Patrick Balf and Donald Stone are expected to plead guilty in connection with their alleged roles in mortgage fraud transactions in Allentown, Pennsylvania between January 1998 and September 2003. News of the indictment was previously posted here.

The Government’s Guilty Plea Memorandum as to Donald Stone describes the facts the government believes it would prove beyond a reasonable doubt if the case were to proceed to trial. The Memorandum describes the conduct alleged to have been engaged in by Balf and Stone as ‘creative financing’ which the Memorandum characterizes as ‘nothing more than a euphemism for fraud.’ The defendants are alleged to have used two primary methods to misrepresent the amount of cash contributed to the transactions by the borrower. The first method described is manipulation of VODs:

In several real estate transactions, Stone accompanied the buyer to his or her bank. There, Stone provided cash to the buyer to deposit in an account in the buyer’s name. Stone then requested from the bank a “verification of deposit” form stating that the cash was in the buyer’s account. Stone then immediately withdrew the money in the form of a certified or cashier’s check. The money would be in the account for only minutes.

The Memorandum also describes the use of ‘circle checks’ – a term used to describe the circular route of the check from the seller's side of the transaction to the buyer and back to the seller:

A “circle check” works as follows: Balf and Stone knowing that the mortgage lending company required the real estate buyer to bring cash to the closing but also knowing that the buyer would not be able to come up with such cash, convinced the real estate seller (or someone close to the seller (e.g., a business partner)) to bring a certified or cashier’s check, made out to the settlement agent, to the closing. The settlement agent (and, in turn, the mortgage lending company) was falsely told that the check was from the buyer (not the seller). The money from the check was accounted for in the mortgage loan documents as cash from the buyer, when in fact it was not from the buyer. At closing, the real estate seller (or the person who provided the check) is reimbursed for the check from the proceeds of the sale.

The Memorandum alleges that the defendants utilized mortgage lenders that did not require that funds be sourced or seasoned so that the lenders would not discover the use of 'creative financing.'

The Defendants are innocent until proven guilty. The Government’s Guilty Plea Memorandum is not an admission by the defendant of the facts alleged therein or an admission of guilt.