Hedge Funds and Mortgage Fraud

Palm Beach, FLUnscrupulous hedge fund managers and other financial advisors should be very nervous. Recent news has been filled with reports of indictments, lawsuits and arbitration cases against advisors who used their role for their own gain rather than for the benefit of their clients. More and more frequently, investors are holding their advisors accountable for providing misleading investment information. And they are not the only ones—even the FBI is getting involved.

At the top of the news last month was the FBI's announcement regarding Operation Malicious Mortgage, in which 406 people were charged in 144 cases of mortgage fraud. Those 144 mortgage fraud cases are alleged to have resulted in $1 billion in losses for homeowners. Mortgage fraud perpetrators used a variety of tactics to scam victims including lending fraud, which involves misrepresentations involving the borrower's financial status; foreclosure rescue scams, in which homeowners in poor financial situations are convinced to pay fees for fraudulent foreclosure prevention services; and mortgage-related bankruptcy schemes in which bankruptcy petitions are filed to stay foreclosure.

Along with individual mortgage fraud, cases of mortgage-related securities fraud are also under investigation, including the indictments of two former Bear Stearns managers. The managers are alleged to have told investors that two hedge funds were in good financial condition despite knowing that the funds were at risk of collapse. The managers marketed the funds as low risk and backed by a pool of debt securities, including mortgages.

Companies who are alleged to have been involved in fraudulently marketing hedge funds are now facing lawsuits filed by investors who lost money in the hedge funds. These include both individual investors and corporations. Bear Stearns faces multiple lawsuits regarding its hedge funds. Barclays, a British bank, is refiling its $300-$400 million hedge fund lawsuit against Bear Stearns in the wake of Bear Stearns' collapse. Barclays was a sole shareholder in one of Bear Stearns' two hedge funds that collapsed in the summer of 2007. The bank described the Bear Stearns collapse as among the most shocking hedge fund failures in the past decade.

In a different case, two principals who were involved in a hedge fund swindle have been sentenced for their part in scamming millions of dollars from investors. The two received prison sentences of 220 months and 75 months after they were found guilty of lying to investors and providing counterfeit account statements. The men were involved in a hedge fund that was actually a Ponzi scheme, through which the defendants, along with one other accused, swindled more than $194 million from investors.