New Castle Man Pleads Guilty In Affordable Housing Mortgage Fraud Scheme
PITTSBURGH, Pa. ‑ A resident of New Castle, Pa., pleaded guilty in federal court to charges of bank fraud, mail fraud, and money laundering conspiracy, United States Attorney David J. Hickton announced today.
Nicholas DeRosa, 65, pleaded guilty to three counts before Senior United States District Judge Gustave Diamond.
In connection with the guilty plea and other pleadings, the court was advised that the Lawrence County Housing Authority, under the direction of then Lawrence County Treasurer Gary Felasco, either lent or made a grant of $200,000 to Affordable Housing of Lawrence County, a then newly formed not‑for‑profit entity. Affordable Housing's purported purpose was to purchase homes, fix them up, and then rent or sell them to the elderly or disabled.
In 2004, Affordable Housing hired Robert Ratkovich, the president of New Castle City Council and a maintenance employee for the Lawrence County Housing Authority, as a consultant at $45 an hour. Ratkovich, among other things, was to search for suitable homes for Affordable Housing to purchase as part of its purported mission.
After Affordable Housing paid Ratkovich approximately $60,000 in consulting fees, Ratkovich recommended that Affordable Housing purchase seven properties. Four of those properties were owned individually or through a partnership by Mr. DeRosa. Two others were owned by his cousin, and the seventh was owned by one of his good friends. Ratkovich recommended these homes to Affordable Housing despite the availability of homes in better condition and for less money.
Affordable Housing lacked sufficient funds to purchase these homes, and therefore, through Ratkovich, it applied for a loan through First Commonwealth Bank, a federally insured financial institution. Castle Realty Appraisal Services, Inc. was hired by the bank to prepare appraisals on the properties. Anthony J. Staph, Jr., a Vice‑President of Castle Realty Appraisal Services, submitted fraudulent appraisals of the properties that overstated the values of most of the homes. At trial, the government would have presented witness testimony indicating that DeRosa, through Ratkovich, requested that the Bank hire Castle Realty. In addition, the government would have presented evidence that DeRosa made assurances to Ratkovich and Felasco that the appraisals would support the values reflected in the sales agreements and that he would take care of the appraisals.
After DeRosa received his money at the closing in December 2005, most of the Board from Affordable Housing resigned within days. Within a couple of months, Affordable Housing defaulted on the loan and Affordable Housing sold all but one of the properties through an auction without reserve. First Commonwealth received pennies on the dollar when it auctioned off the properties.
At trial, the government would have presented evidence that Affordable Housing was used as a mechanism to get money to Felasco, Ratkovich, DeRosa, and a fourth co‑conspirator. Some of the buyers of the properties, other than DeRosa himself, were required, as part of the deal for getting rid of their properties, to pay DeRosa. DeRosa was then, according to the agreement between the co‑conspirators, to distribute that money to them. None of the contemplated payments to DeRosa, however, were disclosed on the settlement statements, as required, nor were they disclosed in the Sales Agreements that were provided to the Bank. The Board of Affordable Housing was also not told about these payments. Thus, the Bank and Affordable Housing were led to believe falsely that the sales prices were actually higher than the true sales prices would have been without the payments to DeRosa.
Originally, there were to be fourteen properties that were to be purchased by Affordable Housing, but First Commonwealth would only approve a loan that would allow them to purchase seven. At trial, the government would have presented evidence that DeRosa decided which properties to purchase, and he decided how much Affordable Housing was going to pay for those houses.
The appraisals prepared by Staph contain numerous misrepresentations related to, among other things, the conditions of the properties, improvements to the properties, and the neighborhood. The appraisal for one of the properties indicates that the property is occupied, when, in fact, the property had not been occupied for years. Staph also ignored more comparable properties in order to support his fraudulently elevated values of the properties.
One of the properties was owned directly by DeRosa and his partner. The appraisal for this property was dated November 11, 2005. This property was condemned by the City of New Castle on November 21, 2005, just ten days later. According to the appraisal, however, there were no problems with the condition of this property. Staph rated the condition of this property as average and failed to note a number of severe problems with the property, including a severe problem with its foundation.
At trial the government would have presented evidence the appraisals omitted mention of accumulated trash in several of the properties. After the majority of the Board resigned, one of the few remaining officers inspected the properties and noted a huge accumulation of trash in some of the properties. The remaining officer used some of the little remaining funds from Affordable Housing to hire a company to dispose of the trash. Dumpster loads of trash were removed, but there is no mention of this issue in the appraisals despite representations that Staph had inspected the interiors of the properties.
At trial, the government would have presented the testimony of an expert appraiser and who would have opined that the appraisals prepared by Staph included a myriad of misrepresentations and vastly overstated the true values of those properties. The government would have also presented records from New Castle Code Enforcement that describe the properties in a far more negative light than the Staph representations of the conditions of the properties to the Bank.
The government at trial would have presented testimony that the Bank did not just rely, however, on the fraudulent appraisals. It also relied on the Sales Agreements that overstated the true sales prices of the properties in that they did not include the payments to DeRosa, the settlement statements that did not disclose the payments to DeRosa, and the projected financial statements for rental of the properties. The projected financial statements were based on occupancy rates that were not realistic and that the government would have offered testimony that these financial statements were known by the co‑conspirators to be unrealistic. The appraisals, however, also supported that false assumptions because they overstated the occupancy rates of the properties.
The government would also have offered testimony at trial that the projected financial statements were also fraudulent because they contained representations related to the amount of money required to repair and maintain the properties. That amount was understated because serious and expensive repairs were needed to several of these properties to make them habitable. The appraisals have a section in which the "repairs needed" are listed. The appraisals listed that no repairs were needed, which stood in stark contrast to reality.
The government would have presented evidence of the facts described above in connection with Count One of the Superseding Indictment, which charges DeRosa with Bank Fraud.
Many of these facts are also relevant to the Mail Fraud charge in Count Two of the Superseding Indictment. Basically that Count alleges that DeRosa participated in a scheme to defraud Affordable Housing. The facts already outlined here detail one aspect of the fraud of Affordable Housing, as it contributed approximately $90,000 toward the purchase of those seven properties.
In addition, with regard to the Mail Fraud scheme, the government would have presented evidence related to Ratkovich's consulting contract with Affordable Housing in which he was to be paid $45 an hour. Basically, Ratkovich received approximately $60,000 pursuant to this consulting agreement, but did not work anywhere close to the number of hours that would have been required to earn $60,000. The government would have presented evidence that a portion of the $60,000 was paid with DeRosa's knowledge, to other members of the scheme. For example, some of the money was used to pay attorneys' fees for co‑conspirators.
As part of his consulting activities, Ratkovich was tasked with locating properties for Affordable Housing to purchase. He, of course, did not do a real search for appropriate properties, but, at DeRosa's insistence, recommended that Affordable Housing purchase the seven properties referred to above. The government would have presented evidence at trial that the sales prices agreed to were not the product of arms length negotiations, but that Ratkovich simply accepted the sales prices DeRosa demanded. In addition, as discussed above, some of the sellers agreed to pay DeRosa.
Despite those facts, Ratkovich presented his recommendations to the Board of Directors of Affordable Housing as if these properties were the product of a true search, and that the sales prices were negotiated at arms length. He failed to disclose to them the true situation with these properties. Based on Ratkovich's recommendation, the Board approved the purchase of the seven properties, leading to the financial downfall of Affordable Housing.
The scheme to defraud Affordable Housing also involved receiving kick backs from a contractor in connection with rehabilitation work done by the contractor for work on a Affordable Housing property located on Cunningham Avenue, and stealing coins that Affordable Housing collected from laundry machines located in Lawrence County Housing Authority properties.
Specifically with regard to Count Two, the government would have presented evidence that in furtherance of the scheme, the closing agent sent, via federal express, a Power of Attorney document to DeRosa's partner in Florida. That Power of Attorney document was then returned and used to close the loan at issue.
As far as the Money Laundering Conspiracy charge, which is Count Four of the Superseding Indictment, the participants in the conspiracy, including DeRosa, agreed to funnel and did funnel some of the money from the above‑described schemes, through a series of transactions, to Felasco's attorney. Felasco was, at that time, facing state corruption charges. In summary, the co‑conspirators arranged for cash from the transactions to be deposited into the account of an individual who ran a business that received cash receipts. That individual then forwarded money to Felasco's attorney. The idea of depositing the money into the account of this individual was to disguise the illegal nature of the funds and its connection to them, and try to make it look like legitimate money. The financial transactions involved financial institutions involved in interstate commerce and which are federally insured financial institutions.
Ratkovich pleaded guilty to his role in the conspiracies, and is awaiting sentencing. Felasco pled guilty to a tax charge based his failure to report as income on his tax returns the money paid to his attorney on his behalf. He was sentenced three years probation, including six months of home detention. On Oct. 27, 2010 Castle Realty Appraisal Services pleaded guilty to bank fraud based on its submission, through Staph, of the fraudulent appraisals. Sentencing for the company is scheduled for March1, 2011.
Judge Diamond scheduled sentencing for March 1, 2011. The law provides for a total sentence of 70 years in prison, a fine of $1,750,000, or both. Under the Federal Sentencing Guidelines, the actual sentence imposed is based upon the seriousness of the offenses and the criminal history, if any, of the defendant.
Assistant United States Attorneys Brendan T. Conway and James T. Kitchen are prosecuting this case on behalf of the government.
The Mortgage Fraud Task Force conducted the investigation that led to the prosecution of DeRosa. The Mortgage Fraud Task Force is comprised of investigators from federal, state and local law enforcement agencies and others involved in the mortgage industry. Federal law enforcement agencies participating in the Mortgage Task Force include the Federal Bureau of Investigation; the Internal Revenue Service, Criminal Investigation; the United States Department of Housing and Urban Development, Office of Inspector General; the United States Postal Inspection Service; and the United States Secret Service. Other Mortgage Fraud Task Force members include the Allegheny County Sheriff's Office; the Pennsylvania Attorney General's Office, Bureau of Consumer Protection; the Pennsylvania Department of Banking; the Pennsylvania Department of State, Bureau of Enforcement and Investigation; and the United States Trustee's Office.
Mortgage industry members with knowledge of fraudulent activity are encouraged to call the Mortgage Fraud Task Force at (412) 894‑7550. Consumers are encouraged to report suspected mortgage fraud by calling the Pennsylvania Attorney General's Consumer Protection Hotline at (800) 441‑2555.
This prosecution is part of President Barack Obama's Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.