McGrath Pleads Guilty to Fraud and Money Laundering, Faces 20-Year Term
Under his plea agreement, McGrath faces sentencing of up to 20 years in a federal prison, which he is scheduled to enter on Oct. 1. He was released on a $1 million bond and ordered to electronically monitored home confinement until sentencing.
According to an FBI release, McGrath admitted in court that he "conspired with several others" over a five-year period to fraudulently sell credit union loans, using the proceeds to address cash flow problems created by losses on investments in mortgage-backed securities. McGrath spent some of the stolen funds on one million shares of Fannie Mae common stock, millions of shares of common and preferred stock of a New Orleans-based company and ownership of a Hoboken, N.J., property. McGrath conceded that approximately $13 million in funds that the government has frozen or seized to date were involved in, derived from or traceable to his offenses.
McGrath first pilfered proceeds from credit union mortgages that he was authorized to sell to Fannie Mae. However, as U.S. Mortgage's financial condition continued to deteriorate, McGrath admitted to selling hundreds of mortgage loans to Fannie Mae without the knowledge and consent of the credit unions that owned the loans.
"This was truly a massive fraud, a giant shell game by McGrath," said Acting U.S. Attorney Ralph J. Marra Jr. "McGrath deftly and fraudulently moved these mortgage assets around and sold them while the institutional owners had no idea they no longer held the assets. The goal was to prop up his own company, which instead sunk deeper into trouble as his scheme grew larger and ultimately collapsed."
To conceal the scheme, McGrath directed his servicing manager to generate reports for victim credit unions falsely stating that loans he sold to Fannie Mae were still in their portfolios.
He also directed his chief financial officer to pay off or make monthly payments to the credit unions for the fraudulently sold loans and falsify other documents.
The Dover, N.J.-based Picatinny Federal Credit Union lost $15 million in McGrath's scheme. The $263 million credit union is suing Fannie Mae to either recover its fraudulently sold mortgages or receive compensation for an authorized sale, said attorney James Forte.
McGrath's guilty plea eliminates Fannie Mae's argument that he was authorized to sell Picatinny's mortgages, Forte said. The government-sponsored enterprise also argued that because U.S. Mortgage had a previous agreement with Picatinny to sell the credit union's mortgages to Fannie Mae, McGrath was still authorized to transfer loan ownership. Forte said that previous agreement was well-defined and clearly did not apply to future deals.
"Their position is Picatinny should have notified Fannie Mae that McGrath was not authorized to sell their loans," he said, adding, "We intend to show that position does not have merit."
Fannie Mae has agreed to provide documents to Picatinny that support its claim that the mortgages belong to the government-sponsored enterprise, but the attorney said he has not yet received those documents. A scheduled July 21 court conference will determine if Fannie Mae has handed over the appropriate documentation to Picatinny.