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Unprecedented Win in Federal Case

Dan Koukol represented one of four defendants recently acquitted of five charges related to mortgage fraud in a landmark federal case in Sacramento. Koukol mounted two distinct defenses for his client, one of which had never been used before anywhere in the country.

Koukol’s client was charged with various counts of mortgage fraud—three counts of money laundering and two counts of mail fraud— in connection with real estate dealings in 2006 and 2007. The prosecution claimed that Koukol’s client was the “ringleader” in the group of four defendants, in that he recruited straw buyers to purchase properties under false pretenses and then turned around immediately and resold the properties for extraordinary profits to a subsequent straw buyer who, the government claimed, lied on her loan applications.

The defense attorneys for all four defendants argued that for fraud to have been committed, the lenders would have had to actually rely on the misstatements and gaping holes in loan applications. Instead, the lenders turned a blind eye. In fact, in many cases the lenders encouraged buyers to fill in false information on loan applications, so that those very same lenders could approve large numbers of mortgage applications that would not pass muster if the buyer provided truthful information.

The most common type of false information courted by the lenders was overstated income. By accepting large numbers of applications based on overstated income, the lenders were able to close far more mortgage loans than honest lenders. Honest lenders cared about whether the buyer could carry for the mortgage. Dishonest lenders, like the ones in this case, did not care whether the buyers would ultimately default on the loans because they immediately packaged the loans as securities, lied about the quality of the loans, and sold them to investors for a huge profits.

The people behind fraudulent scheme were the CEOs of these lending companies. The CEOs were awarded large bonuses based on the growth of their companies—growth was based on these faulty loans. The CEOs knew that the companies would eventually fail but they also knew that they could cover their illegal behavior by blaming the borrowers and that they would never have to return a single bonus.

Koukol’s client was a real estate agent who was accused of encouraging buyers to overstate their income. Koukol was able to show in trial that, factually, his client acted as any other real estate agent would and was not guilty. Even if he had encouraged false statements on loan applications, the false statements would not have mattered to the lenders.

Koukol argued that because these lenders were engaged in this fraud, it meant that borrowers could not be guilty of fraud for putting false information in loan applications—the false information was exactly what the lenders desired.

There are hundreds of other borrowers and realtors in federal court in the Central Valley, but this is the first time this particular defense was used. The defense was so unique (and successful), the not guilty verdict made not only local but also national news.

To read more about this groundbreaking case, see articles in The Sacramento Bee, Bloomberg News, and Salon.

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