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MCA Financial guilty plea reveals elaborate real estate fraud

Financial Crime News - June 2004

Detroit, Michigan - MCA Financial , a mortgage investment company based in the Detroit, Michigan area, was the entity at the heart of a web of companies which engaged in an extravagant series of sham transactions among themselves to pull off an accounting fraud that cost its investors and lenders some $250 million, alleged federal prosecutors in a series of indictments against MCA officials.

There were several parts to this scheme. MCA Financial and its affiliates bought and originated subprime mortgage loans. They also entered into and bought land sale contracts. They placed these subprime loans and land contracts into ‘pools’ and then sold interests in the pools to public investors in the form of so-called “pass through certificates.” MCA would collect monthly payments on these loans and contracts and pass through a portion of the collections to the investors. This process of thus turning loans and contracts into an investment product—a security where the investor’s interest is backed by the loans or contracts—is called securitization.

According to the SEC’s complaint against MCA Financial’s officials, the company sold about $71 million of these securitized pool interests between 1994 and 1999, when MCA was closed down and placed into a conservatorship by the State of Michigan. The SEC case alleged that investors lost about $49 million on these securitized pools as a result of MCA’s fraudulent representations about what these pool assets were.

According to the federal criminal complaint against MCA, the securitized pools contained numerous sham mortgages which were really the result of contrived real estate sales between MCA-controlled companies. MCA and its affiliates were accused of manipulating the prices on these sales and recording fictitious gains on the sales to inflate company income in financial statements. The case alleged that MCA removed some mortgages from the pools without telling investors and sold these to banks to get cash. Some mortgages pledged to pool investors were also reportedly used again as collateral for credit from lenders. The indictment describes a type of shell game with real mortgage assets, supported by a scheme to replace them with phony ones—without telling the pool investors or the lenders. To accomplish this, MCA officials created separate companies that they controlled to keep part of the trail of these deals off MCA’s books.

According to the federal criminal case, MCA’s lenders incurred over $100 million of losses on loans to MCA Financial and its affiliates. Several MCA officials were charged in the SEC’s civil case and/or the federal criminal case in Michigan. They included:

Patrick D. Quinlan Sr, MCA’s former CEO,
Former MCA President Lee P. Wells
Keith D. Pietila , MCA’s former CFO,
Former MCA Controller Alexander J Ajemian 
Cheryl A. Swain,
Kevin C. Lasky,
John P. O’Leary , MCA’s former Vice President for Corporate Finance

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