Flipping Fraud in Florida

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‘FLIP THAT HOUSE’ FRAUD COST BILLIONS

SUSPICIOUS FLIPS

MIAMI-DADE: Bought for $315,000 in September 2005; sold for $479,000 two months later. Sold again for $552,000 in March 2006. Buyer defaulted a year later.

HILLSBOROUGH: Bought for $120,000 in October 2007, then sold again less than three months later for $200,000. A year later, the loan went into default.

PINELLAS: Bought for $80,000 in April 2007 and sold three months later for $235,000. The loan went into default 15 months later.

SARASOTA: One unit sold for $300,000 in January 2007 and flipped the same day for $742,000. Buyer defaulted within two years.

HERALDTRIBUNE.COM

A HERALD-TRIBUNE INVESTIGATION: IT IS ONE OF THE LARGEST WHITE-COLLAR CRIME SPREES IN FLORIDA HISTORY — $10 BILLION IN SUSPICIOUS PROPERTY FLIPS THAT HELPED TURN THE REAL ESTATE BOOM INTO THE WORST FINANCIAL CRISIS SINCE THE GREAT DEPRESSION.

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG, Staff Writers

INSIDE

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MANATEE: Bought for $1.25 million in December 2004 and flipped the next day for $1.65 million. Buyer defaulted within three years’ time.

MANATEE: Bought for $146,000 in November 2001 and sold the same day for $328,000.

MIAMI-DADE: Bought for $155,000 in July 2005 and sold the same day for $300,000.

Less than five months later, the loan went into default.

raudulent property flipping ran rampant during this decade’s housing boom, with $10 bil- ■ Hot spots for suspicious property flips. 8A lion in suspicious deals in Florida alone, a Herald-Tribune investigation has found.

■ How the Herald-Tribune The deals — many of them inflated sales among friends, family and business associates identified suspicious flips.

9A — drove up property values and tax bills during the boom, fed bank bailouts and failures af■ Flipping schemes: a field ter the boom, and fueled the foreclosure wave that has gutted property values. guide. 9A Unscrupulous property flippers would buy houses or condos, then drive up the price in ■ How flipping fraud hurts homeowners. 9A a few days or weeks by selling it to someone they knew. Buyers used the inflated price to get bank ONLINE: Starting loans for more than the property was worth, leaving money for flippers to split as profit. tomorrow, a who’s who guide to flipping in Despite their role in one of Florida’s largest white-collar crime sprees, the vast majority of unscrupu- Sarasota and Manatee lous real estate flippers will never be prosecuted. Most Florida law enforcement agencies have done lit- counties. Plus an interactive map providing tle to investigate property flip fraud. The FBI has been left to chase far more cases than it can handle. details on each of the But evidence of illegal deals is available in the public records filed when a property changes hands. 50,000 suspicious Florida flips. Heraldtribune.com/ The Herald-Tribune spent a year gathering and reviewing nearly 19 million Florida real estate flipping. transactions for red flags that can help identify flipping fraud. Using public records, including land TOMORROW: More than 30 groups of flippers deeds and mortgage filings, it found that: operated in Sarasota and ■ Since 2000, more than 50,000 Florida properties flipped under circumstances that fraud investi- Manatee counties. gators identify as suspicious — where homes, vacant land or commercial properties were bought TUESDAY: One Sarasota real estate agent and resold in 90 days or less and increased in value by at least 30 percent. Even during the hottest orchestrated $100 million in questionable deals. days of the housing boom, average home prices increased at half that rate. More than a dozen fraud WEDNESDAY: Law experts interviewed by the Herald-Tribune said such large price increases within 90 days are an indi- enforcement ignored flipping fraud as it was cator of fraud. happening — and may not , ■ In June 2005, when flipping hit its peak, more than 2 percent of punish it now.

THURSDAY: Who made all Florida real estate sales fit the criteria for potential fraud. flipping fraud possible?

■ Many of the questionable flip deals were orchestrated by real 2,000 Bankers. estate professionals. A close review of several thousand flips in NEXT SUNDAY: How to prevent mortgage fraud.

Sarasota and Manatee counties showed that 40 percent of the flippers were industry insiders — real estate agents, mortgage 1,500 brokers and attorneys.

Florida’s suspicious property flips ■ Lenders facilitated fraud by approving mortAs the real estate market boomed in Florida, 1,000 suspicious property flips followed suit. gages on suspicious transactions. In deal after The number of suspicious flips peaked in June 2005, when overall sales volume also reached its high mark.

See FRAUD on 8A

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STAFF GRAPHIC / JENNIFER F. A. BORRESEN

SOURCES: Property appraisers’ offices, 57 of 67 counties, Analysis by the Herald-Tribune

INSIDE FLORIDA

STATE’S CREDIT SOLID Florida seems to be weathering the recession better than most states, but some foresee a day of financial reckoning. 1B Arts ...................1E Classified .........1F Lottery .............2A Movie Log .......6B

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OUR 84TH YEAR NUMBER 283 6 SECTIONS

In law to thwart drug seekers, a critical hole?

15-DAY WINDOW: Critics fear

measure gives too much time to go ‘doctor shopping’

By ZAC ANDERSON and JOHN DAVIS zac.anderson@heraldtribune.com Billy Courtright got prescriptions for 250 addictive painkillers from doctors in Venice and North Port within a

matter of days last month. His wife, Linda, got dozens more.

Her teenage son, Nick Block, ingested some of those pills before he died of a drug overdose in a North Port motel room, according to federal investigators. When police found his body, his mother was lying on a bed, unconscious from an overdose, in the same room.

A new state law is supposed to prevent such “doctor shopping” for prescription pain pills, which

have become the state’s leading drug killer, but the law has a big loophole: Pharmacists have 15 days to enter prescriptions into a new electronic database.

Billy Courtright, Block’s stepfather, reportedly obtained two prescriptions from different doctors 14 days apart, leading some experts to cite the case as evidence that legislative compromises crippled the law.

Other states require much fast-

er reporting to prevent people from visiting multiple doctors for prescriptions.

“This is a very important case of a child that might have been saved,” said Dr. Rafael Miguel, a pain expert with the University of South Florida who lobbied for the new law but opposed the 15-day window.

When the new database comes online next year, doctors are supSee DRUGS on 13A

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HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

‘Flip That House’ fraud cost Florida billions

UNHEALTHY SPECULATION Flipping has long been a part of the real estate business.

Smart investors find bargain properties, fix them up or simply wait a few months and resell at a profit.

But during the past decade, changes in the way mortgages were funded virtually eliminated the incentive banks had to screen people applying for loans.

Mortgages were transformed into a commodity that could be sliced up, then bought and sold on Wall Street. Banks that once wrote mortgages carefully, knowing they could lose money, found they could pocket fees for initiating the loan and then sell it, making someone else the loser if the loan was not repaid.

Strict screening was replaced by an entirely different banking tenet — volume.

As a result, bank executives ignored warnings from employees whose job was to weed out questionable loan applications, said Jill DeLormier, executive vice president of Diligence Solutions, a Florida consulting firm specializing in bank fraud protection.

“I can’t count the times I heard, ‘Just close it, we already have it committed for sale,’ ” DeLormier said. “Volume is all that counted.”

The relaxation of lending standards combined with historically low interest rates to superheat the housing market.

And flipping was transformed into a national pastime, with Florida becoming one of the key playgrounds.

From 2000 through 2008, thousands of Florida properties doubled in value in a single day, the Herald-Tribune’s statewide analy-

Hot spots for suspicious property flips Property flips occurred in nearly every city across Florida. But an analysis by Herald-Tribune reporter Paige St. John, based on the the newspaper’s review of 19 million Florida property sales this decade, shows suspicious property flips were most prevalent in high-growth areas near the coast and along the Interstate 4 corridor. The flipping started in urban centers and radiated into the suburbs and surrounding communities. When the market peaked in 2005, only the most remote neighborhoods in Florida had not experienced property flipping.

In sheer numbers, Florida’s largest cities experienced the most flipping. (See small map below.) But adjust for population, and a different picture emerges. (See large map below.) South Florida and the Tampa Bay area nearly disappear from the map. They are replaced by smaller communities where speculation — and flipping — was most intense: Panama City, Port St. Lucie, the Fort Myers area and southern Sarasota County.

Total flips

Flips by population

SOUTHWEST FLORIDA PANAMA CITY

Adjusted for population, Florida’s most intense flipping hotspot was not Miami, but Bay County, where the vast majority of the population lives in and around Panama City.

The intensity of flipping near Panama City was nearly double the next closest community.

Flipping was driven in part by new condo towers, including Laketown Wharf and Shores of Panama.

Despite the many speculators who put down deposits before construction, today both buildings sit nearly empty.

Few places in the nation experienced a construction boom to rival what happened in places like Lehigh Acres outside Fort Myers and North Port in southern Sarasota County.

During the past decade, the number of houses doubled as developers rushed to build what speculators wanted to buy — new homes in relatively low-cost neighborhoods.

Today, the communities that flew highest during the boom are hurting the most. The metropolitan area covering Fort Myers, Cape Coral and Lehigh Acres had the highest foreclosure rate in the nation at the end of 2008.

*The way the St. Johns County Property Appraiser provided data may have excluded a significant number of sales and flips.

Flips per 1,000 transactions 5-8

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MIAMI

During the boom, dozens of new condo towers went up in Miami.

Real estate investors would buy units and flip them for a profit long before a condo tower had been built. In raw numbers, Miami-Dade County had more flips from 2000 through 2008 than any other Florida county. But adjust for population and Miami’s flipping looks small compared with other Florida communities.

While dramatic price increases and quick sales occurred almost everywhere in Florida, the Herald-Tribune analysis found that flipping hot spots emerged. The analysis looked for areas where flipping occurred more often and in closer proximity than would be expected under normal circumstances.

Clustering was driven in part by new construction. Speculators — including legitimate flippers — found these new subdivisions and condo towers attractive places to invest.

But some clustering also occurred because of fraudulent activity that concentrated in one subdivision or condo community. Concentrating in one place allowed fraudulent flippers to more easily inflate the value of real estate.

On a county-by-county basis, the Herald-Tribune calculated the rate of flips to total property transactions. Counties that experienced the most intense flipping saw as many as 15 flips per 1,000 sales from 2000 through 2008.

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The real estate boom was kind to St. Lucie County. Cheap, empty land lured developers, and the new houses on the market were an enticing target for flippers. Property values shot up, and the population of its biggest city — Port St. Lucie — nearly doubled.

But the bust brought it all to an end.

Faced with an economic crisis and one of the worst foreclosure rates in the nation, St. Lucie County commissioners declared a state of emergency in April, a move that freed more than $25 million held in reserves.

Flips in clusters

Rate of flips

Data not available

TREASURE COAST

12-15

These areas show the regions of Florida in which community-level pockets of flipping were unusually prevalent.

These areas show communities where flips occurred in unusually high concentration compared to the rest of the state.

ABOUT THE DATA: The Herald-Tribune defined suspicious flips as properties that sold at least twice in 90 days and increased in value at least 30 percent. The data used for this analysis included nearly 19 million sales from 57 of Florida’s 67 counties. Some county property appraisers could only supply a partial list of sales. For the purpose of this analysis, the Herald-Tribune discarded extremely high and extremely low sales in an effort to remove property transfers that did not reflect the actual value of a property. To generate the maps showing flipping density, the Herald-Tribune used the Surfer software application created by Golden Software.

During the boom, more sales were flips

Flips get bigger as market cools

2.5%

90

At the height of the real estate boom, the number of flips increased sharply. By June 2005, flips made up more than 2 percent of all sales in the state.

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In thousands

FRAUD from 1A deal, loan officers either failed to make the most basic checks to flag risky loans or ignored what they found. In some cases, the HeraldTribune found, bank employees knew deals were suspect but approved mortgages anyway.

■ Lenders continued to finance flips even after the boom, when property values were declining and price increases should have raised suspicion. Across Florida, more than 10,000 flips involving significant price increases occurred from 2006 to 2008 — after the market peaked in the second half of 2005. In 2007 alone, nearly $1 billion in suspicious flip deals took place.

The actual amount of fraudulent land deals in Florida is likely more than $10 billion, according to several fraud experts, who believe the newspaper’s findings are understated.

While some of the 50,000 deals identified by the Herald-Tribune may be legitimate, many more fraudulent deals were not counted because they involved smaller price increases or took place over longer periods, said Bill Black, a University of Missouri economics professor and bank fraud expert who helped the World Bank develop anti-corruption initiatives.

“It isn’t even close to the bare minimum,” Black said. “You have been so conservative in your technique. Just in the world of flipping fraud, it’s many times that number.”

Quick property flips accompanied by price increases have long been used as an indicator of fraud.

In 2003, the U.S. Department of Housing and Urban Development announced that the federal government would no longer insure mortgages on properties resold in 90 days or less — regardless of the increase in value. A report issued

by HUD stated that the sales were likely to involve mortgage fraud and therefore too risky to insure.

At least as far back as 1999, the FBI began using computerized land records to create a national database of suspicious flips similar to the one created by the Herald-Tribune for Florida.

FBI officials would not provide details about their database, but mortgage fraud experts familiar with the project said it helps identify patterns of flipping with large price increases over short periods.

Despite the unusual price increases that accompanied their sales, many of the flippers identified by the Herald-Tribune said they did nothing wrong. They described themselves as victims of a real estate downturn and said their actions had not hurt anyone.

But their manufactured sales distorted real estate prices and drove up property tax bills. The inflated sales led some homeowners to borrow more and more money against their own homes because skyrocketing sales prices had made their houses appear to be worth more. And when the bubble popped, the flippers’ bad loans saddled banks with properties worth far less than what was owed, threatening the stability of the entire banking system.

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When the real estate market began to cool, the amount of money made on flips — the price increase between the first and second sale — actually increased. This may be because many investors began manufacturing sales to associates when they were unable to sell properties legitimately during the downturn.

60 Florida property sales peaked in June 2005

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SOURCES: Herald-Tribune analysis of Florida property appraisers’ sales data, U.S. Census Bureau

sis found. In some new subdivisions, investors from cold-weather regions snatched up entire streets of new homes. Many were back on the market the same day, waiting for the next speculator to come along.

The number of suspicious flips began a steady climb in early 2004 and had tripled by the time sales peaked in summer 2005.

In June that year — a month before “Flip This House” premiered on television — the state averaged 80 suspicious flips a day. That month alone, real estate flippers pocketed $242 million more than they originally paid for their properties, a transfer of wealth nearly equal to every flip completed in 2000.

The speculation drove every aspect of Florida’s economy. Lenders and real estate companies made millions in fees and commissions. Contractors had more work than they could handle. Governments, collecting record property

taxes, hired new employees and awarded raises to everyone from police officers to code compliance officers.

The volume of real estate sales provided perfect cover for fake sales and manipulated property values.

“It became easy to do any type of mortgage fraud,” said Scott Friedman, a special agent with the Florida Department of Law Enforcement. “Even people who never thought they’d do that type of thing found themselves caught up in it.”

FROM FLIPS TO FRAUD At its heart, illegal flipping is a mechanism to artificially drive up the value of properties. It becomes mortgage fraud when those artificial values are used to justify bank loans.

During the past decade, flippers honed schemes that allowed them to secretly inflate the value of homes. Often everyone involved

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STAFF GRAPHIC / JENNIFER F. A. BORRESEN

was a willing participant, leaving few victims to complain to authorities.

Sarasota real estate investor Neal Mohammad Husani is one of Florida’s most notorious property flippers.

From 2004 through 2006, Husani bought seven pieces of land in the Sarasota area for $42.5 million. In each case he increased the price by millions, then flipped them on the same day to his thenpartner, Michael Tringali.

According to federal prosecutors, who indicted Husani and Tringali last July on charges of mortgage fraud and money laundering, Tringali never actually paid for the properties.

Instead, the men faked the sale to qualify for loans that covered Husani’s original purchase price and left $40 million to split as profit.

Not long after his deals, which are among those captured by the Herald-Tribune database, Husani

left the country. Mortgage payments on the loans stopped, leaving banks with more than $70 million in defaults on property worth a fraction of that amount.

Husani’s flips remain among the most egregious to spill out of Florida’s real estate bubble.

But similar approaches were used by thousands of real estate players going back as far as the mid-1990s.

In the Herald-Tribune’s review of flips statewide and in Sarasota and Manatee counties, the newspaper found that some investors brought their own twist to flipping.

One group in Sarasota held on to properties for several years, trading among the same buyers only when someone in the circle needed cash through a mortgage loan.

Another flipper pulled together investors to repeatedly trade properties back and forth so he could collect real estate agent and mortSee FRAUD on 9A

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HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD FRAUD from 8A gage broker fees on each sale.

At least one other flipper sold property as part of an investment partnership. He would buy a home, recruit investors through real estate seminars, then promise to pay the monthly mortgage if the investors would purchase the property in their name. The goal was to sell the house again and share the profit. But when the real estate market turned, the original flipper simply walked away.

AIDED BY BANKS Banks were in a unique position to recognize and stop questionable property flips. But like millions of property investors during the boom, many lenders believed real estate values would continue to rise.

Even when sales began to slow in the second half of 2005, banks continued to approve loans on questionable flips between related parties.

In fact, the Herald-Tribune’s analysis shows, the inflated values for suspicious flips became even larger as the real estate market got worse.

In 2005, the median difference between what a flipper paid for a house and what he sold it for was $65,000. A year later, after the real estate market had begun a noticeable decline, that amount increased to more than $73,000. And by 2007, the spread between the original purchase price and the flip was still more than $70,000.

This intensification occurred, in part, because banks allowed struggling builders and real estate investors to bail themselves out by taking out larger and larger bank loans against their properties.

That is what happened to Shlomo Manor, a real estate agent in Hollywood, Fla., who for years worked with Israeli nationals wanting to invest in Florida real estate.

Manor was one of the flippers identified by the Herald-Tribune. His deals would not be fraudulent if he disclosed to banks his relationship to those selling him property. But they do help illustrate lax lending practices by banks.

In 2004, deeds show, Manor and his investors started buying new homes and vacant buildings in St. Lucie and Lee counties. The market was so hot that Manor easily flipped the properties to willing buyers, Manor said during a telephone interview from Israel.

But he said buyers disappeared in late 2005. He and his clients were left holding 10 unsold houses and dozens of vacant lots.

Hoping the market would turn and in need of a short-term fix, Manor said he and several investors participated in a number of sales to each other. Mortgage records show those sales allowed Manor and his associates to get $1.38 million in fresh bank loans.

He said he also had his wife buy one of the properties because of pressure from an investor who was not happy that the house would not sell.

Manor eventually defaulted on six loans totaling $1.65 million. He defended the flips, saying they were necessary to protect his clients.

“When you bring in investors, you can’t throw them in the garbage,” Manor said.

“If you are not loyal to your customers, you will lose them.”

TOMORROW: More than 30 groups of flippers operated in Sarasota and Manatee.

THE REPORTERS Michael Braga has been a reporter at the Herald-Tribune since 2001, and has covered real estate since 2004. He is also an assistant business editor.

Matthew Doig has been a reporter at the HeraldTribune since 2001 and has been on the newspaper’s investigative team since 2004.

Chris Davis is investigations editor at the Herald-Tribune, where he has worked as a reporter or editor since 1997.

How Herald-Tribune identified $10 billion in suspicious flips

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG Staff Writers It is impossible to determine exactly how much housing fraud occurred during the recent real estate boom.

But the Herald-Tribune used commonly accepted indicators of fraud to sort through 19 million sales and highlight those that raise clear red flags for one type: illegal property flipping.

The newspaper looked for properties that sold at least twice in three months and increased in price by 30 percent or more. Even during the real estate boom’s hottest days, average home prices increased at only half that rate.

More than a dozen real estate and fraud experts interviewed by the Herald-Tribune said such price increases alone are enough to make the flips highly suspicious.

Across Florida, the newspaper found 50,000 property deals involving $10 billion in sales that met the criteria for likely fraud.

Each of the experts, which included Florida mortgage fraud investigators, nationally recognized academics and bank fraud-prevention consultants, said the HeraldTribune’s methodology was sound. Most said $10 billion was a reasonable estimate and at least three said the figure underestimated flipping fraud.

Bill Black, an internationally known bank fraud expert who helped the World Bank develop anti-corruption initiatives, said the

amount of flipping fraud in Florida was far more than $10 billion.

“Just in the world of flipping fraud, it’s many times that number,” said Black, who is also an economics and law professor at the University of Missouri.

The Herald-Tribune’s pool of suspicious flips contains legitimate real estate sales. But thousands of other fraudulent deals were not captured because they involved smaller price increases or occurred over a longer time, Black and several other experts said.

In addition, before calculating the amount of questionable deals, the Herald-Tribune discarded property flips that were less likely to be fraud. For example, large price increases can appear to have occurred on the same day because of the way deeds are recorded for newly built homes and condos.

The first sale may actually have occurred before the house was built and the second sale many months later when the home was complete.

To eliminate such sales, the newspaper excluded more than 5,000 same-day flips worth about $3 billion. That process left out nearly 2,500 flips that did not necessarily occur on the same day, but appeared to be same-day transactions because of the way data was provided by some county property appraisers.

Miami-Dade, Pinellas and several smaller counties could only provide the month and year of their transactions, meaning any sales

that occurred in the same month appeared to have occurred on the same day. Those sales — including more than 1,400 in Miami-Dade alone — were therefore not counted in the fraud estimate.

The newspaper also excluded properties that sold for less than $10,000 or increased in price more than 300 percent to remove extreme price changes that might have other explanations.

“While it’s impossible to quantify precisely, Miami-Dade and Florida have been at the top of the indices for years,” said Ann Fulmer, vice president of business relations at Interthinx, one of the nation’s leading providers of mortgage fraud prevention tools for lenders.

“Under the facts you outline, $10 billion is probably a conservative estimate.”

In addition to consulting with experts, the Herald-Tribune tested its data by more closely examining several thousand deals.

The newspaper reviewed more than 3,000 property flips in Sarasota and Manatee counties for additional signs of mortgage fraud.

Those signs include foreclosures soon after sale and large price increases on sales between friends, family members and business associates. The newspaper also looked for patterns of repeated flipping by real estate investors.

After reviewing thousands of pages of deeds, mortgage filings and other public records, the Herald-Tribune identified more than $500 million worth of deals that dis-

play multiple signs of fraud in Sarasota and Manatee counties alone.

Sarasota and Manatee account for 5 percent of the 50,000 suspicious Florida deals. That suggests there may have been $15 billion in fraudulent deals statewide.

Finally, the Herald-Tribune used the standard statistical practice of using a smaller random sample to draw conclusions about a larger pool. The newspaper randomly selected 100 flips from across the state and closely reviewed the deals and the parties involved for the most obvious indicators of fraud.

Chris McCarty, director of the Survey Research Center at the University of Florida, said the random sample method used by the HeraldTribune is a valid way to draw conclusions about the larger pool.

Mortgage fraud investigators reviewed each of the deals at the Herald-Tribune’s request. In most cases, the investigators said there was not enough information available to determine if the case involved fraud. However, at least 12 percent of the deals displayed such obvious indicators that the investigators flagged them as likely fraud.

When applied to the entire pool of flips, that means just the most obvious cases of fraud amount to more than $1.6 billion in property deals. Experts say the actual amount of fraud is undoubtedly more because many flippers are able to avoid leaving behind obvious clues.

MANATEE: One unit sold for $557,000 in December 2005 and resold the same day for $725,000.

SARASOTA: Bought for $814,000 in January 2001 and resold the same day for $1.1 million.

HILLSBOROUGH: Bought in July 2006 for $87,000 and sold less than two months later for $151,000.

SARASOTA: Bought for $324,000 in February 2007, then sold two months later for $585,000. Loan went into default in December 2007.

SARASOTA: Sold five times in four years, with the value increasing from $600,000 to almost $2 million in 2004. After default, sold for $910,000 at auction.

SARASOTA: Bought for $10.4 million in January 2006 and sold the same day for $24.6 million. A year later, the bank was forced to sell for $10.7 million.

The flip scheme: a field guide

By CHRIS DAVIS chris.davis@heraldtribune.com Traditional real estate flippers buy houses, make improvements and resell at a profit. But a host of schemes exist to artificially drive up prices or convince lenders to make oversized loans.

Some of the most common flip schemes: THE STRAIGHT FLIP An investor buys a parcel and flips the property to an associate for a much higher price. No money changes hands. Instead, the buyer gets a loan based on the inflated price, and buyer and seller split the bank’s money. If they cannot sell to an outside buyer, they eventually walk away from the mortgage.

THE DAISY CHAIN A group of investors buy a number of properties in the same general area. Group members flip among themselves for higher and higher prices, but avoid selling any one property multiple times between the same people. The deals appear to drive up the value of all properties in the area. Members then sell at the inflated prices to outsiders or get loans for the inflated amounts.

THE INVESTMENT SCHEME A property flipper buys a house and flips it for a profit to an investment “partner.” The deed and the loan are put in the new buyer’s name, but the new buyer signs a contract granting the original flipper a stake in any future sale.

In exchange, the flipper promises to pay the mortgage — usually by finding renters — until the two can sell the house at a profit.

The flipper may do this over and over, allowing him to use other people’s credit to buy more houses than he could afford on his own. If the real estate market gets stronger, the house can be flipped to an outside buyer for even more profit. But if things go sour, the flipper walks away, leaving his investors to deal with the financial losses and foreclosures.

THE BUILDER BAILOUT Some builders who borrowed money to develop homes were unable to sell when the market turned. Under pressure to repay loans, these builders sold the properties to themselves or their associates at prices no one else would pay.

The sales helped them get loans that repaid the original cost to build the homes. Eventually, the

builders land in foreclosure on personal mortgages.

Real estate investors used similar schemes to bail out themselves or their clients. When no one would buy their properties, they inflated the value, arranged a flip to an associate and borrowed enough to pay the monthly mortgage for a year or two.

THE ASSIGNMENT Most of the time, a seller must file a deed with the clerk of court and pay real estate taxes on transactions. But there is a loophole. A buyer is allowed to “assign” the property to someone else.

The legitimate use of assignment is to buy property on behalf of a third party. But it can also be used to manufacture flips and avoid paying taxes.

Before closing, the buyer assigns the property to a company, a relative or an associate for a higher price. This allows the sale price to be inflated without clueing in a seller, who is not part of the scheme.

Because only the higher sale price is recorded, it can be used to borrow more than the property actually cost.

How flipping fraud hurts homeowners Even if you watched Florida’s real estate boom from the sidelines, the speculation and flipping over the past eight years have affected you. Here’s how: PROPERTY VALUES When property flips at inflated prices, those deals artificially drive up the market value of homes for miles around.

The inflated sales help establish a baseline of what property in a community is worth. Flippers know if they can sell one property for an inflated amount, that sale can be used to justify additional inflated property transactions. Before approving loans, banks perform appraisals that compare the sales value of the property being purchased with similar properties.

The same process occurs when refinancing or applying for a homeequity loan. Based on inflated sales in your community, a bank may allow you to borrow too much and leave you owing more than you could hope to recoup when selling.

PROPERTY TAXES Elected property appraisers set the taxable value on your house by looking at sales of properties similar to yours. Properties that are sold between relatives are usually not considered because they are not “arm’s-length transactions” and therefore may not reflect the true value.

But property appraisers often are unaware when flips occur between business partners or associated parties who do not share the

same last name.

The Herald-Tribune found that suspicious flips have been used to help set taxable value, leading to higher tax bills.

FORECLOSURES A Herald-Tribune analysis of suspicious flips in Manatee and Sarasota counties suggests that flipped properties are more likely to end up in foreclosure.

Experts say that the local trend likely occurred across Florida, so that areas of high speculation were left with high levels of foreclosure.

More foreclosures in a given community means more downward pressure on real estate prices; the end result is that home values drop.

In addition, studies show a link

between an increase in vacant homes and an increase in crime.

FEDERAL BAILOUT When a property’s value is artificially inflated, a bank may be stuck with an overvalued asset if the homeowner defaults on the loan.

The crush of foreclosures following the real estate boom left banks saddled with properties worth far less than the mortgages. Banks faced such big losses that they did not have enough capital to cover them and had to stop making loans of all kinds. America’s banking system nearly shut down in October.

As a result, the federal government spent billions in taxpayer money to recapitalize banks and rescue other financial institutions.

— Chris Davis

*

WATSON DENIED Golfer Tom Watson misses a chance to make history, losing the British Open to Stewart Cink, right. 1C

MONDAY, JULY 20, 2009 ❘ 75¢

HERALDTRIBUNE.COM

INSIDE

LAKEWOOD RANCH CONDOS Mark Riley stands next to the $300,000 Mercedes Maybach he leased during the boom. Unhappy former clients say he orchestrated flips in Lakewood Ranch, rarely selling to outsiders. The toll: $30 million in defaults. 7A

FLIPPERS’ TOLL ON GULF COAST: HALF A BILLION IN DEFAULTS A HERALD-TRIBUNE INVESTIGATION: IN SARASOTA AND MANATEE COUNTIES, 37 GROUPS OF PROPERTY FLIPPERS NOW ACCOUNT FOR NEARLY HALF A BILLION DOLLARS IN

SARASOTA INVESTMENT SEMINARS

DEFAULTS. REAL ESTATE INSIDERS ARE AT THE HEART OF MANY OF THE GROUPS.

Arthur Seaborne leaves his office in downtown Sarasota.

Former clients say Seaborne recruited investors into property-sharing ventures that guaranteed him a profit and left investors with mortgages they could not pay. 8A

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG, Staff Writers

PALMETTO INVESTMENT CLUB

Marc Mailloux outside his home in Palmetto. The real estate agent and his associates bought at least 158 properties. But when the market cooled, they started selling to each other as a way to get more bank loans. 6A

GULF COAST EASY TARGET FOR FLIPS The Herald-Tribune identified 37 groups of property flippers operating in Sarasota and Manatee counties this decade. 9A

HERALDTRIBUNE.COM/FLIPPING: Onlineonly profiles of more than 100 people in Sarasota and Manatee counties who were involved in property flips. Plus an interactive map that lets you drill into the details on each of the 50,000 suspicious Florida flips.

YESTERDAY: A Herald-Tribune investigation of flipping fraud finds $10 billion in suspicious Florida deals.

Find yesterday’s story at heraldtribune.com/flipping.

TOMORROW: One Sarasota real estate agent orchestrated more than $100 million in questionable deals.

WEDNESDAY: Law enforcement ignored flipping fraud as it happened — and may not punish it now.

THURSDAY: Bankers made flipping fraud possible.

A

ll across Sarasota and Manatee counties, the price increases defied logic.

More than 100 properties from Palmetto to North Port doubled in price in a single day during the recent real estate boom. Proposed condos — no more than ideas on paper — flipped two or three times before anyone moved in.

Some investors bought up dozens of houses within a few blocks. Within weeks or months, they flipped them at a profit.

A yearlong Herald-Tribune investigation has found that many of these sales cannot be explained by shrewd deal-making or as an innocent consequence of the real estate boom. Instead, they were manufactured by property flippers who found ways to drive up housing prices so they could make money at the community’s expense.

The Herald-Tribune examined more than 3,000 property flips that occurred since 2000 in Sarasota and Manatee counties. Based on interviews with more than 100 investors and real estate professionals and a review of thousands of pages of deeds, mortgages, foreclosure filings and other public records, the Herald-Tribune found: ■ At least 37 groups of property flippers operated in Sarasota and Manatee counties. The groups bought hundreds of properties worth more than $350 million and sold them to associates for inflated prices.

■ The flippers identified by the Herald-Tribune — and the people who ultimately bought their properties — have so far defaulted on more than $450 million in mortgage loans. Their defaults account for $1 in every $13 lost to foreclosure in Sarasota and Manatee counties from 2005 through 2008.

■ Nearly 40 percent of the people involved in questionable flips in Sarasota and Manatee counties were industry insiders — real estate agents, developers, lawyers and mortgage brokers. Of the 37 groups discovered by the newspaper, 21 were organized by real estate agents or mortgage brokers.

■ Most flipping circles were organized by a leader who either recruited investors on the promise of easy money or conspired with friends and associates to sell properties at inflated prices. Some of these investors did not realize they were buying properties at inflated prices; others willingly lied about sales prices to obtain mortgages that more than covered the actual purchase.

■ Some of the people who organized or participated in flips were considered leaders of their profession. One was recognized as one of the top 50 Re/Max real estate agents in the world. Another won multiple awards from the Mortgage Bankers Association of Florida. Some flippers identified by the HeraldTribune were seen as key clients by local banks and were allowed to pick their own appraisers or had loan approvals expedited to quickly close deals.

■ Widespread flipping occurred in neighborhoods of all kinds. Some groups focused on new develop-

SUNDAY: How to prevent mortgage fraud.

INSIDE

See FLIPPING on 6A

40th ANNIVERSARY OF THE FIRST LUNAR LANDING

SARASOTA

HOSPITAL MAY UP RATE The increase would cover growing expenses and fund building projects at Sarasota Memorial. 1B

Before a giant leap, plenty of anxiety

1931-2009

APOLLO 11: Local man was

FRANK McCOURT DIES His Pulitzer Prize-winning book, “Angela’s Ashes,” told of his impoverished Irish childhood. 4A Classified ........6C Comics .............6B Lottery .............2A Movie Log .......5B

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OUR 84TH YEAR NUMBER 284 4 SECTIONS

part of the team that put the moon within reach

By BILLY COX billy.cox@heraldtribune.com ANNA MARIA — On the day the Earth stood still for the Apollo 11 drama on July 20, 1969, a Grumman engineer who tested and retested the lunar module was on the edge of his seat. Powerless to change things now, Dick Morash could only hope he had asked all

A NICHE IN TIME A new Sarasota company helps the lawyers helping homeowners in foreclosure.

Business Weekly

the right questions and run the right tests.

Astronauts Neil Armstrong and Buzz Aldrin were riding the most thoroughly inspected flying machine in the history of flight as it approached the moon’s Sea of Tranquility. But with memories of astronauts consumed by a pad fire and colleagues obliterated in a rocket-engine explosion, Morash knew the high frontier was smeared with the debris of past miscalculations.

“It was nail-biting,” recalled Morash, 76, now retired in Anna Maria. “I guess I was like a zombie, hoping it would work.”

An estimated 500 million people See APOLLO on 2A APOLLO 11: A look at how the historic mission was executed. 2A

AT SEA: A man linked to the Apollo 11 mission couldn’t watch it on TV. 2A

ONLINE: See more historic photos and watch NASA’s restored video of the July 20, 1969, moon walk at heraldtribune.com.

Astronaut Edwin E. “Buzz” Aldrin Jr. poses for a photograph beside the U.S. flag deployed on the moon on July 20, 1969. ASSOCIATED PRESS ARCHIVE

6A Monday, July 20, 2009

www.heraldtribune.com

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Flipping hot spots

Flipping toll: $73 million just at local banks

Herald-Tribune reporter Paige St. John mapped the amount of real estate flipping in each square mile of Sarasota, Manatee and Charlotte counties and found that suspicious flips occurred in nearly every residential neighborhood. But as the dark clusters show, hot spots emerged in some communities. Flipping was most intense in areas with a lot of new construction, such as Lakewood Ranch, and in Bradenton, North Port and other places where housing prices were lower.

French Creek Court Sarasota mortgage broker Arthur Seaborne bought about 21 homes in one 20 homes North CountyCounty neighboron thisManatee East Manatee hood street and and quickly quickly flipped flipped them them to investors for what appear to be inflated prices. Many are now in foreclosure.

75

41

FLIPPING from 1A ments in Lakewood Ranch. Others preferred luxury waterfront houses on Bird and Siesta keys or duplexes in the working-class neighborhoods in and around Bradenton.

■ When the market cooled, flippers and their business partners stuck lenders based in Southwest Florida with about $73 million in bad loans. Although Sarasota-area flippers got most of their loans from national lenders, their mortgage defaults hit aggressive local banks especially hard. Those defaults helped doom Bradenton-based First Priority Bank.

The Herald-Tribune found that some of those involved in flips were nothing more than naive investors. They paid far more than they could afford believing they could sell the houses before the bills overwhelmed them.

Others were irresponsible speculators who bought house after house with little or no money down and no clear way to pay their mortgages if the houses could not be resold.

Flipping schemes uncovered by the Herald-Tribune were so common that some investors who participated believed they did nothing wrong.

They viewed flipping as a legitimate financing tool, an easy way to demonstrate that property had increased in value so that banks would lend money

64

70

MANATEE COUNTY

University Parkway

SARASOTA COUNTY

Bradenton In working-class neighborhoods in and around Bradenton, one group bought at least 158 properties and legitimately flipped many to outside buyers. When the market slowed, they sold properties to each other, allowing them to obtain bigger loans from the banks.

Fruitville Road

Bee Ridge Road Clark Road 41

Waterfront property A Sarasota real estate agent working with 28 investors bought and sold dozens of properties along the Sarasota County waterfront. In some cases, properties were sold from one investor to the next several times.

75

Lakewood Ranch Demand in some new Lakewood Ranch developments, particularly the WaterCrest condominiums, was so high that banks approved loans on properties that nearly doubled in value in a year.

THE DIFFERENCE BETWEEN LEGITIMATE FLIPS AND FRAUD Property flipping is perfectly legitimate when transactions are arm’s length — when buyers and sellers act independently. It becomes fraud when buyers and sellers conspire to artificially drive up prices. And if they inflate sales prices to get larger mortgage loans, they commit mortgage fraud.

against the equity. Banks fed that belief by approving deal after deal.

But others identified by the HeraldTribune tricked investors into buying overpriced homes or conspired with associates to fraudulently drive up housing values.

Many arranged sales with fake prices so they could get loans that more than covered the cost of a house. Then they pocketed the extra money.

The following pages have deeper looks at several of the local groups whose real estate flips have led to the most defaults.

Tomorrow, the newspaper takes a closer look at the area’s most prolific flipping group.

Online at Heraldtribune.com/flipping, read profiles of more than 100 local people involved in suspicious property deals — some of them organizers, some of them occasional participants and some of them innocent victims.

Venice Ave. 75

Price Blvd.

North Port Although the Herald-Tribune did not find the same type of organized flipping schemes in North Port that it found elsewhere, few places in the region experienced more suspicious flips per square mile than the residential neighborhoods that largely make up this city. Many of the flips displayed classic signs of fraud, including foreclosure soon after purchase.

In Southwest Florida, North Port was among the communities with the most new houses built during the boom.

41

Dig into property flips in your neighborhood Online at heraldtribune.com/flipping, an interactive map displays all of the more than 50,000 suspicious Florida real estate deals uncovered by the Herald-Tribune analysis. Click on the map button, then double click on the map to zoom in and see specific sales. Or type in a city (Sarasota, Fla.) or a street address to see flips in your neighborhood.

75 41

By clicking on the dots, you can view the details of any of the 50,000 suspicious transactions. The size of each dot represents the sale price of the property. The dots are also color-coded so at a glance you can see how big the price increases were in your neighborhood.

During the boom, the number of suspicious property flips soared

As the real estate market boomed in 2005, suspicious property flipping intensified in Sarasota, Manatee and Charlotte counties. The charts show the number of suspicicous flips in each county for every month this decade.

90

90

Manatee County

80

80 Property flipping intensified in

Manatee County as it did across the state during the height of the 60 real estate market. In summer 2005 there were 155 flips in 50 Manatee County, nearly as many as occurred in all of the previous 40 year.

70

70

60 50

90

Sarasota County

80

In June 2005 alone, there were 89 suspicious property flips. That is about the same number of flips that occurred in all of 2001 in Sarasota County.

70 60 50

40

40

30

30

30

20

20

20

10

10

10

0

0 Jan. ’00

Jan. ’01

Jan. ’02

Jan. ’03

Jan. ’04

Jan. ’05

Jan. ’06

Jan. ’07

Jan. ’08

Jan. ’00

Charlotte County In summer 2005, more than 200 suspicious property flips occurred — nearly as many as occurred in all of 2002 and 2003.

0 Jan. ’01

Jan. ’02

Jan. ’03

Jan. ’04

Jan. ’05

Jan. ’06

Jan. ’07

Jan. ’08

Feb. ’00

Jan. ’01

Jan. ’02

SOURCE: Herald-Tribune analysis of Florida property appraisers’ sales data

cooled in the second half of 2005, the investment group, including Marc Mailloux, Tony Toledo, Brian Sirois, Vincent Bower and Danette Bloomer, began struggling to sell their houses to outside buyers.

Sirois said it became more difficult to get banks to approve refinancing as the real estate market slowed, so club members began selling properties to each other to get back some of the money they had invested in improvements.

If one group member renovated a house and no one would buy it, the price was marked up and a sale arranged to another member.

That sale was used to apply for fresh loans.

Before summer 2005, property deeds show, investment club members rarely sold properties to each other — on average two a year from 2000 to 2004. In the follow-

Jan. ’04

Jan. ’05

Jan. ’06

Jan. ’07

STAFF GRAPHIC / JENNIFER F. A. BORRESEN

Bradenton area ‘club’ bought 158 properties

By MICHAEL BRAGA and CHRIS DAVIS Staff Writers Drive a few miles through the residential neighborhoods around downtown Bradenton or along the waterfront in Palmetto and chances are you will pass a house that was once owned by a self-described Palmetto “investment club.”

Since 1998, the investors have purchased at least 158 properties in Manatee County. Their goal was to buy, fix up and sell properties as rapidly as possible.

When they could not find buyers for the houses they fixed up, they would get mortgages, rent out those houses and wait for an opportunity to sell.

The investment strategy worked for years while property values were increasing.

But when the real estate market

Jan. ’03

ing three years, the club sold 25 properties among its members, all at escalating prices that allowed them to get larger bank loans.

After receiving the new loans, club members kept making interest payments for years, hoping they could eventually sell the properties at a profit. But that never happened, Sirois said.

“I was losing money the whole time I was paying those mortgages,” Sirois said. “Trust me, we all took a beating on this.”

Because the houses the group bought were primarily duplexes and houses at the most affordable end of the housing spectrum, the economic downturn hit them especially hard.

Their pool of renters dried up as construction workers and laid-off manufacturing employees left the area. Then the banks froze their access to fresh capital, which pushed

them into foreclosure.

Since April 2008, the group has defaulted on 70 loans. In addition, group members have ceded 16 other properties to a private financier, Alan P. Richards of Sarasota.

That means people associated with the investment club have defaulted on 86 loans totaling $17.1 million in the past 16 months.

Dennis Black, a Port Charlotte real estate consultant and appraisal instructor, said the rash of foreclosures is the result of bad lending practices by banks. Lenders should have looked at how much rent could be charged for each property and written loans only for amounts that could be justified by the rental income.

Instead, Black said, he believes lenders wrote oversize mortgages based on the belief that property values would continue to rise.

“No lender was basing their decision on investment criteria.

They were basing it on the hope that the borrower could sell at a higher price,” Black said.

“Some people didn’t believe it would end. But bubbles always end. The primary function of housing is shelter. If rents you obtain do not support the purchase price, then something has to give.”

Sirois said the group operated

within the law and never intended to inflate values. He pointed out that banks had their own appraisers review each deal and always signed off on the mortgages.

“Did we do anything to their appraisers? Did we do anything incorrect?” asked Sirois, a Realtor who once worked at Vantage Realty of Florida in Palmetto. “We would buy a property for $80,000 and put $30,000 in and then the bank would send an appraiser to reappraise the property. Sometimes the properties were double appraised to make sure the value was there. We didn’t care.”

Mailloux, another Vantage Realty agent, told the Herald-Tribune that he and his fellow investors were legitimate investors who found themselves in a desperate situation.

He said their property flips were not designed as scams, but were the only means they could find to avoid foreclosure.

Mailloux said he depleted his bank account, spending several hundred thousand dollars paying mortgages on properties until he could no longer make payments.

“I was just going down this road that was a financial train wreck,” he said. “It turned into the American nightmare.”

www.heraldtribune.com

Monday, July 20, 2009 7A

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

In March it was moving day for Mark P. Riley, left, and Richard S. Waid at their Westchester Circle home in Lakewood Ranch. As a real estate agent during the boom, Riley benefitted from repeated flips he helped arrange among his friends and neighbors. Today, Riley and many of his clients are in foreclosure. STAFF PHOTOS / THOMAS BENDER

Riley: agent at the center of $30 million in defaults

Mark Riley’s clients were among the many who flipped condos at WaterCrest in Manatee County. Today, one in four units is in foreclosure.

WaterCrest condos a microcosm of everything that went wrong

By MICHAEL BRAGA and CHRIS DAVIS Staff Writers Just a few years ago, Mark P. Riley was a rich man.

On the back of the real estate boom, he earned enough money to buy a $2 million home in Lakewood Ranch. He and his life partner shared a fleet of luxury cars, including a $300,000 Mercedes Maybach with recliner rear seats and a built-in champagne refrigerator.

Riley made so much money flipping homes that he pledged to pay nearly half a million dollars to put his name on a hockey arena set for construction in eastern Manatee County.

Today, all of it is gone.

The house has been seized by the bank, the luxury cars returned or repossessed. The hockey arena is a half-finished shell, abandoned when the economy began to slump.

And Riley has left a trail of financial ruin and unhappy clients.

Interviews with Riley clients, along with public records and other documents obtained by the Herald-Tribune, reveal that from 2004 to 2007, Riley acted as the real estate agent and organizer of repeated flips in Lakewood Ranch.

The flipping seeded speculation in the growing community.

To date, it is one of the most financially damaging groups to operate in Manatee County, leading to more than $30 million in defaults.

The basic premise was simple: Identify investors, flip the same properties several times from one to the next and cash in on real estate price increases driven by the speculation.

In three lawsuits filed against Riley and his company in Manatee County’s circuit court in 2005 and 2006, former clients describe him as a flipping orchestrator who promised to flip under-construction properties before the bills came due.

Riley and his company “engaged in a scheme to flip condominium units at WaterCrest numerous times in order to collect repeated commissions,” Stephen Smith alleged in one of those lawsuits, filed in January 2006.

According to several of Riley’s investors, including former neighbor Jim Scalici, Riley would convince people to buy a condo, promising them riches with no risk. Then Riley arranged sales from one investor to the next, rarely if ever selling to outsiders, Scalici said.

In the beginning, everyone prof-

ited. Investors made several million dollars selling property, primarily in the WaterCrest condo development. Riley made hundreds of thousands in commissions on the repeated sales he brokered. But it all crashed with the fall of the real estate market.

In interviews with the HeraldTribune, Riley said he did nothing wrong. He said he was merely a facilitator, helping sellers find buyers and vice versa.

If there was any collusion to drive up property values, he was not a part of it, he said. In fact, he said, sale prices in each deal were set by the seller and backed up by an independent bank appraisal.

Riley said that all the transactions he arranged as a real estate agent were “arm’s length” and that he did not recruit his buyers.

“All of these people came to me; I didn’t seek them out,” he said.

But deeds filed with the Manatee County Clerk of the Circuit Court show that sales brokered by Riley in Lakewood Ranch primarily involved about a dozen people, many of whom knew Riley before the sales.

Buyers involved in the transactions included Riley’s neighbors Scalici and Genaro Epifanio; a friend and neighbor, Linda Maughan, and her sister, Milene Moses; and Mike Shackelford, a real estate agent who worked with Riley.

Other buyers were referred to Riley through his employees or had previously used him as their real estate broker.

In a 2005 Herald-Tribune story, Riley described himself as a real estate agent with ready investors waiting for the next opportunity.

“I get calls from builders and developers because they know I have the buyers,” Riley said at the time.

In his recent interviews, he said sales among friends are perfectly legitimate.

“What could be more normal than that?” he said. “You have three or four friends. You call them and tell them you just bought and sold condos and made a pile of money, and they say they’d like to do that, too.”

FLIPPING WATERCREST Just as the real estate market was heating up in Sarasota, Riley left his agent’s job at Michael Saunders & Co. and struck out on his own.

Confident and charismatic, the 48-year-old rapidly joined the top ranks of local society, winning the trust of people of means.

By early 2005, he and his life

James W. Scalici at the Lakewood Ranch house he originally bought as an investment with real estate agent Mark Riley. Scalici later bought Riley out. He said he was told to lie about his income to qualify for a loan.

partner, Richard Waid, had started their own real estate company and mortgage brokerage — Mark P. Riley Luxury Real Estate Group and Mortgage Concierge — giving them the ability to broker their own deals and navigate the mortgage industry on behalf of clients.

It did not take long for an opportunity to present itself.

The year before, Homes by Towne had put nearly 200 new condo units on the market in its WaterCrest development in Lakewood Ranch. Moderately upscale, lakefront and well-located, the development became a microcosm for everything that went wrong during the housing boom.

Demand was so high that the developer had to hold a lottery to decide who would get a unit. Hopeful crowds were stocked with speculators who planned to flip their units before they were even built.

Each new flip generated a new sales commission for whoever brokered the deal.

“Mark made over $1 million in WaterCrest flipping condos back and forth to the same people two or three times,” said Scalici, the onetime Riley neighbor who participated in deals with Riley.

Closing documents from one transaction show that Riley made a real estate commission of as much as 7.5 percent on sales in WaterCrest.

Riley’s clients bought and sold the units as many as three times within a year, meaning Riley could collect $150,000 or

more on a single unit by the time it was built.

Unit 201 at 6406 WaterCrest Way followed a typical path. In November 2005, one of Riley’s clients bought the condo from the developer for $550,763. Three weeks later, Riley’s neighbor, Linda Maughan, bought it for $675,000, a 22.5 percent increase. Deed records show she sold it the same day to Scalici for $825,000, a 50 percent increase over the original price.

Riley said that the dates on many of the deeds are misleading because the sales occurred over a longer period of time and the deeds were simply filed all at once when the condo construction was completed. Even so, the time that passed between each sale could be measured in months.

Riley’s ability to make such sales happen earned him a reputation as Lakewood Ranch’s master of the flip. In 2004, when Curtis Shaw was frustrated by slow construction of a condo in East Manatee, he sought Riley for help.

“I went to him because someone told me he was a master at flipping unfinished condos. He could sell it before it had gotten out of the ground because he had all these investors,” Shaw said.

Riley says he was not doing anything unusual. Especially in 2005, the Sarasota-Bradenton market was a frenzy of speculation. WaterCrest prices increased rapidly from month to month because so many people wanted to buy.

“Everybody in this community

was part of the greed factor,” Riley said. “Everybody from age 20 to age 80 wanted a quick return.”

But a Herald-Tribune analysis of every condo sale in WaterCrest shows that sales prices among Riley’s associates were often higher than the going rate. Riley said that can be explained because many of his condos had special amenities, such as high-end flooring and kitchen fixtures.

The Herald-Tribune found that in 2005 and 2006, when the vast majority of WaterCrest sales occurred, deals arranged by Riley were on average nearly 20 percent higher than the norm.

The gap is even wider when you consider only the prices Riley’s buyers could control. Ignoring the original purchase from the developer, Riley’s average sales values were 38 percent higher in 2005 and 31 percent higher in 2006 than the total average for WaterCrest in those years.

LAWSUITS AND DEFAULTS With money from WaterCrest deals flowing in, Riley and Waid began living the high life.

Records from one of Riley’s former employees show he leased an $83,000 Land Rover, a $63,000 Porsche and a $43,000 BMW at about the same time.

But by late 2005, it was clear that something was wrong with many of the WaterCrest deals.

The final buyers on several condos were having trouble getting banks to finance their loans, according to several lawsuits filed against Riley in Manatee County’s circuit court.

Starting in late 2005, a string of Riley’s clients filed lawsuits claiming he convinced them to participate in real estate investments without explaining the risks and that he took money from escrow deposits before the final contracts were closed.

In one of those lawsuits, Stephen Smith alleged that the unit he bought was worth substantially less than what he had paid.

In another, Phil and Elizabeth Greenwell alleged that Riley failed “to disclose that banks and mortgage companies would not finance or would place severe restrictions on an assigned contract, generally known as a ‘flip.’ ” Today, about four years after WaterCrest was completed, one of every four condos has gone into default. Sixteen of the 46 defaults belonged to Riley clients.

Across Sarasota and Manatee, Riley’s clients, including Maughan, Moses, Shackelford, Epifanio and Manoj Bhattacharjee, have defaulted on 17 loans totaling $12.1 million since June 2007.

“I made a mistake,” said Bhattacharjee, a Manatee County real estate investor and neighbor of Riley’s. “I should not have gone with him, and I am paying a penalty for my foolishness. At times we lose sight and try to earn something extra. This was a situation like that.”

Riley filed for Chapter 7 bankruptcy protection in November, claiming $51 million in debts and only $3.5 million in assets. It is the largest personal bankruptcy filing to date by anyone who invested in local real estate.

In February, a tow truck driver attempted to repossess Waid’s car. Riley began shouting at the driver and continued arguing with a police officer dispatched to defuse the situation, a Sarasota County Sheriff’s Office report says.

Riley was arrested on misdemeanor charges of resisting arrest without violence. In May, prosecutors agreed to withhold prosecution.

8A Monday, July 20, 2009

www.heraldtribune.com

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Seaborne: More than 40 f lips as market fell Promises of ‘no money down’ turned into big losses for investors

ch en Fr rt ou kC ee Cr

Arthur Seaborne bought 21 newly constructed houses (in red on the photo) in the Covered Bridge Estates neighborhood of Ellenton in 2006 and 2007. At a time when prices were starting to drop, Seaborne sold most of the properties to his clients for tens of thousands of dollars more than he paid. At the same time, he sold houses to himself and his wife at higher prices than he originally paid, allowing him to obtain larger loans.

Willows Bridge Loop

g

SELLING THE FLIP When a trusted friend told Jessica Leis in 2006 about a seminar that could make her money, the 57-year-old Sarasota resident fig-

Rising prices during a downturn

sin ros Halls Mill C

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG Staff Writers Back in 2001, Sarasota mortgage broker Arthur Seaborne was broke.

Forced to give up his real estate license years before and more than $2 million in debt, Seaborne filed for bankruptcy protection for the second time in 13 years.

None of that stopped him from harnessing the real estate boom to remake himself into one of Sarasota’s most prolific property flippers.

From mid-2006 through 2007, Seaborne bought and sold more than 40 new homes worth $11.6 million in Sarasota and Manatee counties. Along the way, he made more than $1 million in profits, court records show.

He did it by recruiting more than 30 investors into a propertysharing venture that guaranteed him a profit and left his so-called partners to bear the brunt of the real estate collapse.

In summer 2006, when prices were already declining, Seaborne started buying dozens of new houses in Ellenton and Venice. He marked up the price by $8,000 to $75,000 and, within a few months, sold them to people who came to his real estate seminars.

He promised his investors they would pay no money down and he would pay most of the monthly mortgage bills by finding renters.

All they had to do was take out a loan in their name.

Seaborne even lined up financing through his own mortgage brokerage, directing buyers to exotic mortgages that paid him a higher commission up front and reduced the monthly payment he had promised to pay, eight of his investors told the Herald-Tribune.

By using his brokerage, Southeast Capital Mortgage, Seaborne was able to deposit his own cash in at least seven investors’ bank accounts so banks would approve loans, according to a 2007 state licensing investigation that led Seaborne to surrender his mortgage broker’s license.

Seaborne paid his share of the mortgages at first, but stopped in late 2007 as the real estate market worsened.

“He’s a pretty slick character,” said Dr. Mark Walter, a connective-tissue specialist who bought a Palmetto house with Seaborne. “He comes off as very nice and very up front — like he has nothing to hide. But he ended up stiffing a lot of people. Instead of acting in our interests, it turned out he was only out for himself.”

Nearly half of the homes Seaborne sold to investors are now in foreclosure. All told, people who bought into his investment plan have defaulted on 16 loans totaling $4.9 million.

More defaults may be coming, according to Anthony Lefco, a Sarasota attorney whose client, Jessica Leis, sued Seaborne in 2008.

As part of the suit filed in Sarasota County’s circuit court, Seaborne stated in a sworn deposition that he recently stopped paying his mortgages, Lefco said.

That could lead to another $5 million in defaults.

Seaborne told the Herald-Tribune that every real estate deal he struck was legitimate, backed by bank appraisals and paid for by willing investors.

He denied inflating property values and said his financial troubles came from an unforeseen downturn in the real estate market that forced him to stop paying his investors’ mortgages.

“We certainly would not have done some of the buying we did if we knew we’d be where we are today,” Seaborne said.

Arthur Seaborne outside his Sarasota office. Seaborne gave up his mortgage broker license last year after state regulators said he secretly lent money to clients so they could qualify for loans. STAFF PHOTO / CHIP LITHERLAND

SOU SOURCE: OURCE RCE:: Manatee M Mana anatee tee Co Count County untyy Property P Prop ropert ertyy Appraiser Appr Apprais aiser er

STAFF GRAPHIC / JENNIFER F. A. BORRESEN

Claeys said Seaborne stopped paying his share of the mortgage and he found himself with a house he could no longer afford.

“Like a lot of scams, this one is a hundred years old,” said Dennis Black, a Port Charlotte real estate consultant and appraiser instructor. The organizer cannot qualify for mortgages to buy dozens of houses, Black said, “so he goes out and finds people to borrow for him. He does a seminar and tells them he will help them get loans.

If the market goes down, he bails.”

Seaborne said his investment program was intended to make money for everyone involved. He said the only reason it did not work was because the real estate market declined too fast.

Seaborne said he has attempted to help his clients refinance debt, but said he does not have the money to bail them out.

Advice Arthur Seaborne offered to real estate investors through his Web page can still be found on the Internet. SOUTHEASTCAPITAL.COM

ured she had nothing to lose.

The widow of a police officer who died from injuries sustained during a 1990 rescue, Leis had a nest egg to invest. Real estate seemed like a smart choice.

So she gathered with a handful of others in Arthur Seaborne’s downtown Sarasota office and listened intently to his “no money down” investment pitch.

An hour later she was hooked, convinced she could make money with no financial risk.

“He kept saying ‘no money down’ and I kept thinking I can’t lose,” Leis said. “I think some women want someone to take care of them and I was definitely suffering from that. Here was this nice, rich man who talked about how he made his wife rich and how he wanted to make us rich, too. And I wouldn’t have to think or do anything.”

Leis bought her first house with Seaborne on French Creek Court, a quarter-mile stretch of North Manatee suburbia where Seaborne bought at least 15 houses he planned to sell to investors.

Within a year, she bought two more houses from Seaborne. Not long after she closed on the last one, in August 2007, things started to go wrong.

Leis’ deal with Seaborne required her to buy a house from him for a set price — as much as 30 percent more than Seaborne paid a few months before.

Seaborne retained part-interest in the house. In return, he agreed to find renters and to pay most of the monthly mortgage.

But in late 2007, Seaborne stopped paying his bills, Leis claims in her lawsuit. Leis told the Herald-Tribune she has been struggling to avoid foreclosure.

“I’m almost a million dollars in

debt now,” she said.

Leis and seven other investors told the newspaper that Seaborne put them in negative amortization loans without telling them. Such loans reduced Seaborne’s mortgage payments so they did not cover the interest owed each month and the borrowed amount actually increased over time.

Bradenton resident Gerry Claeys said he attended a Seaborne seminar and bought a house on the promise that he would only pay $200 a month toward the mortgage. Claeys said Seaborne directed him into an interest-only loan, which reduces monthly payments but give larger upfront fees to mortgage brokers.

“I asked how he was making money on this and he said all he got was a real estate commission,” Claeys said. “But later he told me that the bank paid him a sizable fee for arranging the financing through him. He came out like a bandit.”

WAVE OF FORECLOSURES Seaborne used a number of techniques that allowed him to inflate real estate values and make money on property flips.

By buying houses and selling them to investment partners, he was able to mark up the prices on houses that might not have sold on the open market. In 2006 and 2007, when real estate prices across the region were falling and many new houses could not be sold, Seaborne was able to buy 41 and quickly resell at a profit.

In addition, four former clients told the Herald-Tribune he directed them to lie on mortgage applications so that they would qualify for loans on properties he was selling to them.

“He falsified my income and the amount of money I had in the bank,” said Bart Borriello, who invested in two houses with Seaborne. “He said he was doing that to keep the payments down.”

In the 2007 complaint that cost Seaborne his mortgage license, the state Office of Financial Regulation concluded that Seaborne failed to tell World Savings Bank he had lent the required down payment to seven people who applied

for mortgages.

Beyond the houses he sold to investment clients, Seaborne bought property through his corporations and transferred them to himself or his wife at increased values.

He and his wife bought 11 houses in 2007 for $2.8 million and then, in essence, re-purchased each one a few months later for a total of $3.4 million.

Based on the sale prices, banks or private lenders gave the Seabornes $2.6 million in loans.

Seaborne says that all of his property sales reflected the market at the time. Sale prices on his homes increased only because he originally bought the houses in bulk and the builder gave him a discount, he said.

But a Herald-Tribune comparison of Seaborne’s sales in two neighborhoods to other houses in those same subdivisions shows otherwise. Seaborne’s houses, on average, sold for 8 percent more than the going rate, regardless of what he originally paid for the property, the Herald-Tribune analysis shows.

In one of those neighborhoods, Covered Bridge Estates in Ellenton, Seaborne flipped more than a dozen houses for an average of $140 per square foot in 2006 and 2007. The average sales price of other homes in the subdivision during the same years was about $130 per square foot.

Today, Seaborne’s mortgage brokerage is closed. Records show Seaborne and his wife have defaulted on three mortgage loans in recent weeks. Manatee County Sheriff’s spokesman Dave Bristow told the Herald-Tribune that sheriff’s detectives have been part of an multi-agency investigation into Seaborne since April.

Seaborne’s business phone still operates and offers callers extensions to reach his property management and real estate divisions.

Since an interview earlier this year, Seaborne has not returned repeated calls from the HeraldTribune.

THE REPORTERS Michael Braga has been a reporter at the Herald-Tribune since 2001, and has covered real estate since 2004. He is also an assistant business editor.

Matthew Doig has been a reporter at the Herald-Tribune since 2001 and has been on the newspaper’s investigative team since 2004.

Jerry Claeys says attorneys have told him he has little chance of recovering money from Arthur Seaborne. STAFF PHOTO / THOMAS BENDER

Chris Davis is investigations editor at the Herald-Tribune, where he has worked as a reporter or editor since 1997.

www.heraldtribune.com

Monday, July 20, 2009 9A

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Gulf Coast easy target for flips T

he Herald-Tribune identified at least 37 groups of property flippers operating in Sarasota and Manatee counties during this decade. Several people involved in local property flips are profiled on this page.

PATRICK BRESTER Real estate agent and mortgage broker Defaults – 9 – $3.9 million

Brester formerly worked as an agent for Florida Sun Realty Corp. and was once the strength and conditioning coach for the Cincinnati Reds. More recently, he worked for Executive Property Management.

In an October 2004 Sarasota Magazine profile, Brester recommended borrowing as much money as possible to make money in the real estate business.

“The more you can leverage the money, the more property you can control,” Brester was quoted as saying. “If you are making 10 percent, it’s better to make 10 percent on someone else’s money.”

Though most of Brester’s defaults result from buying properties at the height of the boom, court records show he defaulted after buying a property being resold by his one-time business partner Richard Dear.

Dear bought a house on Suntan Avenue in Sarasota for $125,000 in June 2004 and sold it to Brester for $179,000 six months later.

Brester financed his purchase with $161,100 in loans and defaulted in December 2007.

Brester also made money by buying and quickly reselling properties. The Herald-Tribune identified more than a half-dozen individuals — including his sister-inlaw — who bought a flipped property from Brester and later defaulted on their loans. Those defaults totaled more than $4 million.

In one of those deals, Brester bought a three-bedroom house at 5310 Matthew Court in Sarasota in July 2006 for $275,000 and sold it on the same day to Doug Knipper for $385,000. Knipper borrowed $385,000 and defaulted 16 months later.

After the real estate market cooled off, Brester bought nine condos at the 238-unit Vintage Grand complex in Sarasota in early 2007 for $1.9 million. He sold them the next day to Michael Chadwick at a $300,000 profit. A year later, Chadwick filed for bankruptcy and defaulted on all nine units.

Brester could not be reached for comment and did not return phone messages left with his relatives.

HUSSEIN MAKKI Real estate investor Defaults – 7 – $1.9 million

Makki is a property investor who flipped houses with Zeinab Makki and Zahrah Dawood in Manatee County.

Together, they sold at least 10 houses back and forth to each other between 1997 and 2001, raising the value of those houses from about $1.3 million to more than $3 million in deals that occurred just weeks apart.

The increased value allowed the trio of investors to obtain at least $1.6 million more in loans than they originally paid for the properties.

By May 2001, banks had foreclosed on 11 of their loans worth $3 million and Zeinab Makki had filed for bankruptcy protection.

Land records show that the law firm of Sarasota attorney John Yanchek closed more than a halfdozen of the property transactions involving the Makkis and Dawood between December 1997 and June 1998.

Reached by telephone in November 2008, Makki said all his deals were legitimate and he agreed to explain each in detail when he returned to Bradenton.

He has not returned five calls since then.

In his brief conversation with the Herald-Tribune, Makki denied that he was related to Zeinab Makki, with whom he shared several addresses and participated in seven flips.

“There are a lot of people with

the same last name of Makki,” he said. “It’s like Smith.”

Lawsuits and counter suits filed between the two in Sarasota County’s circuit court show that Dawood was Hussein Makki’s girlfriend.

RICH BOBKA Real estate agent Defaults — 13 — $7.8 million

Bobka, who worked at Re/Max Properties and at Paradigm Group in Sarasota, bought rental properties during the boom with little or no money down.

Between 1993 and 2007, Bobka bought 24 properties for $14.3 million. He sold a half-dozen of them for a $600,000 profit and kept refinancing the rest until he had $1.6 million more in loans than he originally paid for the properties.

At the same time, Bobka acted as a real estate agent for his brother, George Cavallo, helping him to buy 15 properties for $5.3 million.

Cavallo financed the purchases with $5.6 million in loans.

During his 13-year real estate investing career, Bobka bought and sold properties with associates and family members at higher prices 12 times, records show. Five of those deals involved three properties that were bought and sold between Bobka and his brother and sister-inlaw. All ended in default.

In one of the deals, Bobka bought a house on Southpointe Drive in Sarasota in February 2003 for $1 million and sold it a week later to his brother and his brother’s wife, Paula Hornberger, for $1.15 million.

The couple borrowed $1.0325 million, $32,500 more than Bobka originally paid for the property.

Cavallo and his wife later built a house on the property and obtained $3.125 million in fresh loans, on which they defaulted in 2008.

In May 2004, Bobka bought a four-bedroom house at 1614 Anchorage St. in Sarasota for $1.1 million and sold it the next day to Hornberger for $1.35 million.

Hornberger borrowed $945,000 and eight months later refinanced the loan to $1.4 million.

In December 2005, Hornberger sold the house back to Bobka for $2 million. Bobka borrowed $1.5 million from Countrywide, $400,000 more than he had paid for the property 18 months earlier.

A year later, Bobka added another $250,000 loan from Branch Banking & Trust. He defaulted on all the attached loans in 2008.

Bobka told the Herald-Tribune all of his deals were legitimate. If laws were broken, he said it was done by associates he trusted and without his knowledge.

“I don’t lie, steal or cheat,” he said. “Is it hard to believe you trusted the people you worked with?”

MARK BRIVIK Disbarred lawyer and real estate investor Defaults – 17 – $14.9 million

Brivik bought 14 houses with partners. But instead of selling the houses to outside buyers, Brivik cashed in on the booming market by increasing the debt he carried on the properties, or by finding investors who would take on a greater share of the debt.

Brivik said that when a new partner came in, he would arrange a sale or a no-cost property transfer to that person. Using a new appraisal, the partners would get a larger mortgage. Those mortgages created a steady flow of cash — just like homeowners who take out home-equity loans to tap into the rising value of their home.

Brivik could pocket the money or spend it improving his properties.

The continual refinancing also allowed Brivik to shift risk to the banks that lent money and to his partners, who took on more and more debt.

Brivik flipped one of his properties back and forth to partners and companies he controlled 12 times over a 10-year period, increasing the attached loans from $406,000

Online: interactive guide to flips The people involved in property flipping in Sarasota and Manatee counties did not operate in isolation. In some cases, key players within each loose group socialized or conducted business with people in other groups.

To track the connections, the Herald-Tribune built an extensive interactive guide to flipping in Sarasota and Manatee counties. Go to heraldtribune.com/flipping for: LIST Click the list tab for the names of more than 100 local people who were involved in property flipping, the people who sometimes innocently bought their properties and the real estate professionals — closing agents and

to $2.7 million.

Brivik has disputed the HeraldTribune’s characterization of him as a “flipper.” He says he always reinvested borrowed funds into the properties he purchased.

But Sarasota County and Longboat Key government documents show that Brivik spent $1.2 million improving the properties he purchased, while extracting $9.3 million in loan proceeds above what he paid.

Brivik said he used much of the extra money to make interest payments and to pay for architectural and engineering fees and other improvements that were made to his investment houses without the need of a permit.

Brivik has since defaulted on eight loans and filed for bankruptcy, listing $16 million in debts and $2.7 million in assets.

He defaulted on two loans worth $6.9 million from First Priority Bank. Brivik’s defaults represented about 15 percent of the bank’s nonperforming loans when it was shuttered by regulators in July 2008.

NEIL MOHAMMAD HUSANI Real estate investor Defaults — none

Husani, along with Manatee County builder Michael Tringali and Sarasota attorney John Yanchek, is accused by federal prosecutors of orchestrating some of the largest fraudulent flips in the state.

Between June 2004 and March 2006, Husani bought nearly 2,000 acres of land for $42.3 million. He then sold the properties, often on the same day, to Tringali for a total of $117 million. The flips enabled Tringali to borrow $83 million, $40 million more than Husani originally paid.

Prosecutors estimated that Husani took the bulk of the proceeds, while Tringali and Yanchek wound up with about $7 million each.

In July 2008, Husani, Tringali and Yanchek were indicted along with Tampa mortgage broker Larry Nardelli on charges of mortgage fraud and money laundering.

Tringali and Yanchek pleaded guilty.

Husani, who fled to Jordan after the Herald-Tribune exposed his deals, was arrested by Jordanian law enforcement officials and then released on bail. Federal prosecutors say he is awaiting extradition to the United States.

JOHN EDWARD COUCH Real estate investor Defaults — 3 — $1.9 million

Couch and his wife, Yu Mei Cheng, were invited to Sarasota by another California investor, Shane Unruh, who had been contacted by Sarasota real estate agent Warren Hickernell.

Hickernell was trying to sell the units at his Bermuda on Osprey condo conversion project in Sarasota and Couch came up with a way to finance the sales with no

real estate agents, for example — involved in the transactions.

Some people on the list were merely speculators hoping real estate prices would continue to rise.

Others knew they were bending the rules but played the game anyway.

Hover over a name to see a person’s connections. Double-click to read more details about the individual’s involvement.

NETWORK Click the network tab for a social network analysis. In this view, you can choose any name in the database and find who they did business with — the direct connections between people involved in Sarasota-area flip deals.

Hover over a dot to find a

money down, according to two attorneys who handled the closings.

Couch bought 30 units for an average price of about $300,000. He then marked up the price as much as $400,000 and sold them to investors he recruited. Deed records show that the units were sold to those investors for $450,000 to $700,000.

The higher prices allowed Couch and his investors to obtain loans that more than covered the actual sale price.

According to attorneys who handled some of the initial closings, the extra money was supposed to be put into an escrow account and used to build amenities and turn the complex into a senior living facility.

But neither of the attorneys — Will Schlotthauer of Williams Parker and Chad Gates of Tyler Betterton & Gates — knew where the amenity fund was located or who controlled it.

One investor — Couch’s botherin-law Christopher Woods — said there was never an amenity fund and no amenities were ever built.

Couch and 21 investors bought the 30 units at Bermuda on Osprey from November 2006 through September 2008. In the ensuing months, they defaulted on all 30 loans, totaling $13.5 million.

In the midst of buying the units, Couch and Cheng were charged in March 2007 by the Orange County District Attorney’s Office with running a brothel from a massage clinic they operated in the Anaheim, Calif., area. Couch was acquitted but Cheng was sentenced to 60 days in prison.

Couch could not be reached for comment. Woods said Couch was “missing in action” after all the loan defaults.

Woods said the defaults were caused by the economic downturn. He also said the excess money group members borrowed after flipping the units went to making interest payments on outstanding debts.

“Everything went to keep the project afloat,” Woods said.

Just after Couch started flipping the units at Bermuda on Osprey to his family and business associates, he filed for a protective order against Shane Unruh in Sarasota County’s circuit court.

Couch claimed that Unruh had threatened him and said he feared for his life. A judge denied the petition.

JASON REYNOLDS Home builder Defaults — 15 — $1.8 million

Reynolds and his wife, Melissa, have been active real estate investors in Sarasota and Manatee counties since the mid-1990s. Over that time, they bought 28 properties for $4 million and resold 19 them for $1.4 million more than they paid.

The couple borrowed $1.9 million against the remaining properties and later defaulted on those loans.

Among their deals are at least five in which Reynolds bought or sold properties with people who

name. Click once on the dot to reconfigure the network with that person at the center, showing the others who that person did business with. Double-click on an individual’s dot for more information.

CIRCLE Think of this as the “six degrees of separation” analysis. Click the circle tab to see how any person in the database is connected with the others. Connections are drawn between buyers and sellers of flipped properties and between flippers and the real estate professionals they hired to complete transactions.

Hover over an individual’s dot to see how they are connected.

Double-click on the dot for more information.

were partners in corporations he controlled.

In one deal, Reynolds and his brother-in-law, Donald Golder, bought a property at 217 N.E. 22nd Court in Bradenton through their company for $82,600 in November 2000.

The company sold the property to Golder and Reynolds in April 2001, years before the height of the boom, for $167,000. Golder obtained a $125,250 loan.

“We would buy a property through our investment company and flip it into one of our names and then take equity out that we would use to remodel the house,” Golder said. “Then we would sell it.”

Golder said he has long since split with Reynolds. “He’s a hack,” Golder said. “He took $140,000 from me. I just washed my hands of it and walked away.”

Reynolds declined to comment.

TODD KOLBE Mortgage broker Defaults – 5 — $5.5 million

Kolbe helped to manage Affinity Homes, a homebuilding company involving Kolbe family members.

Kolbe was also a mortgage broker at CTX Mortgage, where he met and interacted with a number of other property flippers identified by the Herald-Tribune.

Kolbe organized a group that bought and sold houses among themselves in Sarasota and Manatee counties to get inflated mortgages. Kolbe and four other members of his group were sentenced to prison for their roles in 27 fraudulent flip deals that defrauded a New Jersey mortgage company out of $1.8 million.

TINA VALENTE Real estate agent Defaults – 5 – $2.2 million

Valente and Hubert Steenbakkers work together in the same boutique real estate agency, Gulf Realty in Sarasota.

They also have sold four properties to each other since 2001.

In February 2007, Steenbakkers bought a property in Sarasota for $324,300. At a time when real estate prices were in decline, he sold it to Valente two months later for $585,000. Valente received $526,500 in loans that she defaulted on eight months later.

In another deal, Steenbakkers bought a property for $135,000 in July 2003, when the market was starting to heat up. He sold it to Valente for $290,000 in June 2007, long after the market had peaked.

Valente borrowed $252,000 and defaulted 10 months later.

Experts say defaults within a year do not necessarily indicate mortgage fraud, but they typically trigger a close review by banks.

Court records show Valente ultimately defaulted on five loans totaling $2.24 million. Valente and Steenbakkers did not return four messages left at their real estate company’s answering service.

*

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In video case, an apology by chief INVESTIGATION: Abbott

says ‘missteps’ are not signs of deeper problem

By TODD RUGER todd.ruger@heraldtribune.com SARASOTA — Police Chief Peter Abbott apologized to the city at a press conference on Monday for a series of “missteps” in the handling of an excessive force case against one of his officers.

The problems started immediately, with a lieutenant who saw video of the officer kicking a handcuffed suspect at the jail but did not report it to his bosses for 11 days.

And as the investigation got rolling, the problems multiplied, Abbott acknowledged on Monday. He cited his own “moronic decision” to have the lead detective negotiate a $400 settlement with the victim and hand-deliver the check — all before the investigation was over.

City Manager Bob Bartolotta promised to correct “major mistakes” and hold employees accountable. Abbott promised to do better in the future.

Both Abbott and Bartolotta said the problems with this investigation are not a symptom of a deeper problem in the police department and do not mean there was an attempted cover-up.

City commissioners on Monday night said that assurance was not enough, saying they were concerned about the public perception of the police department, and whether it could happen again.

“I’m much more concerned See VIDEO on 10A WATCH THE VIDEO: Go to heraldtribune.com to view the raw footage of an officer kicking a handcuffed man.

INSIDE LOCAL

DISTRICT LIKELY TO PAY Acquittal on charges she abused students means teacher will not have to pay legal bills. 1B BUSINESS

SEEKING MISSING PAIR U.S. Marshals are now looking for a Sarasota couple accused of running an investment scam. 5C

HERALDTRIBUNE.COM

WHO IS A FLIPPER? Have you ever flipped a property? Participate in an online poll on our Web site.

Classified .......10C Comics ............8D Lottery .............2A Movie Log ........5B

Obituaries ........4B Opinion ............8A People .............5B Sports ..............1C

OUR 84TH YEAR NUMBER 285 4 SECTIONS

HERALDTRIBUNE.COM

THE KING OF THE SARASOTA FLIP A HERALD-TRIBUNE INVESTIGATION: WITH MORE THAN 100 DEALS, REAL ESTATE AGENT CRAIG ADAMS WAS SARASOTA’S MOST PROLIFIC PROPERTY FLIPPER. NOW HE AND HIS ASSOCIATES HAVE $100 MILLION IN DEFAULTS.

Sarasota real estate agent Craig Adams in front of a luxury home he was building on Bird Key in 2005.

HERALD-TRIBUNE ARCHIVE / 2005 / ROD MILLINGTON

INSIDE

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG, Staff Writers

E

ven before the real estate boom made selling houses easy, Craig Adams made it look that way.

The Sarasota real estate agent had an uncanny ability to get houses sold and to drive up prices.

By the time the real estate boom peaked in 2005, Adams was something of a local legend.

Sarasota’s ultimate dealmaker.

But the swagger and the fancy cars and the millions in property he bought and sold were not just the result of extraordinary skill as a salesman.

A Herald-Tribune investigation into scores of property deals orchestrated by Adams places him at the center of the largest and most financially damaging group of property flippers to operate in Sarasota during the recent real estate boom.

As part of the Herald-Tribune’s year-long investigation into property flipping fraud, the newspaper interviewed Adams’ former business partners and analyzed land deeds, mortgage documents and other records related to his real estate deals. The investigation found that for more than a decade, Adams used a network of professional associates and a stable of regular buyers to control every aspect of his real estate flips.

Instead of selling properties to outside buyers, he created a real estate market where his handpicked buyers and sellers could set the price they wanted, and repeated flips made Adams hundreds of thousands of dollars in real estate sales commissions.

In some cases, Adams and his associates bought a house, marked up the price and quickly sold it to another associate for more than it was worth. Using the inflated sale price, they qualified for a mortgage that more than covered the actual purchase, then divided the remaining See FLIPPING on 6A

■ The Adams network. 7A ■ The title agent who closed

more than 100 Adams transactions. 7A ONLINE: Go to heraldtribune.com/ flipping for: ■ Interactive map with details on each of the 50,000 suspicious Florida flips.

■ Guide to flipping in Sarasota and Manatee.

SNN LOCAL NEWS 6: Lauren Mayk reports from a neighborhood hurt by flips.

LAST SUNDAY: A Herald-Tribune investigation of real estate flipping fraud finds $10 billion in suspicious Florida deals.

YESTERDAY: More than 30 groups of flippers operated locally.

TOMORROW: Law enforcement ignored flip fraud as it happened — and may not punish it now.

THURSDAY: Who made flipping fraud possible?

Bankers.

SUNDAY: Changes are needed to prevent a rash of new mortgage fraud.

Some stimulus projects Driving safety data are hitting roadblocks kept from the public

By DON LEE Los Angeles Times WASHINGTON — In February, when Congress approved President Barack Obama’s plan to stimulate the economy, transportation projects were supposed to be among the fastest-acting pieces of the

SPORTS

IS RACE OVER? For now, Armstrong has helping role in Tour de France. 1C

$787 billion package.

All 50 states moved quickly to qualify for their share. But since then the pace has slowed considerably, particularly in Florida and California, where the economic crisis has been especially severe.

More than 3,600 of the 5,600 road projects approved by the federal government — including six of the 10 largest approved projects — by July 10 had not been given the green light to start construction.

“What we’re seeing is a significant level of bidding activity,” said Anne Lloyd, chief financial officer at Martin Marietta Materials, a nationwide supplier of stone, asphalt and other construction supplies. “But the big thing we’re not seeing is work on the ground.”

The reasons are many. One is See ROADS on 4A

By MATT RICHTEL The New York Times In 2003, researchers at a federal agency proposed a long-term of study of 10,000 drivers to assess the safety risk posed by cell phone use behind the wheel.

They sought the study based on evidence that such multitasking was a serious and growing threat on America’s roadways.

But the agency, the National Highway Traffic Safety Administration, did not commission such a study — in part, officials say, because of concerns about angering Congress. And senior government officials decided not to make public hundreds of pages of the NHTSA’s research that had led to the recommendation, as well as other draft policies to curtail the use of phones by driv-

ers.

Today, the full body of research is being made public for the first time by two consumer advocacy groups, which filed a Freedom of Information Act lawsuit for the documents. The Center for Auto Safety and Public Citizen provided a copy to The New York Times.

In interviews, the officials who withheld the research offered their fullest explanation to date. Dr. Jeffrey Runge, the former head of the National Highway Traffic Safety Administration, said he was urged to withhold the research to avoid angering members of Congress who had warned the agency to stick to its mission of gathering safety data but not to lobby states.

See DRIVER on 10A

6A Tuesday, July 21, 2009

www.heraldtribune.com

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Craig Adams and his associates bought and sold this home on Cove Terrace in Sarasota four times — inflating the price from $600,000 to $1.95 million.

Adams orchestrated more than 100 flips FLIPPING from 1A cash among themselves, according to seven people familiar with the deals.

Three of those sources spoke to the Herald-Tribune on the condition of anonymity. But four others — including Sarasota financiers Gordon Hester, Stephen Witzer and Nick Melone and Sarasota real estate agent Stephen DuToit — all confirmed the basics of how Adams and his associates operated.

“They had a joke,” said Melone, who did property deals with one of Adams’ associates. “They said: ‘We’re getting low on money.

Let’s go buy a property.’ ” Adams found other ways to maximize the amount he could borrow from banks.

One private financier, Art Whittmer, said Adams asked him to stop recording their private loans. That hid outstanding debt from other banks lending Adams money.

And public records show that Adams sold at least five houses without telling the banks that held the mortgages, allowing him to hang on to the banks’ money for months, and in at least two cases, years before repaying the loans.

As long as property values were going up, Adams looked like a real estate savant. Every property he touched made money for him and his investors.

“Craig became the person everyone saw and the example of what everyone wanted to be,” said Hester, who loaned millions to Adams over the years and made money until the market cooled. “He knew the game, and once others got the taste of success, it was easy to pull them into more deals.”

From 1997 to 2008, Adams and his associates completed more than 100 real estate deals in which they sold each other properties for ever-increasing values. In at least half of those deals, Adams served as the real estate agent, records show.

Adams’ buyers would typically hold on to houses for a year or two, then sell to another associate who got fresh loans. More than a dozen times, the flips occurred much faster, with property values increasing by tens or hundreds of thousands of dollars within 24 hours.

Adams sold properties from his associates to his 79-year-old mother. He used his 82-year-old aunt, Norma Faye Pearce, to borrow several million dollars in her name. On one loan, Pearce’s signature appears to be forged, according to mortgage fraud experts who reviewed the documents.

The loan documents were approved by a BB&T officer who signed off on more than 20 loans to Adams’ associates.

Today the deals by Adams and his associates have resulted in nearly $100 million in mortgage defaults. Twenty of Adams’ associates have filed for bankruptcy or gone into foreclosure. Adams himself has defaulted on more than $17 million in mortgages.

Adams has moved from Sarasota and is working with a Lakeland attorney to help cash-strapped borrowers avoid foreclosure by organizing short sales. He has not been charged with any crime. Citing pending litigation, he declined

FORGED SIGNATURE Experts say at least one of these two signatures of Norma Faye Pearce, who is Craig Adams’ 82-year old aunt, appears to have been forged. The top signature is from a BB&T loan document dated April 2006. The bottom signature is from a warranty deed dated May 2006.

APRIL 2006

MAY 2006

Craig Adams at the Pink Party, a breast cancer fundraiser in 2007 CORRESPONDENT / AIMEE CHOUINARD

to comment for this story.

Some who participated in deals with Adams argue they did nothing wrong. Real estate values were going up. They were selling property. And banks were approving their loans.

What could be wrong with that?

HOW ADAMS OPERATED Few communities in the nation experienced the kind of fundamental change that re-forged Sarasota over the past decade.

Thousands of new homes were built. Downtown Sarasota was transformed into a vibrant destination, thanks in part to more than a dozen new condo towers.

The change was most dramatic along the water.

On Sarasota’s beaches, bays and canals, developers razed halfmillion-dollar houses so McMansions could rise in their place.

In 2004 and 2005, property values rose so quickly that a house bought one month could be flipped the next at a legitimate profit, especially if it had a waterfront view.

At first glance, that is exactly what Adams appeared to do. He and his friends focused on waterfront property and often bought lots big enough to divide and build two houses.

But a closer inspection of Adams’ deals shows more was going on. Over and over, when he put together a sale, Adams knew all the parties at the table.

Using deeds going back more than a decade, the Herald-Tribune identified 24 people who bought or sold two or more properties with Adams or his associates. Together, these investors formed a network of buyers and sellers that Adams regularly turned to. The network included fellow Riverview High School alumni and contacts Adams made as a young real estate agent. It also included his family.

Deed records show seven deals in which Adams’ aunt bought or sold properties from his associates. Three more involve his mother and three his then-wife. Two properties were sold by Adams’ associates to his sister-in-law and dozens involved sales between business partners and friends.

In all, the Herald-Tribune found more than 100 deals in which properties changed hands between Adams’ associates. In at least 61, Adams is listed as a real estate agent on the transaction in the Mid-Florida Regional Multiple Listing Service database, which records property sales completed by its member agents. In 37 of those 61 deals, Adams is listed as the real estate agent on both sides of the sale, representing the buyer and seller simultaneously.

Another 14 sales between Adams associates involve houses that were never listed in the MLS database. That suggests the deals were arranged without the properties ever being put on the market.

Finally, the MLS review found 13 transactions where no real estate agent is listed. In those deals, the real estate agency involved is Re/Max Properties or Paradigm Group — the companies where Adams worked at the time of the sales. Although Re/Max had dozens of other agents, Paradigm Realty was owned by Adams and only a few agents worked there.

FLIPPING COVE TERRACE A Cove Terrace house on Sarasota Bay is a case study in how Adams and his associates increased the values of the houses they bought and ultimately left the bank with a big loss.

Built in 1983, the four-bedroom house has a pool, a waterfront view and a slip to dock a boat. But when Dr. Frederick Bloom put it up for sale in 1999, it sat on the market for months, forcing him to cut tens of thousands of dollars off his asking price until it was listed for $600,000.

A decade after the sale, Bloom still remembers the man who bought the house: Craig Adams.

The deal stuck in his mind because a few weeks after the sale, the house sold again for $725,000.

Bloom wondered why his real es-

STAFF PHOTO / CHIP LITHERLAND

How Craig Adams flipped houses INFLATING PRICES Throughout the boom, speculators approached sellers and asked them to report a higher sale price than was actually paid. That allowed the buyer to get a larger mortgage and use loan proceeds to offset the down payment. In some cases, the inflated price was enough to give the buyer cash back at closing.

At least once, Adams attempted to use the scheme in a purchase, according to Lorry Eible, who owns the Foxy Lady clothing boutique on Siesta Key. Eible said Adams asked her to report an inflated sale price on a property she bought in 2004. She said she refused.

ASSIGNMENT Instead of asking outside buyers to overstate the sale price, speculators can misuse a legal process known as an assignment to accomplish the same goal.

The speculator lines up a purchase from an unrelated seller. Before closing on the first sale, he arranges to assign the property immediately to an associate at a higher price.

Only the second deed, with the higher price, gets placed in the public record and is used to apply for the mortgage.

Adams used this method at least once, according to Earl Schlegel, who sold a house to Adams in 2006. Documents

tate agent had not been able to sell the house for that much.

“I was not happy,” Bloom said.

What Bloom did not know was that he never actually sold his house to Adams. Though Bloom said Adams orchestrated the deal, public records show he sold his house to Steven Wexler, a real estate broker who eventually would participate in at least nine deals with Adams or his associates.

Just a few weeks later, Wexler sold the house for $725,000 to John C. Keyworth, a roofing contractor who bought or sold at least four properties with Adams and his associates over the years.

Keyworth, who bought the house as an investment property, kept it for about a year. Then, in early 2001, he sold it to Adams for $1.1 million — nearly double what the house had sold for a little more than a year before.

In August 2001, Adams sold it for $1.475 million to Kelly West, whose husband, John, said Adams was his real estate agent.

On paper, Bloom’s house had increased nearly 11/2 times in value in less than two years. The property had changed hands three times, each time between people with a relationship to Adams.

John West, a Sarasota attorney, said there was nothing strange about his role in the deal.

“I bought the house. I lived there for two years and I sold it,” he said.

In 2004, the flipping of the Bloom house stopped when Charles Scott Abel bought it for $1.95 million. Before the purchase, Abel had sold one property to Adams and bought two from him.

Abel declared the house as his homestead, which implied he lived there, and he kept it for three years before defaulting on his mortgage.

When Washington Mutual foreclosed on the property in July 2007, Abel owed the bank more than $2 million for the mortgage and assorted fees. Washington Mutual auctioned the property in September 2008 for less than $910,000.

from Schlegel’s sale show that Adams paid $925,000 for the house and assigned it to another buyer. That buyer turned out to be Adams’ aunt, Norma Faye Pearce, who paid $1.225 million, deeds show.

WRONG DEED PRICE When real estate agents complete a sale, they are required to report the price in an online database that licensed agents use to list their properties.

With help from agents who have access to the Mid-Florida Regional Multiple Listing Service database, the HeraldTribune reviewed more than 90 properties bought and sold

by Adams and his associates.

At least 10 times, the HeraldTribune found, sale prices recorded in MLS were lower than the sale price recorded on deeds.

NOT REPAYING LOANS At least five times, Adams sold a house but did not immediately pay off his mortgage.

Instead, he kept loan proceeds for at least nine months before repaying them. In one case, he never repaid the loan.

Mortgage contracts require borrowers to repay their loans upon sale. Lee Huszagh, executive secretary treasurer of the Florida Land Title Association, said selling a property without repaying the loan is fraud.

Abel did not return a message left with his wife seeking comment.

Candy Swick, Bloom’s real estate agent on the original 1999 deal, told the Herald-Tribune that she had a client last year who was interested in buying the Cove Terrace house out of foreclosure.

She said she reviewed property records available to licensed real estate agents and found that over the years only minor improvements had been made. She said she also noticed that every time the property had been sold since 1999, Craig Adams was listed as the real estate agent for both the buyer and seller.

“I found it unusual that every time the property was listed, Adams was on both sides of the transaction,” Swick said. “It’s very unusual. It looked very suspicious.”

ADAMS’ ASSOCIATES In the mid-1990s, Adams was a little-known agent in a Century 21 office on South Tamiami Trail, no different from hundreds of others carving out a living on sales commissions.

Starting in 1997, Adams began orchestrating sales among his associates and quickly developed a reputation for deals that always made money. In 2004, Adams was named one of the top 50 Re/Max real estate agents in the world.

He could not have done it alone.

Adams relied heavily on a regular group of investors to generate sales. Sometimes a property was flipped several times among the group, each time generating thousands of dollars in sales commissions for Adams.

In at least 20 of Adams’ deals, properties were flipped between his associates more than once, with one associate after the next paying more for the property.

With some sales, the latest buyer in the chain overstated what he or she actually paid, according to people familiar with the sales.

Overstating the price allowed buyers to borrow enough from banks See FLIPPING on 7A

www.heraldtribune.com

Tuesday, July 21, 2009 7A

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Adams depended on real estate insiders FLIPPING from 6A to walk away from the purchase with cash in their pockets.

Using only public records, it is impossible to determine how many of Adams’ sales involved inflated prices and which of Adams’ regular investors agreed to overstate what was actually paid for a property.

What is clear is that most of the investors made money, at least until the real estate market cooled.

Then, Adams’ repeat buyers began defaulting on their mortgages.

The Herald-Tribune repeatedly attempted to contact those who bought from or sold properties to Adams. Many did not return phone calls. Most who did would only agree to speak if they were not quoted, because they did not want to be blamed for getting friends and business associates in trouble.

Several people who participated in Adams’ deals told the HeraldTribune that Adams kept key information secret. They said Adams would approach them with an investment opportunity that he promised would make them money. He set the prices and explained why the property would be worth more in a short period.

All they had to do was sign the paperwork, they said.

What Adams did not share, according to several of the buyers, was that he or another associate had already bought the property, marked up the price and would profit from the sale to them.

By 2008, Adams and his regular buyers had bought and sold more than $100 million in real estate.

The buyers included: ■ Jonathan Glucker, a mortgage broker who once worked at CTX Mortgage and won multiple awards from the Mortgage Bankers Association of Florida. Glucker socialized with Adams and helped him get financing on some real estate deals, according to Hester, the Siesta Key financier who provided dozens of loans to Adams and his associates over the years. Deed records show that Glucker bought and sold at least six properties with Adams or his associates. Glucker did not return several calls seeking comment.

■ Heather Kabobel, Glucker’s wife and a real estate appraiser.

Kabobel was involved in two transactions with Adams. She also provided the appraisal for at least one mortgage for Adams, according to Hester. Kabobel did not return calls seeking comment.

■ Steven Wexler, a fixture on the Sarasota real estate scene for more than two decades. Wexler started Waterside Property Sales and built it into a 65-person firm specializing in Longboat Key before selling the company in 1998.

Deed records show he participated in at least nine deals with Adams and his associates. Wexler would not comment.

■ Rich Bobka, a real estate agent who worked with Adams at Re/Max and Paradigm Group. He was involved in five deals with Adams or his associates and went on to flip properties with his own buyers, including his brother and his sister-in-law. Bobka and his family members eventually defaulted on more than 20 loans.

Bobka told the Herald-Tribune that if laws or rules were broken in any of his deals, it was done without his knowledge.

■ Douglas Kanter, a real estate investor and home builder who owned a company with Adams called Waterside Developers.

Kanter also did five real estate deals with Adams associates. In one of them, Bungalow Beachside, an Adams company, bought a property near Sarasota Bay for $689,000 in August 2000. The company sold it on the same day

The Adams network A Herald-Tribune analysis of nearly 200 property deals involving Sarasota real estate agent Craig Adams uncovered a pattern of repeated sales among the same people.

Lisa Rotolo

Rotolo became Adams’ go-to closing agent during the boom. Deed records show she closed more than 100 real estate transactions for Adams and his associates. Half of those deals involved properties purchased and then sold to a group of regular buyers, including Adams’ family members.

Jonathan Glucker

Glucker is a Sarasota mortgage broker who shared mutual friends with Adams. Glucker and his wife were involved in at least eight transactions with Adams and his associates.

Sources say he also helped Adams get some loans through his mortgage brokerage.

Real estate professionals

Scott Schuhriemen

Schuhriemen went to Riverview High School with one of Adams’ associates, Rich Bobka. As a loan officer with BB&T, Schuhriemen arranged more than 20 second mortgages for Adams and his associates. When contacted by the Herald-Tribune about the mortgages, Schuhriemen said: “Those guys cost me my job.” He declined further comment.

Adams developed close ties to mortgage brokers, bankers and closing agents who helped him complete his real estate deals.

Craig Adams

Charles Scott Abel

Friends and business associates

The Sarasota real estate agent built a network of buyers and real estate professionals to help him sell dozens of properties in Sarasota County. The inside nature of his deals allowed him to inflate property values. He and his associates have defaulted on more than $100 million in loans.

Holly Adams

to Kanter for $950,000, enabling Kanter to get $863,000 in loans. Kanter could not be reached for comment.

THE FACILITATORS By recruiting his own buyers instead of selling properties on the open market, Adams was able to control the prices.

But to complete the deals, he needed help from real estate and lending professionals.

Adams found real estate attorneys, mortgage brokers and bank employees whom he returned to time and again to secure loans or close deals.

By using mortgage brokers who were close associates, Adams was able to pick and choose the appraisers who reviewed his deals.

Before banks write a mortgage, they hire professional appraisers to determine if the properties are actually worth what the buyer wants to borrow. If a mortgage broker is used, the broker often hires the appraiser and presents the results to the bank.

Several people familiar with Adams’ deals, including Hester, the private lender, said Adams had goto appraisers to review his transactions. Hester also said Adams had go-to mortgage brokers and Glucker was one of them. But it isn’t known how many loans Glucker may have helped Adams and his associates get because mortgage brokers, who help buy-

Adams bought and sold properties in his family members’ names. Properties would change hands between Adams’ associates and his family members at increasing prices, in some cases allowing the buyer to borrow more than the original purchase price.

Norma Faye Pearce

Bank officials did not realize what she had done until early 2008, when her clients, Jonathan Glucker and his wife, Heather Kabobel, stopped making payments and another lender foreclosed on the property, claiming it had first rights to sell the house and recoup its losses.

Knowingly filing such false documents is a federal crime, punishable by up to 15 years in prison, according to Lee Huszagh, executive secretary treasurer of the Florida Land Title Association.

Rotolo, citing client confidentiality, would not talk about the court case or the loan. Glucker and Kabobel did not return repeated phone calls seeking comment.

Rotolo is among the many real estate professionals who experts say were in a position to help pre-

SOURCES: Sarasota and Manatee Clerk of Court records, Herald-Tribune interviews

Jocelyn Adams

Lisa Rotolo

vent the rash of questionable activities that has led to billions of dollars in bank losses during the current real estate downturn.

Ann Fulmer, vice president of business relations with Interthinx, a leading provider of mortgage fraud prevention tools for banks, said as much as 80 percent of the mortgage fraud during the recent real estate boom was facilitated by professionals. These professionals may not have been directly involved in fraud, but they ignored signs that it was occurring, Fulmer said.

STAFF GRAPHIC / JENNIFER F. A. BORRESEN

Craig Adams’ 79-year-old mother bought property at least three times from Adams’ associates. She has since defaulted on more than $3 million in mortgages.

ones that disburse the funds, and they are at the table and can pick up on clues that the parties are not who they seem to be or the transaction is not what it seems to be.”

Before Adams began using Rotolo as his closing agent, he and his associates closed at least 30 deals using Sarasota attorney Stephen Voigt Sr. At the request of the Herald-Tribune, Voigt and his law firm reviewed 11 deals in which they represented Adams or his associates.

The details of each sale were different, but most involved a series of sales between associates. In some cases, Adams or his associates bought a house that ended up being sold two or three additional times to people who bought other properties from him.

Stephen Voigt Jr., speaking on behalf of his father, said nothing about the transactions was suspicious. He suggested that rapid price increases might have occurred when lots were subdivided so two houses could be built.

Voigt Jr. said he and his father were not aware of some of the relationships between Adams and his buyers when they closed deals, including one between Adams and his aunt, Norma Faye Pearce.

In each case, Voigt Jr. said, he could only guess why Adams’ associates were willing to buy properties from each other for hundreds of thousands of dollars more in a matter of weeks or months.

“As for why Pearce was able to resell the unit for $100,000 more than she paid for it two months after she closed, I don’t know,” Voigt Jr. wrote in an e-mail. “One possibility is that the unit had increased dramatically in value since the original contract date to the closing date.”

Voigt Jr. also said there may have been good reasons for sameday sales by Adams associates.

“It is unusual for a property to be sold twice on the same day, but it does happen and it is certainly legal,” Voigt Jr. said.

Public records show that the Voigts’ law firm stopped closing deals for Adams and his associates in 2003. Citing client confidentiality, the Voigts would not say why.

Several others, including Hester, told the Herald-Tribune that they eventually stopped doing business with Adams because of the unusual nature of his deals.

“In the end, I knew Craig was going to have problems,” Hester said. “He played too many games and burned too many bridges.

Truth is, people like Craig never earned the money they borrowed.

But in their minds, a dollar borrowed was a dollar earned.”

“Professionals drove it. They drove it and enabled it,” said Fulmer, a nationally recognized mortgage fraud expert and a former Georgia prosecutor. “All of this fraud was aided and abetted by the real estate professionals who were making bigger and bigger commissions.”

In addition to misdirecting bank funds in one transaction, Rotolo was the closing agent on deals involving two of Sarasota’s largest groups of real estate flippers.

From 2002 to 2008, the 46-yearold title agent helped real estate agent Craig Adams and his associates close more than 100 real estate transactions. About half of those deals involved properties that were sold among a group of regular buyers, including Adams’ family members.

Last year, Rotolo was named in a suit filed by David Oriente in Sarasota County’s circuit court. Oriente alleged that Rotolo allowed Adams to take $400,000 out of an escrow fund that was supposed to be used for buying properties. Adams used the money to pay off an old debt and kept $50,000, the law-

suit states.

“That’s just plain theft,” Huszagh said in an interview. “It’s like pulling money out of a guy’s wallet.”

Circuit Court Judge Bob McDonald awarded Oriente’s company more than $471,000 in damages in December 2008 after Adams failed to respond to the lawsuit.

Rotolo also closed deals for real estate agent Mark Riley, who organized sales between his neighbors and other associates in Lakewood Ranch. In those deals, a small group of buyers sold condo units to each other, in some cases nearly doubling the price within months.

Today, Rotolo’s company, Diamond Title, has closed. But Rotolo still has her Florida license to operate as a title agent. No one, including the bank officials suing her, has filed a complaint against her, according to a spokeswoman for the Department of Revenue, the state agency that oversees Rotolo’s profession.

Rotolo remains a committee chair for the Sarasota Association of Realtors, a trade group that promotes itself as a watchdog over local real estate agents.

Adams’ 82-year-old aunt appears as the buyer or seller in at least seven transactions that also involved other Adams associates. Pearce, who said she was unfamiliar with the transactions, has defaulted on one loan worth $884,000.

ers secure loans from a bank, are not named in public records.

Appraisers also are not named in public records, but other real estate professionals are. Real estate filings show that Adams and his associates used the same attorneys and title agents to close many of their deals.

Among them, no one handled more sales than title agent Lisa Rotolo.

Rotolo, who for years ran Diamond Title in Sarasota, met Adams through business connections, according to her ex-husband, Paul Dezzi. After 2002, Rotolo closed more than 50 sales between Adams’ associates, many of whom bought and sold multiple properties among themselves.

Rotolo, who is now vice president of DeSoto Title, would not comment.

“Settlement agents are just about the last line of defense,” said Ann Fulmer, a former Georgia prosecutor, nationally recognized mortgage fraud expert and an executive with Interthinx, which provides banks with fraud prevention tools. “They are the

Douglas Kanter

Kanter and Adams were partners in a company called Waterside Developers. He bought from or sold to Adams’ associates at least five times. In one deal, an Adams company bought a house for $689,000 in August 2001 and sold it to Kanter the same day for $950,000.

Family

Craig Adams’ ex-wife appears as a buyer or seller on at least three properties that changed hands among other Adams associates. She also bought a number of properties jointly with Adams when they were married.

Today, Holly Adams has filed for bankruptcy, listing $22.4 million in debts.

Abel was a mortgage broker who partnered with Adams in a company called Innovative Real Estate Concepts and was involved in at least three transactions with Adams or his associates. Abel was the last buyer of a Sarasota house that was traded five times among Adams’ associates. The sale price increased from $600,000 in December 1999 to $1.95 million in 2004.

Adams arranged dozens of property sales among his friends and close associates, including people he knew from Riverview High School and others he met as a young real estate agent. In many cases, Adams’ properties were not sold to outside buyers, but changed hands several times among people he knew. Adams or his real estate agency is recorded as the listing agent in nearly every sale.

Title agent closed 100 Adams deals

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG Staff Writers The instructions from the bank were clear.

Chevy Chase would approve the loan, but only if the proceeds were used to repay an outstanding mortgage on the property.

As the closing agent on the deal, it was Sarasota title agent Lisa Rotolo’s job to make sure the old loan got repaid. Instead, in 2004 Rotolo partially paid off the old loan and handed her clients $100,000, according to a 2008 foreclosure case filed in Sarasota County’s circuit court.

During testimony in the case, Rotolo conceded that she directed money to her clients and then filed documents incorrectly stating the old mortgage had been repaid.

MORE ONLINE: The Herald-Tribune identified more than 100 people who were involved in local property flips, including many who bought and sold houses with Craig Adams. To read about them and see how they are connected, go to heraldtribune.com/flipping.

*

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Orioles deal is said to be close SPRING TRAINING: Votes

today may end long effort to bring baseball back

By ROGER DROUIN and DOUG SWORD roger.drouin@heraldtribune.com SARASOTA — It seemed impossible a few months ago, but the county and the Baltimore Orioles now have a deal that would bring the team to Sarasota by spring 2010, and team officials will be on hand for two final votes today.

Given the county’s history with baseball deals going bad, officials were not quite ready to pop the champagne corks on Tuesday.

But the basics of the deal are all worked out, after 10 months of on-again, off-again negotiations. A 35-page agreement calls for a $31.2 million renovation of Ed Smith Stadium, and the city handing the property over to the county.

The Orioles kept mum Tuesday, refusing to discuss any part of the deal. Spokesman Greg Bader said the team “will refrain from commenting on the matter until after the votes take place.”

If the agreement is finalized today, the county and the Orioles will have 150 days to reach an agreement for redeveloping Ed Smith.

The team would use the stadium as-is in 2010, with construction beginning sometime after spring ball ends.

The stadium would be expanded from 7,500 seats to 9,000, including a new party deck and clubhouse, and would resemble a larger version of the rebuilt stadium in Charlotte See ORIOLES on 6A INSIDE: Take a look at the changes that may be in store for Ed Smith Stadium. Page 6A ■ Things you should know about the Baltimore Orioles. Sports 1C

INSIDE SCIENCE

JUPITER’S BIG BRUISE Something smacked into the planet recently, leaving a scar the size of the Pacific Ocean. 3A LOCAL

A BUZZ FROM THE PAST Today’s mosquito onslaught pales when compared with how things used to be. 1B HER ALDTRIBUNE.COM/REGISTER

BREAKING NEWS ALERTS Sign up to receive local SMS breaking news alerts on your cell phone.

FLIPPING FRAUD IGNORED BY POLICE AND PROSECUTORS

A HERALD-TRIBUNE INVESTIGATION: IT IS THE DIRTY SECRET OF ILLEGAL REAL ESTATE FLIPPING — FRAUD PAYS. THE FBI HAS TOO MANY CASES TO CHASE, AND STATE AND LOCAL LAW ENFORCEMENT DO LITTLE TO PROSECUTE UNSCRUPULOUS FLIPPERS.

Jessica Leis, who believed she had been duped in a property flipping scheme. contacted the Sarasota County Sheriff’s Office in 2006. But she found it difficult to generate interest in her complaint. STAFF PHOTO / E. SKYLAR LITHERLAND

Classified .......10C Comics ............8C Lottery .............2A Movie Log ........7B

Obituaries ........5B Opinion ............8A People .............7B Sports ..............1C

OUR 84TH YEAR NUMBER 286 4 SECTIONS

INSIDE

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG, Staff Writers

J

essica Leis, the widow of a hero cop who died after saving lives in the line of duty, thought she had been duped in a property flipping scheme.

She figured the Sarasota County Sheriff’s Office would help her.

She was wrong.

Her call in 2006 was answered by a deputy who told her the Sheriff’s Office had no one to investigate that kind of crime.

So Leis contacted the Attorney General, the District 12 State Attorney and the state agency that regulates real estate agents. Each sent her elsewhere.

At the Department of Business and Professional Regulation, which oversees mortgage brokers, Leis said a woman threatened to include her as a co-conspirator in the scheme she was trying to report.

“I was in shock from the scam and I felt just so despondent and hopeless,” Leis said.

“When I was calling these agencies and they were saying, ‘We don’t have a department for that,’ I felt like a bad situation had just gotten worse.”

A yearlong Herald-Tribune investigation into housing fraud found that law enforcement at every level often failed to act even when obvious cases of fraud came to their attention.

Their inaction allowed mortgage fraud to continue virtually unchecked during the real estate boom. Phony deals skewed property values and victimized home buyers. Year after year, a national mortgage research institute ranked Florida one of the worst states for fraud.

The Herald-Tribune investigation found that mortgage fraud ran rampant all over Florida. The newspaper looked for just one kind of fraud — illegal property flipping — and found

SNN LOCAL NEWS 6

FEAR OF FALLING Find out why seniors are more susceptible to falls, and get tips on how to prevent accidents.

CK

See FRAUD on 7A

■ Excerpts from the 2005 FDLE report warning that an epidemic of housing fraud loomed. 7A

ONLINE: At heraldtribune.com/ flipping: ■ FDLE’s full 2005 report warning about housing fraud.

■ Who’s who guide to flipping in Sarasota and Manatee counties.

■ Find flips in your neighborhood or dig into any of the 50,000 suspicious Florida flips.

■ Previous stories in the series.

SNN LOCAL NEWS 6: Starting tonight at 5, an IRS investigator tells Lauren Mayk how fraud is prosecuted.

LAST SUNDAY: A HeraldTribune investigation of flipping fraud finds $10 billion in suspicious Florida deals.

MONDAY: More than 30 groups of flippers operated in Sarasota and Manatee counties.

YESTERDAY: One Sarasota real estate agent orchestrated more than 100 flips.

TOMORROW: Who made flipping fraud possible? Bankers.

SUNDAY: How to prevent mortgage fraud.

City’s small bid to end What’s in this health plan, case was not the first for the U.S. — and for us?

By TODD RUGER todd.ruger@heraldtribune.com SARASOTA — Almost a year before the city offered $400 to Juan G. Perez to avoid a lawsuit over a police officer using excessive force, the city paid out another small settlement for

MILITARY

THE F-22 BUDGET WAR Supporters of the Air Force fighter jet lose a major spending battle in the Senate. 3A

the same reason to a man sitting in jail.

Records show the city offered $800 to a man last August to sign an agreement waiving his right to sue an officer who punched him during an arrest.

The waiver, signed by Abdelkhalak Serroukh, is worded exactly the same as the one Perez signed after a police officer kicked him while in the jail sallyport June 26.

The city has never used its funds to settle police liability cases as quickly — or as cheaply — as it did for Perez and Serroukh, a review of the police liability fund for the past three years shows.

The fact that both of the people who have signed the waivers are immigrants — Perez from GuateSee WAIVER on 6A

ANALYSIS: While most

want more coverage for the uninsured, worry lingers

By DAVID LEONHARDT The New York Times WASHINGTON — What’s in it for me? On the subject of health care reform, most Americans probably do not have a good answer to the question.

And that, obviously, is a problem for the White House and for Democratic leaders in Congress.

Current bills would expand the number of insured — but 90 percent of voters already have insurance. Congressional leaders say the bills would cut costs. But experts are dubious. Instead, they point out that covering the

uninsured would cost billions.

So the typical person watching from afar is left to wonder: What will this project mean for me, besides possibly higher taxes?

Our health care system is engineered, deliberately or not, to resist change. The people who pay for it — you and I — often do not realize that they are paying for it.

Money comes out of our paychecks, in withheld taxes and insurance premiums, before we ever see it. It then flows to doctors, hospitals and drugmakers without our realizing that it was our money to begin with.

The doctors, hospitals and drugmakers use the money to treat us, and we of course do see those treatments. If anything, we want more of them. They are supSee LEONHARDT on 2A

www.heraldtribune.com

Wednesday, July 22, 2009 7A

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Flip fraud ignored by law enforcement FRAUD from 1A $10 billion in suspicious deals this decade.

Lawmakers passed a law in 2007 making mortgage fraud a crime in Florida for the first time, and state officials created mortgage task forces and opened a hot line to gather complaints.

But even now, two years into a recession brought on by real estate speculation and fraud, state and local law enforcement is doing almost nothing to prosecute past fraud or prevent future fraud.

The Herald-Tribune found: ■ In 2005, the Florida Department of Law Enforcement issued a report to law enforcement officials and prosecutors warning of a cataclysmic rise in mortgage fraud. Even so, most law enforcement agencies, including those in Manatee and Sarasota counties, ignored FDLE’s most basic recommendations.

■ While the FBI has recently devoted more manpower to mortgage fraud, most local law enforcement agencies have not. Most Florida police departments and sheriff’s offices have no detectives dedicated to mortgage fraud. Many do not even have detectives trained to pursue such cases.

Meanwhile, the FBI is pursuing about 2,500 mortgage fraud cases nationwide, a tiny fraction of the fraud that was committed.

■ In some counties, victims of real estate fraud schemes were rebuffed when they sought help from local law enforcement. At the Sarasota County Sheriff’s Office, a half-dozen people said they tried to report fraud but deputies would not even write up an incident report. In at least one case, multiple victims reported a fraud to multiple agencies, including the Sarasota County Sheriff. No one investigated.

■ Until recently, no one at the state level coordinated the response of the various agencies that regulate mortgage fraud and the real estate industry. Complaints to one agency were not necessarily shared with other agencies that could have investigated or might have received complaints about the same schemes.

■ Florida Attorney General Bill McCollum made no attempt to coordinate mortgage fraud response among local law enforcement until April, a few days after the Herald-Tribune called McCollum to get his reaction to the newspaper’s findings. That month, McCollum held his first mortgage fraud conference call with representatives from local law enforcement and state regulatory agencies. He called the mortgage fraud crisis a “state of emergency” and said there needed to be better coordination among agencies.

■ For years, McCollum’s office had been collecting complaints and referring cases to local law enforcement agencies — police departments and sheriff’s offices whose detectives had no training to go after mortgage fraud.

Many law enforcement officials interviewed by the Herald-Tribune said they lack the resources to aggressively pursue mortgage fraud. Such cases can take a year or more to build and often require specially trained detectives.

Bill Black, a white-collar crime expert and economics professor at the University of Missouri, said there needs to be a “fundamental rethinking” in law enforcement.

“You get no deterrence and it’s free money,” said Black, who helped the World Bank develop anti-corruption initiatives. “These things caused far more losses than blue-collar property crimes.”

IGNORING A WARNING In November 2005, when the real estate market in Florida had just begun to slow, the state’s top law enforcement agency issued a warning that mortgage fraud was about to wreak financial havoc.

In sober language, a 36-page Florida Department of Law Enforcement report explained that banks would collapse and losses would be counted in “hundreds of billions of dollars.”

The level of fraud would rival the Enron case and the Savings and Loan collapse of the 1980s, the intelligence report warned.

The report, which was not released to the public but was sent to prosecutors and law enforcement officials across the state, laid out a series of responses to help prevent or lessen the disaster.

But instead of heeding the warning, most law enforcement officials — including Earl Moreland, the elected state attorney for Sarasota and Manatee counties, and Bill Balkwill, Sarasota County’s sheriff at the time — did nothing.

Even the most basic recommendation in the FDLE assessment — posting a notice at the county courthouse warning that mortgage fraud is a criminal offense — was ignored in Sarasota County.

Today, as the FDLE assessment

FDLE’s 2005 warning about mortgage fraud In a November 2005 report distributed to Florida law enforcement agencies and prosecutors — but not the public — the Florida Department of Law Enforcement’s Office of Strategic Intelligence warned bluntly that failing to curb mortgage fraud would be disastrous. Below are excerpts from the report. Find the full report online at heraldtribune.com/flipping.

vestigate. Richard and Col. Steve Burns said it is unrealistic to expect local law enforcement agencies to go after flipping fraud.

Richard said he had not read the FDLE assessment and said it is possible that no one at the Sheriff’s Office read it. Burns added that while it might be easy to identify fraudulent real estate deals, it can take years to build a case, and the office simply does not have the money or manpower.

“I’d like to go aggressively after a lot of things, but we just don’t have the budget,” Burns said.

Gary Mosseau, who tried to file a complaint about alleged financial misdeeds with the Sarasota Sheriff’s Office. STAFF PHOTO / E. SKYLAR LITHERLAND

warned, the scope of fraud has overwhelmed state and federal law enforcement agencies to the point that only the most egregious cases are likely to be prosecuted.

In addition to the FBI’s 2,500 cases, state agencies, including the Attorney General and FDLE, have pursued a few hundred more dating back to 2000.

But the amount of fraud dwarfs the number of cases being pursued, the Herald-Tribune found.

The Herald-Tribune analyzed nearly 19 million property transactions looking for one type of housing fraud — illegal property flipping. The newspaper found more than 50,000 transactions in which prices increased so much, so quickly, that fraud experts interviewed by the newspaper deemed them highly suspicious.

Former U.S. Attorney Alex Acosta, who led South Florida’s Mortgage Fraud Task Force until earlier this year, said only a fraction of fraudulent flippers have been prosecuted.

“Our approach here is we’re focusing on the worst of the worst,” Acosta said in an October interview.

POLICE WON’T HELP While the FBI and several mortgage fraud task forces across Florida struggle to keep up with their caseloads, local law enforcement agencies have largely avoided taking on the complicated cases.

In Sarasota County, a half-dozen people interviewed by the Herald-Tribune said they attempted to report mortgage fraud scams to the Sheriff’s Office. In each case, the victims said, they were told

the Sheriff’s Office could not help and they left without even an incident report being taken.

Sarasota resident Gary Mosseau said he contacted the Sarasota County Sheriff’s Office to report that he and others were victims in a multimillion-dollar mortgage embezzlement scheme involving Bradenton’s Coast Bank.

As with the Leis case, a deputy referred Mosseau to Florida’s Division of Financial Regulation and did not file a report.

Mosseau said he was ready to provide the names of principals and a detailed chronology of events. He was disappointed to find such a lack of interest in what he considered a major white-collar crime case.

“What I wanted everyone to know is that I had been robbed,” he said. “In the end, it was probably 165K that disappeared from my construction loan.”

Sarasota Sheriff Lt. Paul Richard acknowledged that detectives should have documented the mortgage fraud complaints.

“Any person who feels like a victim, we should document it,” Richard said. “It could be a breakdown in communication. Under those circumstances, we should have taken a report.”

Sheriff Tom Knight, who was elected last November and took office after Balkwill retired in January, said he has instructed officers that they should never tell anyone the Sheriff’s Office is unable to handle their complaint. They should at least take a report, Knight said.

But taking a report does not mean the Sheriff’s Office will in-

NO TRAINING, NO STAFF Most Florida law enforcement agencies have the same lack of expertise. The Herald-Tribune interviewed officials from more than a dozen Florida sheriff’s offices and found that none had detectives specializing in mortgage fraud.

During McCollum’s April meeting, Amy Mercer, the executive director of the Florida Police Chiefs Association, said that most of their agencies do not have the time or resources to investigate mortgage fraud.

Mercer added that she doubted most officers would even recognize such a case for what it was if a citizen complained.

Even agencies with detectives devoted to white-collar crimes — such as the Manatee County Sheriff’s Office — reported they had not pursued a mortgage fraud scheme more complicated than forgery. However, Manatee County Sheriff’s detectives took on the Leis case in April with help from federal agencies.

The biggest problem, experts say, is lack of training and staff.

Some police agencies say they could expand fraud efforts but only if other crimes were to go unpunished.

Even if detectives build a case, it might end with the state attorney, whose prosecutors are rarely trained to pursue complicated white-collar crime.

The lack of training is not limited to Florida, said Ann Fulmer, a former Georgia prosecutor and nationally recognized mortgage fraud expert. “There’s no one in the prosecutor’s office who can prosecute these cases,” Fulmer said. “Why should a cop make the effort even if he has the interest?

What’s the incentive for the cop to do it if the prosecutor is not going to touch it?”

In Southwest Florida, victims of

various mortgage fraud schemes have filed complaints with the Attorney General. More than a dozen of those complaints were forwarded to State Attorney Moreland, whose district includes Sarasota and Manatee counties.

Moreland did not pursue any of them or even meet with local sheriff’s office officials to press for an investigation, Assistant State Attorney Dennis Nales conceded.

He added that the office can only deal with the cases sent by law enforcement agencies.

Nales said it would not be appropriate for his office to suggest a shift in resources by sheriff’s offices and police departments.

COUNTIES THAT TRY Many experts, including Fulmer, say more prosecution is only part of the solution. Far more important, she said, is fraud prevention. Even so, some local agencies have attempted to prosecute mortgage fraud in their communities.

The Hillsborough County Sheriff’s Office has a representative on a local mortgage fraud task force run by the U.S. Attorney’s Office.

Palm Beach County’s financial crimes unit pursues its own real estate fraud cases and works with the FBI on others.

Florida’s most aggressive local law enforcement agency is the Miami-Dade Police Department, which created its own mortgage fraud task force in 2007. The department assigned about 20 officers to the task force, which has now made more than 100 arrests.

The task force includes officers familiar with real estate, including Sgt. Richard Davis, who said he is also a licensed Realtor and mortgage broker.

Davis said members of the task force receive specialized training.

“Mortgage fraud is so complex, and there are so many scams,” Davis said. “A lot of the fraud is going to be the insiders. They’re going to manipulate the system.”

U.S. Rep. Kendrick Meek, D-Miami, has advocated for a national mortgage fraud task force and said he believes local agencies across Florida should take the same approach.

“A sustained and coordinated law enforcement effort goes a long way in solving this problem,” Meeks said in a statement to the Herald-Tribune. “The MiamiDade model of combating mortgage fraud needs to be exported throughout Florida.”

*

FACES OF COMEDY Traci Kanaan owns a successful merchandising company in Palmetto, but she also squeezes in time for her real passion: making people laugh.

TICKET

THURSDAY, JULY 23, 2009 â?˜ 75¢

BASEBALL: Officials vote

in favor of deal to have Orioles train right here

By ROGER DROUIN and DOUG SWORD Staff Writers SARASOTA — After three years of failed deal brokering with three teams, local officials saved spring training on Wednesday.

Just when even the slightest possibility of a baseball deal seemed unlikely, county officials reached an agreement with the Baltimore Orioles clearing the way for a 30-year contract with the team and a $31 million renovation of Ed Smith Stadium.

Sarasota lost two teams, the Reds and Red Sox, because of money. It got the third team for the same reason — the cost was right.

Both the city and county commissions approved a deal. Now the team and local officials have 150 days to reach a final agreement. The team is scheduled to start training in Sarasota next spring in the stadium as-is.

In an interview, Orioles attorney Alan Rifkin said he hoped the high level of detail in the 35-page agreement would convince everyone that the deal was basically done and that the terms of the lease and the project agreement are already worked out. “For all intents and purposes See ORIOLES on 12A INSIDE LOCAL

GRISLY CRIME A Sarasota man is murdered and his mutilated body is set ablaze. 1B BUSINESS

GYROCAM BEING SOLD The Manatee County company is joining one of the largest defense contractors. 5C

NATION

VACCINE TESTING Medical centers are set to begin a series of studies on a new swine flu vaccine. 8A

HER ALDTRIBUNE.COM/TICKET

BEST BETS Get a jump on your weekend entertainment planning by checking out Ticket.

SNN LOCAL NEWS 6

ONLINE To see the latest news and features by SNN, visit HeraldTribune.com/snn.

Classified .........1F Comics.............8C Lottery .............2A Movie Log .......7B

Obituaries ........5B Opinion .........10A People ..............7B Sports ..............1C

OUR 84TH YEAR NUMBER 287 5 SECTIONS

NATION

ON HEALTH President Obama, in a televised news conference, says his health care overhaul plan will help families and the economy.

3A

LENDERS FAILED TO HEED RED FLAGS

A HERALD-TRIBUNE INVESTIGATION: REVOKED REAL ESTATE LICENSES AND MULTIPLE BANKRUPTCIES WEREN’T ENOUGH TO STOP LENDERS FROM MAKING LOANS

Crippled by bad loans, including $15.7 million related to flips, Bradenton’s First Priority Bank was shut down in 2008.

STAFF PHOTO / E. SKYLAR LITHERLAND

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG, Staff Writers

INSIDE

F

â– During the boom, loans defied

raudulent property flippers had an unlikely accomplice during the real estate boom — the lending industry.

A yearlong Herald-Tribune investigation into thousands of suspicious Florida flip deals found that lenders of all kinds approved risky deals and ignored obvious red flags for mortgage fraud.

In 2006 and 2007, several banks and mortgage firms loaned $2.5 million to a Sarasota property flipper despite a revoked real estate license and two bankruptcies on his record.

When a Sarasota home builder was unable to sell his newly built houses, mortgage companies lent him and his family nearly $2 million so they could purchase four themselves. Three of those properties are now bank-owned.

Washington Mutual loaned a Sarasota resident $2 million three months after it had foreclosed on a previous $2 million loan. The new loan went into default less than a year later, about the same time WaMu’s crush of bad loans put it out of business.

The Herald-Tribune’s review of nearly 19 million Florida property sales from 2000 through 2008, along with a closer inspection of more than 3,000 suspicious flip deals, showed that: ■Banks and mortgage companies approved loans on tens of thousands of properties that changed hands at least twice in 90 days and increased at least 30 percent in value.

Industry experts and mortgage fraud investigators say such quick price increases should have been an automatic sign of fraud for any banker. â– Lenders approved loans even when applications exhibited additional signs of fraud.

Hundreds of loans were written after properties had been sold at large price increases See FLIPPING on 6A

common sense. 7A â– Bad appraisals fed flipping fraud, experts say. 7A â– A guide to flipping loans at the 18 local banks. 6A

ONLINE: Go to heraldtribune.com/ flipping for: ■Who’s who in flipping in Sarasota and Manatee. ■Find flips in your neighborhood or dig into any of the 50,000 suspicious Florida flips. ■Previous stories in the series. ■Lauren Mayk’s three-part series on SNN Local News 6.

LAST SUNDAY: A HeraldTribune investigation of flipping fraud finds $10 billion in suspicious Florida deals.

MONDAY: More than 30 groups of flippers operated in Sarasota and Manatee counties.

TUESDAY: One Sarasota real estate agent orchestrated more than 100 flips.

YESTERDAY: Police and prosecutors ignored flipping fraud as it happened — and may not punish it now.

SUNDAY: How to prevent mortgage fraud.

2 Dillard’s stores are said to be closing in the region

By TONI WHITT toni.whitt@heraldtribune.com In another sign of stress on the Southwest Florida economy, giant retailer Dillard’s is closing two of its four stores in the region.

The anchors at Westfield Sarasota Square and DeSoto Square Mall in Bradenton are two of the five store closings that the Little Rock, Ark.-based retailer plans nationally in 2009.

The company confirmed on Wednesday that the Westfield Sarasota Square is closing, but a corporate spokeswoman would not confirm the shuttering of the Bradenton site.

Sales associates, however, said they were told that the DeSoto Square Dillard’s would close before the end of the year. Many of their co-workers have already been transferred to other stores.

Consumers have cut their See DILLARDS on 4A

Dillard’s confirmed it will close its store at Westfield Sarasota Square. Also, sales associates at the DeSoto Square Dillard’s said they have been told that store will close before the end of the year. STAFF PHOTO / CHIP LITHERLAND

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HERALDTRIBUNE.COM

6A Thursday, July 23, 2009

www.heraldtribune.com

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Lenders looked past obvious signs of fraud

FLIPPING from 1A between relatives, spouses or close business associates. Others were approved on sales between businesses and their officers. The Herald-Tribune was able to identify many of these relationships through Internet searches alone.

■ Lenders allowed property flippers to hold millions in mortgages all at once with no clear way to afford the payments. Then they let flippers drive themselves further into debt, refinancing over and over on multiple properties.

■ Banks and mortgage companies dug an even deeper hole for themselves by continuing to lend money for suspicious deals long after the real estate boom ended. In 2007, more than a year after the market started falling in mid-2005, flippers arranged more than $1 billion in sales involving suspicious price increases.

■ Insider contacts were not necessary to get loans approved.

Whether from a small local bank or a big national chain, mortgages were readily available. In fact, several bank insiders told the HeraldTribune they approved questionable loans because if they did not, they knew another bank would.

■ A Herald-Tribune review of every mortgage written by 18 banks with headquarters in Sarasota and surrounding communities found that flippers were responsible for $72.4 million in loan losses.

Nearly half that total — $36 million — fell on just three banks: First Priority, Freedom and First State.

What makes the flipping fraud so egregious is not just that it happened, but that it would have been so easy to stop.

Using public records and Internet searches, the Herald-Tribune identified hundreds of deals that exhibited classic red flags for fraud. They include sales between family members and business partners in which prices increased $100,000 or more overnight. In other cases, flippers repeatedly traded properties from their company to their own name, each time increasing the price and the amount they borrowed.

Lenders knew they were writing bad loans, but did it anyway because they were making so much money on underwriting fees, said Jack McCabe, a Deerfield Beachbased real estate consultant who has been studying Florida housing fraud for years.

“There’s no doubt during the boom years in Florida there were lenders who were fully knowledgeable of rings of people who were acquiring loans without any plans to pay them back and were out to pocket as much money as they could,” McCabe said.

“They knew in the pit of their stomachs that what they were doing would bring the system crashing down. But they didn’t say anything because they did not want to be blamed for ending the gravy train.”

IGNORING THE RISK During the boom, Scott Schuhriemen earned rainmaker status at the Sarasota BB&T branch where he worked.

By 2006, the loan officer was among the most productive in his office, thanks in part to his relationships to some of Sarasota’s most prolific flippers.

One of Schuhriemen’s regular clients was Craig Adams, a Sarasota real estate agent-turned-flipper who organized repeated sales between his family members, friends and business associates.

Schuhriemen had gone to Riverview High School with Rich Bobka, who worked with Adams at two Sarasota real estate companies.

In two years at BB&T, Schuhriemen signed off on more than 20 home equity lines of credit for Adams and his associates, mortgage filings with the Sarasota County Clerk of the Circuit Court show.

One of the loans approved in 2006 went to Adams’ 82-year-old aunt, Norma Faye Pearce.

Schuhriemen, also the Notary Public on Pearce’s mortgage documents,signedthe standard oath stating that Pearce had appeared before him and signed the papers. But Pearce’s signature on the loan document does not match her signature on more than a dozen other loan and real estate documents filed with the clerk of court. Pearce’s signature appears to have been forged, two fraud experts told the HeraldTribune.

When contacted about the Pearce signatures and his ties to Adams and his associates, Schuhriemen said, “Those guys cost me my job.” He would not elaborate.

Schuhriemen was not alone in approving questionable loans.

The Herald-Tribune found that banks of all types ignored clear red flags.

At Sarasota’s First State Bank, officers provided six loans to Sarasota attorney John Yanchek and his client James Russell Crain from March 2001 to August 2004.

Flipping and defaults at local banks A Herald-Tribune review of every mortgage written since 2000 by the 18 banks based in the Sarasota area found that only five of the 18 have been unaffected by property flippers’ defaults. Some bank losses were minimal. But at First Priority and Freedom Bank, defaults on flipping loans helped put the banks out of business.

The listings below show total loan defaults at each bank; the amount of defaults from suspicious property flips, which the Herald-Tribune defined as properties that changed hands quickly among associated parties; and total defaults by people involved in suspicious property flips. The last number includes defaults from flips and from other transactions.

First Priority Bank (CLOSED)

Freedom Bank (CLOSED)

Total defaulted loans: $45.6 million Defaults caused by flips: $15.7 million, 34 percent Total defaults by flippers: $18.9 million, 41 percent

Total defaulted loans: 36 million Defaults caused by flips: $1.3 million, 4 percent Total defaults by flippers: $6.4 million, 18 percent

First State

Bank of Commerce

LandMark Bank

Flagship Bank

Total defaulted loans

Total defaulted loans

Total defaulted loans

$51.1 million

$16.7 million

$14.3 million

Total defaulted loans

Defaults caused by flips:

Defaults caused by flips:

Defaults caused by flips:

$5.8 million, 11 percent

0

$1.7 million, 12 percent

Total defaults by flippers:

Total defaults by flippers:

Total defaults by flippers:

$10.5 million, 21 percent

$12.6 million, 75 percent

$8 million, 56 percent

Insignia Bank

Century Bank

Community National Bank

Total defaulted loans

Total defaulted loans

Total defaulted loans

$5.4 million

$124.7 million

$12.8 million

Defaults caused by flips:

Defaults caused by flips:

Defaults caused by flips:

$16.9 million

$1.5 million, 28 percent

$1.5 million, 1 percent

$245,000, 2 percent

Defaults caused by flips:

Total defaults by flippers:

Total defaults by flippers:

Total defaults by flippers:

0

$5 million, 93 percent

$6.6 million, 5 percent

$545,000, 4 percent

Total defaults by flippers:

Horizon Bank

Manatee River Community Bank

Sabal Palm Bank

Bank of Venice

Total defaulted loans $12.2 million

Defaults caused by flips: 0

Total defaults by flippers: $106,000, 1 percent

Total defaulted loans $7.4 million

Defaults caused by flips: 0

Total defaults by flippers:

Total defaulted loans

$30.5 million

Defaults caused by flips: $843,000, 3 percent

Total defaults by flippers: $2.9 million, 10 percent

Community Bank of Manatee

Total defaulted loans

$524,000, 3.1 percent

Total defaulted loans

$5 million

$795,000

Defaults caused by flips:

Defaults caused by flips:

0

0

Total defaults by flippers:

Total defaults by flippers:

$150,000, 3 percent

0

$202,000, 3 percent

First America Bank

Gateway Bank

Florida Shores Bank

1st Manatee Bank

Total defaulted loans

Total defaulted loans

Total defaulted loans

Total defaulted loans

$284,000

0

0

0

Defaults caused by flips:

Defaults caused by flips:

Defaults caused by flips:

Defaults caused by flips:

0

0

0

0

Total defaults by flippers:

Total defaults by flippers:

Total defaults by flippers:

Total defaults by flippers:

0

0

0

0

* Bank defaults include non-performing loans and write-offs as of March 2009 or the date when defunct banks were closed by regulators.

In each case, Yanchek bought properties and sold them on the same day for hundreds of thousands more to companies or trusts that involved Crain.

In one of their deals, Yanchek, who recently was sentenced to five years in prison for his part in an unrelated mortgage fraud case, bought a house in March 2001 for $362,500 and sold it the same day for $560,000 to Sarasota’s Jaybird Inc., a company that lists Yanchek as an officer.

A loan officer at First State signed as a witness to the deed between Yanchek and Sarasota’s Jaybird and also signed off on $498,000 in loans. That gave Yanchek $135,500 more than he had paid for the property.

First State approved five more loans to Yanchek and Crain under similar circumstances.

John E. “Jed” Wilkinson, First

State’s chief executive, said a new group of managers in 2002 eventually recognized the risk associated with flippers and refused to write them new loans.

“We identified loans that had been made like these and we immediately put policies in place to prevent this type of lending in the future,” Wilkinson said. “We then let borrowers know that their loans would not be renewed and that they should take their business elsewhere.”

ROAD TO FAILURE The Herald-Tribune’s review of suspicious flips found that flippers qualified for loans at large national lenders, including Countrywide, Washington Mutual and Indymac.

But smaller regional and local banks also wrote them loans.

A review of every mortgage written by 18 banks based in the

Sarasota area found that flippers were responsible for loan defaults at all but five.

Flips identifiedby the Herald-Tribune led to $28.7 million in bad loans at local banks. Another $43.7 million in losses came from mortgage defaults that did not involve flipped properties, but were tied to people who participated in flipping.

All told, the $72.4 million in loan losses represented nearly 20 percent of local banks’ non-performing loans and write-offs as of March 31.

No bank in the area was hit harder by flipping than First Priority.

Founded in December 2003, the bank gained a reputation for aggressively writing loans to local developers and real estate speculators.

A Herald-Tribune review of public records shows that mortgage loans to flippers represented at least 10 percent of the bank’s to-

tal loan volume and were among the largest made by the bank.

“I usually see banks as conservative lenders,” said Gordon Hester, a financier who writes high-interest loans to borrowers looking for more flexibility than traditional lenders offer. “First Priority was way outside that profile. They did loans that I wouldn’t have done.”

GOOD MONEY AFTER BAD Until mid-2005, when the real estate market began to cool, lenders thrived despite the questionable loans they wrote.

As long as real estate values increased, it did not matter if buyers defaulted. Lenders could take ownership of the houses and recoup their money by selling them.

But when Florida property sales slowed in late 2005, banks and mortgage companies did not See FLIPPING on 7A

www.heraldtribune.com

Thursday, July 23, 2009 7A

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD WHY LENDERS MADE SUCH BAD LOANS What the Herald-Tribune found in Florida is emblematic of lending problems across the nation.

Starting in the 1990s, lenders that once cautiously wrote mortgages to ensure they would be repaid found they could make more money selling loans to major financial institutions, including Merrill Lynch, Bear Stearns and Lehman Brothers.

Those companies and others were buying loans and turning them into securities that could be sold to investors on Wall Street.

The incentive for bankers and mortgage brokers to screen for fraud was reduced.

Instead, they were encouraged to write more and more mortgages, no matter how risky the loans seemed to be, said Bill Black, a University of Missouri professor and internationally recognized white-collar crime expert.

In the rush to collect more underwriting fees, lending officers discarded their own underwriting rules and in some cases approved loans they suspected were fraudulent, Black said.

“The lenders are the key,” Black said. “The lenders didn’t want any internal controls.

They were making their money by making bad loans.”

FLIPPING from 6A adjust.

Many continued writing risky loans and ignoring clear signs of fraud, the Herald-Tribune found.

In fact, the deals approved by lenders got bigger as the market worsened.

In 2005, the median price increase from the first to the second sale for flips identified by the Herald-Tribune was about $65,000. A year later, after the real estate market had begun a noticeable decline, that amount increased to more than $73,000.

By 2007, the spread was still more than $70,000.

The increase was driven in part by lenders allowing borrowers to take on larger amounts of debt — essentially betting that real estate prices would start rising again and bail everyone out.

Starting in 2006, some investors and builders arranged sales to themselves or to their associates at higher prices so they could qualify for larger loans and shift exposure to lenders.

Sarasota home builder David Winterrowd was in financial trouble in late 2006. He said he was being pressured by banks to pay off $1.15 million in construction loans on four houses he and his brother had just built.

Unwilling to let his lenders seize the houses, Winterrowd sold the houses from his business to himself and his brother.

They exchanged $1.15 million in construction loans for $1.95 million in personal mortgages at a time when Winterrowd said he was having trouble making the mortgage payments on the Laurel Oaks home where he and his family lived.

Winterrowd told the HeraldTribune that he disclosed what he was doing to the banks and that he believed the real estate market would rebound.

But just four months after receiving the last of the loans on his new houses in January 2007, Winterrowd and his brother began defaulting on other debts. Between May 2007 and June 2008, banks foreclosed on 11 of their loans totaling $9.5 million, including two loans the brothers received after selling newly constructed houses to themselves.

Experts say that Winterrowd did nothing wrong, but that bankers and mortgage brokers who allowed such loans after 2005 were making bad underwriting decisions.

“The problem in late 2006 and early 2007 is that builder bailouts were just a delaying tactic,” McCabe said. “It was a nonconspiracy conspiracy on the part of banks and developers to keep the gravy train running.

Deals got riskier and riskier.”

Those deals protected many of the parties involved. The original lender got repaid. The borrower got enough money to pay off his old debt and sometimes put extra cash in his pocket. Ultimately, the borrower was able to walk away from property worth far less than the outstanding mortgage.

“Everyone — except the taxpayer at the end — came out ahead,” said Port Charlotte appraisal instructor Dennis Black.

SUNDAY: How to prevent mortgage fraud.

Boom loans ignored default, bankruptcy and common sense

By MICHAEL BRAGA michael.braga@heraldtribune.com The Herald-Tribune closely reviewed more than 3,000 Florida property flips that occurred this decade. Banks facilitated many of the deals by approving mortgages even when the sales looked unusual or the borrowers had past credit problems.

Among them: HUSANI DEFAULTS Bankers at Naples-based Orion Bank, Fort Lauderdale-based BankAtlantic and Clearwater-based Mercantile Bank were all embarrassed by the loans they made to Neil Mohammad Husani and his associates, who borHusani rowed $83 million from these and four other banks during the boom.

Court testimony by an Orion executive in the fraud trial of one of Husani’s associates shows that Orion actually made a loan in three weeks rather than the usual 90 days so Husani’s partner could borrow $13.1 million during the busy 2004 Christmas season.

Bankers at Orion and the other two banks also testified that they never confirmed whether Husani’s partner actually held millions of dollars in escrow accounts, or whether other critical statements made by Husani and his partners were true. Ultimately, the group defaulted on more than $70 million in loans.

SEABORNE BANKRUPTCIES Despite having two previous bankruptcies and losing his real estate license, Sarasota mortgage broker Arthur Seaborne got 11 loans from various banks and mortgage companies on properties he bought in Sarasota and Manatee counSeaborne ties.

On average, he and his wife got two new mortgages each month from March through September 2007, borrowing $2.5 million.

Lenders included SunTrust, BankUnited and Regions Bank.

Court records show they have defaulted on three loans totaling $684,000. Seaborne recently said in a court deposition that he was 90 days behind on other mortgages, according to Anthony Lefco, a Sarasota attorney representing an investor suing Seaborne in Sarasota County’s circuit court.

Seaborne said all his real estate deals were legitimate and that he was a victim of the market collapse.

Bank damage Flippers identified by the Herald-Tribune were responsible for nearly 20 percent of the problem loans at the 18 banks with headquarters in Sarasota and Manatee counties.

Total bad loans resulting directly from flips

$28.7 million

Total bad loans caused by people who regularly engaged in flips

Total non-performing loans and write-offs reported by 18 Southwest Florida community banks

$379.8 million

$43.7 million Total bad loans caused by flips and flippers

Other banks $1.5 million

$72.4 million First Priority Bank $18.9 million

Flagship National Bank $2.9 million Insignia Bank $5 million

Bank of Commerce $12.6 million First State Bank $10.5 million

Freedom Bank $6.4 million

LandMark Bank $8 million

Century Bank $6.6 million

SOURCE: Sarasota and Manatee clerks of court, Securities and Exchange Commission

STAFF GRAPHIC

AGENT DEFAULTS From 2001 to 2003, Richard Asendorf defaulted on four mortgage loans to three banks. But the Sarasota real estate agent did not have to sit out the real estate boom.

From April 2005 to February 2006, he and his wife, Victoria, bought three properties in her name in Manatee and Sarasota counties.

In February 2006, the Asendorfs bought a house in The Landings for $850,000, deed records show. They qualified for a $722,500 loan from Peninsula Bank, an Englewood-based community bank. Peninsula foreclosed seven months later.

“It’s not illegal to get a good deal on something,” Victoria Asendorf told the Herald-Tribune in late 2006. “As long as your house appraises for the higher amount, you will get a loan.”

BERMUDA ON OSPREY Starting in 2006, John Couch and a group of California investors began buying units at Bermuda on Osprey, an apartment complex being converted into condos in Sarasota.

Couch got the units for about $300,000 each, acCouch cording to attorneys involved in the development project. Deed records show he quickly resold the units to himself or other investors for an average of $540,000 — an 80 percent increase in value.

Lenders, including CitiMortgage, Countrywide and Lehman Brothers, approved 30 loans to the group. The loans averaged $450,000 each, $150,000 more than Couch paid for a unit.

William G. Schlotthauer, an attorney with Williams Parker in Sarasota, represented the developers who sold units to Couch’s group.

He said banks approved the large loans because the extra money was supposed to be placed in escrow and used to build a clubhouse and other amenities.

But the amenity account never existed, according to Christopher Woods, Couch’s brother-in-law, who bought several of the units.

No amenities were ever built.

Couch, whose phone numbers have been disconnected, could not be reached for comment.

Woods said the excess loan proceeds went to making interest payments on the group’s debt.

By February 2009, Couch and his investors had defaulted on all 30 loans, totaling $13.5 million.

“When you talk about toxic assets, this is a great example,” said Jack McCabe, a Deerfield Beachbased real estate consultant.

“These loans will never be repaid and when the properties are sold they will yield only a sliver of what the banks originally loaned.”

DEVELOPER CASHES OUT Neil Malamud and Ron Shenkin are Sarasota-area developers who were partners in more than a half-dozen companies over the years.

In mid-2006, Malamud sold two properties to companies controlled by Shenkin for $9.1 million, which was $3.7 million more than Malamud originally paid. Malamud had bought one property in 2000 for $400,000 and the second in September 2005 for $5 million.

At a time when the real estate market was slowing, the sales allowed Malamud to recoup millions of dollars he had spent on the properties.

Two banks, SunTrust and Pennsylvania’s First National, agreed to finance the deals and take on most of the risk.

Ultimately, Shenkin was unable to complete the developments. He defaulted on $11.6 million in loans two years after his purchase.

“It’s easy to look back and judge those loans given what has happened,” Malamud said. “But at the time, they looked like perfectly good loans and were justified based on both the appraisals and the market. It’s like looking at a marriage that resulted in divorce.

At the time of the wedding, it looked like it would last.”

BRIVIK APPRAISALS In 2006, real estate investor Mark Brivik applied for a loan on properties he had bought in Manatee County and sold to his own company for a higher price.

Brivik and a Brivik group of investors paid $6.1 million for a 17-acre tract, which Brivik cobbled together over a four-year period for $3.2 million.

First Priority approved a $5.4 million loan. And instead of ordering an independent appraiser to ensure the property was worth $6.1 million, First Priority hired Glenn Greber, who Brivik had previously paid to appraise the land.

Brivik’s investor group defaulted on the loan 18 months later.

During the foreclosure process, the investors argued in court documents that they should not have to repay the loan because the bank was to blame for signing off on its inflated value.

First Priority “violated the covenant of good faith and fair dealing by failing to obtain an appraisal from an independent and approved third party, the result of which was an elevated and even biased value being accorded to the property,” the investors argued.

Brivik told the Herald-Tribune earlier this year that the appraisal was the bank’s responsibility, not his.

Appraisals hidden from view, but experts say they fed fraud

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG Staff Writers In his report to Synovus Bank, real estate appraiser Glenn Greber said the Siesta Key house was in good condition and worth $6.55 million.

But his report missed a crucial fact: The house had been stripped down to bare walls and turned into a paintball battlefield.

When the owner defaulted on his loan just six months after refinancing, Synovus found itself foreclosing on a house worth far less than the underlying mortgage, its 2007 foreclosure filing alleges.

Greber, who said he remains one of Sarasota’s most respected real estate appraisers, would not talk about the specifics of the appraisal, but he denied that his appraisal of the house was too high.

“It wasn’t a value issue at all,” Greber said. “There was nothing wrong with what I did on that appraisal.”

Professional appraisers are supposed to act as independent watchdogs to protect lenders from inflated property values.

But experts told the Herald-Tribune that during the real estate boom, many appraisers abandoned their professional standards and facilitated price increases on houses that were actually worth far less.

“Appraisers sold out,” said Andy Gray, who offers real estate training courses in Sarasota.

“They got involved in a greed situation and forgot that when you wake up and look in the mirror, you have to be able to respect yourself.”

Lenders were just as culpable,

experts say, because banks and mortgage companies needed appraisals that valued properties high enough to allow deals to proceed. Appraisers who failed to hit the right number quickly learned that lenders would find someone who would.

“You don’t need to bribe an appraiser,” said Bill Black, a whitecollar crime expert who teaches at the University of Missouri.

“You just don’t send them business.”

A 2007 study released by October Research said 90 percent of appraisers surveyed felt they had been pressured by mortgage brokers, real estate agents and customers to restate values upward.

Four years earlier, at the start of the real estate boom, the number was only 55 percent.

It is impossible for the public to review appraisals or to determine which appraisers signed off on overvalued sale prices. Deeds and mortgage records that must be filed with the clerk of court do not contain information about the appraisal.

Across the Gulf Coast, many of the corners cut by real estate appraisers and the banks that hired them became apparent only after the real estate market crashed and buyers began to default on their mortgages.

The Herald-Tribune found a number of examples: ■ Punta Gorda appraiser Jeffrey Miller valued a North Port home at $360,000 in April 2007.

His value was $120,000 more than the number reached by another appraiser at the same time.

Miller’s report stated that the house had two stories when it

only had one, and he provided the addresses of two comparable properties that did not exist, according to records at the state Department of Business and Professional Regulation, whose Real Estate Appraisal Board handles complaints against licensed appraisers.

Miller surrendered his license in October 2008 after the appraisal board accused him of fraud in its complaint. Miller denied committing fraud, saying he simply made mistakes in the appraisal process.

“I chose to surrender it rather than fight because of all the finger pointing that’s going on,” Miller said. “Everyone is filing complaints against everyone else.

Banks and homeowners are looking for scapegoats. No one is willing to admit that greed is what caused everyone to do all this.”

■ Sarasota appraiser Romy Steinberg misstated the size of a property she was appraising and provided a sketch that did not match public records or the actual floor plan, an appraisal board review found. Disciplinary documents show she also said she drove by and inspected a property from the street when that would have been impossible because a wall blocked the view. Steinberg was placed on probation. She could not be reached for comment.

■ Naples appraiser Julian Stokes appraised at least three properties bought by Neil Mohammad Husani and his associates from 2004 to 2006. In those deals, Husani bought properties and sold them the next day to his thenpartner, Michael Tringali, for

Glenn Greber

more than twice the original purchase price.

After reviewing the properties, Stokes issued an appraisal report backing up the sales prices. In at least one case, Stokes did not include the fact that the property had been bought by Husani for millions of dollars less the day before. The appraisals allowed Tringali to get $38 million in mortgage loans that he later stopped paying.

Stokes, who was not implicated in subsequent federal case against Tringali, told the Herald-Tribune that he was tricked and that he was unaware of the first sale when he made his report. Husani and Tringali were indicted on mortgage fraud charges in 2008 after prosecutors alleged their sales prices were purposefully inflated so they could get oversized loans.

■ Sarasota appraiser Heather Kabobel was fined this year and placed on a year of probation following allegations that she overstated the value of a Cape Coral property by $163,000. An administrative complaint by the Real Estate Appraisal Board states that in 2005 Kabobel used properties that had spas, boat lifts and other amenities to establish the value of a property that did not have such features. Kabobel did not return calls.

*

A TALE OF TWO TEAMS While Charlotte embraces its minor league team, will Sarasota even miss the Reds? 1C

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Capt. Lucius Bonner, right, will serve as Sarasota’s interim police chief while Peter Abbott, left, is on leave. HERALD-TRIBUNE ARCHIVE PHOTOS / 2009

Police chief put on leave in Sarasota INQUIRY: The trouble

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A HERALD-TRIBUNE INVESTIGATION: IN FLORIDA ALONE, THERE WERE $10 BILLION IN SUSPICIOUS DEALS DURING THE BOOM. HERE ARE 10 WAYS TO KEEP A FRAUD EPIDEMIC FROM HAPPENING AGAIN. ONLINE

By MICHAEL BRAGA, CHRIS DAVIS and MATTHEW DOIG, Staff Writers

F Sarasota City Manager Bob Bartolotta, above, said Abbott would be on paid leave pending the outcome of an inquiry into the events surrounding the arrest of the man whom an officer kicked.

violates a basic rule of police work, say legal experts who have also suggested that police officials may have broken the law.

Last week, Abbott apologized to the community for trying to settle the case before it had been fully investigated, and implied that the unusually quick settlement attempt came only after the detective had taken Perez’s statement for the criminal investigation.

Mayor Dick Clapp said the e-mail that came out Friday surprised him. He said he was disappointed that the city had to learn about it through the newspaper and not the chief himself.

“All of that should have been See ABBOTT on 5A

lipping fraud was not invented during this decade’s real estate boom. It helped burst Florida’s real estate bubble during the 1920s and played a key role in the nation’s savings and loan crisis in the 1980s.

But widespread flipping fraud does not have to happen again with the next real estate boom.

Though people determined to commit fraud will always look for weakness in the system, experts say there are ways to make mortgage fraud more difficult.

Some changes have already been adopted or are in the works. In 2007, Florida lawmakers specifically made mortgage fraud a crime for the first time in the state. Before that, such crimes had to be prosecuted federally or under the state’s more generic fraud statutes.

And earlier this year, new regulations were introduced to prevent appraisers from being influenced by banks and mortgage companies. Lenders are now required to use independent appraisal management companies to hire appraisers instead of hiring appraisers directly themselves.

But more is needed and the changes must be made within the industry and at every level of government, says Ann Fulmer, a former Georgia prosecutor and nationally known

Go to heraldtribune.com/ flipping for the HeraldTribune’s full coverage of real estate flipping fraud: ■ Who’s who in flipping in

Sarasota and Manatee.

■ Find flips in your neighbor-

hood or dig into any of the 50,000 suspicious Florida flips.

■ Watch the three-part series

by Lauren Mayk on SNN Local News 6.

■ Read all the previous stories

in the series: PART 1: A Herald-Tribune investigation of flipping fraud finds $10 billion in suspicious Florida deals.

PART 2: More than 30 groups of flippers operated in Sarasota and Manatee counties.

PART 3: One Sarasota real estate agent orchestrated more than 100 flips.

PART 4: Police and prosecutors ignored flipping fraud as it happened — and may not punish it now.

PART 5: Lenders made flipping fraud possible.

PART 6: How to prevent flipping fraud.

See FLIP on 8A

‘Everybody knew Beau and trusted Beau’ FINANCES: Area residents

thought their investments were safe with a whiz kid

By MICHAEL POLLICK michael.pollick@heraldtribune.com SARASOTA — In a beachfront community where New Age boomers sip yerba mate while taking courses in how to attract money into their lives, Beau Diamond grew up like a young prince from a royal family.

His father, Harvey Diamond, was the co-author — along with then-wife Marilyn — of a 1980s best-seller about food-combining called “Fit For Life.”

The elder Diamond, a divorced father, became a Sarasota celebrity within his circle of friends — plugged-in folks drawn to this beachfront city, long known for its blend of organic chic.

Now both the father and his 31-year-old son are in the hot seat

Beau Diamond, left, founder of Diamond Ventures LLC, posed for a photo with investor Paul Cavalier, right, in June 2007. Cavalier attended the same spiritual center that Diamond frequently visited. COURTESY PHOTO

over a foreign currency futures trading program that took in roughly $38 million and spun out huge monthly dividends for at least a year and a half before going suddenly — and totally — broke in

January.

The failure washed over the community at about the same time that news broke that the hedge funds managed by accused Ponzi schemer Arthur G. Nadel

were drained of $400 million.

The Diamonds and their investment company, three-year-old Diamond Ventures LLC, are now the subject of a lawsuit in Sarasota County circuit court that is about to grow in scope, with the number of plaintiffs doubling from 11 to 23.

But that could be the least of the Diamonds’ worries. The HeraldTribune has confirmed that the Commodity Futures Trading Commission and the FBI, in a coordinated investigation, are looking at Diamond Ventures and at chief trader Beau Diamond, who never registered as a fund manager and who portrayed himself as someone running a private investment club.

“We are still undertaking our investigation, and that means our investigation is confidential and that we cannot share it with anyone,” said Diane Romaniuk, a lead enforcement attorney with the CFTC, a government agency that is the futures trading equivalent of See DIAMOND on 9A

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By TODD RUGER todd.ruger@heraldtribune.com SARASOTA — Police Chief Peter Abbott was put on administrative leave Saturday over the mishandled criminal investigation of an officer who was recorded on video kicking a handcuffed man.

City Manager Bob Bartolotta said Abbott would remain on paid leave pending the outcome of an administrative investigation. The move came the day the Herald-Tribune reported that the lead detective in the criminal case was told to take “cash for an instant settlement” to his first interview with the man who was kicked, Juan G. Perez, 21.

An e-mail released Friday because of a public records request revealed that police considered sending a detective with a settlement offer even before beginning the criminal investigation.

Combining the criminal investigation with the civil settlement

HOW TO PREVENT FLIPPING FRAUD

8A Sunday, July 26, 2009

www.heraldtribune.com

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD

Ten ways to prevent real estate flipping fraud FLIP from 1A mortgage fraud expert. “Our figures are suggesting that fraud is not slowing down, and yet we have not seen anything from the government explaining what we are going to do to stop fraud in the originating process,” Fulmer said.

Below are a series of proposals that bankers, mortgage brokers, appraisers, fraud specialists, economists and real estate analysts say could help curb mortgage fraud.

MAKE HUD-1 DOCUMENTS PUBLIC These forms, filed with every mortgage, reveal the real estate professionals involved in a sale and how much they were paid. Publicly reporting the information would discourage inflated appraisals and other fraudulent acts, experts say.

USE DATABASES Mortgage fraud schemes can be difficult to uncover, and they can cross county, state and even international lines. But modern tools make schemes easier to prevent.

9

MORE TRANSPARENCY Many elements of real estate deals remain hidden, and that secrecy allows mortgage fraud to thrive.

1

Appraisals, commissions, fees and information about mortgage brokers should be made public.

Today, even the name of the person who conducted the appraisal, which is used by banks to establish the value of a property, is secret. Disclosure of appraisal reports would discourage appraisers from inflating values.

In addition, HUD-1 documents, which must be filed with every mortgage loan, remain secret. Requiring the HUD-1, or a portion of it, to be publicly filed would let the public see if a real estate sale involved back-door dealing — such as a cash-back incentive or furniture allowance — that artificially inflated the sales price.

Florida lawmakers could institute the changes in the state, or Congress could make the documents public across the nation.

As part of federal legislation passed in 2007, mortgage documents are now required to record names of the mortgage brokers or loan officers who originate a loan, according to the Florida Association of Mortgage Brokers.

Trade groups that represent appraisers and mortgage brokers expressed concern about disclosing more information.

“Opening up the HUD-1 to public scrutiny would mean taking away a consumer’s ability to keep personal information private,” argued Valerie Saunders, president of the Florida Association of Mortgage Brokers.

But such information could be redacted, and other information, such as the name of the appraiser would not be problematic, some said.

Marc Savitt, the immediate past president of the National Association of Mortgage Brokers, said he did not have a problem with making the HUD-1 public.

“I think it should be left up to consumers,” Savitt said. “If they don’t mind having that information public, then I don’t have a problem with it.”

2

Close the loophole that lets people sell a property they have just purchased at a higher price without recording a separate deed.

Fraudulent property flippers used this method — known as an assignment — to make it look in county records like the purchase price was higher than it actually was, allowing them to get larger bank loans. That led to larger loan defaults and meant higher property taxes for the people living in the same neighborhoods.

By requiring buyers and sellers to file the appropriate paperwork for each deal before entering anoth-

will be less likely to back deals they know have been inflated,” Thomas said.

er, there would be a more accurate record of the property’s value.

“In the interest of honesty and accountability, there should be a way to prohibit the use of this tool for fraudulent purposes,” said Jack McCabe, a Deerfield Beachbased real estate consultant.

MAKE IT ILLEGAL TO PAY EXTRA FOR DOC STAMPS The amount paid can be inflated to make it appear that a property sold for more than the actual purchase price.

3

Make it illegal to pay more in documentary stamp taxes than is required by law.

Florida counties collect a tax on the sale of every piece of property, and the tax payment — not the sales price — is recorded in public documents.

But nothing prevents a buyer from paying additional taxes, a tactic used by those who want to dupe banks or other buyers into thinking properties sold for more than they actually did.

“When someone pays more in doc stamps than they have to, you know they’re trying to do something screwy,” said Grant Thrall, a University of Florida land economist and member of the Appraisal Institute’s academic board of directors.

ENFORCING RULES Mortgage fraud can be a lucrative enterprise for those involved and financially devastating for everyone else, especially when it operates largely unchecked.

4

Real estate agents, title agents and county property appraisers should be required to notify law enforcement about suspicious real estate transactions.

Elected county property appraisers already scrutinize real estate deals to determine whether they are legitimate and they reflect the values of adjacent properties for tax purposes. But if they come across suspicious deals, their only responsibility is to exclude them from assessments.

While appraisers were never envisioned as regulatory agents, their role could be broadened to identify suspicious sales.

“The more eyes that are focused on mortgage and real estate fraud, the better for everyone,” said McCabe, the Deerfield Beachbased real estate consultant.

“County appraisers see a variety of documents cross their desks and are skilled in understanding the difference between normal transactions and ones that could use investigation.”

State or federal lawmakers could pass a law requiring property appraisers or others to report suspicious deals. Although some elected appraisers say their employees already are overworked,

others interviewed by the HeraldTribune said reporting potential fraud would not create an undue burden.

But Manatee County Property Appraiser Charles Hackney said even if his office reported a suspicious case, it was unlikely to lead to action.

“Even in cases when we find those kinds of things, we don’t know what to do with them,” Hackney said. “Unless it’s pretty flagrant, they’re not going to take a huge interest in prosecuting these things.”

5

Train local law enforcement to investigate and prosecute mortgage

fraud.

Mortgage fraud cases are often complex, time-consuming and require specialized knowledge to pursue. Time, money and manpower are in short supply at many local agencies. As a result, few cases are pursued unless federal authorities are involved.

The biggest hurdle for local law enforcement officials may be shifting their priorities. White-collar cases have long received less attention than drug and property crimes.

“There needs to be a much more fundamental rethinking of law enforcement,” said Bill Black, a former bank regulator and a white-collar crime expert who teaches at the University of Missouri. “These things cause far more losses than blue-collar property crimes.”

Local policing agencies and prosecutors do not need to wait for state or federal initiatives to redirect resources. City and county officials, prosecutors, police departments and sheriff’s offices have their own budgets and could put more resources into investigating real estate fraud.

At least one effort to increase training and resources for local police has started. In the 15 states with the most mortgage fraud, a $200 million federal grant program is under way to bolster law enforcement agencies, said Glenn Theobald, chief counsel of the Miami-Dade Police Department.

Theobald, who helped create the grant program and is chairman of Miami’s mortgage fraud task force, said local law enforcement agencies need to pursue more mortgage fraud because the FBI cannot handle the problem alone.

“There’s a void there with law enforcement,” Theobald said. “Local law enforcement must get involved.”

On the federal level, Black said, the FBI needs more agents on white-collar crime to step in for

agents diverted to fight terrorism.

NEW BORROWING RULES Much of the blame for rampant fraud falls on a lending industry that stopped following its own underwriting rules during the boom.

In their rush to approve loans and earn origination fees, banks and mortgage companies created mortgage products that did not require borrowers to prove their income. Lenders also approved mortgages that gave borrowers 100 percent financing.

Reining in lenders must occur at the federal level, experts said.

For example, Fannie Mae and Freddie Mac, government-chartered organizations that buy up mortgages to ensure money is always available for home buyers, could refuse to accept mortgages on certain kinds suspicious property flips or in cases where borrowers do not put down cash to buy a property.

6

The lending industry should closely scrutinize any property that is sold more than once in less than 90 days.

Recognizing that these types of quick flips are potentially fraudulent, the Department of Housing and Urban Development announced in 2003 that mortgages for those deals would no longer be eligible for government insurance.

Black said lenders should presume loan applications for properties that sell twice in 90 days and increase substantially in price are fraudulent.

“This would be a very suspicious circumstance for an honest lender,” he said. “You should recognize this as a substantial risk.

That’s what an honest, competent lender would do.”

7

Borrowers should be required to have a significant investment in a property, especially when it is not their primary residence.

Fraudulent flippers typically craft schemes that allow them to borrow as much money as possible against a property.

During the boom, borrowers could often get close to 100 percent financing without having to resort to inflating property values. If they could concoct sales that inflated values, they could put cash in their pockets. Requiring borrowers to put more money down — especially borrowers who are regularly buying and selling properties — could discourage risky speculation and reduce certain types of flipping fraud.

“If you require the old standard rule of 20 percent down, it forces people to keep some skin in the game,” said Ken Thomas, a Miami economist and bank analyst. “That means they will be less likely to walk away from their mortgages.”

Require banks to use the kinds of fraud-prevention databases private companies have created to flag mortgage applications for potential fraud.

Such anti-fraud tools can determine if an applicant has applied for recent loans at other banks, check for sharp price increases in short periods and flag applicants who have bought multiple properties in the same area — all red flags that can predict fraud.

Today, these modern fraud prevention tools remain voluntary.

Even banks using them now may stop by the time the next real estate boom arrives.

Advance detection tools have existed since at least 1995, said Fulmer, who is also an executive with Interthinx, one of the leading providers of such tools.

But Fulmer said that during the boom, some lenders wrote loans even when the detection services flagged loans as potential fraud.

“Fraud detection protocols are entirely voluntary, subject only to the demands of the secondary market, which today is, for all intents and purposes, the federal government,” Fulmer said. “Most definitely, the federal government should mandate robust fraud detection and prevention protocols and the use of available technology.”

10

Require Florida regulators to create a computerized case-management system to keep track of mortgage fraud complaints that come in to various regulatory agencies, licensing boards and law enforcement offices.

Mortgage fraud schemes can be complicated. They can involve multiple counties and often require cooperation from real estate professionals who are regulated by different state agencies.

Florida has no mechanism to resolve these problems. If mortgage fraud complaints are filed with one sheriff’s office, for example, deputies there have no way of knowing their target is under investigation by another agency.

Officials at the Attorney General’s Office said it makes sense for them to lead coordination efforts.

Attorney General Bill McCollum has launched an effort to create a mortgage fraud task force involving state agencies and law enforcement across the state. McCollum also oversees a mortgage fraud hotline for citizen complaints.

Those complaints are directed to agencies for response.

Creating a tracking system would take money and would likely require lawmaker approval and funding at a time when the state’s budget is squeezed.

8

Congress should approve proposals that would require lenders to retain an interest in mortgages loans they issue.

A proposal approved by the House in May would ensure that lenders lose money if loans go bad. So far, the Senate has not approved the measure.

“If we make banks keep a five or 10 percent interest in a loan, they will also have skin in the game and

CONTACTS TO CALL To report fraud: ■ Florida’s mortgage fraud hotline: (866) 966-7226 ■ Sarasota County Sheriff Tom Knight: (941) 861-5800 ■ Manatee County Sheriff Brad Steube: (941) 747-3011 ■ Charlotte County Sheriff Bill Cameron: (941) 639-2101 ■ District 12 State Attorney Earl Moreland: (941) 861-4400 To report a real estate agent: ■ Florida Department of Business and Professional Regulation: (850) 487-1395 To report a mortgage broker: ■ Florida Office of Financial Regulation: (850) 410-9805

HERALD-TRIBUNE INVESTIGATION: FLIPPING FRAUD HERALDTRIBUNE.COM/FLIPPING Go online to find: NEWSPAPER STORIES: All of the stories and graphics that appeared in the newspaper are available online in two formats: as traditonal Web pages or in a pdf format that lets you read or print the pages as they appeared in the newspaper.

SNN LOCAL NEWS 6: Watch Lauren Mayk’s three-part series on real estate flipping that aired last week on SNN Local News 6.

DAY 1

DAY 2

DAY 3

DAY 4

DAY 5

A review of 19 million Florida real estate transactions since 2000 finds $10 billion in suspicious property flips.

More than 30 groups of flippers operated in Sarasota and Manatee counties — and now account for nearly half a billion dollars in defaults.

One Sarasota real estate agent orchestrated more than 100 flips. He and his associates are now responsible for $100 million in defaults.

Police and prosecutors ignored flipping fraud as it happened — and may not punish it now.

Lenders made flipping fraud possible.

DAY 6 Ten steps to prevent mortgage fraud.

EXTRA ONLINE FEATURES: Go online for added reporting that is only available at heraldtribune.com/flipping: ■ An interactive map that lets you find flips in your neighborhood and lets you dig into any of the 50,000 suspicious Florida deals

identified by the Herald-Tribune.

■ An interactive guide to flips in Sarasota and Manatee counties, with details on more than 100 local people involved — some of them innocently, some unknowingly, some willingly — and a social network analysis that shows connections.