Lawsuits swarm Winyah project
Allegations of fraud follow Virginia firm
01/23/2011 12:00 AM
01/24/2011 7:01 AM
Federal officials have sent two people to prison, arrested another man and hope to obtain indictments against others who are alleged to have run a widespread mortgage fraud operation that snared hundreds of buyers in three states and included the failed Craven's Grant residential development here.
Court records show the alleged fraud has cost banks more than $10 million at Craven's Grant, a project along Winyah Bay that remains undeveloped except for roads, utilities and a clubhouse that sits in the middle of 292 proposed home sites on 140 acres.
Craven's Grant home lots - which were sold for up to $400,000 each during the real estate boom five years ago - now sell for as little as $2,000 each, according to county property records.
Investigators say Woodbridge, Va.-based Total Realty Management recruited unqualified buyers for land it didn't own, falsified documents so the bank would approve the buyers' loans, and then used the buyers' loan funds to purchase the land and resell it at a higher price to the buyers.
"The buyers were definitely naive, and they were taken advantage of," said Robert Maring, a Georgetown lawyer who represents dozens of people in civil lawsuits against the now-bankrupt Total Realty Management, banks and appraisers.
The Sun News attempted to contact several Craven's Grant buyers. They either did not return telephone messages or declined to be interviewed.
Maring said his clients - most of them with modest incomes already strained by mortgages on their primary homes - were victimized by "snake oil salesmen" who capitalized on buyers' lack of financial sophistication and dream of participating in the real estate investment frenzy.
"These were middle-income people who never would have been able to qualify for this type of investment," Maring said.
Total Realty Management offered them a purported no-cost, no-risk investment, according to court documents. The company also promised buyers that they would be able to flip the properties for even higher prices as the real estate boom continued.
"The buyers wanted to make some money, and that's not a bad thing," Maring said. "Total Realty Management took advantage of that and said, 'Here's your opportunity.'"
Others, however, say the buyers have only themselves to blame because they failed to do their homework before signing a contract.
"Greed is what feeds a buyer's enthusiasm for these deals, and they leave their common sense and reason at the doorstep," said Richard Lovelace, a Conway lawyer who specializes in real estate and banking law. Lovelace is not involved in any of the Craven's Grant lawsuits.
Some of the defendants in Maring's lawsuits also say the buyers are at fault.
The buyers wanted "to make hefty profits by flipping properties without making a single mortgage payment," Robert Muckenfuss, a lawyer who represents Bank of America, said in court filings.
"Now that their speculative investment decision has not paid out, [they] seek to blame Bank of America for their alleged losses," he said.
Whoever is to blame, the project's failure is having a negative impact on the city, according to Georgetown Councilwoman Peggy Wayne.
"They have not built a single house there, so the city has no way of collecting any money on its investment in the utilities and other work that went into that development," Wayne said. "The developers made big promises, but it has been nothing but a drain on the city's budget."
How it all started
Total Realty Management was formed in the mid-2000s by Virginia real estate agents Mark Dain and Mark Jalajel.
Dain and Jalajel could not be reached for comment. It is believed one of the men is cooperating with federal authorities, because court documents identify an unnamed "confidential witness" as being the majority owner of Total Realty Management.
In addition to the Craven's Grant project, the company is accused of defrauding banks and investors in a pair of North Carolina developments - Cannonsgate in Carteret County and Summerhouse in Onslow County.
Prosecutors say the company routinely falsified information on loan applications for purchasers who would not have been able to qualify for the mortgages otherwise.
Total Realty Management inflated buyers' wages, misrepresented their job duties, and falsified tax forms and pay stubs, according to court records.
The company also deposited money into buyers' bank accounts to make it appear as if they had assets that did not really exist, court records show. The buyers returned the money after the loans were approved.
It is not clear how many buyers knew their information was being falsified on loan applications. One buyer said in an affidavit that information was falsified without his knowledge and his signature on two applications had been forged.
Many of the buyers were Northern Virginia residents who were recruited during high-pressure seminars that Total Realty Management sponsored at upscale hotels, with free food and alcohol.
The company also recruited community leaders - including local school principals - to give the deals credibility by providing "testimonials" to prospective buyers about the money they could make using Total Realty Management, according to court documents.
Prospective buyers did not realize that Total Realty Management was paying the leaders $1,000 per seminar for their testimonials and up to $25,000 for each referral those leaders provided to the company.
Buyers also did not realize that the sales price of the properties they purchased had been grossly inflated.
At Craven's Grant, for example, developer Maryville Partners Inc. was selling lots to the public for about $200,000 apiece. Total Realty Management bought the lots at that price and then flipped the property to other buyers for nearly double the amount.
Buyers did not realize they could get the same type of home site for less money because they did not research other sales in the development.
Instead, court documents state that the buyers relied on Total Realty Management's boasts that it was getting special deals on the property by buying in bulk.
An elaborate scheme
Buyers also purchased from Total Realty Management, court records show, because the company offered them investment opportunities with no money down and no payments for up to two years.
Here is how the deals typically worked at Craven's Grant, according to court documents and property records.
Total Realty Management marketed lots for sale, even though it had no inventory and had not yet purchased the property from Maryville Partners, a land owner and developer based in Kingstree.
Kenneth Kellahan, managing member of Maryville Partners, said his company had no knowledge of what Total Realty Management was doing with the property.
When Total Realty Management found a buyer for one of the lots, the company would sign a contract to purchase it at fair-market value from Maryville Partners.
Total Realty Management then would sign a contract with its buyer, re-selling the lot for up to twice what it was paying Maryville Partners.
Total Realty Management would help push through a loan for its buyer.
Once financing was approved, Total Realty Management would conduct a concurrent settlement of its acquisition purchase and its sale to the buyer, with the deeds often recorded on the same day and sometimes minutes apart.
Total Realty Management would use part of the proceeds from its sale to the buyer to buy the land from Maryville Partners, pocketing the difference. Property records show the company made an average profit of $155,000 on each lot sale at Craven's Grant.
Buyers did not know about the lower-priced lots or the flips, court records show, because they had agreed to use Total Realty Management as a one-stop shop that would handle their transactions at every step - from signing the purchase contract to closing the loan.
"The problem was that Total Realty Management did not disclose to the buyers what was going on," Maring said. "This was an elaborate scheme, and there was only one unsophisticated person in the mix - the buyer."
Total Realty Management falsified down payments, court records show, so its buyers would not have to spend any money upfront.
Total Realty Management also paid the buyers' monthly mortgage payments for the first one or two years - using money it had made from the land sales. Total Realty Management promised its buyers that they would be able to flip the properties for higher prices before they had to start making their own mortgage payments.
When Total Realty Management stopped making the mortgage payments, buyers learned they could not flip the properties and the loans went into default.
Arrests and lawsuits
Prosecutors estimate Total Realty Management sold about 300 lots for more than $110 million at the three Carolinas developments where it operated.
Buyers have stated in court filings that Total Realty Management's executives are hiding millions of dollars that they made during the real estate boom. They say that money should be used to repay buyers and others who were defrauded.
However, Martin Yeager - an Arlington, Va., lawyer who represents Jalajel in a personal bankruptcy case - has downplayed the amount of money the company's executives received.
Yeager could not be reached for comment last week. He told Virginia Lawyers Weekly in October that Total Realty Management made an estimated $60 million to $70 million between 2006 and 2008. He said most of that money went to acquisition and operating costs.
"They were not making the amount of money they were alleged to have been making," Yeager told the newspaper in November. "Money flowed through the corporation, but it was not profit."
The real estate transactions have prompted dozens of civil lawsuits in state courts, at least three federal class-action lawsuits and a federal criminal investigation.
Two of Total Realty Management's former employees - Cari Deuterman of Raleigh, N.C., and Christopher Tonkinson of Centreville, Va. - were sentenced last month to two years in prison for conspiracy to commit bank and mail fraud. The two also were ordered to make a combined $2.5 million in restitution to banks.
Michael McCracken of Herndon, Va., the company's chief financial officer, was arrested last month and charged with conspiracy to commit mortgage fraud and possession of a firearm by a felon. McCracken has a felony conviction in Fairfax County, Va., for assaulting a police officer. He is in prison awaiting trial.
Jill Pisner, a McLean, Va., lawyer who represents about 130 buyers in one of the federal class-action lawsuits, said the arrests and prison sentences are good news for her clients.
"We've been waiting on the criminal indictments and guilty pleas for some time, and my clients are finally seeing some justice in the criminal case," Pisner told the Raleigh (N.C.) News & Observer newspaper earlier this month.
Maring, Pisner and others say appraisers and banks cooperated with Total Realty Management to perpetrate the alleged fraud, and they should be held accountable.
Gerald Lee, a federal judge in North Carolina, ruled late last year that Bank of America - which made many of the loans at Craven's Grant - should be restored as a defendant in Pisner's lawsuit. That reversed a 2009 decision in which the same judge dismissed Bank of America from the lawsuit, saying it did not make sense for a bank to purposely make under-collateralized loans.
Lee changed his mind after Pisner's law firm introduced e-mails from former Bank of America loan officer Lynne Cooke.
Those e-mails were obtained by a lawyer in another class-action case following clandestine meetings with an informant in a hot tub at a Myrtle Beach fitness center, presumably so neither person could wear a wire and record the transaction.
The e-mails allegedly show that Cooke worked closely with Total Realty Management to choose appraisers willing to inflate the price of home lots and support risky loans based on falsified information. Cooke was motivated to help because she made about $1,000 in commission for every loan she approved, according to court documents.
"For 2006, I made Platinum Club here at Bank of America and it was my best year ever in most part due to the relationship that I have with you," Cooke wrote a Total Realty Management sales manager in one of the e-mails.
Bank of America lawyers say the e-mails prove nothing and the bank ultimately will be dismissed from the lawsuit again.
The bank has asked to be dismissed from Maring's lawsuits involving Craven's Grant, but a judge has not ruled on the request. Maring said having a well-known bank such as Bank of America involved in the alleged fraud lent credibility to Total Realty Management.
One of the appraisers in Maring's lawsuits - Cromartie Appraisal Service Inc. in Pawleys Island - also has asked a judge to dismiss the company from the lawsuits.
Thomas Milligan, a lawyer who represents Cromartie Appraisal Service, said in court filings that the appraisals were conducted after buyers had already signed a contract with Total Realty Management agreeing to the inflated purchase price.
Milligan said the buyers did not see or request copies of the appraisals until about two years after the transactions, as they were getting ready to file lawsuits.
"In purchasing the property, [buyers] in no way relied on the appraisal done by Cromartie and put his full faith and trust in Total Realty Management to make him a quick profit," Milligan said.
Maring said the lawsuits are moving forward and he expects them to go to trial this year if a settlement cannot be reached.
"In hindsight, a lot of buyers are looking back now and saying, 'I was duped' or 'I should have seen it,'" Maring said. "We're just trying to get our clients out of this nightmare."
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