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Bankers, Appraiser Accused in Builder Fraud Case

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Two former bank executives and an appraiser have been accused of playing a role in a scheme where one of Cincinnati’s largest builders allegedly used funds — intended to pay off construction mortgages — to cover bad checks.

According to a copy of an FBI affidavit completed in May, A. William Erpenbeck, Jr., who was president of homebuilder The Erpenbeck Company, directed his employees to deposit checks made out to construction lenders to the company’s own account at Peoples Bank of Northern Kentucky. Because the checks — which were issued from the closings of homes built by Erpenbeck — were not used as intended to pay off the outstanding construction loans, many buyers were stuck with unintended construction liens.

In some cases, buyers that paid cash for their homes were duped as Erpenbeck allegedly took their cash payments at the closings while not paying off construction loans.

The FBI estimates that Erpenbeck diverted approximately $25 million in construction payoff proceeds to the company account. An article by the Ohio REALTORS said lawyers, bankers and regulators have put a $75 million price tag on the scandal.

A spokesman for the U.S. Attorney’s office said no charges have yet been filed.

Erpenbeck was considered one of Northern Kentucky’s most prominent business executives and political fund-raisers, according to the The Cincinnati Enquirer.

Builder magazine ranked Erpenbeck Co. as the fourth-biggest home builder in Greater Cincinnati, behind only the Drees Co., Fischer Homes and Crossmann Communities, the Enquirer reported in April.

The Enquirer reported that in late 2001, Erpenbeck employees began to discover that fundings from home sales weren’t being used to pay off construction loans on the properties, as intended. However, loan-satisfaction letters were allegedly fabricated on the stationery of banks such as Firstar Bank and Kenwood Savings Bank, giving home buyers the impression that their construction-loan mortgages had been paid off.

A spokeswoman for the Kentucky Department of Financial Institutions reportedly said in April that no state-chartered banks in the region were in danger of insolvency.

John Finnan, president of Peoples Bank of Northern Kentucky in Crestview Hills — one of the builder’s creditors — was quoted at that time by the Enquirer as saying that investigators were trying to determine whether Erpenbeck diverted mortgage payment checks written by homebuyers. Finnan reportedly said Peoples’ loans to Erpenbeck Co. were within the bank’s lending limit of $6 million to any one borrower. “I would like to take this opportunity to reassure you that Peoples Bank is strong and healthy and will continue to be so.”

The affidavit accuses Finnan and fellow bank executive Marc Menne of forming a limited liability company — JAMS Properties, LLC — with their wives to purchase Erpenbeck-developed properties. The affidavit said that while no down payments were made on the property purchases, the HUD-1 closing statements associated with the purchases falsely reflected cash down payments were made. In fact, the affidavit noted, JAMS financed the properties for amounts in excess of the purchase prices, creating a cashout purchase transaction. Erpenbeck allegedly received kickbacks from the two in these transactions.

The scheme by Finnan and Menne helped Erpenbeck sell 24 homes and dupe three other banks into loaning more money than the homes were worth while they personally financially benefited, the Enquirer said. Four loans for $5.9 million from other banks were reportedly used to cover an overdrawn account at Peoples instead of the intended use — real estate projects.

The Enquirer reported last month that both men were ousted from the bank shortly after Finnan’s April statement.

The Kentucky Post quoted Finnan’s attorney as saying that Erpenbeck didn’t tell Finnan and Menne about an unpaid construction loan on one property he sold them.

Peoples has agreed to settle one class action lawsuit in November where $16.8 million in mortgages will be removed from homes for people who had paid for their Erpenbeck homes with checks, the Enquirer reported. Countless other claims, covering everything from cash purchases to down payments, subcontractors’ billings and delinquent bank loans, reportedly remain unresolved.

Beset by tighter regulatory requirements, more and more lawsuits, a run on deposits, negative publicity and the prospect of increasing losses, Peoples reportedly exited the banking business by selling its assets to The Bank of Kentucky about a month ago.

Peoples also introduced Erpenbeck to more than a dozen Kentucky, Ohio and Indiana small-town banks which banded together in so-called participation loans totaling about $28.5 million, the Enquirer said. These banks are now reportedly setting aside millions of dollars to cover potential losses.

Farmers Bank & Capital Trust, which the Enquirer said is owed $14 million for an unpaid loan balance (down from an original $18 million), reportedly took title to mortgages on unsold multifamily buildings and land from Peoples “to move them rather than to finish them.” That bank’s chief lending officer and two of it’s directors reportedly took part in a $300,000, seven-day Erpenbeck-paid Carnival cruise from New Orleans to Jamaica, Puerto Rico, the Cayman Islands, and Mexico in 2001.

Two loans totaling about $325,000 were sold by Guardian Savings of Cincinnati to First American Title Co., halting foreclosures already in process, according to the Enquirer, and those loans are now held by Kentucky Land Title. Payments on those loans were allegedly misdirected by Erpenbeck employees to the Peoples account, the Enquirer said, and the title company will seek to have them paid off by Peoples.

“Employees at title companies allowed the builder to take loan payoff checks from the closing for delivery to the builder’s lenders,” said Howard A. Lax, a corporate law attorney with Lipson, Neilson, Cole, Seltzer & Garin, P.C. “The fraud was compounded when the bank CEO and SVP allegedly purchased and leased back the builder’s homes – allowing the builder to hide the true state of its finances.”

The Cincinnati Post reported in September that federal investigators have been looking into the role played by local appraiser Kim Moore of Fort Mitchell, Kentucky — who performed the appraisals for all JAMS properties in Kentucky. Moore has reportedly bought a home from an Erpenbeck affiliate, and also purchased a condo in the same country club community in Fort Myers, Fla., where Erpenbeck, Finnan and Menne own condos.

Around March, Erpenbeck was replaced by his younger brother, Jeff Erpenbeck, as president of the company he co-founded in 1993, the Enquirer reported.

Other articles about mortgage fraud cases include:

  • Angel L. Serrano Jr. accused of duping mortgage lenders in a Massachusetts flip scheme.
  • Fraud Flips National Phenomenon: A look at mortgage fraud schemes.
  • Atlanta fraud network responsible for more than $100 million in losses.
  • Several southern California individuals have been charged for defrauding lenders and HUD of millions.
  • The Provident Bank has reportedly filed a civil lawsuit against Community Home Mortgage Corp., accusing the company of fraud.
  • Todd H. Charske and Gregory B. Romer of Kemper Financial Inc. are accused by the FBI of operating a flipping scheme and defrauding Meritage Mortgage Corporation
  • According to the Suspected Fraud Activity Index for August of this year, the state showing the most deterioration in the Fraud Index combined with the higher activity levels is Texas.
  • Two Virginia men are accused of using a Virginia title insurance agency to illegally divert loan proceeds for their own benefit.
  • 83 individuals have been indicted by a Cleveland grand jury for participating in mortgage fraud schemes.
  • Former PinnFund CFO admitted to being a coconspirator in the $300+ million Ponzi scheme
  • Three Peoria, Illinois women were sentenced for their involvement in a mortgage loan scam where they defrauded a bank of $1.7 million in a classic flip transaction scheme
  • Shirley Harwood and her employee pled guilty to defrauding two lenders out of more than $6 million
  • Loan originator Brian J. Wilkozek and two loan processors are among fifteen people indicted in a south side Chicago “flipping” scheme
  • Edward Rostami was sentenced to a year in prison for using a fraudulently obtained property title to obtain a $1 million loan
  • Rene Abreu was among 11 people indicted in a case involving The Mortgage Pros, Inc. in Guttenberg, New Jersey
  • David Allan Van Velzer, Jr., was sentenced to more than 8 years in prison for wire fraud and money laundering
  • Kenneth Bradford and Jo Ellen Bryant received 10+ year sentences in a Georgia flipping case
  • Seven indicted in mortgage fraud scheme
  • Indian authorities apprehended Rajiv C. Shah, one of two brothers that allegedly sold loans with fraudulent documentation to 3 U.S. lenders
  • Loans originated by originated by Chapel Creek Mortgage Banker, Inc. could cost Chase Manhattan Mortgage Corp. between $10 and $20 million
  • Kent E. Baklor was sentenced for defrauding two lenders of over $8.5 million
  • Tamira Smyth was sentenced in a Chicago ‘flipping’ scam involving twenty defendants
  • Former Las Vegas mortgage broker David Ferradino was sentenced to five years’ probation and ordered to pay $4.2 million in restitution to 90 investors
  • Michael Graham received a sentence of more than 12 years in prison and was ordered to pay $515 million in restitution for his role in the failure of The First National Bank of Keystone.
  • Yehuda Shiv was charged by the SEC with overstating the value of his clients’ assets by more than $139 million
  • Cheryl A. Swain pleaded guilty to a charge of mail fraud in connection with her conduct as the VP for Marketing Syndication of MCA
  • Robert B. Herbert, Jr. of Raleigh allegedly “embezzled and misappropriated moneys from Stewart Title.
  • Donald Lukens allegedly defrauded more than 100 investors — including popular sports figures — of at least $12.5 million in a number of schemes, including one involving mortgage backed securities
  • Steven D. Mueffelman and John S. Lombardi charged in a 15-count indictment with mail and wire fraud
  • Raymond T. Jackman, JR. was sentenced to two years’ probation
  • GreatStone Mortgage in Florida is accused of fraud, sexual harassment.
  • The government is pursuing mortgage fraud cases in Charlotte and Cleveland.
  • Miami family allegedly ran a mortgage fraud ring that swindled lenders out of $3.8 million.
  • Maryland is the state with the most instances of possible fraud, according to Affinity Corporation’s ‘Suspected Fraud Activity Index’ for the months of June, July and August.
  • Thomas Eck and Zahra Gilak made as much as $15 million, and defrauded investors of $100 million in sham that included online mortgage brokerage
  • Richard Wood, a Las Vegas mortgage broker accused of bilking millions of dollars from dozens of investors in a nationwide Ponzi scheme, was gunned down outside his home.
  • FBI Investigating Massive Mortgage Fraud Case In Spokane
  • Richard Michael McDowell, who through southern California-based Active Home Loans and M&M Loan Service admittedly swindled an estimated $7 million from about two

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