Real Estate Developer Fraud Charges.

To begin with, you won’t find a specific federal statute titled “real estate developer fraud.” Instead, prosecutors rely on a handful of other statutes to seek charges against developers facing these types of allegations in federal court. In fact, developers have faced allegations ranging from overstating rental income to using straw borrowers, using inflated appraisals, and hiding liabilities.

What is the Difference Between Federal Mortgage Fraud Charges and Federal Bank Fraud Charges?

Beyond the specific statutes that are used, the general nature of mortgage fraud and bank fraud is different as well. Federal mortgage fraud charges typically involve the use of false statements or false documentation to obtain loan funds from a lender in violation of the lender’s own internal requirements (and federal laws as well). In contrast, federal bank fraud charges often involve alleged schemes that are designed to defraud a financial institution or obtain its property by false or fraudulent pretenses.

What Type of Misrepresentations Can Lead to Charges of Federal Real-Estate Fraud?

The types of statements and schemes alleged can vary as well. For example, this is not a situation where developers have to be the same type of “liars” who get in trouble. While developers have been accused of inflating rental income and occupancy in the past, developers can also be accused of inflating the value of the collateral in their deal, their appraisals, or the amount they are contributing to a deal. They can also be accused of providing false information about their debts, liens, and other issues as well.

Is There a “Real Definition” of Federal Mortgage Fraud or Federal Bank Fraud?

Unfortunately, there is no easy answer to this. We don’t know what the “real definition” of mortgage fraud or bank fraud is here, although federal statutes specify prohibited conduct. This means that the evidence in your case will help determine what the government is trying to claim, and it also means that the evidence can also be used to defend against government claims.

Is Federal Real-Estate Fraud the Same as a Civil Misrepresentation Claim?

Finally, it is important to understand the difference between criminal and civil charges. Criminal fraud charges are quite different from private misrepresentation claims in court. This means that even if your case is facing a potential civil claim, this is not a one-to-one match to the criminal fraud statutes that are at issue here. Again, this is because of the nature of the “real-estate developer fraud” offenses.

Which statements and transactions fit the main federal fraud statutes?

What Statement-Based Fraud Offenses Apply to Real-Estate Developers?

Real-estate developer fraud is a broad term, and not one identified federal offense. When this terminology is used, it usually includes a combination of offenses. As we saw in the federal mortgage fraud example above, the mortgage fraud statute is the primary statement-based fraud offense prosecutors rely on. Mortgage fraud, under federal law, is covered by Section 1014 of Title 18 of the United States Code. Section 1014 says:

“Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, or knowingly makes or uses any false, fictitious or fraudulent statement, document or thing of value, or representation, with intent to influence the action or action of any institution which is affiliated with a national, federal, or state-insured bank, or with intent to obtain any loan or other extension of credit or any other accommodation, from any national, member, insured, or Federal home loan bank, or from any insured depository institution shall be punished as shall be provided in the case of fraud in relation to deposits.....”

The federal bank-fraud offense is generally codified at 18 U.S.C. § 1344, whereas 18 U.S.C. § 1014 addresses false statements and willful overvaluation in specified applications and other credit-related transactions. While the provision that governs bank fraud includes fraudulent documents and false-sounding “things of value,” this broad provision is not quite as wide as it seems.

What are the Elements of a Federal Mortgage Fraud Charge (Section 1014)?

To establish a charge of mortgage fraud under Section 1014 of the US Code, federal prosecutors must generally establish each of the following elements:

• Use of a statement or report;
• The statement or report must be false;
• Use of the statement or report must have been knowing;
• Use of the statement or report must have been intended to influence or obtain an action, or intended to obtain loan, extension of credit, or other accommodation; and
• The target of the action, or target of the loan, extension of credit, or accommodation, must have been a “covered institution”

Do you Need to Prove Reliance or Financial Harm in a Section 1014 Prosecution?

Based on our understanding of the law, reliance or financial harm (or other damages), do not have to be proven in federal mortgage fraud prosecutions brought under Section 1014.

So, what does a federal mortgage fraud conviction do to a real estate developer? Federal mortgage fraud convictions carry the possibility of up to thirty years of federal imprisonment and up to one million dollars in federal fines for each count.

So, why do prosecutors use the general bank fraud statute? With bank fraud, prosecutors must generally establish the elements of 18 U.S.C. § 1344; mortgage fraud is a broader label that may involve different federal offenses, including § 1014 or § 1344:

• Use of a false, fictitious, or fraudulent representation, promise, scheme, or artifice (this includes the attempt to do so as well); and
• Intention to defraud a financial institution in the United States, or to obtain money, funds, credit, assets, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, promises, or forgeries, or under circumstances which constitute false or fraudulent pretenses, representations, promises, or forgeries.

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How do investigators distinguish a knowingly false statement from a failed development project?

How do Investigators Gather Evidence of Fraud?

In investigations involving allegations of real-estate developer fraud (as defined, loosely, in this section), federal investigators will go through a process of reconstructing a developer’s actions in the past. In this process, investigators will collect financial documents, loan applications, internal and external emails, tax returns, bank transfer records, and other evidence. They will also seek information (and potentially testimony) from developers’ lenders, partners, business associates, and other third parties.

Based on the evidence gathered, investigators will attempt to determine if any of the “red flags” of real-estate developer fraud are present. In many cases, investigators can identify these “red flags” by comparing the records that developers (and their company) have in their possession (including tax returns and internal financial statements) to the information that developers (and their company) provided to lenders during and after the loan application process.

When Will I Find Out that Federal Authorities are Investigating Me?

When federal prosecutors have sufficient evidence to pursue criminal charges, the target of the investigation may receive a target letter from the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI) or a similar federal agency may execute a search warrant, or the federal grand jury or other investigative entity may issue a subpoena. In all cases, it is important to discuss your options with an experienced defense attorney promptly.

Does Repaying the Bank’s Loan Negate the False Statements that Led to the Prosecution?

Regardless of whether a developer has repaid a loan in full, this fact will not necessarily negate criminal exposure if the government is pursuing charges under Section 1014 or other bank fraud statutes. Repayment is not an element of criminal mortgage fraud under Section 1014 of the US Code. Thus, repaying a loan doesn’t erase the criminal or civil liability that arises from any allegedly knowingly false statements or otherwise fraudulent means.

Are Financial Projections Considered False Statements (or “Fraud”)?

As a general rule, financial projections are not fraudulent. As the name suggests, projections reflect an estimate or a guess about what might occur in the future. That said, financial projections can become fraudulently misrepresented if they are presented as guaranteed income or as a reflection of current financial condition when the developer knew the projection was false at the time it was made.

What Are Common Defenses in Federal Real-Estate Developer Fraud Cases?

While there are many available defenses to fraud charges, this include showing a lack of intent to defraud, lack of knowledge (of the alleged false statement or representation), or that the transaction was legitimate and failed due to unforeseen financial or business circumstances.

Each case requires a unique defense strategy, one that can be determined and executed by experienced defense counsel.

Can buyers, investors, or lenders sue a developer for misrepresentation?

What Other Allegations Can Be Brought Against Real-Estate Developers?

The types of fraudulent acts and fraudulent transactions that federal prosecutors use to seek criminal charges under the general “real-estate developer fraud” banner are often listed alongside a range of other criminal allegations as well. These other allegations can include (but are not limited to) money laundering, identity theft, securities fraud, conspiracy, immigration offenses, and public-corruption offenses.

In addition to those, in some cases, the same federal prosecutors may also use a related set of federal statutes that target investment fraud. For example, some examples of federal investment fraud include flipping houses by inflating the property’s value; flipping mortgages by forging property owners’ signatures; foreclosure-relief schemes; and other forms of investment fraud. The elements of these offenses vary, and so does the definition of these offenses as well. So, if you are facing allegations of real-estate fraud, you may also have additional concerns related to these other federal fraud-related offenses.

Does the Federal Government Require Real-Estate Developers to Pay Restitution Following a Conviction?

The short answer is, yes, in some cases. The federal government is prepared to pursue restitution claims against real estate developers found guilty of defrauding financial institutions, investors, homebuyers, or other individuals. As a result of a real estate developer fraud conviction, developers may be required to repay lenders for the loss resulting from their fraudulent schemes. However, restitution is not available in all cases, and it is only available where a court determines that there are qualifying victims of the developer’s alleged fraud.

There are limits placed on restitution awards under federal law. When assessing restitution, the court will evaluate the documented losses suffered by the victim.

Can Private Parties Sue Real-Estate Developers for Fraud in Federal Court?

Yes, private parties can sue real-estate developers in federal court for fraud. In fact, many developers who are facing charges of federal mortgage fraud or other fraud-related offenses will also face civil lawsuits from their lenders, partners, investors, and other private parties. While some underlying facts may overlap, civil and criminal fraud cases have different burdens of proof and may involve different substantive elements; prosecutors and plaintiffs’ attorneys may also use different theories to support their allegations.

A real-estate developer who is accused of federal fraud must also be prepared to defend against fraud-related lawsuits.

However, in civil litigation, proving actual knowledge can be quite different from proving “scienter” or intent to defraud in a criminal case. This means a real estate developer who is facing a criminal prosecution for fraud may also have some opportunities to defend against private parties in civil litigation as well.

Where to Go From Here

If any of this describes your situation, the next step is a conversation rather than more reading. Spodek Law Group runs a fully online client portal and represents clients coast to coast, with offices in New York, Brooklyn, Queens and Los Angeles. The number is 888 348 8028.