A hard-money mortgage servicer in California is accused of hiding delinquency from investors and — in a classic Ponzi scheme — using new investments to fund interest payments to existing investors. In all, investors are expected to lose more than $100 million.
Cedar Funding Mortgage Fund LLC, a $150 million “blind pool” fund, promised investors returns of between 12 and 13 percent on safe and secure first and second mortgages, according to an indictment filed on Sept. 8 in U.S. District Court in San Jose, Calif. Loans typically had 12-month terms, were made to developers and were supposed to be funded by no more than 10 investors each.
Once funded, Cedar Funding Inc. handled loan servicing of the hard-money loans for investors. The portfolio included residential and construction-and-development loans. Cedar Funding Inc. also managed the fund.
But in 2004, many borrowers stopped making payments as delinquency soured.
So David A. Nilsen, owner and operator of Cedar Funding Inc., and Manoel A. Errico, loan servicing manager for the Monterey, Calif., firm, launched a scheme to defraud the fund’s investors and maintain income for themselves, the indictment says.
The duo began providing fraudulent statements to investors, according to the indictment. They also began providing loan extensions to borrowers that were in violation of the servicing agreements.
The defendants allegedly stopped recording assignments of liens in violation of the loan servicing agreement, leaving them as the owner of record. All of the critical loan documents remained in Cedar Funding Inc.’s name.
They also made investments outside of what they promised and “converted millions of dollars of the investors’ money for their personal benefit.”
As the rising delinquency cut into their collections, the defendants allegedly began using funds from new investors to make interest payments to existing investors — a type of scheme made famous nearly a century ago by Italian immigrant Charles Ponzi.
Loans owned by investors were secretly subordinated in favor of loans from Accustom Development LLC — a company owned by Nilsen — or other third parties, prosecutors allege. In addition, although prohibited by the agreements, the defendants allegedly lent millions of dollars in investor funds to themselves or their affiliates and earned “multiple millions” from loan origination fees, modification fees and other fees.
By May 2008, the loan portfolio had grown to 150 loans for $150 million. Around 1,000 investors were on the hook.
As their scheme unraveled, they belatedly began filing the unrecorded assignments.
But Cedar Funding Mortgage Fund LLC and Cedar Funding Inc. landed in bankruptcy court on May 26, 2008.
Investor losses are expected to exceed $100 million.
United States of America, Plaintiff, v. David Arthur Nilsen, and Manoel Antonio Errico, Defendants.
Case No. CR 09 0895 JW, Sept. 8, 2008 (U.S. District Court for the Northern District of California).
