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Bank leaves trail of fraud


Last Edited: February 1, 2010, 12:16 am

Atlanta Business News 8:16 a.m. Sunday, January 31, 2010 


Bank leaves trail of flipping, fraud

  Russell Grantham


The Atlanta Journal-Constitution


Atlanta’s downtrodden neighborhoods proved a gold mine for Omni National Bank and its founders, who amassed tens of millions of dollars’ worth of mansions, company stock and a private jet after launching an unusual bank that financed renovations of inner-city houses.



But the only thing growing at Omni these days is the list of casualties racked up since the bank’s failure 10 months ago.

Hundreds of homes that should have been improved instead sit vacant and crumbling. Though most depositors weren’t hurt, the bank’s demise has cost the Federal Deposit Insurance Corp.’s insurance fund an estimated $289 million and wiped out shareholders who owned about half the company, once valued at about $100 million.

Meanwhile, the number of Omni-related arrests has reached four, including the bank’s co-founder, Jeffrey L. Levine, who pleaded guilty to bank fraud two weeks ago.

The story of Omni’s rapid rise and sordid fall goes far beyond the usual tale of woe at Georgia’s many failed banks, where risky loans blew up when the real estate bubble burst. More people may be charged in the wide-ranging probe of Omni, and the charges already filed suggest fraud pervaded the bank’s operation.

Federal prosecutors said in court filings that bank records, for instance, were routinely doctored to hide losses, and a loan officer took kickbacks in return for doling out loans. The bank allowed people to “flip” houses three, four and even five times, artificially inflating their value, prosecutors said.

Omni also has been linked to at least two large mortgage fraud operations uncovered by regulators, one involving an ex-con who stole multiple identities and another by a Lithonia man who falsified the income and employment records of borrowers he steered to Atlanta-based Omni.

An attorney for Omni’s co-founder and former chief executive, Stephen Klein, says he is not a target of the investigation; federal investigators won’t say.

A federal audit indicates that even as Omni’s leadership was enriched by the bank’s rapid growth, it masked the institution’s shaky foundation by hiding foreclosures, using flawed appraisals and lending to questionable borrowers, including a convict who got a loan just days after his release from prison — for mortgage fraud.

Through their attorneys, Levine and Klein declined to be interviewed.

Levine “admitted his wrongdoing quite some time ago to the government and has been cooperating with the government’s investigation of Omni since that time,” said his attorney, Jack Williams. Levine, who pleaded guilty to falsifying the bank’s books, faces up to 30 years in prison and a fine as much as $1 million.

Said Klein’s attorney, Craig Gillen: “Mr. Klein was cooperating fully with the investigation and was perceived as a witness.”


From lenders to bank

This wasn’t how things were supposed to turn out when, in the early 1990s, the two men launched a private loan business that eventually became Omni National Bank.

Klein had been director of a Michigan bank and had owned an insurance and real estate investment business. In 1992, he partnered with Levine, a real estate lawyer, to start a firm that made short-term loans of $20,000 or so to inner-city home renovators who didn’t have easy access to loans from traditional banks.

The company made big profits bankrolling the rehabilitation of derelict homes and declining neighborhoods — sometimes making loans with hefty upfront fees and interest rates exceeding 18 percent.

“Our borrowers were more than glad to pay that, because there was no other source of funding available to them,” Klein told a group of investors in 2007, according to a transcript on investor Web site SeekingAlpha.com .

Starting in 2000, Omni expanded rapidly. It acquired a collection of banks, which allowed it to tap a new, cheap source of funds: bank customers’ deposits, which were FDIC-insured — “backed by the full faith and credit of the United States government,” as the FDIC’s motto goes.

Omni’s growth continued. Fueled by deposits that reached $797 million by the time it failed, Omni’s assets grew more than ninefold between 2001 and 2009, to $956 million.

Meanwhile, it spread out from its southeastern base, adding bank branches or loan offices in Chicago, Birmingham, Philadelphia and Dallas. Omni’s reported profits soared, rising from $685,000 in 2002 to $9.3 million in 2006.

But much of those profits turned out to be a mirage. Like many of Georgia’s hundreds of small banks, Omni was swept up in the real estate boom in metro Atlanta and other cities, making a growing pile of loans that were based on seemingly ever-rising property values.

By 2007, rehab and other commercial real estate loans totaled $488 million — 75 percent of Omni’s loans.

When the real estate market crashed later that year, the loans quickly soured and the bank eventually failed.

That’s a story common to many of the 32 Georgia banks that have failed in the past 17 months. But the federal probe and interviews with those familiar with the bank reveal a darker tale at Omni.


A magnet for flippers

For years, Omni was a magnet for so-called property flippers, some of whom do superficial repairs and resell homes at inflated prices. Often, a scammer recruits straw buyers to obtain fraudulent loans.

The scammers obtain ever-bigger mortgages through a series of fraudulent sales transactions, often in collusion with appraisers, loan officers and real estate attorneys who lie about home values and the borrower’s income in loan documents. They then keep the proceeds from the home sales at inflated prices but often don’t repay some of the loans.

A number of such schemes, say federal investigators, were run by a Lithonia man, Delroy Davy, who ran a one-stop shop for wannabe house flippers in metro Atlanta that promised a road map to riches.

For hefty fees reaching $30,000, Davy offered access to bargain-priced properties and a team of expert renovators, and even found Section 8 renters to cover short-term expenses.

Davy now sits in federal custody on charges that he defrauded many of his customers as well as the banks that financed the deals, according to the U.S. Attorney’s office in Atlanta. His go-to lender in many cases: Omni National Bank.

Perhaps the most explosive allegation among the charges: Davy paid kickbacks to an unnamed loan officer at Omni who gave approval for funding to investors who wanted to buy Davy-owned properties.

Ralph Roberts, a Michigan-based author of how-to books on real estate investing who runs a flippers Web site, said people across the country told him they were victims of the scheme. Some said they were chauffeured around Atlanta on a tour that included a stop at his sprawling mansion.

“Everyone I talked to lost everything they put in,” said Roberts. “It wasn’t set up to make [them] money. It was set up to make Delroy Davy money.”


‘Most egregious’ lender

In another flipping case, an East Point man, Mark Anthony McBride, pleaded guilty to falsifying his identity and using straw borrowers to obtain millions in loans from Omni and other banks.

Amazingly, he began working on the scheme in 2006 while still in prison for mortgage fraud, collecting his first Omni loan only days after his release.

Such schemes have worsened the damage in some of Atlanta’s struggling neighborhoods, said Brent Brewer, a civil engineer turned neighborhood activist. Several houses flipped with Omni financing have driven up property taxes in his West End neighborhood, he said. Yet the homes mostly sit vacant, attracting criminals and squatters.

Omni is “the most egregious of the lenders because they’re local. They can ... see if the appraisals are correct,” he said.

Brewer said Omni repossessed, sold and financed one house near him three separate times, even though for much of that time it sat vacant and windowless, with huge sections of its exterior walls torn away. (See accompanying story.)

Property records confirm Omni took possession and resold the house three times in two years at rising values — following a pattern that allowed the bank to hide its growing number of foreclosures, federal auditors said.

The audit said Omni often sold and refinanced foreclosed properties before month’s end to keep them off monthly reports. Omni CEO Klein later halted the foreclosure sales when falling prices would have forced the bank to book more losses, the audit said.


Success brings spoils

While all this was happening, the fortunes of Omni’s founders were soaring.

In 2002, Levine bought a riverfront home in Sandy Springs for $1 million, according to Fulton County tax records. A year later, Klein and his wife built an 8,398-square-foot home downriver worth $1.7 million, according to tax records. Meanwhile, a condominium they had bought in Fernandina Beach, Fla., in 2000 they later sold for $2.1 million, according to Nassau County records.

Klein, a private pilot, also sold his Cessna jet to Omni for $2.6 million in 2004. Despite the sale, Klein retained use of the jet for up to 40 hours a year as an executive perk.

In 2006, Klein and Levine decided in 2006 to take Omni public, selling $33 million worth of stock to investors.

At one point, the deal valued Klein’s 30 percent stake at $32 million and Levine’s 11 percent stake at almost $12 million. The pair were also the highest-paid employees at Omni. Klein’s salary, stock and other compensation in 2006 was $597,199; Levine’s was $521,997.

Then in 2007, the real estate market collapsed. Soon, Omni was awash in foreclosures, setting off a chain of events that led to criminal conduct as the bank tried to cover up losses and turn money-losing loans into earning assets.


Bad debts come to light

Omni tried to mask its growing pile of foreclosed properties from banking regulators and investors, according to the Treasury Department audit.

Many foreclosed properties were “sold with new Omni-financed redevelopment loans within the same month” so Omni could avoid reporting the foreclosed properties on monthly reports, auditors said. “In some cases, properties were foreclosed and sold multiple times for higher amounts to avoid losses and mask the bank’s condition.”

A sampling of property records for some of Omni’s largest home loans in Fulton County bears out that pattern.

Of the top dozen Omni deals ranging from $226,500 to $500,000, about half showed signs of being involved in flipping schemes. Often, Omni financed the deals two or three times at rising prices. In some cases, their values ballooned more than 100 percent.

Indeed, Omni recycled bad loans on 169 foreclosed properties with $25 million worth of new loans during a 12-month period in 2006 and 2007, the audit shows. Those loans accounted for about one-sixth of its redevelopment loans.

Auditors criticized Omni’s primary regulator, the federal Office of the Comptroller of the Currency, for not catching the bank’s lending practices and other problems until late 2007. Even then, the OCC took almost a year to take formal enforcement action, in October 2008, though a new examiner had found “severe management and control deficiencies,” according to the audit.

The OCC agreed that its supervision came up short, but disagreed that it took too long to take formal action because Omni had already shut down its redevelopment lending.

Indeed, with property values crashing in 2008, Omni could no longer sell foreclosed properties with new loans big enough to cover the old ones.

But according to the audit, the bank’s CEO still tried to avoid reporting losses. Klein “directed bank managers to refrain from selling foreclosed properties at discounted prices because it would force the bank to recognize significant losses,” according to the audit.

Auditors said Omni also violated banking rules by inflating the value of foreclosures on its books and telling appraisers to come up with inflated property values to support new loans.

In summer 2008, regulators ordered the bank to write off a third of the value of its foreclosed properties. Within seven months, Omni was shut down.

“This case demonstrates the damage that can result when senior bank officials ignore rules and regulations designed to protect a bank,” acting U.S. Attorney Sally Quillan Yates said when announcing Levine’s guilty plea.




How we got the story


After a key former executive and the bank’s second-largest shareholder pleaded guilty two weeks ago to fraudulently hiding its financial condition, we decided to take a deeper look at Omni National Bank, which failed last March. We interviewed officials with the U.S. Attorney’s Office, lawyers for people involved in the investigation and the banking industry, and people in the neighborhoods affected by alleged property-flipping schemes that were financed by Omni. We also reviewed property records and a federal audit conducted after Omni failed, as well as court documents and indictments related to federal investigators’ probe into the bank and various mortgage fraud schemes connected to the bank.

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