Here in Northern California, we are all just wrapping up the mess that California Plan, Inc. made. Michael Schneider was convicted and only recently sentenced. He stole over $40M from investors, and was sentenced to 28 years. Schneider's fraud was typical in that all investors claimed Schneider had their trust and was like family to them.
Now the Cedar Funding fiasco in Monterey has surfaced. Cedar Funding is a $70M+ fund, and the principal, David Nilsen, has been accused of running a giant Ponzi scheme, loaning money to insiders, (ie, himself to purchase his $4.2M posh home). The DRE has suspended his license. The Court has appointed a receiver to manage the fund and the DA is investigating. Again, investors are saying that they trusted Nilsen. The Montery Herald article says it all:
Nilsen was a member of her church, she said, and he instilled her with a sense of trust.
"I thought, 'This man is a God-fearing individual who would take good care of my money,'" said Abraham-North. "But he did not — he left me penniless."
The schemes fraudsters like Schneider use are not particularly creative. Schneider was simply cutting and pasting investor names onto a Deed of Trust to make it look like it had been recorded for the investor. In reality, Schneider photocopied investor names and glued them over the actual secured parties' name. In this manner, he was able to make it look like the investor was secured when in fact, the Deed of Trust with their name was forged.
Additionally Schneider would not tell investors when their loans had paid off. Instead, investors received their monthly interest payments for years, never realizing the borrower had re-financed and paid off their loan years ago. Often, Schneider would tell investors after a payoff to leave their money in his trust account and he would "roll it over" into the next loan to allow them to continue to earn interest on their money.
How does an investor protect his or herself from this?
Regardless of how trustworthy and conscientious a broker is, the investor must safeguard their financial future and take charge of their loan portfolio. If the investors had simply asked Schneider for the originals of their Deed of Trust, half their problem would have been eliminated.
Additionally, a random spot check/audit of your Deed of Trust investing portfolio is never a bad idea. You can search county records to see if your Deed of Trust has been reconveyed. If it has, but you never received the payoff funds–you've got a problem.
Lastly, complacency puts the investor at risk. If your loan pays off–take the money. Wait for your broker to bring you the next investment opportunity and re-invest your money. Losing out on a month of interest can spare the investor the heartache of losing the whole enchilada.
For investors in mortgage pools or collateralized mortgage obligations–you are entitled to monthly accountings. If you are uncomfortable about not knowing the percentage loans held by insiders, hire an independent auditor to help you ask the right questions and get the right documentation from the fund manager.