The following three defendants were indicted for mail and wire fraud arising from a scheme to defraud lenders and a title insurance company of over $4 million: Stephen J. Troese, Sr., 71, Davidsonville, Maryland; James Kevin Hughes, 52, Crownsville, Maryland; and Brenda Lukenich, 60, Hughesville, Maryland.
According to the 12 count indictment, Troese was an attorney, and owned or controlled title companies that he created in the 1980’s and 1990’s that did business in the Baltimore, Annapolis and Washington, D.C. metropolitan areas, including Troese Title Services, Inc. (Troese Title), Camp Springs, Maryland; Troese/Hughes Title Services, Inc. (Troese/Hughes), Greenbelt, Maryland; and Troese/Prestige Title Services, Inc. (Troese/Prestige), Ellicott City, Maryland. Troese entered into agency agreements with Chicago Title Company which authorized the Troese title companies to sell its title insurance policies to lenders and buyers. While the title insurance policies obligated Chicago Title to pay losses resulting from undiscovered defects in the title of the property, the agency agreements expressly provided that Troese and the Troese title companies were responsible to Chicago Title for any losses associated with fraud, dishonesty or theft.
The indictment alleges that beginning at least as far back as 2004, a substantial shortfall began to develop in an escrow account maintained by Troese Title and Troese/Hughes for the receipt and disbursement of funds in connection with real estate closings carried out by both title companies. This shortfall is alleged to have been partly the result of mistakes made during the closing process on several transactions that required costly pay-outs to resolve, and partly from several large and long-undetected thefts by individual employees, although these factors did not account for all of the deficit. In the spring of 2005, Lukenich, the escrow accountant for the title companies, advised others at Troese Title and Troese/Hughes that the shortfall totaled at least $2 million. The shortfalls were further aggravated in 2006 through 2008 as the real estate and refinancing boom that had started in approximately 2002 first cooled, then collapsed.
Because of these shortfalls, both Troese Title and Troese Hughes allegedly delayed making the required payoffs to the original lenders after each closing in order to generate a “float,” whereby funds coming into the escrow accounts from later transactions could be used to make the payments due on transactions that had already closed. Initially, funds were held for periods of three to five days, but this “hold” allegedly later grew to 10 days and even longer. By mid-2008, payments were being held for three weeks or more.
The indictment further alleges that instead of disclosing the shortfalls to Chicago Title, the defendants concealed the shortfalls. In an effort to generate cash to cover at least part of the shortfall, Troese and Hughes refinanced their homes, using Troese/Hughes as their title company. Instead of using the money from the new lenders to pay off their old mortgages as required, they allegedly used most of the money to attempt to cover the shortfall, which continued to grow over time. Although they caused the HUD-1 settlement statements to state that funds from the new lenders were used to pay off the outstanding debts, Troese allegedly caused the funds from the new lender to be used to make mortgage pay-offs on other closings previously handled by Troese Title. Because the original lenders were never paid off, the new lenders on the defendants’ residences did not have a first lien on the homes to secure the repayment of funds that the new lenders had advanced. To keep the original lenders from realizing that the homes had been refinanced, Troese and Hughes allegedly continued to make the monthly mortgage payments to the original lenders. Using this same scheme, Troese also allegedly caused a Troese employee, a manager and a president of Troese Title to refinance their three homes.
Although Chicago Title remained unaware of the scheme to cover up the shortfalls, the indictment alleges that Troese Title and Troese/Hughes employees failed on a number of occasions to uncover title defects and also had made other mistakes that resulted in numerous claims being filed against Chicago Title. In the spring of 2008, Chicago Title determined that its relationships with Troese Title and Troese/Hughes were no longer profitable, and notified Troese that as of May 31, 2008, it was terminating its relationship with Troese individually, and with Troese Title and Troese/Hughes. Chicago Title was, however, willing to continue its relationship with certain other Troese-related title companies, including Troese/Prestige, whose insurance policies had not generated a similarly high volume of claims. Accordingly, a new agency agreement was concluded that covered just those other entities.
According to the indictment, by May of 2008, Troese Title and Troese/Hughes were at least $1.5 million behind in paying off the outstanding mortgages on transactions they had already closed. The defendants knew that if these companies were unable to conduct settlements and stopped receiving additional infusions of loan proceeds to replenish the shortfall, they would quickly find it impossible to make the remaining unpaid mortgage pay-offs still owed by each company, and the entire scheme would be revealed. Troese allegedly decided that Troese Title and Troese/Hughes would continue to operate from their old offices in Camp Springs and Greenbelt, but that without informing Chicago Title, they would operate under the Troese/Prestige name and would issue title insurance policies under the new agreement between Chicago Title and Troese/Prestige. Troese allegedly hid the fact that Troese Title and Troese/Hughes had started conducting operations under the Troese/Prestige name not only from Chicago Title, but also from the manager and employees of the original Troese/Prestige office in Ellicott City. Chicago Title believed that the title insurance policies that were still being sold by the former Troese Title and Troese/Hughes offices were actually originating from the Troese/Prestige office in Ellicott City.
The indictment alleges that the defendants agreed that the initial funds generated by the secret continuation of Troese Title and Troese/Hughes under the Troese/Prestige name would be used to cover the outstanding mortgage pay-offs still owed by each company. From approximately early June until the end of the first week of August 2008, following each closing conducted under the name Troese/Prestige, an employee of Troese Title or Troese/Hughes would send a copy of the HUD-1 by Federal Express to the new lender, falsely representing that the proceeds of the loan had been disbursed to the original lender.
As a result of the scheme, Chicago Title allegedly suffered a loss of over $4 million.
The defendants face a maximum sentence of 20 years in prison on each of the eight counts for mail fraud and on each of the four counts for wire fraud. Troese and Hughes are scheduled to have their initial appearances on January 28, 2011, and Lukenich is scheduled for her initial appearance on February 4, 2011, all in federal court in Baltimore, Maryland.
The indictment was announced by United States Attorney for the District of Maryland Rod J. Rosenstein and Special Agent in Charge Richard A. McFeely of the Federal Bureau of Investigation.
An indictment is not a finding of guilt. An individual charged by indictment is presumed innocent unless and until proven guilty at some later criminal proceedings.
The Maryland Mortgage Fraud Task Force was established to unify the agencies that regulate and investigate mortgage fraud and promote the early detection, identification, prevention and prosecution of mortgage fraud schemes. This case, as well as other cases brought by members of the Task Force, demonstrates the commitment of law enforcement agencies to protect consumers from fraud and promote the integrity of the credit markets. Information about mortgage fraud prosecutions is available www.justice.gov/usao/md/Mortgage-Fraud/index.html.
This law enforcement action is part of President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
United States Attorney Rod J. Rosenstein commended the FBI for its investigative work, and thanked Assistant U.S. Attorneys Tonya Kelly Kowitz and Jefferson M. Gray, who are prosecuting the case.