A Tiny Bank’s Surreal Trip Through a Fraud Prosecution
In
the heart of New York’s Chinatown, a mortgage closing at the Abacus
Federal Savings Bank was just about complete. All had gone smoothly:
identifications verified, documents signed, checks exchanged. Only one
set of papers still required signatures.
Eight
mortgage loans had been scheduled for closing that day in mid-December
2009, and Vera Sung — a director at Abacus Bank and a daughter of Thomas
Sung, its immigrant founder — was on hand. She was happy to be there.
After all, while many larger institutions had pulled back from
residential lending after the financial crisis, Abacus was keeping its
loan spigot open.
But
as the paperwork was being completed, Ms. Sung noticed something odd.
Ken Yu, the loan officer handling the mortgage, had asked that extra
checks be made out to the borrower. Ms. Sung called Mr. Yu, requesting
that he come to the closing office to explain what the checks were for.
Waiting for Mr. Yu, she saw him outside the office talking furtively
with the borrower. After confronting the two, Ms. Sung grew suspicious
and called off the deal.
Although
she didn’t know it immediately, Ms. Sung had stumbled on a fraudulent
scheme involving false borrower income verifications and documentation.
The bank began investigating, and Mr. Yu was fired the following Monday.
The
discovery put an end to the scheme at Abacus. But it was only the
beginning of a five-and-a-half-year odyssey through the New York State
criminal justice system for the Sung family and the community lender the
family had built from nothing.
Bank
officials uncovered the fraud, fired the mastermind, investigated and
reported it to regulators and provided New York State prosecutors with
over 900,000 pages of documents. Yet by May 2012 Abacus was under
indictment by a grand jury in New York State Supreme Court.
Much
has been written about the failure of state and federal prosecutors to
pursue criminal cases against mighty institutions and high-ranking
figures after the 2008 financial crisis. This is a different story, of a
powerful prosecutor relentlessly pursuing a speck of a bank that for 31
years has prudently served an immigrant community in New York City.
In announcing the 184-count indictment against the bank and 11 former employees, Cyrus R. Vance Jr.,
Manhattan district attorney, said Abacus participated in “a systematic
and pervasive mortgage fraud scheme” that resulted in the sale of
hundreds of millions of dollars of fraudulent loans to Fannie Mae, the
national mortgage security packager.
Prosecutors
cited 31 loans ranging from $80,000 to $700,000 and issued from May
2005 through February 2010. Among the charges were conspiracy, grand
larceny and falsifying business records.
Facing
indictment and the threat of long prison sentences, eight Abacus loan
department employees entered guilty pleas and agreed to cooperate with
the district attorney’s investigation.
But this June, after a 19-week trial, a Manhattan jury exonerated the bank
and two top officials, Yiu Wah Wong, its former chief credit officer,
and Raymond Tam, former supervisor of loan origination. The jury threw
out every one of the 80 counts charged at the trial, down from 184 in
the original indictment.
The
cost for the bank was high, however. Mr. Sung said Abacus, which had
originated about $500 million in loans in all of 2009, paid about $10
million to defend itself; on top of that the bank had to post $10
million in collateral to Fannie Mae after the indictment. While Abacus
was allowed to keep servicing the loans Fannie Mae had already bought,
its lending capacity was vastly diminished because Fannie Mae would no
longer buy any new loans.
Abacus employs about 150 people at six branches
in Manhattan, Queens, Brooklyn, Philadelphia and Edison, N.J. In a
recent interview at the bank’s Chinatown headquarters, Mr. Sung
questioned why a small minority bank that never took federal bailout
money should be singled out for prosecution.
“What Vance accomplished was making a small bank weaker,” he said. “He scared the community, all to glorify his reputation.”
Asked about the prosecution, Joan Vollero, a spokeswoman for Mr. Vance and his office, provided a statement.
“When
confronted with loan after loan in which the paperwork was allegedly
falsified, a grand jury voted to indict the bank and other individuals,”
her statement said. “Eight individuals publicly accepted criminal
responsibility for their roles in this conspiracy by admitting to crimes
they committed while employed in Abacus Bank’s loan department.”
Calling
the jury’s verdict disappointing, Ms. Vollero continued: “We are
confident that as a result of this prosecution and enhanced supervision
by the Office of the Comptroller of the Currency, the fraud perpetrated
within the loan origination department has been terminated.”
The
prosecution against Abacus appears to be Mr. Vance’s only
mortgage-related prosecution against a bank since he won election as
Manhattan district attorney and took office in January 2010. Ms. Vollero
declined to provide a list of other cases brought by Mr. Vance related
to the financial crisis.She did point to guilty verdicts in a 2010
mortgage fraud case against AFG Financial Group,
a loan originator that Mr. Vance said had used sham real estate sales
to defraud banks of more than $100 million. AFG Financial, based on Long
Island, was not a bank.
Kevin
R. Puvalowski, a lawyer at Sheppard Mullin Richter & Hampton in New
York, represented Abacus at its trial. In his closing arguments, he
characterized the prosecution as a trip through Bizarro World, a comic
strip universe where everything is turned on its head.
“When
I was listening to this trial for the last three months, I couldn’t
help but thinking how backwards this trial has been, this prosecution
has been from the very, very beginning,” Mr. Puvalowski told the jury,
according to the trial transcripts. “It’s in reverse. It’s upside down.”
Who,
for example, was the government’s star witness against the bank? Mr.
Yu, the loan officer fired by Abacus. As part of a plea agreement he
struck with the Manhattan D.A., he provided testimony in the case and at
trial.
That may have backfired. The jury seemed unwilling to believe a man who had been terminated for being dishonest.
Even
more perplexing, however, was that Fannie Mae, the entity that bought
the 31 purportedly fraudulent Abacus loans, did not lose any money on
them. Rather, trial transcripts show, by early May 2015 Fannie Mae and
the investors who bought securities containing the loans had earned $2.5
million in interest. Nineteen of the 31 loans have been paid off and
the rest are current, court documents show.
That
left only one entity at risk of being victimized in the case, Abacus
itself. The bank’s contract with Fannie Mae required it to repurchase
any loans that didn’t meet Fannie Mae’s quality requirements.
And
what of the prosecutors’ claim that Abacus was driven by greed to
conduct the fraud? Figures provided to jurors show the bank has made a
modest $123,000 in servicing fees on the loans.
“It doesn’t make sense, except in a Bizarro prosecution,” Mr. Puvalowski told the jury.
Indeed, Abacus was an unlikely bank to target after all the rampant abuse of the housing bubble era.
In
the years leading up to the mortgage crisis, Abacus’s loan performance
was much better than most. Figures supplied at the trial show that from
the beginning of 2005 to the end of 2009, Fannie Mae acquired 3,104
loans from the bank. Only nine of them defaulted over the period.
Even
after the 2008 disaster, the bank’s lending held up. In 2009, jurors
learned, just 16 of 4,390 Abacus mortgages were seriously delinquent, or
more than 90 days late. That’s one-third of 1 percent. According to
national statistics, the rate of seriously delinquent prime loans in
late 2009 was 6.26 percent.
And
of course many of the lending institutions that plunged into the market
for subprime mortgages did even worse. Abacus, by contrast, never
succumbed to the subprime lure.
At
the trial, defense lawyers produced a Feb. 12, 2007, email forwarded by
Mr. Sung to his daughter Jill Sung, Abacus’s chief executive. Neither
executive may have known it, but the subprime mortgage bomb was just
about to detonate.
“I
read The Wall Street Journal last week about HSBC on subprime loans,”
Mr. Sung wrote. “I know that we are not involved, but this tells us to
never let the guard down. Basically, the lending needs to be sound.”
“Agreed,” Ms. Sung responded.
Having ridden out the subprime crisis, the bank was confronted with an all-too-common problem. A rogue employee.
Upon
terminating Mr. Yu, Abacus immediately began investigating all the
loans he had brought in and verifying borrower information on them. It
hired a forensic expert to analyze those and other loans.
On
Jan. 15, 2010, the bank filed a report of its findings with financial
regulators. In April, it notified Fannie Mae, which began its own
investigation.
None
of this carried any weight with prosecutors, who first contacted the
bank in late January or early February that year. “We thought they were
going to help us resolve a crime against the bank,” Vera Sung said. “We
did not have an attorney early on. We cooperated with them, not
realizing we were the target.”
About a year later, Mr. Sung and his daughters saw that the bank was in prosecutors’ cross hairs. They hired counsel.
The
day the indictment was announced, the Abacus employees who declined to
plead guilty were handcuffed together and led down a hallway in the
Criminal Courts Building. Photographers were there to record the
proceedings.
In news reports,
Mr. Vance said the fraud at the bank reached to its management and
justified the indictment, saying the bank’s cooperation was “too little,
too late.” He also said the Abacus indictment was his office’s first
against a bank since the famed 1991 prosecution of Bank of Credit and
Commerce International, or B.C.C.I., under Robert M. Morgenthau, the
former Manhattan district attorney.
After
the indictment, Jill Sung said, the district attorney’s office told the
bank it would seek a temporary restraining order along with a
forfeiture action, essentially freezing the bank’s assets. Then the
prosecutors demanded that the bank put $6 million into an escrow
account.
“We
negotiated it down to $2 million,” Jill Sung recalled. “But in the end,
we determined not to go through with the escrow agreement as we found
out that the funds would be put into an account controlled by the D.A.
and commingled with other persons’ funds.” She feared the bank would
never get the funds back even if the bank officials won their case.
I
asked Ms. Vollero, Mr. Vance’s spokeswoman, why his office pursued a
case in which the buyer of the fraudulent loans — Fannie Mae — lost no
money.
“Whether
the loans performed was never in dispute,” she responded in an email.
“This case was about an infected loan department.”
Mr. Vance, through his spokeswoman, declined to comment.
Now that the bank has prevailed in the criminal proceeding, it is negotiating to begin selling loans to Fannie Mae again.
And what of Mr. Yu? Ms. Vollero declined to provide the terms of the plea agreement he received in exchange for his testimony.
Seven
former lower-level Abacus employees — loan originators, processors and
underwriters — still face criminal prosecution by Mr. Vance’s office. A
hearing in their case is scheduled for July 24.
The
former employees were among those led through the halls of the Criminal
Courts Building three years ago. They maintain, to this day, that they
did nothing wrong.
