A Montclair, New Jersey man pleaded guilty last week to charges in connection with a $139 million fraud scheme that bankrupted Pine Brook, New Jersey's ""U.S. Mortgage Corp."":http://www.usmtg.com/ and its subsidiary, ""CU National Mortgage, LLC"":https://www.cunational.com/ in February of this year.
According to the ""U.S. Department of Justice"":http://www.usdoj.gov, Michael J. McGrath Jr., 46, the former president and director of U.S. Mortgage, admitted wrongdoing before U.S. District Judge Katharine S. Hayden, pleading guilty to one count of mail and wire fraud conspiracy, and one count of money laundering conspiracy.
McGrath admitted that from January 2004 to January 2009, he conspired with several others to fraudulently sell loans belonging to other financial entities and use the proceeds to fund U.S. Mortgage's operations, as well as his personal investments and investments he made on his company's behalf.
McGrath told officers the scheme started with the diversion of funds, which should have been paid to various credit unions for mortgage loans they had authorized CU National to sell to Fannie Mae. McGrath explained that he began withholding these funds to help U.S. Mortgage address cash flow problems caused by investments lost in mortgage-backed securities (MBS). McGrath further admitted that when U.S. Mortgage's financial condition continued deteriorating, he sold hundreds of mortgage loans to Fannie Mae without the knowledge and consent of the credit unions that owned the loans.
Acting U.S. Attorney Ralph J. Marra, said, ""This was truly a massive fraud, a giant shell game by McGrath. McGrath deftly and fraudulently moved these mortgage assets around and sold them while the institutional owners had no idea they no longer held the assets. The goal was to prop up his own company, which instead sunk deeper into trouble as his scheme grew larger and ultimately collapsed.""
To accomplish the fraudulent loan sales, McGrath executed documents, in which he pretended to be an officer of the credit unions, assigning the loans belonging to the credit unions to U.S. Mortgage. He also ordered subordinates at his company to execute documents selling these loans from U.S. Mortgage to Fannie Mae. And he sold some of these loans a second time, to an institution based in New Jersey. All told, the scheme netted approximately $139 million.
McGrath also admitted taking numerous steps to conceal the scheme, including directing U.S. Mortgage's servicing manager to generate reports for the credit unions falsely stating that loans which had been sold to Fannie Mae were still in their portfolios. He also told the servicing manager to modify data in U.S. Mortgage's servicing system, directed the company's CFO to pay off or make monthly payments to the credit unions for the fraudulently-sold loans, and caused the CFO and another subordinate to falsify documents.
McGrath stated that he used the transferred proceeds to invest in, among other things, one million shares of Fannie Mae common stock, millions of shares of common and preferred stock of a New Orleans-based company, and a Hoboken property.
McGrath's guilty plea is the latest step in an investigation by the U.S. Postal Inspection Service, the IRS Criminal Investigations, the Federal Bureau of Investigation (FBI), and HUD's Office of Inspector General that became public on January 27, when dozens of law enforcement agents executed a search warrant at U.S. Mortgage's and CU National's Pine Brook headquarters. Shortly after the search, McGrath indicated that he would take responsibility for the scheme.
Under his plea agreement, McGrath faces a sentencing range of between 150 and 240 months in federal prison. He also will have to pay restitution to the victims and has agreed to forfeit to the United States the contents of several bank and brokerage accounts and his interest in the Hoboken property. McGrath's sentencing is scheduled for October 1.