Value fraud – chickens come home to roost

In this case the court allowed a duped lender to recover its shortfall from a mortgage broker and the vendor because the value of the security was fraudulently inflated.

 

1 January 2009

Imposter Fraud is actually extremely rare. This is because there is only a small pool of people prepared to cross the line and commit fraud that can result in a prison sentence. By contrast Affordability Fraud and Value Fraud are far more common. This is because the culprits do not see their activity as being illegal, or even morally reprehensible. They reason that if it is perfectly fair to sell a property for whatever a buyer is prepared to pay for it then it must be perfectly fair to mortgage a property for whatever a lender is prepared to lend. This attitude is bolstered by the fact the police are uninterested prosecuting such cases typically telling duped lenders their gripe is a “civil dispute”.

The main reason for a lack of interest by police is that Value Fraud and Affordability Fraud are both difficult to prove beyond a reasonable doubt (unlike Imposter Fraud):

  1. Imposter Fraud is easy to prove. All the police need to do is to prove the money went to the accused and that will usually convince a jury they are looking at the culprit.
  2. Affordability Fraud is a more difficult to prove. Usually it involves an application form that exaggerates the borrower’s salary. The borrower will admit his signature is genuine but will claim he signed the form before the details were completed by the broker. The broker will admit he completed the form but will claim it merely reflected the details provided by the borrower who signed it only after reading it. Both the broker and the borrower had a motive to lie so it is difficult for a jury to be certain beyond any reasonable doubt as to where the blame lies.
  3. Value Fraud is also more difficult to prove. Usually it involves a contract with an inflated purchase price. This is used to dupe the lender into loaning 100% LVR or higher. The vendor claims he thought the price was real and he was gratified to be paid over the odds, therefore did not require the extra money on settlement – he was happy to wait for it. The borrower (if he can be found) claims to have been genuinely intending to pay the balance of the purchase price – once he got the money together. Both stories are plausible and with both parties having a motive for their plausible excuse it is difficult for a jury to be certain beyond any reasonable doubt.

However a different standard of proof – the balance of probabilities – applies to civil proceedings. When these scenarios are closely examined in civil proceedings the plausibility of the fraudster’s story will often be shredded. If any party complicit in a fraud can be shown on the balance of probabilities to have acted dishonestly then lenders will be able to recover their shortfalls from them. Such an action will usually be founded in common law deceit or breach of one of the state or federal statutes that prohibit misleading & deceptive conduct in trade and commerce. This is what happened in the value fraud case of Commonwealth Bank v Hilellis [2009] NSWDC 9, handed down on 13 February 2009.

Dramatis personæ

Vendors: George Hilellis senior and Aspasia Hilellis.
Purchasers: Micheal Elsadir and his brother Mr Meliad Farad
Purchaser’s Father: Sam Elsadir (not a party to the fraud but found by the judge to have been the prime mover behind it)
Broker: George Hilellis junior
Lender: Commonwealth Bank


The Facts

The court found the following facts to be proved:

  1. The broker introduced the Vendors to the Purchasers;
  2. The same solicitor acted for the Purchasers and Vendors;
  3. The broker witnessed the contract;
  4. The contract falsely claimed a real estate agent was the intermediary;
  5. The contract price was $550,000 however only $440,000 was paid over at settlement. All of the $440,000 was provided by the Lender and no money was contributed by the Purchasers at all. Stamp duty, legal costs and broker’s fees were all paid from the $440,000 provided by the Lender.
  6. The $440,000 received by the Vendors on settlement was significantly higher than the value of the property and the $365,000 they paid to buy the property one year earlier;
  7. The deposit cheque of $55,000 was never banked;
  8. False letters of employment provided on behalf of the Purchasers were provided by a company controlled by the Broker’s father and a by a company incorporated for the purpose with the same registered office as the broker and the solicitor who acted for both parties.
  9. The Purchasers disappeared without ever making a payment under the mortgage and could not be found for the proceedings.

The Vendors claim they settled with a $100,000 shortfall on the contract price because the Purchaser’s father assured them he was expecting $500,000 to “come from Lebanon”. This was disbelieved by the Judge.

The broker claimed the $9,680 his employer received was not brokerage but rather money owed by the Purchasers for maintenance work on another property. He argued it was a coincidence that $9,680 is the equivalent of 2% of $440,000 plus 10% GST. This was disbelieved by the Judge.

“The loan application was based on a web of deceit that was underpinned by false, deceptive and misleading documentation that ranged from misleadingly completed details on the contract for sale to false letters attesting to the employment and the income of the purchasers.”
Justice Levy

One of the reasons the Lender was duped as to the value of the property may have been because there were two recent inflated comparables sales in the same building. The Judge concluded that the Purchasers’ Father (who seems to have been the one pulling the strings) had previously pulled off two previous value frauds in the same building.

The Judge assessed damages at $121,804.54 and held the Broker and the Vendors liable to pay them plus the Lender’s costs

His Honour noted:

These are not criminal proceedings where the standard of proof is higher than the civil standard. Bearing in mind the applicable test I find that the circumstances of the Broker’s involvement suggest that it is more probable than not, he had knowledge of the scam that was perpetrated against the Lender.

Lenders who have been scammed should investigate whether those involved in the transaction have net worth sufficient to warrant recovery proceedings. The solicitor in these proceedings, from the evidence given by him and the findings of fact, would in all likelihood have been found liable for negligence had he been sued.

Scroll to Top