldn’t afford was a “formula for disaster.”

His suit claimed that he also clashed with management over a requirement that the lending unit approve 10 percent of backlogged loan applications each day so the green light could be given to KB Home to start building the homes under contract. After he said he couldn’t meet that goal, he was “taken out of the loop” and “treated like a pariah by his supervisor.”

Instead, Zachary charged, Countrywide KB Home Loans began OK’ing applications through a backdoor process in which loans were in essence “being approved without a review by an underwriter.”

These authorizations, he said, had a special name: “Shadow Approvals.”

And Zachary? A supervisor wrote him up for “performance issues,” he said, a stark turnaround from a glowing performance evaluation he’d received three months before. He was terminated two weeks after the written warning, his lawsuit said.

After Zachary sued, Countrywide said it had “investigated each of his claims and found no merit to his accusations.” It said Zachary had “received verbal counseling on his performance, as well as written feedback in the form of his evaluation, before he first made allegations of impropriety.”

Countrywide said its lending operations were “prudently and effectively managed” and that its ethical standards were “rigorously enforced.”

Zachary and Bank of America reached an out of court settlement in the case in 2009. As part of the settlement, Zachary agreed not to talk further about his experiences at Countrywide.

‘Everybody’s flipping out’

After the Boston investigation, Foster says, she continued to run into problems with Countrywide’s management

She says she urged the company’s internal audit unit to investigate the lack of accurate reporting of suspicious activity reports. An audit report about fraud across the company’s divisions was “edited down” and in the end “said almost nothing” about problems with reporting the suspicion activity reports, Foster says.

She also hit a roadblock, she says, when she started putting together a report listing all the questionable loans that had been sold to investors. A superior, she says, told her: “You need to pull it. Everybody’s flipping out.”

Management didn’t want the information put down on paper, she believed, because then it would have to buy back the bad loans. The company left it up to investors, she says, to find fraud-tainted loans themselves — a difficult task given the volume of loans pooled into mortgage-backed securities deals.

Foster also began clashing with Countrywide’s employee relations unit, which had a key role in disciplinary actions against employees. Employee Relations, she says, worked with sales managers to shield high-producing salespeople from scrutiny.

In one case, a branch manager hung on to his job despite fraud allegations that went back five years. Workers complained he was doing drugs and ranting and screaming in the office. After the manager swore he only took prescription drugs, Foster says, Employee Relations labeled the drug allegations unsubstantiated.

One witness claimed the manager had threatened to kill an employee’s family. Another supposed witness was too scared to speak, trembling uncontrollably, Foster says. But because it was the manager’s word against the word of a single witness, Foster says, Employee Relations also listed the murder-threat allegation as unsubstantiated.

These and other investigations convinced Foster that Employee Relations was doing more than excusing fraud, according to Labor Department records. It was, in her view, actively working to cover up fraud by discouraging employees from reporting wrongdoing to her team, violating the confidentiality of tipsters and using its influence over personnel decisions to retaliate against whistleblowers.

“Without ER, the sales people couldn’t have done what they did,” Foster told iWatch News. Employee Relations had “the ultimate power to silence the whistleblower. They were the controlling factor. Without them, it wouldn’t work.”

‘A rare opportunity’

In January 2008, Bank of America announced that it had reached a deal to purchase Countrywide, which had lost $1.6 billion over the previous six months.

Countrywide’s CEO, Mozilo, said it was “the right decision for our shareholders, customers and employees.” Bank of America called it a “rare opportunity” for the company to add what it believed to be the best “mortgage platform” in the nation.

Foster continued her duties as fraud investigation chief, while applying for a chance to work for Bank of America once the merger was completed July 1.

In February 2008, Labor Department records indicate, she learned that over a period of two to three years, several workers had been transferred or fired after telling Employee Relations that Michael Eckhart, a high-producing loan officer at a Countrywide branch in Nashville, was committing fraud. Her team also uncovered evidence that a regional vice president had kept Eckhart apprised of the progress of investigations targeting him, according to Foster’s witness statement in Countrywide shareholders litigation.

Eckhart’s attorney says that Eckhart died last year. The attorney declined to comment about the fraud allegations raised against him.

In late February, Foster began voicing open criticism of Employee Relations’ actions, pressing the issue with senior executives in emails and meetings, according to the Labor Department. In May, she informed Employee Relations that she intended to refer her allegations about its treatment of whistleblowers to Countrywide’s internal audit unit.

As Foster was reporting her concerns about Employee Relations’ conduct, Labor Department records say, Employee Relations launched an investigation — not of Foster’s allegations, but of Foster herself.

A senior vice president from Employee Relations began questioning members of Foster’s team about her management style, according to the Labor Department. One of Foster’s fraud investigators later complained, agency records show, that Employee Relations reps grilled him for almost three hours, asking leading questions and trying to get him to say damaging things about her. He said he worried that many employees might simply cave to the pressure.

Foster remained unaware of the investigation against her for several weeks. In early July, with the merger complete, she got some good news: Bank of America named her senior vice president in charge of its new combined mortgage fraud unit.

Foster says she learned about Employee Relations’ investigation later in July. She was questioned by Employee Relations in August.

By early September she thought the investigation was dead, she says. Bank of America had stripped Countrywide’s employee relations unit of power to conduct investigations, she says, and she believed the new owners weren’t going to put stock in anything Employee Relations had to say about her.

On Sept. 8, 2008, a Monday, Foster reported to work with a busy week ahead of her. She was supposed to meet the following week, she says, with officials from the bank’s federal regulator, the Office of the Comptroller of the Currency. The subject: questions about Countrywide’s reporting of suspicious activity reports. She had a spreadsheet showing the Countrywide’s subprime division was grossly underreporting these reports, she says.

The phone rang at 8 a.m. It was a call she’d been expecting from a Bank of America human-resources official. She thought they would be discussing salary structure for her team members.

Instead, with the Bank of America official on the phone, two Countrywide officials walked into her office, turning it into a conference call. They presented her with a 16-page severance agreement.

Bank of America offered her a buyout totaling almost one year’s salary, nearly $230,000. The catch was that, to get the money, she had to agree to a gag order that would prevent her from talking about what she knew about the company’s practices. “I was just furious,” she says. When she refused to sign, she says, the buyout offer turned into a straight-up firing.

They asked for her ID badge and keys. Then Bank of America security operatives escorted her out of the building.

It was her 51st birthday.

Later, in an email exchange, the employee relations official who’d led the investigation told Foster that her firing was due to her “inappropriate and unprofessional behavior” and “poor judgement as a leader.” Within her unit, the official said, there was a perception that Foster would retaliate against underlings who crossed her. As a result, the official said, Bank of America’s senior managers had “lost confidence” in her ability to lead the team.

The Labor Department later noted that the bank never consulted or interviewed Foster’s direct supervisor during the investigation, and that it violated its own progressive disciplinary policy: She’d never been written up, suspended or disciplined previously, and in fact was “a high-performing employee with no history of poor performance or conduct issues.”

Four former coworkers told iWatch News that the picture of Foster’s management style painted by Bank of America doesn’t square with their recollections of Foster as a colleague and boss. Among them is Larry Goebel, a former captain in the Los Angeles Police Department’s internal affairs unit who worked with Foster at Countrywide and Bank of America. “She had a lot of integrity,” he says. Any suggestion she was unprofessional is “total b---s---, to be honest with you.”

‘Sleaze factor’

After it fired Foster, Bank of America named Goebel to replace her as head of its mortgage fraud investigation unit.

The former police detective was surprised, he says, to find that many sales-department holdovers from the Countrywide era continued using fraudulent tactics to try to maintain their production and commissions as the mortgage market fell in on itself. “It was a culture that wouldn’t die,” he says.

Management didn’t block him from investigating fraud cases, Goebel says, but it never gave him enough trained investigators to keep up with the huge volume of fraud. Bank of America didn’t show much interest, he says, in rooting out the culture of corruption or getting a reading on just how much misconduct had gone on inside Countrywide. “It wasn’t really like: ‘We need to take a look back, we need to clean house.’”

Nine months after taking over the fraud unit, Goebel says, he quit, fed up with the “sleaze factor” that had overtaken the mortgage industry. He now works as head of security for the Performing Arts Center of Los Angeles County.

Bank of America declined to answer questions about Goebel’s account of his time in charge of the fraud unit.

Since the merger, Countrywide has produced little but headaches for Bank of America.

The bank agreed to an $8.5 billion settlement with a group of 22 big mortgage investors. It also helped Countrywide’s founder, Angelo Mozilo, settle charges that he’d added $141.7 million to his personal fortune through fraud and insider trading. (Mozilo’s attorney called the charges “baseless.” ) The final settlement was for $67.5 million, with Bank of America and Countrywide’s insurers chipping in $45 million and Mozilo paying $22.5 million — or about 16 cents out of his own pocket for every dollar authorities claimed he’d taken in ill-gotten personal gains.

The bank also agree to pay $108 million to settle fraud charges against Countrywide Home Loans Servicing, the same unit Foster says forced her to stop highlighting its complaint data in her reports. The Federal Trade Commission alleged that the servicing unit gouged homeowners with illegal fees and misled them about how much they owed on their mortgages.

Countrywide Home Loans Servicing now operates as BAC Home Loans Servicing, but it continues to draw the ire of regulators for its conduct under the Bank of America banner. A coalition of state attorneys general and federal authorities are pressing Bank of America and other big banks to pay $20 billion or more to settle claims that they used so-called “robosigners” to falsify foreclosure documents and push homeowners out of their homes.

The Federal Housing Finance Agency, which oversees mortgage investing giants Fannie Mae and Freddie Mac, has filed massive lawsuits charging that Countrywide, Bank of America and other lenders misled Fannie and Freddie about the quality of the loans they pooled into mortgage-backed securities.

A lawsuit by Nevada’s attorney general, meanwhile, charges that Bank of America’s servicing unit has engaged in a pattern of misconduct in the way it handles homeowners’ requests for loan modifications. The practices, the suit says, include falsely promising that their homes wouldn’t be foreclosed on while their applications were pending, promising them one set of terms but then delivering agreements with different terms, and providing “inaccurate and deceptive reasons” for denying their requests.

One former employee told the attorney general’s office the company gave instructions to mislead borrowers about their modifications. “One time I complained to my supervisor that I felt I was lying to borrowers,” the ex-employee said. “Her instructions … were just to give the borrowers their status and tell them that they are ‘in the process,’ in spite of the fact that the computer showed that nothing was happening.”

In response to the Nevada action, Bank of America said it was disappointed that the state had sued, because it had been “a cooperative partner” with attorneys general around the country in working out solutions for distressed homeowners. “We are already underway with further improvements to our processes and programs for Bank of America customers,” the bank said.

Holding the line

Eileen Foster says she didn’t set out to be yet another of Bank of America’s legal adversaries.

“In the beginning, I just wanted my job back,” Foster says. “I thought as soon as Bank of America looked into it, they would bring me back.”

It didn’t happen. Instead, she and the bank’s lawyers spent almost three years locked in a punishing fight inside the Labor Department’s whistleblower protection division.

Since last week, when the labor agency ordered that Bank of America rehire her, Foster has declined to comment on the bank’s role in her case, noting that she may end up going back to work there.

In interviews with iWatch News before the ruling, she expressed mixed feelings about the bank. She said she thought that the bank may have been misled by Countrywide holdovers, and wondered whether the bank’s lawyers had prevented it from realizing she’d been done wrong.

At other times, she expressed stronger feelings about the bank. “They had multiple opportunities to fix things,” Foster said in an interview earlier this year. “They chose not to do the right thing.”

Foster was unemployed for more than two years after Bank of America fired her.

“I applied for 145 jobs before I got one,” she says.

She’s now vice president of security at Lockheed Federal Credit Union in Burbank, a job that pays about half what she would have been making at Bank of America. But she says it’s a good place to work and the credit union’s CEO is a model of openness and straight-shooting.

What her next step will be is unclear. Although the Labor Department ordered Bank of America to rehire her, the bank has vowed to appeal the order to an administrative law judge. That could set up a lengthy round of litigation.

Foster says she remains a reluctant whistleblower. She’s turned down interview requests from many media outlets, and agreed to go on the record with iWatch News only for publication after the Labor Department issued its final ruling.

It was important, she says, to tell her story — and the story of other employees who tried to blow the whistle on fraud.

“I don’t want this to be about me,” Foster says. “The only reason I have a voice is because of my position. It’s not the same for somebody who’s an underwriter or production staff assistant. Management can call them disgruntled or whatever.”

Fraud flourishes, she says, when companies are allowed to intimidate and abuse employees. Without protections for whistleblowers, it’s easy for big companies to “beat people down” and silence them.

“It’s very difficult to hold the line and do what you believe,” she says.

Countrywide protected fraudsters by silencing whistleblowers, say former employees

Countrywide Financial Corporation — 2013-01-29T15:57:33-05:00

Editor's note 12/2/11: Eileen Foster, the fraud sleuth profiled in iWatch News' "Great Mortgage Cover-Up" series, appeared on CBS News' "60 Minutes" on Sunday night (12-4-11). In a two-part story published Sept. 22-23, iWatch News staff writer Michael Hudson reveals how Foster, Countrywide Financial Corp.'s fraud investigation chief, uncovered massive fraud within the company and, federal officials say, paid a price for doing so.

In the summer of 2007, a team of corporate investigators sifted through mounds of paper pulled from shred bins at Countrywide Financial Corp. mortgage shops in and around Boston.

By intercepting the documents before they were sliced by the shredder, the investigators were able to uncover what they believed was evidence that branch employees had used scissors, tape and Wite-Out to create fake bank statements, inflated property appraisals and other phony paperwork. Inside the heaps of paper, for example, they found mock-ups that indicated to investigators that workers had, as a matter of routine, literally cut and pasted the address for one home onto an appraisal for a completely different piece of property.

Eileen Foster, the company’s new fraud investigations chief, had seen a lot of slippery behavior in her two-plus decades in the banking business. But she’d never seen anything like this.

“You’re looking at it and you’re going, Oh my God, how did it get to this point?” Foster recalls. “How do you get people to go to work every day and do these things and think it’s okay?”

More surprises followed. She began to get pushback, she claims, from company officials who were unhappy with the investigation.

One executive, Foster says, sent an email to dozens of workers in the Boston region, warning them the fraud unit was on the case and not to put anything in their emails or instant messages that might be used against them. Another, she says, called her and growled into the phone: “I’m g--d---ed sick and tired of these witch hunts.”

Her team was not allowed to interview a senior manager who oversaw the branches. Instead, she says, Countrywide’s Employee Relations Department did the interview and then let the manager’s boss vet the transcript before it was provided to Foster and the fraud unit.

In the end, dozens of employees were let go and six branches were shut down. But Foster worried some of the worst actors had escaped unscathed. She suspected, she says, that something wasn’t right with Countrywide’s culture — and that it was going to be rough going for her as she and her team dug into the methods used by Countrywide’s sales machine.

By early 2008, she claims, she’d concluded that many in Countrywide’s chain of command were working to cover up massive fraud within the company — outing and then firing whistleblowers who tried to report forgery and other misconduct. People who spoke up, she says, were “taken out.”

By the fall of 2008, she was out of a job too. Countrywide’s new owner, Bank of America Corp., told her it was firing her for “unprofessional conduct.”

Foster began a three-year battle to clear her name and establish that she and other employees had been punished for doing the right thing. Last week, the U.S. Department of Labor ruled that Bank of America had illegally fired her as payback for exposing fraud and retaliation against whistleblowers. It ordered the bank to reinstate her and pay her some $930,000.

Bank of America denies Foster’s allegations and stands behind its decision to fire her. Foster sees the ruling as a vindication of her decision to keep fighting.

“I don’t let people bully me, intimidate me and coerce me,” Foster told iWatch News during a series of interviews. “And it’s just not right that people don’t know what happened here and how it happened.”

‘Greedy people’

This is the story of Eileen Foster’s fight against the nation’s largest bank and what was once the nation’s largest mortgage lender. It is also the story of other former Countrywide workers who claim they, too, fought against a culture of corruption that protected fraudsters, abused borrowers and helped land Bank of America in a quagmire of legal and financial woes.

In government records and in interviews with iWatch News, 30 former employees charge that Countrywide executives encouraged or condoned fraud. The misconduct, they say, included falsified income documentation and other tactics that helped steer borrowers into bad mortgages.

Eighteen of these ex-employees, including Foster, claim they were demoted or fired for questioning fraud. They say sales managers, personnel executives and other company officials used intimidation and firings to silence whistleblowers.

A former loan-underwriting manager in northern California, for example, claimed Countrywide retaliated against her after she sent an email to the company’s founder and chief executive, Angelo Mozilo, about questionable lending practices. The ex-manager, Enid Thompson, warned Mozilo in March 2007 that “greedy unethical people” were pressuring workers to approve loans without regard for borrowers’ ability to pay, according to a lawsuit in Contra Costa Superior Court.

Within 12 hours, Thompson claimed, Countrywide executives began a campaign of reprisal, reducing her duties and transferring staffers off her team. Corporate minions, she charged, ransacked her desk, broke her computer and removed her printer and personal things.

Soon after, she said, she was fired. Her lawsuit was resolved last year. The terms were not disclosed.

Bank of America officials deny Countrywide or Bank of America retaliated against Foster, Thompson or others who reported fraud. The bank says Foster’s firing was based only on her “management style.” It says it takes fraud seriously and never punishes workers who report wrongdoing up the corporate ladder.

When fraud happens, Bank of America spokesman Rick Simon says, “the lender is almost always a victim, even if the fraud is perpetrated by individual employees. Fraud is costly, so lenders necessarily invest heavily in both preventing and investigating it.”

When it uncovers fraud, Simon says, the bank takes “appropriate actions,” including firing the employees involved and cooperating with law-enforcement authorities in criminal investigations.

Mozilo’s attorney, David Siegel, told iWatch News it was “unlikely that Mr. Mozilo either would have had a direct role with, or would recall, specific employee grievances, and it would be inappropriate for him to comment on individual employment issues in any event.” Siegel added that “any implication that he ever would have tolerated much less condoned to any extent misconduct or fraudulent activity in loan production and underwriting … is utterly baseless.”

In closed-door testimony a year ago, the ex-CEO defended his company, telling the federal Financial Crisis Inquiry Commission that Countrywide “probably made more difference in society, in the integrity of our society, than any company in the history of America.”

Foster says that, in her experience, Mozilo urged managers to crack down on fraud. If he saw an email about a fraudster within the ranks, she says, he would hit “reply all” and type, “Track the bastard down and fire him.”

She says, though, that others within the company often screened his emails, and it’s likely Mozilo never saw Thompson’s email or many other messages about fraud.

“My sense is they kept things from Angelo,” she says.

‘An old matter’

When Bank of America announced in January 2008 that it was going to buy Countrywide at a fire-sale price, some analysts thought it was a great move, one that would leave the bank well positioned once the home-loan market recovered.

Almost three years later, defaults on loans originated by Countrywide have soared and Bank of America’s stock price has plunged as investors and government agencies have pursued mortgage-related claims totaling tens of billions of dollars.

Federal and state officials are pressing Bank of America and other big players to settle charges they used falsified documents to speed homeowners through foreclosure. Lawsuits filed on behalf of investors claim Countrywide lied about the quality of the pools of mortgages that the lender sold them during the home-loan boom.

Bank of America says issues related to Countrywide are old news. Last year a spokesman described fraud claims by state officials as “water under the bridge,” noting that the bank settled with dozens of states soon after buying Countrywide.

When federal officials announced Foster’s victory last week, Bank of America dismissed the case as “an old matter dating from 2008.”

Accounts from Foster and other former employees, however, put the bank in an uncomfortable position. These accounts, as well as lawsuits pushed by investors, borrowers and government agencies, raise questions about how diligently the bank has worked to clean up the mess caused by Countrywide — and whether the bank has tried to curtail its legal liability by papering over the history of corruption at its controversial acquisition.

In Foster’s case, the Labor Department notes that two senior Bank of America officials — not former Countrywide executives — made the decision to fire her.

The agency says the investigations led by Foster found “widespread and pervasive fraud” that, Foster claimed, went beyond misconduct committed at the branch level and reached into Countrywide’s management ranks.

Foster told the agency that instead of defending the rights of honest employees, Countrywide’s employee relations unit sheltered fraudsters inside the company. According to the Labor Department, Foster believed Employee Relations “was engaged in the systematic cover-up of various types of fraud through terminating, harassing, and otherwise trying to silence employees who reported the underlying fraud and misconduct.”

In government records and in interviews with iWatch News, Foster describes other top-down misconduct:

She claims Countrywide’s management protected big loan producers who used fraud to put up big sales numbers. If they were caught, she says, they frequently avoided termination.
Foster claims Countrywide’s subprime lending division concealed from her the level of “suspicious activity reports.” This in turn reduced the number of fraud reports Countrywide gave to the U.S. Treasury’s Financial Crimes Enforcement Network.
Foster claims Countrywide failed to notify investors when it discovered fraud or other problems with loans that it had sold as the underlying assets in “mortgage-backed” securities. When she created a report designed to document these loans on a regular basis going forward, she says, she was “shut down” by company officials and told to stop doing the report.

In Foster’s view, Countrywide lost its way as it became a place where everyone was expected to bend to the will of salespeople driven by a whatever-it-takes ethos.

The attitude, she says, was: “The rules don’t matter. Regulations don’t matter. It’s our game and we can play it the way we want.”

Bank of America declined to answer detailed questions about Foster’s allegations. Simon, the bank spokesman, told iWatch News “we are certain” that Foster’s claims “were properly and fully investigated by Countrywide and appropriate actions were taken.”

And not all former Countrywide workers say that fraud was condoned by management.

Frank San Pedro, who worked as a manager within the investigations unit from 2004 to 2008, told the Financial Crisis Inquiry Commission the company worked hard “to root out all the fraud that we could possibly find. We continued to get better and better at it.”

He said most of the fraud was “external” — outsiders trying to rip off the lender — and in-house sales staffers who tried to push through fraudulent loans “seldom got away with it.”

Gregory Lumsden, former head of Countrywide’s subprime division, Full Spectrum Lending, says there are thousands of ex-Countrywiders who can vouch for the company’s honesty. When bad actors were caught, he says, Countrywide took swift action.

“I don’t care if you’re Microsoft or you’re the Golf Channel or Dupont or MSNBC: companies are going to make some mistakes,” Lumsden told iWatch News. “What you hope is that companies will deal with employees that do wrong. That’s what we did.”

The American Dream

In February 2003, Countrywide’s founder and CEO, Angelo Mozilo, gave a lecture hosted by Harvard’s Joint Center for Housing Studies titled “The American Dream of Homeownership: From Cliché to Mission.”

Mozilo, the Bronx-born son of a butcher, had started Countrywide with a partner in 1969 and built it into a home-loan empire that was now on the verge of becoming the nation’s largest home lender.

But he saw trouble on the horizon. Before his audience of academics and business people, he complained that a “regulatory mania” was hurting Countrywide and other “reputable” mortgage lenders. Overreaching predatory lending laws, he said, were threatening shut the door to homeownership for hard-working low-income and minority families. Industry and citizenry needed to work together to prevent government from strangling the mortgage market, he said.

It wasn’t, Mozilo added, that he was against cracking down on bad apples that took advantage of vulnerable borrowers.

“These lenders,” the CEO said, “deserve unwavering scrutiny and, when found guilty, an unforgiving punishment.”

Around the time Mozilo was giving his speech back east, one of his employees was finding what she later claimed to be evidence of serious fraud at Countrywide’s Roseville, Calif., branch.

Employees were falsifying loan applicants’ salaries in mortgage paperwork and forging their names on loan documents, according to a lawsuit filed by Michele Brunelli, who was a loan processor and later a branch operations manager for Countrywide. In March 2003, Brunelli recalled, she used the company’s “ethics hotline” and lodged what she thought was a confidential complaint.

Immediately after, Brunelli claimed, her regional manager yelled at her for calling the hotline. Then, she said, her immediate supervisor called her in and reprimanded her for making the complaint.

“Not everyone’s hands are clean in this office,” the branch manager said, according to Brunelli. “Are you ready for that?”

Brunelli didn’t back down. She continued reporting evidence of fraud to the executives above her, her lawsuit said. They dismissed her concerns, she said, saying she was having “emotional outbursts” and accusing her of being “on a witch hunt.”

In court papers, the company flatly denied her allegations, accusing Brunelli of acting in “bad faith.” Her lawsuit was resolved in 2010.

Two other former Countrywide workers, Sabrina Arroyo and Linda Court, claimed they lost their jobs in 2004 after they complained supervisors were directing them to forge borrowers’ signatures on loan paperwork. After they informed Employee Relations about the forgeries, the company quickly fired them, they claimed.

“Corporate came in. We told them the story. We told them everything,” Arroyo told iWatch News. “They said don’t worry, whatever you say, you’re going to be covered. A month or so later, I was let go.”

Arroyo and Court sued Countrywide in state court in Sacramento, but Countrywide won an order forcing the case into arbitration. They decided to drop their claim because the odds are stacked against workers in arbitration, their attorney, William Wright, said.

Some ex-employees say they went high up Countrywide’s chain of command to raise red flags about fraud. Mark Bonjean, a former operations unit manager in Arizona, complained to a divisional vice president, according to a lawsuit in state court in Maricopa County. Within two hours of sending the VP an email about what he believed were violations of the state’s organized crime and fraud statutes, the suit said, he was placed on administrative leave. The next day, according to the lawsuit, he was fired.

Another ex-Countrywider, Shahima Shaheem, claimed she took her complaints to the very top. Like Enid Thompson before her, she said she wrote an email directly to Mozilo, the CEO, about fraud and retaliation. She never heard back from Mozilo, according to her lawsuit in Contra Costa Superior Court. Instead, the suit said, she was subjected to a campaign of harassment by company executives and human-resources representatives that forced her to leave her job.

Shaheem’s case was settled out of court, her attorney said.

A Bank of America spokesman declined to respond to questions about allegations by Shaheem, Bonjean and other former Countrywide employees, noting that their claims “are related to situations and investigations that took place at Countrywide prior to Bank of America acquiring the company.”

‘Fund the loans’

Countrywide had been slower than many other mortgage lenders to fully embrace making subprime loans to borrowers with modest incomes or weak credit. By 2004, though, Countrywide had become a player in the market for subprime deals and many other nontraditional mortgages, including loans that didn’t require much documentation of borrowers’ income and assets.

These loans were part of the plan for meeting its CEO’s audacious goal of growing his company from a giant to a colossus. Mozilo had vowed that his company would double its share of the home-loan market to 30 percent by 2008.

Some former Countrywide employees say the pressure to push through more and more loans encouraged an anything-goes attitude. Questionable underwriting practices often helped risky loans sail through the lender’s loan-approval process, they say.

In one example, Countrywide approved a loan for a borrower whose application listed him as a dairy foreman earning $126,000 a year, according to a legal claim later filed by Mortgage Guaranty Insurance Co., a mortgage insurer. It turned out that the borrower actually milked cows at the dairy and earned $13,200 a year, the lawsuit alleged.

The borrower provided the correct information, but the lender booked the loan based on data that inflated his wages by more than 800 percent, the legal claim said.

In another instance, according to a former manager cited as a “confidential witness” in shareholders’ litigation against the company, employees appeared to be involved in a “loan flipping” scheme, persuading borrowers to refinance again and again, giving them little new money, but piling on more fees and ratcheting up their debt. The witness recalled that when the scheme was pointed out to Lumsden, Countrywide’s subprime loan chief, the response from Lumsden was “short and sweet”: “Fund the loans.”

Such episodes weren’t uncommon, the witness said. In early 2004, he claimed, he discovered that Nick Markopoulos, a high-producing loan officer in Massachusetts, had cut and pasted information from the Internet to create a fake verification of employment for a loan applicant. Markopoulos left the company of his own accord, the witness said, but he was soon rehired as a branch manager.

The witness said he contacted a regional vice president to object to rehiring an employee with a history of fraud. But he said the regional VP — citing Markopoulos’s high productivity — overruled his objections.

Markopoulos couldn’t be reached for a response. Lumsden says he doesn’t recall any incident involving “loan flipping” allegations.

Brushed off

Eileen Foster knew little about Countrywide’s fraud problems when she took a job with the company in September 2005.

For Foster, the move seemed like a natural progression. She’d accumulated 21 years’ experience in the banking business, starting out as a teller at Great Western Bank and working her way up to vice president for fraud prevention and investigation at First Bank Inc.

Countrywide brought her on as a first vice president and put her in charge of a high-priority project: An overhaul of how the company handled customer complaints.

The company’s systems for handling complaints, Foster recalls, were disjointed and ineffective. Various divisions had differing policies and there wasn’t much effort to ensure that complaints got addressed. Things had gotten so bad, she says, federal banking regulators ordered the company to do something about the problem. Foster’s task was to standardize the company’s procedures and ensure that people with complaints didn’t get brushed off.

As she set about fixing the problems, she says, she encountered things that gave her pause.

The company’s mortgage fraud investigation unit, Foster says, refused to share data about the complaints it received. Each time she requested the stats, she says, she hit a brick wall.

Foster says she also ran into a hitch when she began distributing a monthly report that broke down complaint data for each of the companies’ operating divisions.

Countrywide Home Loans Servicing, which collected borrowers’ payments each month, was the subject of complaints about its foreclosure practices and other issues. The volume of serious complaints involving the servicing unit topped 1,000 per month, dwarfing the number for other divisions.

This upset officials with the servicing unit, Foster recalls. The complaints weren’t “real complaints,” the servicing execs argued, and Foster was making the unit look bad by including them in her reports.

The upshot: Foster was ordered, she says, not to include many of the complaints about the servicing unit in her reports. She thought it was odd, she says, but she didn’t think it was evidence of a larger pattern. She figured it was mostly an exercise in backside-covering.

“When we lost at the meeting, I was like, ‘OK, they want to just cover this up,’” Foster says. “But it wasn’t anything to the scale that I thought it would cause great harm.”

Only later — after she took over the mortgage fraud investigation unit — did she realize, she says, that cover ups were part of the culture of Countrywide, and that efforts to paper over problems had less to do with bureaucratic infighting and more to do with hiding something darker within the company’s culture.

“What I came to find out,” she says, “was that it was all by design.”

Bouquets and handbags

State law enforcers would later charge that Countrywide executives designed fraud into the lender’s systems as a way of boosting loan production. During the mortgage boom, critics say, Countrywide and other lenders didn’t worry about the quality of the loans they were making because they often sold the loans to Wall Street banks and investors. So long as borrowers made their first few payments, the investors were usually the ones who took the hit if homeowners couldn’t keep up with payments.

Countrywide treated borrowers, California’s attorney general later claimed, “as nothing more than the means for producing more loans,” manipulating them into signing up for loans with little regard for whether they could afford them.

Countrywide’s drive to boost loan production encouraged fraud, for example, on loans that required little or no documentation of borrowers’ finances, according to a lawsuit by the Illinois attorney general. One former employee, the suit said, estimated that borrowers’ incomes were exaggerated on 90 percent of the reduced-documentation loans sold out of his branch in Chicago.

One way that Countrywide booked loans was by paying generous fees to independent mortgage brokers who steered customers its way. Countrywide gave so little scrutiny to these deals that borrowers often ended up in loans that they couldn’t pay, the state of Illinois’ suit said.

In Chicago, the suit said, Countrywide’s business partners included a mortgage broker controlled by a five-time convicted felon. One Source Mortgage Inc.’s owner, Charles Mangold, had served time for weapons charges and other crimes, the suit said.

One Source received as much as $100,000 per month in fees from Countrywide, banking as much as $11,000 for each loan it steered to the lender. Mangold, in turn, showered a Countrywide branch manager and other employees with expensive gifts, including flowers and Coach handbags, the suit said.

Countrywide in turn funded a stream of loans arranged by One Source, the suit said, even as the broker misled borrowers about how much they’d be paying on their loans and falsified information on their loan applications. One borrower provided pay stubs and tax returns showing he earned no more than $48,000 per year, but One Source listed his income as twice that much, according to the suit.

Mangold couldn’t be reached for comment. His attorney said in 2007 that Mangold denied all of the state’s allegations against him.

Countrywide, the state’s suit said, kept up its partnership with One Source for more than three years. It didn’t end the relationship until the state sued One Source for fraud and slapped Countrywide with a subpoena seeking documents relating to the broker.

As questionable practices continued, Countrywide’s fraud investigation unit had trouble keeping up, according to Larry Forwood, who worked as a California-based fraud investigator for Countrywide in 2005 and 2006, before Foster took over the fraud unit. His personal caseload totaled as many as 100 cases at a time, many of them involving dozens or hundreds of loans each.

Some cases involved mortgage brokers or in-house staffers who pressured real-estate appraisers to inflate property values. The company maintained a “do not use” list of crooked appraisers who’d been caught falsifying home values, but the sales force often ignored the list and used these appraisers anyway, Forwood says.

Countrywide’s fraud investigation unit did have some successes during Forwood’s tenure. It shut down a branch in the Chicago area, he said, after a rash of quick-defaulting loans sparked a review that uncovered evidence of bogus appraisals and forged signatures on loan paperwork. One manager, Forwood says, tried to rationalize the fraud, telling investigators: What was the big deal if, say, five out of every 30 loans was fraudulent?

When the unit shut down a branch in southern California after uncovering similar evidence of fraud, Forwood recalls, it got some pushback. It came all the way from the top, he says, via a phone call to the fraud unit from Mozilo.

“He got very upset,” Forwood says. “He basically got on the phone and said: ‘Next time you need to do that, clear it with me.’”

Mozilo’s attorney didn’t respond to questions from iWatch News about Forwood’s account.

Continue reading part two of this story.