Illegal Acts by Employees May Stain Your Business as Well

photo - small bankConfronted with evidence of fraud by one of its employees, a small New York City bank did the right thing. They reported it to state banking regulators and provided prosecutors with more than 900,000 documents. Bank management later learned they were the ones being investigated and later charged with184 criminal counts. The story of Abacus Bank, as told by the New York Times, is a warning to any business where fraud is uncovered.

Abacus Bank’s six branches and 150 employees largely serve immigrant communities in New York, New Jersey and Philadelphia. Its founder Thomas Sung, is an immigrant himself. In 2009 his daughter Vera Sung, a bank director, reviewed documents at a mortgage closing and saw that extra checks were cut to pay the borrower.

She asked the loan officer, Ken Yu, about them and witnessed a heated conversation between Yu and the borrower. After talking with the two, Sung became suspicious and cancelled the mortgage. Yu was later fired and Abacus investigated all the loans Yu was involved in and tried to verify borrower information. After the investigation bank regulators were contacted.

The day of the closing started the bank’s five and half year trip through the criminal justice system. “We thought (prosecutors) were going to help us resolve a crime against the bank,” Vera Sung was quoted as saying. “We did not have an attorney early on. We cooperated with them, not realizing we were the target.”

A grand jury indicted Abacus, claiming it participated in “a systematic and pervasive mortgage fraud scheme” where hundreds of millions of dollars of fraudulent loans were sold to Fannie Mae, the national mortgage security packager. The bank and former employees were indicted on 184 counts, 80 of which were actually brought to trial.

Prosecutors alleged 31 loans worth $80,000 to $700,000 issued from May 2005 through February 2010 involved criminal conspiracy, grand larceny and falsifying business records. Eight Abacus loan department employees plead guilty and cooperated with the district attorney’s investigation. Employees who decided not to plead guilty were handcuffed together, led down a hallway in Manhattan’s Criminal Courts Building with photographers there documenting the proceedings.

A trial that lasted 19 weeks ended in June. It resulted in the bank and two top officials being exonerated of all charges. Several issues probably were too much for the prosecution to overcome so the jury decided in favor of the bank.

  • From 2005 to 2009, Fannie Mae acquired 3,104 loans from the bank. Only nine of them defaulted.
  • Fannie Mae, which bought the 31 purportedly fraudulent loans, lost no money on them. By May 2015 it and the investors who bought securities containing the loans had earned $2.5 million in interest. Nineteen of the 31 loans have been paid off and the rest are current. Abacus made only $123,000 in service fees.
  • In 2009 sixteen of 4,390 Abacus mortgages were seriously delinquent (more than 90 days late) or a third of one percent of the mortgages. Nationally the rate of seriously delinquent prime loans in 2009 was 6.26 percent.
  • The prosecution’s star witness was Yu, who struck a plea agreement with prosecutors. Jury members appeared to be unwilling to credit the testimony of a man who was fired for dishonesty.

Though the criminal prosecution cloud over the bank is gone (though charges are still pending against seven former employees) Abacus paid a heavy price. Its defense cost is about $10 million dollars and the bank put $2 million into escrow to prevent the prosecution from freezing the bank’s assets. Fannie Mae stopped buying its loans.

As this case shows a business that finds that fraud has been committed by one of its employees needs to protect itself against criminal charges and possible civil lawsuits by those affected by the fraud. If fraud is discovered in your business, contact our office so we can discuss how it should be investigated and how you should protected your company’s interests. Don’t let your business be the next Abacus Bank.