Mortgage Fraud and the Deliberate Ignorance Jury Instruction: The Risk of Criminal Liability for Real Estate Professionals Involved in Civil Litigation

• Author: William Z. Duffy
• Position: Graduate of Southern Texas College of Law
• Pages: 10

William Z. Duffy is a 2007 graduate of Southern Texas College of Law. While there, he seved as Editor-in-Chief of the school’s Currents International Trade Law Journal.

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I Introduction

Current economic conditions, which began with a sharp increase in real estate foreclosures in 2007, have been described as “the worst economic crisis since the Great Depression.”¹ Federal and State law enforcement agencies have responded by investigating suspicious real estate transactions for evidence of fraud.² By April 2008, the FBI had received a record number of complaints of mortgage fraud, and recently warned that “as housing prices continue to fall, more financial misdeeds will no doubt come to light.”³

Mortgage fraud is defined as a materially false or misleading statement made to a lending institution for the purpose of obtaining a mortgage loan.⁴ In many instances, the lending institution will initiate a civil lawsuit against the perpetrators of the fraud and anyone else connected to the transaction before criminal charges are brought by the Department of Justice or a similar state agency.⁵

Real estate professionals such as escrow agents, mortgage brokers, realtors, sellers, appraisers, and developers are vulnerable to civil lawsuits and criminal investigations because of their pivotal roles in the fraud. For example, an escrow agent might close a series of transactions despite suspicions that the borrower was lying about the source of a down payment. Likewise, a mortgage broker might issue loans to a group of individuals despite signs that they were being used as “straw borrowers” to purchase property at an inflated price only to walk away from it after the sale. Real estate professionals like these are often unaware of fraudulent activity until an investigation has uncovered wrongdoing, a lawsuit has been filed, and the relevant documents have been forwarded to the government. This article focuses on the risk of criminal liability to these individuals, who might admit their own negligence but deny knowledge of the fraud at the time of the transaction.

When evaluating a mortgage fraud case, civil counsel should be aware that government prosecutors will argue that “red flags” alerted the defendant to the fraud, but the defendant purposefully avoided gaining knowledge of the crime. Prosecutors will focus on these red flags when requesting a deliberate ignorance jury instruction from the court. This instruction permits the jury to find that there was a knowing violation of the law if the defendant deliberately avoided acquiring knowledge, and further increases the risk of criminal liability by negating arguments that the accused was either unaware of fraudulent misrepresentations or simply neglected to understand the fraudulent scheme.⁶

Mortgage fraud is defined as a materially false or misleading statement made to a lending institution for the purpose of obtaining a mortgage loan.

II The Government’s Case

In a typical mortgage fraud case, the indictment will contain allegations of bank fraud, money laundering, mail fraud, wire fraud, and conspiracy, each of which requires the government to prove that the defendant acted knowingly.⁷ Federal courts define the word “knowingly” to mean that the defendant acted voluntarily and intentionally, not because of ignorance, mistake, or accident.⁸

(A) Bank Fraud

Bank fraud is the core allegation in the majority of mortgage fraud cases. The burden of proof is on the government to show that the defendant knowingly executed a scheme to defraud a financial institution or obtain funds by means of false or fraudulent representations.⁹ Federal statute prohibits the act of knowingly making any false statement or report, or willfully overvaluing any land, property, or security for the purpose of influencing the action of a federally-insured bank.¹⁰

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To prove a conspiracy, the government must establish beyond a reasonable doubt that two or more people agreed to pursue an unlawful objective, that each defendant voluntarily agreed to join the conspiracy, and that at least one of the members performed an overt act to further the objectives of the conspiracy.

(B) Money Laundering

Money laundering is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally-gained funds. Federal money laundering statutes make it illegal for a person to knowingly engage in a financial transaction with proceeds derived from an unlawful activity with the intent to promote the unlawful activity or conceal the nature, location, source, ownership or control of the illegal funds.¹¹

(C) Wire and Mail Fraud

Wire fraud and mail fraud involve knowingly using the mail service, wires, radio or television with the specific intent to defraud an individual or the government.¹²

(D) Conspiracy

Conspiracy requires an agreement between two or more people to defraud the United States.¹³ To prove a conspiracy, the government must establish beyond a reasonable doubt that two or more people agreed to pursue an unlawful objective, that each defendant voluntarily agreed to join the conspiracy, and that at least one of the members performed an overt act to further the objectives of the conspiracy.¹⁴ When an objective of the alleged conspiracy was to defraud a privately-owned lending institution, prosecutors can prove that the conspirators were planning to defraud the United States by presenting evidence that the lending institution was insured by the Federal Deposit Insurance Corporation (FDIC).¹⁵

III Development of the Deliberate Ignorance Instruction

The use of deliberate ignorance as a substitute for actual knowledge can be traced to United States v. Jewell.¹⁶ In that case, Jewell testified that he was vacationing in Tijuana when a man named Ray approached him and offered to sell him drugs.¹⁷ Jewell initially declined but later accepted $100 from Ray to drive a strange car across the border.¹⁸ When customs agents subsequently discovered a large cache of marijuana hidden in a secret compartment in the trunk, Jewell denied knowledge of the illegal cargo.¹⁹ In light of these facts, the trial court instructed the jury that they could find Jewell guilty of knowingly possessing the marijuana if his ignorance was the result of a conscious decision to avoid learning the truth.²⁰ The Ninth Circuit affirmed this instruction, and every federal court of appeals except for the D.C. Circuit adopted the reasoning of that opinion.²¹

The Ninth Circuit recently revisited its holding from Jewell in United States v. Heredia, another narcotics transportation case.²² Heredia used her aunt’s vehicle to drive her mother from Nogales to Tuscon, Arizona.²³ Unbeknownst to Heredia, her mother and aunt stowed drugs in the vehicle and were using her to transport the cargo to Tuscon.²⁴ Heredia testified that she became suspicious when her mother seemed nervous, and she noticed that her mother was carrying a large sum of cash even though she was unemployed.²⁵ The strong smell of detergent in the car raised her suspicions further.²⁶ When asked about the scent, her aunt said she spilled Downey fabric softener in the car a few days earlier, an explanation which Heredia described to police as “incredible.”²⁷

Heredia was convicted at trial. She subsequently appealed the issuance of a deliberate ignorance instruction that allowed the jury to find that she had acted knowingly if she was aware of a high probability that drugs were in the vehicle, but deliberately avoided learning the truth about what she was transporting.²⁸ Citing Jewell, Heredia argued that the instruction should include a third element—that the defendant’s motive in deliberately failing to learn the truth was to give herself a defense in case she should be charged with the crime.²⁹ The Court rejected this argument, holding that the requirement that the defendant deliberately avoided learning the truth sufficiently protects the accused.³⁰

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IV Deliberate Ignorance Instruction in Mortgage Fraud Cases

Mortgage fraud prosecutions lend themselves to the deliberate ignorance instruction because they often involve complicated fact patterns that give real estate professionals the opportunity to deny knowledge about key misrepresentations.

Mortgage fraud prosecutions lend themselves to the deliberate ignorance instruction because they often involve complicated fact patterns that give real estate professionals the opportunity to deny knowledge about key misrepresentations. In United States v. Faulkner, for example, two real estate developers, Faulkner and Toler, were indicted for defrauding a federally-insured savings and loan in Dallas, Texas.³¹ Faulkner, the ringleader of the scheme, began by purchasing a large tract of land upon which he located several new...