Thursday, April 20, 2006

Two More Guilty Pleas in $8M Illinois Mortgage Fraud

Gary Knox plead guilty to 11 counts of bank, mail and wire fraud and conspiracy to commit money laundering and his co-defendant, former real estate appraiser, Dennis Wiese Jr., plead guilty to four counts of bank, mail and wire fraud in connection with an $8M real estate flipping scheme that operated in the Springfield, Illinois area. Frank Kelly Ciota entered a guilty plea Monday for his part in the scheme.

The original indictment, handed down in July 2005, charged Knox and Weise with bank fraud, wire fraud and mail fraud in connection with allegations that they flipped over 150 properties in the Springfield and Decatur areas of Illinois between 1999 and 2005 that involved more than $8,000,000 in loans.  Knox and Wiese were alleged to have obtained a total of more than $3,000,000 from the transactions.

According to media reports, Knox‘s attorney stated in court that Knox was pleading guilty only to the transactions specified in the indictment used to charge him which lists examples of at least 25 real-estate transactions.

Wiese told the judge that he was paid his regular appraisal fee for each transaction, and that he earned a total of about $30,000 from the scheme, according to media reports. Wiese‘s guilty plea admits the allegations of the superseding indictment but allows him to contest the length of time he participated in the scheme.

The superseding indictment alleged that Knox and Ciota obtained $3 million from the scheme and that Wiese was paid $350 to $450 per appraisal. According to the superseding indictment Knox and Ciota would recruit buyers with little or no experience in real estate investment – some of these buyers were relatives of Ciota.

According to the indictment Knox represented himself as being in the business of buying, selling and managing real estate – both individually and dba Central Illinois Management and Development Company.

The initial indictment alleged:

• Knox would identify sellers of low value or distressed rental properties in Springfield or Decatur, Illinois.  He would sometimes represent himself as an agent for real estate investors in negotiating for purchase of properties.  Knox represented to the sellers that he would complete the transactions and provide the sellers with the sales proceeds.  He led the sellers to believe that he would be compensated for arranging the sales by his investor clients and that the sales price arranged between Knox and the seller would be the amount that the buyers would pay to purchase the properties.

• In other cases, Knox and the sellers would negotiate a sales price and the seller would agree that Knox would be entitled to retain any amount in addition to the agreed sales price if he was able to find a buyer willing to pay a higher amount. According to the indictment, theses sellers were later complicit in fraudulent sales of the properties for amounts supported by fraudulent appraisals.

• Knox would fraudulently inflate the sales prices for properties. Wiese prepared fraudulent appraisals and was paid appraisal fees ranging from $350 to $450 per appraisal.  Wiese would prepare appraisals that met target amounts provided by Knox.  The appraisals utilized comparables that were in better condition and located in more favorable areas.  Knox often provided the comparables.  Wiese also created his own comps by relying on prior fraudulent sales conducted by Knox and supported by other fraudulent appraisals prepared by Wiese.  The condition of the properties was misstated.

• Knox also used other appraisers.  In at least one instance, Knox obtained comparable sales information for three Decatur properties and forged the sales properties to make it look as if they sold for over $70K more than their actual sales prices.  He faxed these forged comps to an appraiser who utilized them to prepare an appraisal to support a sale of property at almost $80K over its reasonable value.

• Knox recruited buyers who had little or no experience in real estate investment.  Knox would tell the buyers that (1) they would be paid up to $5,000 for each property purchased, (2) they could purchase properties with no money down, (3) the properties were worth the appraised amounts, (4) Knox would assist them in obtaining loans, (5) Knox would act as property manager – obtaining tenants, collecting rents and making the mortgage payments and (6) Knox would buy back the properties on contract for deed. 

• Knox primarily used to mortgage brokerage firms in Springfield and Peoria to obtain mortgage loans.  The brokerage firms often allowed Knox to assist with completing the documentation and acting as a conduit in the transmittal of information and documents between the brokerage and the buyers.  The indictment does not identify the brokers but an article in the State Journal-Register states that “a 2004 State Journal-Register investigation of Knox and Wiese found that the men had sought loans from Riverfront Mortgage Services in Peoria and State Street Mortgage and Finance Co. in Springfield. The brokers approved the loans and then sold them to other lenders.  Since then, both mortgage companies have lost their state licenses. State Street Mortgage has reopened under new ownership and with a new license.”

• Knox caused false statements to be made on many of the applications including misrepresentations regarding down payment, available cash and rental income.  Some of the purchasers in making false statements.

• Title insurance companies often allowed Knox to assist in completing loan closings and transmit documents between the title insurance companies, buyers and sellers. Knox often orchestrated the closings so the buyers and sellers would not meet.  He sometimes led buyers and sellers to believe that the large disbursements he received at closing were for repairs and improvements to the properties. Knox sometimes caused buyers or seller signatures to be forged on closing documents. In order to complete sales, Knox would sometimes have the title company issue him a check for loan proceeds before the loan closing occurred.  Knox would take the check to the bank and obtain multiple cashier’s checks – one in the name of the buyer that Knox would submit to the title company at closing for the buyer’s down payment.

• Knox didn’t properly manage the rentals, locate tenants and collect rents or make the mortgage payments.  The loans defaulted and lenders foreclosed.

Knox served time in federal prison for bank fraud and mail fraud in the 1990’s.  In 2005, Wiese agreed to a ten year revocation of his appraisal license.

mortgage fraud