Mortgage broker Alma Preciado had just pleaded guilty to embezzlement and fraud when the Montgomery County judge hearing her case remarked, "She's either going to pay the money back or she's going to jail for a very long time."
Roger Vales, 62, a retired federal worker sitting in the courtroom gallery, had waited four years for this moment. He and his wife, Lourdes, lost $350,000 of their retirement savings through an investment deal brokered by Preciado in 2005.
"It destroyed us," Mr. Vales said.
With mortgage fraud rising sharply across the U.S., the couple's experience offers a cautionary tale about the pitfalls of a deal too good to pass up. "There are probably a thousand people like them in every city," said Richard Hagar, a mortgage-fraud expert.
The investment at first seemed safe, Mr. Vales said. As Mrs. Vales got ready to leave her job at the Organization of American States, where she had worked for more than 30 years, he said Preciado pitched a way to invest some his wife's big retirement payout.
Under the deal, the Valeses loaned $350,000 to a borrower Preciado knew who lived in Bethesda. Prosecutors said the loan was supposed to be secured by real estate and repaid within two years, but neither happened.
The money from the loan landed in the bank account of a D.C.-based company called Pidegro LLC, where Preciado was a corporate officer. But the company spent the money then shut down as a big development deal it was working on collapsed in Mexico, according to court records and interviews.
"It was a theft by deception," Montgomery County Assistant State's Attorney Robert Hill said at a recent hearing. "He has never gotten back a dime."
For Preciado, who disputes misleading Mr. Vales, the prospect of jail must have seemed unthinkable a few years ago. She was a successful business owner with her own local radio show and a prominent figure in Maryland Republican politics.
Two poster-sized pictures of Preciado next to former President George W. Bush and first lady Laura Bush adorned the wall in her office, Mr. Hill said. She even was a delegate for Mr. Bush at the Republican National Convention in Philadelphia in 2000.
But Preciado's mortgage business is closed, she filed for bankruptcy last year and now she finds herself trying to avoid prison. Still, she says that Mr. Vales knew what he was getting into all along.
She also says she was open about her involvement in Pidegro LLC and that she didn't spend the money, with others controlling the company's bank account. And Preciado's lawyer, Jim Shalleck, said the only reason she pleaded guilty last month is because she admitted mishandling about $6,700 in the loan transaction.
Mr. Shalleck said the loan deal was "eyes wide open for everybody" and that Mr. Vales "knew it wasn't secured." But Mr. Vales said he never would have given so much money to a person he never met without collateral.
Circuit Judge Michael Algeo, who is overseeing Preciado's criminal case, said he found Preciado's explanation hard to believe at a recent restitution hearing. He called her "a flat-out liar" and "our own little Montgomery County Bernie Madoff."
With her sentencing pending next month and prosecutors calling for Preciado to pay $350,000 in restitution, the judge also warned, "We have a spot for her if she can't."
Sharp rise in cases
The Valeses aren't alone.
The FBI recently warned of an "exponential rise" in the number of mortgage-fraud cases nationwide. Deputy FBI Director John Pistole told Congress more cases are surfacing as an "unexpected consequence" of the current financial crisis.
"These fraud schemes are not new, but they are coming to light as a result of market deterioration," he said.
Although there is no specific statute that defines mortgage fraud, each mortgage fraud scheme contains some type of material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.
The FBI has opened 965 mortgage-fraud cases in fiscal 2009, compared to 136 in all of 2004. And suspicious activity reports of mortgage fraud rose 36 percent in 2008 to 63,173 reports, figures show.
Some areas of the country are harder hit than others. One FBI ranking put Maryland among the top 10 states in the country for mortgage fraud for 2008, with Rhode Island, Florida and Illinois as the top three.
A statewide task force of state, local and federal agencies formed in Maryland earlier this year. In one of the biggest mortgage-fraud cases locally, Joy Jackson, 41, president of the Metropolitan Money Store, pleaded guilty to conspiracy in a $16.8 million fraud scheme.
The company promised to help homeowners facing foreclosure to keep their homes, but it "was in the business of ripping off homeowners," said U.S. Attorney for Maryland Rod Rosenstein. Investigators said proceeds from the scam helped pay for Jackson's $800,000 wedding.
But the Vales case isn't like many of the equity-skimming or property-flipping scams in the news these days, said Curt Novy, president of Corporate Mortgage Advisors, who has testified as an expert witness in fraud cases.
"It's just not on the radar," he said.
A more common sort of fraud occurs when individuals, often retirees, are convinced to provide a loan with real estate as collateral, Mr. Hagar said.
Only later, he said, these investors learn that somebody else already had secured a higher-priority lien on the property, meaning they won't get paid first if the loan defaults, if they get paid at all.
The Vales case was different, however, because there never was a lien.
'Don't worry about it'
There were quiet misgivings about the investment from the start, but Mr. Vales said Preciado assured him that a lien would be placed on the borrower's property to make sure the couple's money was safe.
He said he felt better about the deal the more he learned about it.
He said Preciado made the $350,000 investment more and more attractive as time went on, steadily increasing the interest rate from 12 percent to 15 percent and finally to 17 percent — an account she denies.
He also said a loan application, appraisal, proposed HUD-1 settlement form and other documents seemed to be in order, though he did ask why the husband of the borrower hadn't signed off yet.
Mr. Vales said that Preciado told him the title company would handle "everything," quoting her as saying, "Don't worry about it. You worry too much. That's bad for your health."
At Preciado's request, Mr. Vales said he made the check, dated April 5, 2005, payable to Dorita Down and that he wrote "bridge loan" on the check, an account Preciado also disputes.
"I was totally depending on her because for the 10 years or eight-year period that I knew Alma, she had always instructed us how to do things," he said. "And up to that date, we were happy. From that day on, everything collapsed."
But after the couple returned home to Florida, where they had retired, Mr. Vales said his phone calls to Preciado went unanswered and documents he was expecting never arrived in the mail.
Within weeks, the couple drove back to Maryland to check county land records for proof of a lien securing their loan, but they found nothing.
What's more, an official at the title company purportedly handling the transaction said a settlement never took place, Mr. Vales said.
"When I called [Preciado], she's sort of at a loss, her voice, for a minute, you know," he said later. "And I told my wife, 'Something went wrong here.'"
The discovery soon gave way to years of still-unresolved lawsuits, counterlawsuits and depositions. Filing charges against Preciado, the Valeses also became the target of a defamation suit by Preciado, who also sued Mrs. Down and another associate in Pidegro, alleging fraud in connection with the Vales loan.
Amid all the lawsuits, the Valeses made frequent drives up and down Interstate 95 from Florida to Maryland and back, talking to any law enforcement agency that would listen — the Montgomery County police and the State's Attorney's Office, the FBI, the Federal Trade Commission, Rep. Chris Van Hollen's office, the Secret Service and the U.S. Postal Service, among others.
"We were fighting the agencies, we were begging them to listen," Mrs. Vales said. "Mentally, it's drained us. It's been a nightmare."
Montgomery County prosecutors eventually took the case. But even with criminal charges filed in the case, Mr. Vales isn't celebrating.
The couple long ago realized that, for now, no matter who they sue, no matter who ends up in jail, the money is gone.
Still, four years later, they're trying to find out just where it went.
The money trail
The loan check landed in the bank account of Pidegro LLC, a small D.C.-based company consisting of Preciado, Mrs. Down and a D.C. businessman named William Camp Jr., according to court records.
At the time, the company was hoping to build inexpensive prefabricated homes in Mexico with a special kind of wind-resistant paneling, Mr. Camp said in an interview.
By spring 2005, the company needed cash. A development deal that Pidegro had been working on in Mineral Wells, Texas, fell apart, when a $17,500 "good faith" check from Pidegro to the city bounced, according to the town's former mayor, Clarence Holliman.
"We said thanks but no thanks after that," Mr. Holliman said.
Undeterred, Mr. Camp said other plans were under way in the state of Hidalgo in central Mexico, where Pidegro was hoping to build a factory.
Money from the Valeses' loan provided Pidegro with much-needed cash, but Mr. Camp said he wasn't involved in the Vales loan deal.
For her part, Mrs. Down said in a separate interview that she never agreed to have her husband's property used as collateral. But she declined to discuss specific questions about the transaction, saying she's since suffered a stroke.
The Maryland Department of Labor Licensing and Regulation reviewed the activities of both Mrs. Down and Mr. Camp in 2005, sending the case to Montgomery County authorities for further investigation, records show. Neither was charged with any wrongdoing.
The money from the loan didn't last long.
Mr. Camp processed tens of thousands of dollars in transfers from Pidegro to his D.C.-based business, Universal Business Systems, according to testimony and court records filed by Mr. Vales' lawyer, Marvin Liss.
Pidegro also paid nearly $20,000 to Metropolitan Financial Services, Preciado's business, and issued separate $12,500 checks to Mrs. Down and to Mr. Camp for "reimbursement of expenses," records show. In addition, money was spent in Mexico for employee salaries, office furniture and a Suburban truck.
Mr. Liss called the payments "fraudulent transfers" in court filings, arguing that Mr. Camp and his business benefited from his client's loan proceeds. But Mr. Camp defended the payments as legitimate business expenses.
Preciado wasn't a signatory on Pidegro's bank account with Mr. Camp and Mrs. Down, according to documents and interviews. In court records, Mr. Liss said Mr. Camp had "primary" control of the Pidegro account.
As the money disappeared, so too did the company's prospects.
Pidegro LLC shut down early in 2006, less than three years after its founding. Meanwhile, Mr. Camp and his business encountered other legal problems.
Last year, the Justice Department sued Mr. Camp and Universal Business along with a Texas accountant, saying they told tax clients — including at least seven former or current NFL players — that they could amend old tax returns to get big refunds from investments in a "sham" gold-mining company.
Mr. Camp disputed the accusations, but said he didn't have the money to fight the federal lawsuit and was planning to retire anyway.
A different account
Despite her guilty plea, Preciado disputes just about every aspect of the government's case against her. In a recent restitution hearing, she denied ever misleading the Valeses about the security of their loan.
She said Mr. Vales had done business with her in the past, including deals involving smaller unsecured loan transactions. "There is no history of deceit, there is a history of success" of past business between Mr. Vales and Preciado, said her defense lawyer, Mr. Shalleck.
In addition, Preciado said she told Mr. Vales about her involvement with Pidegro months before the loan. And while prosecutors say Preciado was "very persistent" in pitching the loan deal to the couple, she said it was Mr. Vales who first approached her.
"Mr. Vales walked into my office and said, 'You haven't given me any loans,'" she testified, adding that Mr. Vales pushed for a higher interest rate.
Preciado also said she, too, was surprised when she found out Mrs. Down's name wasn't on the title of the Bethesda property. But she said that she told Mr. Vales, and he was willing to lend the $350,000 as a "personal loan."
Finally, Mr. Shalleck said, Pidegro would have paid back Mr. Vales. He said the company even sent Mr. Vales a few checks. But the defense attorney said Pidegro collapsed once its officers became entangled in lawsuits over the loan deal.
"Mr. Vales pulled the plug," he said.
Yet after Mr. Shalleck and Preciado recounted her side of the story at a recent restitution hearing, Judge Algeo, who will sentence Preciado next month, wasn't convinced.
"I think your client is a flat-out liar, and I send liars to jail who do this kind of thing for a long time," he told Mr. Shalleck. "I do not believe a word she said."
"She scammed them," the judge said, as the Valeses listened in the courtroom gallery. "She tried to scam me. It didn't work."