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The State

How a bank fell victim to loan fraud

Officials allege a scam used phony appraisals and paperwork to wring millions from deals in the Beverly Hills area.

December 31, 2007|Diane Wedner and Kim Christensen | Times Staff Writers

Matz, the federal prosecutor, said Lehman brought the case to the attention of federal authorities, but he did not know how the bank learned of the fraud.

Lehman declined to comment, but according to its civil suit, a series of audits and reappraisals it ordered revealed the suspect properties' actual values. On April 17, 2003, it sued Abrams, Fitzgerald, Babajian, Grasso and a cast of appraisers, escrow officers and others for fraud.

At the time, Lehman literally didn't know the half of it.

The bank's original complaint cited 38 loans totaling about $62 million. Not until it reviewed documents obtained by a court-appointed receiver did it learn it had been stuck with 43 others totaling $80 million -- $142 million in all, according to an amended complaint filed three months later.

Although the alleged fraud ring initially kept up payments on the properties, many of the loans were in default by August 2003 and were headed for foreclosure.

RBC Mortgage Co. of California joined the suit after Lehman forced it to buy back fraudulent loans brokered by Americorp, which RBC acquired while the alleged scam was occurring.

The day the original complaint was filed, a judge appointed receiver David Pasternak and barred defendants from moving assets or destroying records. Prosecutors say the two developers promptly made off with incriminating evidence, alleging among other things that Fitzgerald took a sledgehammer to computer hard drives in his backyard.

When Pasternak and his staff searched a Wilshire Boulevard condo where Abrams lived in July 2003, they found "sculptures, artwork of Miro and Chagall, gold coins, guns, jewelry" and $100,000 in cash, the Lehman suit alleges. A second search yielded $85,000 more in cash hidden in a stereo, the battery compartment of a bullhorn and Abrams' pockets.

By then his partner, Fitzgerald, had skipped the country with his wife and five children -- leaving behind a second woman he married in Las Vegas in 1999, when she was 20, and their young son, court records state. Fitzgerald had told relatives he was taking his family on a Caribbean cruise, one last trip before "going to jail," his sister, Neldene Stoddard, said in an interview.

He later turned up in Western Samoa, where he was arrested in December 2006 and deported to the U.S. He has been held without bail ever since in Los Angeles and is scheduled for trial in May. His attorney, Bernard Rosen, said he was still reviewing the case and declined to comment.

Abrams, who was fined a record $270,000 in 2005 for violating campaign finance laws while raising cash for then-Los Angeles Mayor James Hahn's 2001 campaign, has pleaded guilty to charges of conspiracy, bank fraud, making a false statement on a tax return and obstruction of justice in the real estate fraud case. He will be sentenced after the others' trials.

He declined to comment through his attorney, Nathan Hochman.

"Mr. Abrams has fully and completely cooperated with the receiver and the federal government in its ongoing investigation and prosecutions in this matter," Hochman said.

Babajian and Grasso are to be tried in July. Prosecutors say they reaped hundreds of thousands of dollars in ill-gotten gains from commissions and other payments.

Since 2001, the pair had worked in the Beverly Hills office of Prudential California Realty and were top sellers for the company nationally, their indictment says. Babajian's website said he sold $182 million worth in 2006 alone. Why such prosperous agents might get caught up in an alleged fraud scheme has even some of their competitors wondering.

"Over all the years I've known them, they were competent, qualified and professional," said Stephen Shapiro, a top Beverly Hills agent.

Prudential suspended the agents in August and ordered them to halt all real estate business until their cases were resolved.

That affected not only $65 million in listings they had at the time but also one other that Babajian might have handled: his own three-bedroom, 4 1/2 -bath classic contemporary in Beverly Hills' Trousdale Estates. With 180-degree ocean and city views, the 3,400-square-foot home is now for sale by another Prudential agent, for a shade under $7 million.

Neither responded to requests for comment. Their lawyers said they would be exonerated.

"He's absolutely innocent and he will be completely vindicated at trial," said Babajian's attorney, Thomas Mesereau.

Grasso "fully expects to be acquitted at trial and vindicated," said his lawyer, Marc S. Harris.

Lehman Bros. and RBC, meanwhile, recouped some of their money by selling homes bought by the alleged ring. The receiver, Pasternak, seized and sold about 50 of the properties while Lehman foreclosed on others and sold them itself.

But because loan values far exceeded the homes' actual worth, each lender still stands to lose about $20 million, Pasternak said.

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