Fraud Claims May Stick to Allied Mortgage Execs
HOUSTON (CN) - Mortgage executives must face allegations that the scheme they directed cost the U.S. government more than $150 million in insurance payouts, a federal judge ruled.
The United States had intervened in the civil fraud action against Allied Home Mortgage Corp. after its former branch manager Peter Belli blew the whistle on alleged fraudulent activities. Allied CEO Jim Hodge and executive vice president Jeanne Stell are also named as defendants to the federal action, which was transferred from Manhattan to the Southern District of Texas in August 2012.
The suit accuses Allied, Hodge and Stell of submitting false loan certifications to the Department of Housing and Urban Development to obtain HUD-backed insurance for the loans. A requirement of the HUD insurance program is that a lender who originates home loans must be approved by the agency.
HUD mandates that the lender obtain approval for each branch from which it intends to originate HUD-insured loans, as a way for the agency to track default rates.
The lawsuit claims that, for more than 10 years, Allied originated loans out of hundreds of branches it never disclosed to HUD. The "shadow branches," as the feds called them, often operated in regions where HUD had suspended Allied's power to originate loans, given the areas' high default rates, according to the complaint.
Uncle Sam also accuses Allied and its execs of lying to obtain HUD approval for its branches. The form Allied submitted to HUD specified it would pay the operating costs for each branch. But the government claims Allied actually required branch managers to assume all financial responsibility, and liability, for their branches.
Aware that this was in violation of HUD regulations, Allied allegedly instructed branch managers to tell HUD auditors they were not a franchise.
The government also claimed that CEO Hodge directed Allied to falsify quality-control reports needed to maintain HUD-approved lender status. It said HUD ordered Allied Capital to provide up-to-date quality control reports in October 2008 and Hodge instructed staff to fabricate reports that included verification of borrowers' income and employment when in fact the verifications had not been done.
Hodge moved to dismiss the claims against him under the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.
His "knowledge defense" also argued that the government acquiesced to Allied's fraudulent practices.
U.S. Magistrate Judge George Hanks Jr. shot Hodge down Tuesday.
"Hodge argues that he should not be subject to FCA liability because he did not 'personally' submit any claims or reports to the Government for payment," Hanks wrote, citing 5th Circuit precedent. "He contends that personal submission is required under the FCA, and the Complaint fails because it does not "distinguish the actions of the various defendants.' Hodge is simply incorrect. The FCA applies to anyone who 'knowingly assist[s] in causing the government to pay claims grounded in fraud.'"
The court likewise rejected Hodge's claim that he is not liable under FIRREA because the government does not accuse him personally of making false statements.
"Under FIRREA, any individual who aids, abets, counsels, commands, induces or procures another individual to violate federal law is liable as a principle for the underlying action," Hanks wrote. "A person need merely 'set into motion' the events which caused the false entries to be made."
As for Hodge's contention that the government acquiesced to Allied's fraud, Hanks dispatched that assertion with one sentence: "In short, there is nothing in the complaint to suggest that the government endorsed the fraud or was complicit in the scheme," he wrote.
The 18-page ruling dedicates four pages to Hodge's arguments and only two paragraphs to Allied vice president Jeanne Stell's motion to dismiss. Hanks also denied her motion finding that she raises identical points to Hodge.
Allied has since changed its name to Allquest Home Mortgage Corp.
Hodge did not return a call for comment on the ruling.