Wednesday, July 29, 2015

Age, with his stealing steps, hath clawed me in his clutch!

Age, with his stealing steps, hath clawed me in his clutch! Hamlet (5.1.73-4)

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Consider a scenario in which an elderly individual, let’s say a well-known writer who published only one novel, a famous novel, had always relied on her sister, a lawyer, to take care of her legal needs.

Only one novel!

And, according to the writer’s conspicuously stated intentions, only one novel would ever be published!

Being frail, the writer eventually had to be placed in an assisted living facility. The sister continued to make sure that the writer’s copyrights, trademarks, publishing agreements, licenses, and many financial affairs, were watched over with devotion, love, and professional integrity. Then the sister, being herself quite elderly, dies.

The sister’s law partner, now handling the writer’s estate, comes across an early draft of the famous novel belonging to the writer, written ages ago but never published, and this law partner takes it to a publishing house and gets it published. The new novel has a different name and spins a different story, using the writer’s famous novel as its inspiration; however, it clearly shows signs of revisions done by a different writer.

Perhaps the writer does not even know that the new novel was published!

Let’s further consider the following facts, as known to us:
  • Writer suffered a stroke in 2007, forcing her to move to an assisted living facility.
  • Last year, her friend said she was paralyzed on the left side, profoundly deaf, 95% blind, and had very poor memory.
  • A public letter written by the writer’s sister – her lifelong protector, and attorney – said “[She] will sign anything put before her by anyone in whom she has confidence.”
  • Sister died at age 103, removing writer’s safety net.
  • Staff members at writer’s assisted living facility are banned from talking to the media without the permission of her new attorney.
  • Senior vice president and publisher at the book publishing company said nobody from the company had spoken directly to writer about the book; communication has been solely through her lawyer and literary agent.

The writer I refer to is the eighty-nine year old Harper Lee, who wrote To Kill a Mockingbird.

She received a Pulitzer Prize in 1960 for it!

The new novel is called Go Set a Watchman.

In an insightful article, entitled “Where Is Harper Lee’s Watchman?,” the gerontologist and Editor-in-Chief of The Gerontologist Rachel Pruchno, PhD, noted that “despite pleas and prodding from readers and the literary establishment for more than half a century, Lee never had published again. She consistently had explained her reluctance to publish a second novel with 3 statements:
  • ‘When you’ve hit the pinnacle, you’re competing with yourself.’
  • ‘I wouldn’t go through all the pressure and publicity I went through with Mockingbird for any amount of money.’
  • ‘I have said what I wanted to say and I will not say it again.’”[i] 

Based on Dr. Pruchno’s experience, “she suspects Lee may be a victim of elder abuse.”

I have written extensively and spoken on elder financial abuse. For instance, I published an article on elder abuse, Elder Financial Abuse: Prevention and Remedies, in October 2013; and Elder Financial Abuse, in August 2012. Both articles are in our firm’s website library HERE and archive HERE. I gave an Interview on Senior Web Radio about elder financial abuse, in December 2013, which I recommend.

The possibility of elder financial abuse in connection with Harper Lee has been noted by Op-Ed Columnist Joe Nocera, in his article entitled “The Harper Lee ‘Go Set a Watchman’ Fraud.”[ii] In Mr. Nocera’s view, the publication of the new novel “constitutes one of the epic money grabs in the modern history of American publishing.”  

Mr. Nocera states in his article:

“The Ur-fact about Harper Lee is that after publishing her beloved novel, ‘To Kill a Mockingbird,’ in 1960, she not only never published another book; for most of that time she insisted she never would. Until now, that is, when she’s 89, a frail, hearing- and sight-impaired stroke victim living in a nursing home. Perhaps just as important, her sister Alice, Lee’s longtime protector, passed away last November. Her new protector, Tonja Carter, who had worked in Alice Lee’s law office, is the one who brought the ‘new novel’ to HarperCollins’s attention, claiming, conveniently, to have found it shortly before Alice died.”

Tonja Carter is currently a partner in the law firm Barnett, Bugg, Lee & Carter LLC based in Monroeville, Alabama, and is the trustee of the estate of Harper Lee. She was a one-time protégé of Alice Lee, Harper Lee’s sister. For her part, Ms. Carter has recounted her version of events, involving the discovery of the new novel’s manuscript in a Lord & Taylor’s container stored in a safe deposit box and how it made its way to publication by HarperCollins, the publishing house.[iii]

The new novel sold over a million copies in its first week on sale and now has well over three million copies in print. However, it has largely met with mixed reviews.

The Alabama Securities Commission interviewed Harper Lee about the new book and found no reason to intervene.[iv] Alabama's State Department of Human Resources conducted an investigation into whether Harper Lee was capable of making the decision to release her new book, and it too closed the case, with no evidence of neglect having been determined.[v]

Perhaps this is a case of elder financial abuse. Perhaps not.

But how would we know for sure?

Unfortunately, we are not permitted access to the reports of the interview and investigation.

[i] Pruchno, Rachel, Where Is Harper Lee’s Watchman? (Is Harper Lee a victim of elder abuse?), Psychology Today, June 3, 2015,  I am indebted to Dr. Pruchno not only for her observations, quoted herein, but also for the bulleted schematic of ‘facts’ that I have paraphrased.
[ii] Nocera, Jo, The Harper Lee ‘Go Set a Watchman’ Fraud, July 24, 2015, The New York Times
[iii] Carter, Tanya B., How I Found the Harper Lee Manuscript, July 12, 2015, The Wall Street Journal
[iv] Archibald, John, Alabama closes Harper Lee elder abuse investigation, March 12, 2015,
[v] Reed, Jon, State Department of Human Resources closes Harper Lee elder abuse investigation, April 3, 2015,

Wednesday, July 15, 2015

Attorney Immunity – Unshielded for Fraud

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

A contestant in the Longest Prison Term Sweepstakes is Robert Allen Stanford. If you recall, Stanford was a bon vivant, self-made billionaire – “self-made,” that is, through making his money by having his foreign bank sell investors sham certificates of deposit. His $7 billion ponzi scheme put him in jail for 110 years. He’s a mere piker compared with Bernard Madoff, who bilked his clients for $20 billion in principal funds and was sentenced to 150 years in the clink.

Stanford’s scheme needed somebody to “aid and abet” him in his illicit endeavors. In Madoff’s case, the insiders allegedly consisted of a close circle of associates. But Stanford’s contemptible circumstance has produced a new piñata in alleging civil conspiracy and aiding and abetting fraud; I refer, of course, to the lawyers!

The illustrious, crème de la crème law firms of Proskauer Rose, LLP and Chadbourne & Parke, LLP are alleged to have aided Stanford’s Ponzi scheme. In a class action suit, it is alleged that Proskauer, Chadbourne, Thomas Sjoblom, a former attorney for both Proskauer and Chadbourne, and former Stanford general counsel Mauricio Alvarado aided in the scam. The two law firms were retained by Stanford to perform legal services.

The burned investors, led by Mexican citizen Samuel Troice, brought the suit against Proskauer and Chadbourne in 2009, following a U.S. Securities and Exchange Commission action against Stanford’s empire and its executives. The SEC accused Stanford of selling billions in fraudulent certificates of deposit issued by Stanford International Bank Ltd., while going to great lengths to avoid scrutiny. The investors allege that Sjoblom worked with Stanford and others to thwart the SEC investigation and that Proskauer and Chadbourne should have known that Sjoblom was craftily conniving various ways to avoid scrutiny.[i]

Faced with an SEC inquiry, the Stanford entities hired Chadbourne to represent them in connection with the investigation. Troice alleges that Sjoblom, then a partner at Chadbourne, entered into a conspiracy with principles at Stanford, including Alvarado and none other than Robert Allen Stanford himself, to obstruct the SEC investigation from 2005 to 2009. As part of the conspiracy, it is further alleged that Sjoblom made a number of false statements to the SEC designed to slow down the investigation and that he played a role in the destruction of evidence prior to an impending SEC inspection. Moreover, Troice alleges that in 2009 Sjoblom, then a partner at Proskauer, assisted various principles at Stanford’s entities in giving false testimony to the SEC in a last ditch effort to stall the SEC investigation.

But Proskauer and Charbourne took the position that they were completely immune!

A word about immunity. Under Texas law, an attorney may not generally be held liable for conduct undertaken in the representation of a client.[ii] The general rule is designed to encourage zealous legal representation that might be compromised if an attorney were subject to suit by a third-party.[iii] The scope of the rule turns "on the type of conduct in which the attorney engages, rather than on whether the conduct was meritorious in the context of the underlying lawsuit."[iv] Thus, an attorney is generally immune from suit for conduct that "require[s] the office, professional training, skill, and authority of an attorney."[v] Despite the breadth with which the rule is often described, courts have carved out various exceptions.[vi]

Troice maintains that a viable claim for conspiracy to commit fraud should be based on allegations that Sjoblom and Alvarado, aware of Stanford's underlying wrongdoing and illegality, agreed to help obscure its wrongdoing from the SEC in order to perpetuate Stanford's operation. Based on attorney immunity, the law firms contended that they were shielded from such claims. And, in any event, they should not be held liable if employee Sjoblom does not act within the general authority given him, does not act in furtherance of the employer's business, and does not act for the accomplishment of the object for which the employee was employed.[vii] Chadbourne argued that employers may not be held liable for unforeseeable actions involving serious criminal activities or intentional or malicious actions.[viii]

While U.S. District Judge David C. Godbey dismissed several claims in his March 2015 ruling, he also allowed an array of other claims including conspiracy to violate the Texas Securities Act, civil conspiracy and aiding and abetting fraud. He said, “Defendants assert at the threshold that they are wholly immune from suit under Texas’s attorney immunity doctrine. Because plaintiffs plead defendants engaged in fraud and conspiracy to commit fraud, attorney immunity is no bar at this stage.”[ix]

Motions and appeals followed, but in the meantime the Proskauer and Chadbourne folks advanced a finding from unrelated litigation. On July 8th, they urged the Fifth Circuit not to dismiss their interlocutory appeal of an order denying the firms immunity. Their view was that a June 26th ruling by the Texas Supreme Court, in a case called Cantey Hanger, which is another law firm, erased the immunity loophole that kept them under duress in March, to wit, the fraud exception. To quote: “Fraud is not an exception to attorney immunity.”[x] Let me translate that for you: according to the Cantey Hanger case, attorney immunity provides full immunity to the suit, even where fraud is at issue. That means Judge Godbey’s ruling, allowing fraud to be an occasion to penetrate immunity, effectively stripped the firms of their immunity.

It will be interesting to watch what happens next. Proskauer and Chadbourne are urging the Fifth Circuit not to dismiss their appeal of an order denying the firms immunity. So goes the suit against Stanford’s lawyers, brought by investors who lost money in Robert Allen Stanford's $7 billion Ponzi scheme.

[i] Troice v. Proskauer Rose LLP, 2015 U.S. Dist. (N.D. Tex. Mar. 4, 2015)
[ii] See, e.g., Alpert v. Crain, Caton & James, P.C., 178 S.W.3d 398, 406 (Tex. App. — Houston [1st Dist.] 2005, pet. denied)
[iii] Idem at 405
[iv] Renfroe v. Jones & Associates, 947 S.W.2d 285, 288 (Tex. App. — Fort Worth 1997, writ denied).
[v] Taco Bell Corp. v. Cracken, 939 F. Supp. 528, 532 (N.D. Tex. 1996)
[vi] Op. cit. 1, II, A
[vii] Williams v. United States, 71 F.3d 502, 506 (5th Cir. 1995)
[viii] Chadbourne's Mot. Dismiss 33 (citing Williams, 71 F.3d at 506 n.10; Millan v. Dean Witter Reynolds, Inc., 90 S.W.3d 760, 768 (Tex. App. — San Antonio 2002, pet. denied))
[ix] Op. cit. II
[x] Cantey Hanger, LLP v. Byrd, 2015 Tex., 58 Tex. Sup. J. 1400 (Tex. 2015)

Friday, July 10, 2015

Flipped Out!

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Over the years, I have seen many variations of mortgage fraud. As soon as one scheme is thwarted, another seems to take its place. One particular flipping scheme[i] being currently adjudicated, involving sixty properties (sic), is really for the books!

Michael and Jeremie Sheneman allegedly defrauded both real estate buyers and mortgage lenders through a series of calculated misrepresentations. The scheme lasted from 2003 to 2005, when they were busted.

Their scam was classic mortgage fraud:
(1) acquire control over a large number of rental properties,
(2) induce buyers to purchase the properties through a host of false promises, and
(3) ensure that lenders would finance the purchases by pitching falsified loan documents to the lenders and misrepresenting the buyers' financial standing. 

Note that I emphasized the words “acquire control over” these properties. 

Let's see why that is central to the scheme!

The deceptive actions took place in Indiana, where the Shenemans acquired control over a large number of rental properties being sold by landlords in the South Bend and Mishawaka areas. Many of these sellers had difficulty renting out their properties and were looking to cut their losses and walk away from the homes with their mortgages and taxes paid. So they agreed to sell their properties to the Shenemans. Allegedly, the Shenemans were known to flip houses.

Although the sellers believed they had sold their properties directly to either Michael Sheneman or Jeremie Sheneman, the sellers had in fact merely granted one of the two power of attorney over their properties. Consequently, the Shenemans took control over the properties without ever appearing on any chain of title, because they had the powers of attorney. Each seller received the amount of money agreed upon as the selling price. The funds were not disbursed from a title company, but from none other than the Shenemans themselves. The Shenemans would now seek out the patsies who would be duped into buying the properties for more than the initial seller's asking price, close with a lender, and take the endorsed checks from a lender’s title company, depositing the checks directly into the Sheneman’s own bank accounts.

Back to finding the mark! Once granted control, the Shenemans searched for buyers to purchase the dilapidated properties. Eventually, they found the four chumps who would buy them – sixty properties in all – as follows: a Cameroonian citizen in the United States on a student visa, bought fifteen homes; a Liberian citizen also on a student visa, bought fourteen homes; an electrician, bought twenty-one homes; and a maintenance worker, bought ten homes. None of these people had any real estate experience.

Obviously, to induce these gulls to buy the properties the Shenemans promised a new source of income by purchasing the homes and then renting them out: the more homes purchased, the bigger the profit. False promises! The marks were told that the homes were all in excellent condition and the Shenemans would make any necessary repairs. As a further false promise, the suckers were led to believe that there was little risk because most of the homes already had paying tenants living in them, and, in any case, the Shenemans would help find new tenants for vacant homes. Plus – here’s the rub! – if the buyers ever wanted to get out of the real estate business, the Shenemans graciously promised to buy back properties that the marks no longer wanted. Not enough incentive yet? Then maybe this will do it: the Shenemans also promised to cover all down payments and closing costs. The buyers, despite their modest incomes, could therefore purchase a large number of homes and begin earning an immediate profit - without having to spend a dime out-of-pocket.  

The buyers, for their part, were only allegedly permitted to see one or two of the properties they were purchasing prior to closing. The other homes, buyers were told, had tenants already living in them and a visit to those homes might disturb the tenants. But the buyers were assured that the other homes were all in similar condition and located in comparable neighborhoods.

Now to the financing!

Buyers filled out only minimal paperwork throughout the process. The Shenemans brought each potential buyer to Superior Mortgage, a mortgage broker where Jeremie Sheneman worked as a loan officer. Through Superior Mortgage, each buyer completed a few documents with some very basic information. Jeremie Sheneman then allegedly informed the buyer that he or she was approved to buy a large number of properties. In order to dupe the mortgage lenders, Jeremie Sheneman had falsified key parts of the documents. Among other alleged misrepresentations, numerous loan applications falsely stated the buyers' citizenship, employment status, and finances, and the buyers' signature on many documents was often forged.

Beyond falsifying documents, the Shenemans took other steps to secure financing from lenders and ensure the closings took place.

It was a two-step scheme:

·       Step One: they artificially inflated the buyers' bank accounts, depositing tens of thousands of dollars in order to make it appear as though the buyers had sufficient assets to take on the loans. After the transactions were completed, the money was returned to the Shenemans.

·       Step Two: they masked the buyers' financial infirmities from lenders by utilizing certified checks to cover down payments and closing costs. Lenders therefore had no way of knowing that the buyers were not the true source behind these payments.

After the closing, each of the buyers quickly discovered that the deals they were promised were bogus. A number of the newly purchased homes were hardly habitable. Some had faulty plumbing, others had significant mold and termite damage, and yet others had structural damage and leaky roofs. Moreover, paying tenants were not available at all. Many of the homes did not have tenants living in them, despite previous assurances to the contrary; while other houses had tenants who never paid rent. The few homes that the buyers had actually viewed prior to closing were not even included among the properties they had purchased. Many of the properties were also located in worse neighborhoods than the ones they had visited. Needless to say, the sad saps tried to get to these tricksters, but they were hard to reach, nowhere to be found, did not answer calls, hung up on calls, made few repairs, and ignored repeated requests for assistance.

Predictably, each of the buyers was soon unable to make timely mortgage payments. Of the sixty properties: thirty-six were foreclosed upon, eleven were deeded back to the lender in lieu of foreclosure, six were demolished by the city, and four were sold in tax sales.

[i] United States v. Michael Sheneman 01, 2015 U.S. Dist., United States District Court for the Northern District of Indiana, South Bend Division, July 08, 2015, Filed, Case No. 3:10-CR-126 JD Case No. 3:12-CV-720 JD. The factual background of this case has been set forth extensively in prior orders by this Court [DE 111, 150, 166] and by the Seventh Circuit Court of Appeals. United States v. Michael Sheneman, 682 F.3d 623 (7th Cir. 2012); United States v. Jeremie Sheneman, 538 F. App'x 722 (7th Cir. 2013).

Wednesday, July 1, 2015

What is a Compliance Management System?

Jonathan Foxx
President & Managing Director

Nary a week goes by that I do not talk to somebody about the concept of a Compliance Management System, or "CMS" for short. Now made famous by the CFPB's examination protocol, the CMS has become the sine qua non for federal and state examination readiness.

I have written extensively on the Compliance Management System. Perhaps these two articles would be of interest to you:

Policy, Procedures, and Examinations - Part I: Mortgage Brokers

Policy, Procedures, and Examinations - Part II: Mortgage Bankers

Some companies want to retain us to put in place a CMS, not realizing that, in most cases, they already have one! There are law firms and compliance firms that have no problem in charging terrifically and immoderately for something that is largely hiding in plain sight. Tabulated binders, sophisticated templates, and all manner of bells and whistles are sold to credulous companies seeking the Holy Grail to the CMS requirements. 

Of course, we work with clients on their CMS needs. But first I let them know that if they are maintaining certain basic compliance structures, they likely already have a CMS! Maybe it needs to be reviewed by a firm such as ours, but that review can be done by just going through the structure itself easily and at a modest fee.

I am going to give you a brief checklist of sorts. Consider it a way to get prepared for a banking examination, whether state or federal. The checklist tells you what an examiner is going to look at in determining if you have a CMS.

So what is hiding in plain sight? The structural components that I provide in the checklist. If you satisfy these components, you will be ready - and many of you already do satisfy these components - without having to go out and retain a firm to build for you what you have already built for yourselves!

Seek guidance, where possible. 

Seek compliance support, where needed.

Fortify the weaknesses and ensure the strengths.

But first and foremost, take stock of the existing compliance structure. You may be surprised to learn that the CMS purveyors' fancy binders and due diligence tasks are already manifest in your Compliance Management System and the compliance elements are working just fine!

What you need to know is that compliance examinations start with a top-down, process-oriented, comprehensive review and analysis of an institution’s compliance management system. 

Here's a checklist that a compliance examiner considers:

  • the knowledge level and attitude of management and personnel;
  • management’s responsiveness to emerging issues and past or self-identified compliance deficiencies;
  • compliance organizational structure such as reporting relationships and recent experiences with staff turnover;
  • management information systems;
  • policies and procedures;
  • training; and
  • monitoring and audit programs.

Based on the results of this review, the examiner may conclude that weaknesses in the institution’s compliance management system may result in current or future noncompliance with federal consumer protection laws, regulations, or policy statements. 

Then the examiner determines, based on this analysis, whether transaction testing is warranted to further study particular risk in an entire operational area or regulation, or only a limited aspect of an area or regulation. 

But, generally, the more confidence an examiner has in an institution’s compliance management system, the less transaction testing an examiner may do.

Banking departments and federal agencies take the position that the management of a financial institution is responsible for complying with all federal consumer protection laws and regulations. Management really cannot slough off the responsibility to lower level personnel. While the formality and complexity of Compliance Management Systems will vary greatly among institutions, management is expected to have a system in place that effectively oversees compliance risk, consistent with the institution's size, complexity, risk profile, and product array.

If you gear your Compliance Management System to contain the foregoing checklist elements, and if you understand that examiners are going to manage the examination based on risk, you will get prepared and may even find that there will be a reduction of the on-site examination presence. This also means that an examiner might require elevated supervisory attention if the there are weaknesses that you could have strengthened all along but, for whatever reason, chose not to do so. 

By focusing on Compliance Management Systems, examiners are able to identify the causes of deficiencies and suggest appropriate corrective actions designed to address the problems. 

It is a heuristic that works for them. 

It should be a heuristic that works for you!