Menu
13 Nov

Regulators Investigate Sun Trust Bank for Fraud

UPDATE 10-11-13: SunTrust was forced to settle with the government over the actions in this story which was first reported at Growth Capitalist. They had to pay over $1 billion dollars which lead to a negative 33 cent per share hit to earnings. It’s unclear if the whistleblowers will reap any reward from this sizable settlement.

UPDATE: You can see me talk about my Sun Trust investigation on RT’s top TV show Keiser Report today. Max Keiser also interviews me about the impact of the SEC investigation into JP Morgan – which I first reported on his show last year.

Original Text
A mid-size bank touted as a growth stock by analyst this year is under SEC investigation for selling billions of Alt-A loans labeled as Prime loans to Fannie Mae. I reported on the SEC investigation into SunTrust Bank on November 5th at Growth Capitalist.

According to whistleblowers, Atlanta-based SunTrust took advantage of a Fannie Mae program designed for the bank’s best of the best borrowers. They called it the Agency Shortcut Mortgage. In 2006, with pressure to keep earnings up as banks like Countrywide were laps head in earnings from resi mortgage origination, borrowers with good credit scores became a target for fraud by SunTrust. The bank needed high credit scores to get entry into the Agency Shortcut Mortgage program but after that SunTrust staff could manipulate the income and assets of the borrowers and force the GSE program to buy the loan. The whistleblower complaint alleges SunTrust did this in the billions from 06 to early 08.

Whistleblowers claim the highest level of management was directing the retail arm, wholesale, and outside mortgage brokers how to beat the Fannie Mae program and were encouraged to re-enter borrower income or assets over and over until the loan qualified. These whistleblowers say, once it was accepted in the Shortcut program underwriters were not allowed to ask for follow-up stated income docs like tax returns and bank statements. That’s because the Shortcut approvals were being done by SunTrust loan officers, branch managers, & mortgage brokers who were paid on volume instead of the bank’s underwriters who should have been hitting the approve button. These SunTrust interested parties basically circumvented the underwriting process by committing automated underwriting fraud. The result was Fannie thought it was buying tons of great prime loans from SunTrust.

It wasn’t till early 2008–right before the Shortcut program was terminated–that Fannie Mae limited the number of times their DU system could be re-run for a particular borrower to fifteen. While fifteen seems high Fannie took into consideration the number of hands that touched a loan from origination to funding. Subtle changes are often made in the underwriting process but the goal of Shortcut was to cut down on the detailed document request underwriters usually did. What this highlights is the laddering of income and assets loan officers were doing on Shortcut loans to achieve the ‘right mix’ that tripped Fannie’s DU system into approving the Shortcut loan–an abuse that must have been clear to Fannie executives who oversaw Shortcut. This questions the very core of Fannie’s system of risk controls along with how much their CEO, Daniel Mudd, knew about the health of his bank and didn’t disclose to shareholders.

SunTrust whistleblowers worked for a year to find a lawyer to get their case in front of U.S. regulators. The thought that the bank intentionally planned to cheat Fannie’s computerized underwriting acceptance program so they could improve origination volume was hard to sallow for a bank that’s managed to escape regulatory sanctions so far. I’ve watched whistleblower complaints filed for years now and the SEC will often sit on them for a long time before they start to investigate but with SunTrust the regulator got involved within only a few months. That’s because the mortgage fraud task force was already aware of other large residential mortgage originators doing the same thing. We saw proof of this when the DOJ acted last month and sued Bank of America for the sins of Countrywide’s ‘Hustle program’ with the GSEs.

Banks cheating to earn profits isn’t a new concept for main street to understand but how the Government Sponsored Entities allowed themselves to be cheated opens a whole other can of worms. In my report , at Growth Capitalist, we show a former regulatory enforcement lawyer discuss how and why Fannie isn’t the innocent victim here. On top of that think of the mortgage insurance that was sold alongside these loans which didn’t factor in enough risk. Then there are the second loans place on top of these Shortcut loans that another lender would have thought they were lending against after a prime loan was issued but instead it was a lower quality loan.

SunTrust told investors in September they thought they were through GSE putbacks and added hundreds of millions more to their putback reserves. But my story at Growth Capitalist questions how that could be true when they are faced with an SEC settlement on billions in loans executed with fraud. The bank’s Q3 earnings presentation shows putpacks have been requested on over $6 billion of resi loans with most coming from the GSE.

Editors Note: My story at www.growthcapitalist.com is behind a paywall that only paid subscribers can read. Great investigate journalism is with worth paying for and there are a ton more details in the story that make the subscription worth it.

5 Comments
8 Nov

Where the SEC Puts the JP Morgan-Bear Stearns Settlement Matters

JP Morgan disclosed they reached an agreement with the SEC today for the double-dipping scheme run by Bear Stearns mortgage traders. This was where the traders under Tom Marano kept billions of dollars that were supposed to go back to RMBS investors when resi-loans defaulted in the first 90 days. The SEC hasn’t officially accepted the deal yet and a court still has to approve it so we have ZERO info on how much Jamie Dimon’s bank has to pay and if there are any punitive damages.

Unfortunately with SEC settlements the bank doesn’t admit any wrong doing. So what’s important to watch here is where the SEC slots the funds. Will they place millions in their general fund or will the money go into something called a ‘fair fund’. Sarbanes-Oxley actually gave the SEC a mechanism to create a fund for aggrieved investors so they can get some restitution dollars back. In all fairness any money the SEC gets out of JP Morgan should be put back into the RMBS trust and paid out according to the waterfall for each security. It would be a little complicated to do but hey it’s the SEC and I’m sure they can hire a forensic accountant to sort it out. If that happens then the state and federal judges ruling on $140 billion of rmbs civil suits against the bank (it went up $20 billion in Q3 according to their 10-Q filing) could see it as an admission of guilt, which would really bolster the civil suits with fraud claims who are subject to triple damages.

Sadley we are not expecting JP Morgan to be fined by the SEC anywhere near the billions they should be. The bank’s 10-Q shows they only added $700 million to their litigation reserves in Q3 for a total of up to $6bn over what they have already expensed.

A few naive reporters have written stories today that the SEC settlement shows JP Morgan is getting out of the woods from its rmbs fraud and putback suits but it’s actually the opposite. The SEC’s suit doesn’t affect the billions the NY AG is trying to suck out of JP Morgan for the same crimes—he did sue for around $22 billion. But JPM’s real worry comes in the hefty payout they will have to pay when they settle with the monolines, institutional investors, and even the FHFA who sued for Fannie Mae and Freddie Mac. JP Morgan has been fighting some of these rmbs fraud cases for five years now and a few are set for trial next year.

Today’s news is really about Jamie Dimon finally admitting Bear Stearns traders did something really wrong to its own investors and JP Morgan is going to have to pay a lot for it.

Update 11-13-12: The WSJ is still running PR for Jamie Dimon and yesterday tried to tell readers that Bear Stearns executives won’t and shouldn’t be charged criminally. This is beyond embarrassing for the WSJ reporters as viewers of RT’s Keiser Report know I’ve been explaining for two years how much evidence the DOJ would have if they wanted to charge Tom Marano and his team. Nick Verbitsky, documentary film maker of the Bear Stearns movie ‘Confidence Game‘ even commented on the absurd reporting by the WSJ. It’s clear we are not going to get any decent reporting or analysis out of the WSJ but Reuters legal columnist, Alison Frankel has a great analysis on why JP Morgan is likely to pay billions in RMBS putbacks because of Bear’s fraud. Read it and you’ll see why setting aside even $6 billion in litigation reserves isn’t enough for $JPM.

2 Comments
7 Nov

Told You So: SEC Wants JP Morgan to Pay for Bear Stearns Sins

Last night the Financial Times broke news Jamie Dimon is willing to admit that maybe the Bear Stearns mortgage traders really did break securities laws and he should settle with the Securities & Exchange Commission. What the FT forgot to mention was I was the lone reporter in late January 2011 who reported JPM was under SEC investigation for this. A story I continued to report and warned on for the last two years at DealFlow Media and on RT’s top financial news show Keiser Report.

Most of my peers in the financial press have been afraid to report on this story. Even when JP Morgan admitted in their own 1st quarter filling this year that they’d received a wells notice –which means their regulator told them they are going to be sued if they don’t settle. Once again a series of my reporting on a financial institution committing fraud was proven right. The only thing I don’t know is how many millions the SEC will accept as settlement for these crimes against Bears own investors. The amount of dollars JPM pays the SEC isn’t that important though because the simple fact that they are willing to admit it wasn’t ok for Bear Stearns traders, under Tom Marano, to steal billions from their own clients gives the $100 billionish in civil rmbs fraud suits, filed by investors, a huge negotiating advantage.

The WSJ wrote today that people close to the SEC settlement talks told them the investigation was over, “whether Bear Stearns got compensation from lender for bad loans it had purchased to bundle into mortgage-backed securities, but then failed to pass that money on to investors by putting it into the trust managing the securities.” The WSJ actually learned about this when I first went on Max Keiser’s show last year, multiple times, and told his millions of viewers this is what the SEC was investigating. Then the WSJ read my story in May about JPM getting a Wells Notice.

A sad fact to the state of journalism in covering this story is Tom Marano, Mike Nierenberg, and Jeff Verschielser’s attorneys have done a good job of keeping their names out of the press. The day I broke my first story on the subject at The Atlantic we actually reported an update to the story that the SEC was investigating. That’s because I was able to confirm the SEC called people involved in the situation and started to interview them the day I reported the story. It ran for about 24 hrs and then I watched a pr man from Bank of America, where Nierenberg is head of mortgages, run interference with The Atlantic’s top editors and the SEC update was taken down. A pathetic reaction by the senior editors at The Atlantic.

Max Keiser at international TV network RT trusted my reporting and printed on his website the SEC was now investigating for all the illegal actions I’d just reported. Then my editors at DealFlow Media encouraged me to continue to report out the Bear Stearns traders story at their trade publication The Distressted Debt Report. Jody Shenn at Bloomberg copied some of my reporting on the subject but then dropped off the story. In fact it was really only me and a talented legal columnist at Retuers, Alison Frankel, who continued to report on the impact of the rmbs fraud litigation against JP Morgan.

Still we have no criminal charges filed against Tom Marano’s team and they keep beating motions to add them individually as defendants in civil litigation. I remember feeling a little shocked when I first called Mike Nierenberg’s pr people at BofA to tell them about all the dirty emails and whistleblower testimony I had showing how Mike and Jeff executed this fraud and Mike came back saying ‘I’m not worried about it’. Yep that’s the mindset of Wall Street’s top mortgage executives — it just a cost of doing business and the bank will have to pay for their sins.

JP Morgan was Bear Stearns clearing agent before they bought the bank in March 2008. That means they saw all the toxic rmbs Bear was selling – so I don’t buy the argument that it’s not fair for JP Morgan to pay for Bear’s bad boys. Remember JP Morgan had the chance to settle with the monolines who’d sued for only a little over one billion dollars when they bought Bear in 2008 but choose to rack up millions in legal cost for the last five years and fight these charges. Even after Bear had previously told the monolines ‘ok you kind of caught us’ so we’ll pay back what we stole at cost. Seriously read the Ambac complaint and you’ll see this spelled out. So Jamie Dimon crying wolf that he’s a victim of the US government forcing him to buy Bear Stearns is line of total BS and any reporter who prints that line is only writing pr statements for the nation’s largest bank. Why is it so hard for my peers in the financial press to admit these guys did something really really wrong?

No Comments
13 Oct

Dynamic Journalism

VERBITSKY AND BUHL

Me and doc film maker Nick Verbitsky are immortalized into art for our reporting on the Bear Stearns / JP Morgan double dipping scheme and RMBS investor fraud that has led to over $100bn in lawsuits and a NYAG securities fraud suit against JPM. Verbitsky is on biz TV show The Keiser Report today talking about main street’s frustration with the lack of criminal charges against bankers like the Bear Stearns team led by Tom Marano.

3 Comments
25 Sep

Due Dilligence Problems at JP Morgan Securities: Pension Report Snafu

Due diligence appears to be lacking at JP Morgan Securities. I reported today for Growth Capitalist the mega-bank’s clearing business was using valuation reports from a notorious hedgie manager who has been sued for fraud by regulators and outed from his fund. The inaccurate reports then went to pension investors.

JPM Clearing manages the asset valuation reports Hedge Funds have to file for investors who used IRA pension dollars to join a hedge fund. There are all kinds of special tax treatments this type of investor gets so banks like JP Morgan often act as custodians between investors and the hedge fund managers. Except in this case JP Morgan forgot to do a simple google search to learn Long Island hedgie Corey Ribotsky, of NIR Group, hasn’t had the rights to send any info on the value of the investments in his AJW funds since January.

NIR Group was a large investor in the PIPE space and at its height boasted around $800 million of fund assets. But investors had a rude awakening last month when I reported the court appointed liquidator, PwC, was sending out reports showing the funds had lost 97% of their value. So it’s kind of troubling to see Ribotsky out there trying to get JP Morgan to spin a story for him, by having them deliver reports with inaccurate valuations, during the same week the Liquidator is trying to tell these poor investors they are only getting pennies back.

There is a bunch of great details about other tax related errors (possible manipulations to avoid the IRS knowing taxes should be collected) the hedge fund manager did with JPM Clearing; so go read the story at Growth Capitalist while registration is still free.

1 Comment
18 Sep

What Bear Stearns Whistleblowers told the SEC: New Details of RMBS Fraud & Cover Up

Remember all those whistleblowers the monolines found in their RMBS fraud litigation against Bear Stearns and JP Morgan? The ones JPM’s lawyers tried to publicly out their names so they’d be afraid to testify in the monoline’s case. Well the bank’s dirty legal tactic didn’t work and newly released whistleblower testimony from people who worked for third-party due diligence firms, hired by Bear to get the mortgage security insurers to back their bonds, shows a whole another layer of orchestrated deceit. One so bold it borders on mafia like RICO actions.

Filed in Connecticut state court at the end of August by monolines lawyers at Patterson Belknap is a motion to enforce a New York subpoena that calls for RMBS due dilly firm, Clayton Holdings, to turn over the historical loan review reports that were sent to Bear Stearns. The motion is on behalf of Ambac; the RMBS insurer who first brought the explosive fraud suit against Bear Stearns traders for stealing billions from their own clients. You know the one that led to JP Morgan, Bears’ successor, telling investors last quarter they now have at least $120 billion of possible mortgage security putback suits they could be forced to pay out. Well it looks like Abmac wants the public to know more of the dirt they have on Bear/JP Morgan because in exhibits with the motion they filed there’s some nasty whistleblower sworn testimony.

Clayton Holdings along with a firm called Watterson Prime were the main third-party firms Bear hired to do re-underwriting due diligence. According to the monoline suits this extra level of inspection was designed to prevent defective loans getting packed into the security in the first place. In the heyday of the mortgage boom there was so much competition to get the RMBS bonds insured and sold Bear came up with a novel ideal of paying for ‘independent reviews’ that the monolines use to do themselves before they got so busy picking which bonds to insure. It was a process Bear claimed would add a level of integrity. But new sworn testimony by whistleblowers from Clayton and Watterson Prime shows this was just a ‘veneer of control’ instead of a practiced method to fret out defective loans.

What’s worse is when Clayton or Watterson Prime due dilly workers actually found the bad loans and coded them in the system (called CLAS for Clayton) their supervisors would change the coding to reflect the loans were ok. This enabled the Bear Stearns traders working under Tom Marano to hide the fact loans they’d bought, from the banks like Greenpoint or Countrywide, were garbage but still went into the security because allegedly Bear traders didn’t want to spend the time or money to go back to the originators and buy quality loans. If the courts find the whistleblower statements are true, it’s a clear violation of the monoline rmbs insurance contracts along with possible insurance fraud and violations of the Martin Act.

The whistleblowers names are redacted in the filing but they swore they worked for both Clayton and Watterson prime as freelance due diligence consultants on loan file reviews for Bear Stearns mortgage securities. Their job was to take the original loan files EMC had used to pick which loans would go into a security and make sure it fit Bear’s underwriting standards. Their testimony says they’d find a file with borrower documents they thought were fraud, report it to their supervisor (such as Mr. Weeks at Watterson Prime) and the supervisor would say just move it along and overlook the documents.

“Usually the instruction were just go ahead and keep it moving, enter the information, we will take care of that with the seller or we will try and get correcting documents later,” states one whistleblower talking about working at Watterson Prime in court filings. “Once a lot of the documents were missing or it was prevalent that we don’t have these documents, we were told to ignore, ignore and grade them as normal.”

But it’s wasn’t just ignoring missing documents that was encouraged. The loan reviewers also stated they’d find W-2’s in the files that were logged at ‘stated loans’ (this mean the borrower just claims his income without documentation) and the W-2’s would contradict what the borrower had stated. Meaning the loan clearly had fraud in it.

The whistleblower says when they told their boss at Clayton or Watterson Prime this they were told to “pull out those documents”.
“We would put them in a pile and either they shredded them or they disappeared. They were destroyed but it was not by the underwriter,” said the whistleblower as he testified to how the due dilly firms covered up Bears bad loans for them.

Another whistleblower said at Clayton they were berated in front of their team if they didn’t rate the loan files as normal and feared not getting more contract work if they didn’t find creative ways to make the loans look ok. One method was in the case of couples getting a mortgage; they used the income of one and the credit rating of the other to make the quality rating match up as normal. This process was known as ‘finding compensating factors”.

“When loans did have deviations from loan to value ratios Bear had set as a standard we were told to find compensating factors and approve the loan anyway. On many jobs our team leaders gave us a cheat sheet of compensation factors to make it easier for us to find them,” says another whistleblower in sworn testimony.

In over 50 pages of testimony we learn the team leaders at Clayton Holdings and Watterson Prime were getting this direction from people on the mortgage team at Bear Stearns. According to people familiar with the suit the Securities and Exchange Commission has already interviewed some of these whistleblowers. And the whistleblowers named names regarding who at Bear Stearns was directing the third-party due dilly firms to change loan files and rate them better quality than they really were. One Bear Stearns executive that showed up in court filings directing the due dilly team to basically lie in their reports was John Mongoluzza.

I was told the SEC interviews were done before JP Morgan announced in their last quarterly financial statements the SEC had them given them a Wells Notice saying they were considering suing them for mortgage security violations relating to Bear Stearns.

Former New York Attorney General Andrew Cuomo told the media a few years ago he’d given Clayton immunity for helping with his investigation into possible criminal wrong doing by banks like Bear Stearns. But no charges were brought by Cuomo before he became Governor and it’s unclear what NY’s new AG will do with Clayton.

Ambac’s latest motion filed in Connecticut state court says Clayton is still playing favs with Bear/EMC/JP Morgan by eagerly assisting their lawyers and ignoring a compulsory subpoena to produce documents to Ambac. Clayton who claims they don’t have files Ambac is asking for magically found one of the whistleblowers personnel files that Bear’s lawyer ended up using to cross examine the whistleblower.

So here we have Clayton handed a get out of jail card from NY’s AG and they uses it to help the alleged criminal (JPM/Bear) hide evidence to possibly avoid losing a mega-billion fraud suit?

A recent Abmac filing says they reviewed 5,000 loan files valued at around $2 billion and 85% of the loans had deficiencies problems that Bear should have known were there and thus never put the loan in the security in the first place. Last week Reuters legal columnist Alison Frankel found a new lawsuit filed with similar allegations against Bear/JPM by the RMBS trustee for pension fund investor Baupost. The suit claims after they reviewed Bear/EMC loan files they found an alarming 88% breach rate of the loans in the mortgage securities. So now we have monoline insurers AND investors finding similar malfeasance in the methods of creating and selling RMBS by Bear Stearns.

The examples of cover up described in the recently filed whistleblowers testimony runs deep. Now that I’ve confirmed the SEC has interviewed these whistleblowers we have to wonder if JP Morgan is aggressively negotiating for a settlement or if the SEC is waiting to file suit because it doesn’t want to publicly shame JP Morgan with a securities violation charge before the election. Just think if Bear’s insurers or investors had been given the chance to see Clayton or Watterson Prime due dilly reports that weren’t manipulated – would they have ever bought billions of RMBS from Bear and helped traders under Tom Marano’s team earn millions and go on to run mortgage divisions at Goldman Sachs and Bank of America? It’s those questions investors in Bear’s toxic rmbs hope the SEC doesn’t wait forever on the sidelines to answer.

The case was filed August 24th in Milford,CT Superior Court. Ambac Assurance vs. Clayton Holdings. Ambac’s motion against Clayton asks a CT judge to force Clayton to produce reports reflecting the rate at which Bear Stearns overrode Clayton’s finding with respect to due diligence conducted during the securitization process.

6 Comments
12 Sep

Ridgefield Bank wins Auction of Ruth Jones New Canaan McMansion: Forcing Vacate

UPDATE 9-13-12:Prices paid at auction by the banks on Jones six properties are at the end of the story

New Canaan’s queen of McMansion sales is being forced by local bankers at Ridgefield Bank to vacate her home of sixteen years. The Connecticut District Court judge denied Ruth Jones appeal for a stay yesterday so the auction of her six homes went forward. According to Ruth’s daughter, Stephanie, no outside parties entered viable bids so banks like Ridgefield Bank, Connecticut Community Bank & Country Bank won the homes using their credit bids. This means Jones lost five rental investment homes that will now sit as REO assets on the books of the local banks. Her beautiful 7,500 sq ft McMansion, that she built in the mid 90’s and raised her three children, is now property of Ridgefield Bank who held two secured loans in total of $3.5 million against the 75 Beacon Hill home.

A court order filed by Judge Shiff today says Jones six-year lease to her brother Alton who is sick with cancer is now null and void. Jones had set up the lease after she filed chapter 11 bankruptcy in 2009 so her brother could live in an in-law suite at her primary residence. As result of the court order, Ridgefield Bank got the home free and clear of all liens and leases at yesterday’s auction. The secured creditors, who had not been paid in three years since Jones filed for bankruptcy, get possession of the homes fast. The bankruptcy docket says the closing date for her five investment properties is set for September 28th. And Ridgefield, who started dolling out million dollar loans to Jones in the early 2000’s, is moving fast to kick her out. Court records show next week, September 18th, they’ll hold a hearing for a vacate date.

I previously reported on Jones battle with her bankster creditors last month. New Canaan resident David C. House who invested in one of Jones rental investments was awarded a credit bid in April after he sued Jones for false representation and fraud. Court records show the case settled and the judge wouldn’t allow Jones to discharge the settlement House won in bankruptcy. House picked up Jones beach front vacation rental near tony Watch Hill, RI yesterday for about half of what Ruth paid in 2006.

Richard Coan, the New Haven-based bankruptcy trustee in charge of the bankruptcy assets, can now use the $300k in the DIP account to pay himself and unwind the bankruptcy by dolling out the rest of the DIP cash to the secured creditors (the banks). Coan said the prices Ridgefield bank and others paid will be loaded in public court filings (PACER) by tomorrow. Stephanie Jones wrote me today saying she thinks the banks paid less than what her mother Ruth had offered in her modification plans–plans none of the banks accepted over the course of the three year bankruptcy battle.

Ridgefield Bank gets to play landlord now and spend the banks money to manage maintenance on the large Beacon Hill home till they sell it. So far Ridgefield Bank did not recover anywhere near the $3.5 million they lent Jones but are about to succeed in making Jones and her family homeless.

New Canaan Homes sold at Auction are:

139 – 141 River Street, New Canaan, Connecticut to Country Bank; $393,000
75 Beacon Hill, New Canaan, Connecticut to Ridgefield Mortgage; $2,250,000
279 Old Stamford Road, New Canaan, Connecticut to Residential Credit; $1,564,150
277 Old Stamford Road, New Canaan, Connecticut to Connecticut Community Bank; $1,750,000
42-44 Urban Street, New Canaan, Connecticut to Bank of America; $380,000
994 Charlestown Beach Road, Wakefield, Rhode Island to David C. House; $910,000

1 Comment
7 Sep

New Canaan Realtor Ruth Jones McMansion up for Bankruptcy Auction Next Week

UPDATE 9-12-12:Jones homes were bought by her bank lenders yesterday at auction with credit bids. See Forced to Vacate story.

New Canaan real estate titan Ruth Jones lost her motion to halt the bankruptcy auction on five investment properties and her primary home of sixteen years. Last week Judge Shiff in Bridgeport, Conn. Federal bankruptcy court ruled regardless of her motion for appeal in Federal District court the trustee should move forward with the September 11th auction.

Jones, a real estate agent who in 2009 was named the ‘New Home Broker of the Year’ by the Home Builder’s Association of Connecticut for the 11th straight year, has been battling a chapter 11 reorganization for three years with over half a dozen banks. Rents on her New Canaan investment homes have been locked in a DIP account controlled by a court appointed trustee for over a year and banks like Ridgefield Bank and Greenwich Bank and Trust stated in court filings they haven’t been paid for three years. I previously reported how local banks were not willing to modify the 1st and 2nd loans she took out on most of her homes. The lack of ability for either party to negotiation led Judge Shiff to rule this July the homes must get sold on the court house steps at auction.

According to New Canaan town records Jones built her primary residence at 75 Beacon Hill rd in 1995 with her husband who bought the land for $420,000 in 1994. Then in May 2001 she got a first lien loan from Ridgefield Bank for $1.5 million and the next year the town assessed the 7,510 square ft home for $1.649 million. The assessed value for homes in New Canaan is 70 percent of the appraised value.

During the go-go years of the real estate boom Jones was earning commissions selling mega million dollar McMansions designed by builder Rick Girouard. Girouard was found guilty of bid rigging fraud, went to jail for two years, and was just released last month. The millions earned from commissions helped Ruth build her rental home empire. She also took advantage of her investment in a startup local bank run by Fred DeCaro Jr., and took out 2nd and 3rds on homes in her rental empire. Her loan to values were not near the 100% we saw a lot of real estate investors make from 2002-2007 but after the 2008 financial crises the appraised value tanked driving Jones to be stuck with little to no equity in the homes. (In 2010 Decaro’s USA Bank was shut down by the FDIC and I reported last year the FDIC is still investigating the Bank executives for abusive leading and fraud.)

By the time she filed for bankruptcy in August 2009, Jones had amassed 13 investment properties along the Gold Coast of Connecticut. Jones bookkeeper, Elizabeth Santaus, told me last month if all properties had paying tenants they earn around $45,000 a month. Accept for a $5,000 trustee approved management fee Jones can’t get access to most of that rental income because the banks have it tied up in a debtor in possession account.

“That was supposed to my income for my retirement,” Jones told me this summer over lunch.

Before Jones began loading up on loans from USA Bank to buy more rental properties she refinanced the loan on her primary residence adding on another $500k to the principle with a 5.25% interest rate. Court record show interest and some principle was paid till 2009 but the principle balance is currently $1,986,035. As the home grew in value, court records show, she then set up a credit line, via a home equity 2nd loan, for $1.5 million with an interest rate of 7% in August 2005.

Jones then used $750,000 from her credit line with Ridgefield Bank (also known as Fairfield County Bank) to make a short term investment in early 2007 with a Darien, CT couple who was setting up a pay telephone service to the public in Puerto Rico. Ronald and Margaret Massie of 451 Mansfield Ave, Darien CT ended up being fraudster and Jones filed a civil suit that year against them for a 90-day loan that was secured by their Mansfield home valued at $3 million. Unfortunately the Massie’s had also made deals securing the primary residence with other creditors. The IRS also had a $347,917 federal tax lien on the home since 2003. After over a year of litigation the couple ended up filing bankruptcy leaving Jones with no cash to pay back the credit line as interest was mounting from the Bank. In 2009 the beautiful McMansion, which housed her mother with Parkinson’s disease and an older brother with cancer, was saddled with near $3.5 million of debt. The inflated 2008 town appraised value was $3.25 million, which put her at least $250,000 underwater. Local New Canaan realtors I interviewed said a house like that would sale for only $2 million these days. Jones idea of a modification was to ask the bank in the Spring of 2008 to wipe out $2 million of the loans. She wrote the Bank’s board saying she could make the mortgage payment if the principle was reduced to $1.5 million. A steep discount the bank had no interest in making.

After Jones filed chapter 11 she signed an in-kind 6 year lease with her sick brother Alton to live in an apartment they’ve built in the home. Richard Coan, the court appointed bankruptcy trustee, filed motions last week to have the lease null and void so he could sell 75 Beacon Hill free and clear of liens and leases in the September 11th auction. Judge Shiff will hear that motion on the same day as the auction so it’s unclear if potential buyers will be picking up a home with a sick person locked into a lease living in it.

Steve Dibert CEO of MFI Miami, a foreclosure fraud expert, said, “An in-kind lessee can still be held valid in court assuming the lease, her brother, can perform the in-kind task.”

Last week Jones filed a Hail-Mary motion as an appeal for a stay in Federal District Court to halt the one-day auction of six of her homes. Judge Alvin Thompson heard her argument on September 7th and as of press time a ruling was not filed in court. In the last two days, four of the secured creditor banks and Trustee Coan have filed strong objections to the stay in the District Court. They haven’t been paid in three years, home values are still going down in Fairfield County, and they want the homes sold so they can take whatever cash they can get. Cash that could be used to make new loans to buyers who can afford homes. They also state they don’t believe Jones has a workable plan to pay them back. Unfortunately, the court is refusing to take into consideration that Jones has two sick family members living with her because the court is ruling on economic factors not emotional ones.

Ridgefield Bank went as far to tell the District Court they will be economically harmed by a possible two-year appeal because Jones has admitted her primary residence has some structural damage and she is not spending money to fix it. Ridgefield’s attorney also pointed out there is no equity in the house and asked if the court was to grant a stay Jones would have to put up a supersedeas bond in the amount of $418,335. The bank calculated this taking the principal amount of the two mortgages ($1,986,035 and $1,498584), applying the contractual interest rates (5.25% and 7%), and determining the interest that would accrue over the next two years. That means on the off-chance the District Court grants a motion to stop the auction until her appeal is heard, she still has to fork over $400k in cash to be held by the court. Ouch!

Christopher Fountain, a popular Greenwich blogger and real estate agent who focuses on distressed home sales wrote about Jones troubles after I broke news of the upcoming auction. You can see the local sentiment here – net net this tony lower Fairfield County community doesn’t appear to have a lot of empathy for the methods Jones used to build a real estate empire that federal courts are about to unwind. Nor do they hold bankers not willing to negotiate with troubled over leveraged homeowners as the bad guys.

Parties interested in placing good faith bids need to send 10% of the proposed purchase price and bid in writing to: Timothy Miltenberger at Coan, Lewendon, Gulliver, & Miltenberger, LLC 495 Orange St, New Haven, CT 06511, phone 203-624-4756.

10 Comments
« Previous Page
Next Page »