Thursday, October 27, 2005

Three Men Plead Guilty in North Carolina Mortgage Fraud

Two businessmen and a real estate lawyer pleaded guilty in connection with a North Carolina mortgage fraud scheme involving more than 20 properties.

Charles Richardson Jr. and Phillip Wayne Middlebrooks plead guilty to mail fraud and attorney Rick Franklin Shumate pleaded guilty to lying to the FBI.  The trio were originally indicted on June 28, 2005, in a 20-count federal indictment

According to court documents, between August 1999 and January 2001, Richardson and Middlebrooks, with the assistance of others (including, in most cases, a mortgage broker from Oasis Mortgage Company), caused multiple fraudulent real estate transactions in and around Guilford County, North Carolina.  Richardson and Middlebrooks would identify real property for sale, recruit straw buyers to obtain mortgage loans to purchase the property at prices substantially above the actual sales prices, and provided or caused the provision of false information to lenders (e.g. employment, intent to occupy). Richardson and Middlebrooks would routinely complete paperwork, such as sales contracts, reflecting that they owned the properties when they did not and thus concealing the flip.

Richardson and Middlebrooks enlisted the services of attorney Shumate in connection with closing the transactions. Shumate submitted or caused to be submitted, preliminary opinions of title for numerous transactions involving Middlebrooks and Richardson which reflected they owned property when they did not, thereby concealing the flip of property from the lenders.

The transactions were structured as ‘double-closings’ with the assistance of Shumate. Richardson and Middlebrooks would nominally purchase the real property at the lower price and simultaneously resell it to the straw buyers at a higher price.  Mortgage loan funds intended for the use of the straw buyers were redirected to cover the purchase payments to the original sellers.  Richardson and Middlebrooks skimmed off the fraudulently created ‘equity’ (i.e. the difference between the original sales prices and the amounts of the mortgage loans taken out in the names of the straw buyers.)

Richardson and Middlebrooks paid (or promised to pay) kick-backs to the straw buyers for participating in the scheme and deceived the straw buyers into believing that Richardson and Middlebrooks would make the mortgage payments and transfer the properties out of the names of the straw buyers.  Although they did collect the rents from the properties, they did not keep up the mortgage payments and allowed the properties to go into foreclosure.

One of the transactions involved the purchase of 3220 Cross Tree Way, Winston-Salem, North Carolina on July 26, 2000 in the name of Paul Hairston, a straw buyer.  This property was the third of four properties purchased in the name of Paul Hairston in less than two months. According to the factual basis submitted in support of Richardson’s guilty plea, when he was interviewed by the FBI about his involvement in these activities, he acknowledged that he and Middlebrooks had operated a ‘buyer-partner’ program where they paid ‘buyer-partners’ for the use of their credit in connection with purchasing residence in which the ‘buyer-partners’ would not live. He admitted that he and Middlebrooks had the ‘buyer-partners’ complete the initial loan applications falsely representing an intent to occupy and would provide the applications to a mortgage broker for submission to lenders.  Richardson acknowledged that ‘buyer-partners’ were used to conduct multiple transactions and stated that he knew such transactions had to be done within a 30-day period.  He further admitted splitting profits from the transactions with Middlebrooks, but failing to keep up mortgage payments as promised.  Middlebrooks admitted similar facts according to the factual basis submitted in connection with Middlebrooks‘ guilty plea.

According to the factual basis submitted in connection with Shumate’s guilty plea, Shumate had Hairston execute multiple documents required by the lenders stating that Hairston was purchasing each property as a primary residence which he intended to occupy.  Shumate then forwarded the documents with false representations to the mortgage lenders.  According to Hairston, Shumate did not provide copies of the closing documents to Hairston.  The factual basis states that Shumate claimed, in interviews with the federal authorities, that he would not close transactions for one person to purchase four properties each as a primary residence but that, in connection with the closings for Richardson and Middlebrooks, he did not realize that individuals purchased multiple properties as primary residences. 

According to court documents, Richardson stated that he and Middlebrooks knew that fraudulent information was provided to mortgage lenders, including information as to the income of the buyer-partners.  Richardson admitted that he was present at a meeting in which the mortgage broker who assisted in most of the transactions stated:  “these are all phony loans anyway.” Richardson acknowledged that he was angry that the broker had discussed the fact openly in a meeting. Although Richardson denied direct involvement with the creation or submission of false information, according to the factual statement submitted in connection with the guilty plea, other evidence contradicts his assertions.

Richardson and Middlebrooks each face a maximum of five years in prison, three years supervised release and a $250,000 fine.  As part of the guilty plea, Richardson and Middlebrooks each agreed to pay restitution of $7,650 to Member’s Credit Union and Richardson agreed to pay restitution of $185,000 to MacRich Capital, LLC

Richardson and Middlebrooks are scheduled to be sentenced March 15, 2006 and Shumate is scheduled for sentencing on March 27, 2006.

mortgage fraud