Fraud Identification Training - Case Studies

CASE STUDY 11

Tax assessment values that you gathered for comparison purposes indicate that tax values are way out of line (significantly lower than D. Crabaugh’s estimates). Officials at the State Appraisal Board indicated that several complaints have been filed against D. Crabaugh & Associates regarding significant noncompliance with USPAP provisions. A search of the FinCEN database also reveals that a SAR was filed by another financial institution on D. Crabaugh & Associates. You also conduct an interview with the bank’s former SVP of lending, who now works with another financial institution in the area. Your discussion with Mr. Flaggall indicates that COB Smite approached Flaggall and requested that he supply an appraisal that would support the COB’s desired loan amount of $5.2 million. Instead, Mr. Flaggall supplied the older appraisal that valued the property at $635M. According to Mr. Flagall, this situation culminated in his “resignation” from the bank. The data you compiled indicates that the properties were sold numerous times over the previous year at rapidly escalating prices. Although the real estate market is booming, the escalation in sales prices is not supported by local real estate trends. Furthermore, your review of Dun and Bradstreet reports indicates that COB Smite, SVP Gladda, and some of their family members are listed either as interests or officers of several of the corporate entities or title companies that were involved in the prior property purchases. The tracing of loans further reveals that significant amounts were deposited into the accounts of some of the corporate entities or title companies involved in prior transactions. Review of the bank’s internal records reveals that neither the COB nor the SVP reported the requisite entities as related interests for Regulation O purposes. The EIC advises the Case Manager (CM) of the findings and opines that recommendations for Removal and Prohibition Orders and SARs (on the COB and SVP) would be submitted with the Report when the extent of culpability was ascertained. The EIC also indicated that, in accordance with outstanding procedures, all information to support a formal complaint about the appraiser would be forwarded to the State Appraisal Board. The CM responded that the RO might pursue enforcement action against the appraiser, depending on the final circumstances. The EIC presents the findings to President Lamb who, of course, was not aware of the situation. Subsequently, both you and the EIC also interview the COB and SVP with the president in attendance. Confronted with the time-line data and Mr. Flaggall’s statements, the COB and SVP confess to the fraud.

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