US arrests 406 in mortgage crackdown, 60 yesterday alone, handcuffed 2 executives whose attorneys say they are used as scapegoat

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More than 400 real estate industry players have been indicted since March, including dozens over the last 2 days, in a crackdown on mortgage fraud stemming from America’s housing crisis.

Two former Bear Stearns hedge fund managers today became the first executives to face criminal charges related to the collapse of the subprime mortgage market, following a federal criminal probe into the collapse of two funds they oversaw. In an indictment unsealed in New York, Ralph Cioffi and Matthew Tannin were charged with conspiracy, securities fraud and wire fraud. Cioffi was also charged with insider trading. Cioffi, 52, and Tannin, 46, surrendered to officials and were paraded in handcuffs in front of reporters and onlookers en route to their arraignment today. Their lawyers said they will fight the charges.

Since the beginning of March, 406 people have been arrested in the sting dubbed Operation Malicious Mortgage resulting from 144 cases across America. Sixty people were arrested yesterday alone, including in Chicago, Miami, Houston and a dozen other regions policed by the FBI. Law enforcement officials said their stepped-up focus on mortgage cases aims to combat problems that have grown out of the risky lending practices prevalent until the mortgage market collapse started last year.

Across the country, reports of mortgage fraud have soared over the past year as the subprime mortgage market collapsed, and defaults and foreclosures soared. Banks reported nearly 53,000 cases of suspected mortgage fraud last year, up from more than 37,000 a year earlier and about 10 times the level of reports in 2001 and 2002, according to the Treasury Department’s Financial Crimes Enforcement Network. In recent months, the FBI has been investigating more than 1,400 mortgage fraud cases and 19 companies - including Bear Stearns - tied to the subprime mortgage crisis.

Edward Little, lawyer for Cioffi, said the two men were being used as scapegoats in a crisis that was not their fault. “The subprime crisis took everyone by surprise, including the Fed and Treasury, and dozens of the largest financial institutions have lost over $US300 billion to date on the same investments,” the lawyer said in a statement. “We are shocked and disappointed that the government has seen fit to fix blame on these two decent men. The good news though is that there will be a trial, and we look forward to the day they will be vindicated.”

Officials declined to say who might be the next corporate target, but FBI Director Robert Mueller said the investigations focus on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments. Under review for potential fraud are: investment banks, hedge funds, credit rating agencies, brokerage houses and due diligence firms - which evaluate loans packaged into investments. Similar to the federal investigations of Enron Corp. and WorldCom Inc., the cases are complex and rely on intense scrutiny of documents, Mueller said.

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Images courtesy of Lanzano/AP, Hermann for News and AFP/Getty Images/File

Original Source: The West Australian