The courtroom of U.S. District Judge Oliver Wanger in Fresno is most famously associated with California's never-ending legal battles over water. But on this day in late September, Wanger's courtroom is filled with law enforcement officials, representatives of mortgage and real estate companies, and community members assembled to discuss a Central Valley crime wave so widespread, it has helped bring about the collapse of the state's housing market. The host of the summit, U.S. Attorney Benjamin B. Wagner of California's Eastern District, refers to the Central Valley as "ground zero" for real estate fraud. In fact, Wagner notes, five of its metropolitan areas - Bakersfield, Fresno, Modesto, Stockton, and Vallejo/Fairfield-fill half of the FBI's top-ten list of U.S. metro areas at highest risk of mortgage-related crimes. "Many communities in this district are dotted with foreclosed homes, which depress property values and serve as magnets for vandalism and petty crime," says Wagner, who is co-chairman of the national Mortgage Fraud Working Group. Before the bust, the Central Valley was the heart of California's housing boom. From 2000 to 2005, the number of residential building permits in the region increased by 68 percent. Population in the Valley's 19 counties increased by 15.2 percent from 2000 to 2008 - faster than any other part of the state. And money flowed faster than water in what Wagner calls "the Wild West" of the real estate industry. The Fresno summit is the fourth in a series of public forums, part of President Obama's Financial Fraud Enforcement Task Force launched just a year ago. In addition to Wagner, the panelists include officials from U.S. Attorney General Eric Holder's office, the FBI, and the Housing and Urban Development's Office of the Inspector General (OIG). Speakers during the day include folks from the Federal Trade Commission, California's Department of Real Estate, and the Federal Reserve Bank of San Francisco. HUD-certified mortgage counselors pack an entire section of the courtroom, commiserating throughout the proceedings about the kinds of schemes against lenders and buyers they are seeing on the ground. Sprinkled through the audience are local homeowners who believe they've been victimized. Some clutch tattered manila envelopes stuffed with loan documents, waiting nervously for a chance to tell their tales. "Bankers are the new gangsters," says Gene Johnson, a 73-year-old Fresno man who has filed suit to stop what he considers an illegal foreclosure of his home. "It's been three years I've been fighting," he tells the audience. "Fifteen different companies say they own my note. I've been screwed not only by the banks but by the government, because they aren't doing anything about it!" When another resident in the back stands to report that her bank account has been frozen as she attempts to prevent a foreclosure, the mortgage counselors burst into supportive applause. During a break, investigators from HUD's OIG interview the woman to get more details. But for all the anger expressed at the summit, federal prosecutions rarely focus on single-victim mortgage-fraud scams. With limited resources and an exploding number of mortgage-related crimes, the U.S. Attorney's office takes aim at higher-profile cases with a greater potential for deterrent effect. Such complex cases can take years to investigate and prosecute. Assistant U.S. Attorney (AUSA) Stanley A. Boone, chief of the Eastern District's white-collar crime unit in Fresno, says, "There are so many cases right now, and it often takes a tremendous amount of time and paperwork to do just one." Making matters worse, Wagner says, the con artists learn new tactics on the job. "Fraud schemes look different when the market is on its way up, and when it's on its way down," he says. "There are different sets of victims." The possibilities seem limitless - inflated appraisals, faked loan applications, fraudulent loan modification schemes, bogus short sales, and rigged public auctions of foreclosed properties. The common thread is greed. At a press conference after the summit, Wagner lists a rogues gallery of recent defendants: "Real estate agents who inflated property prices to cover undisclosed payments made to themselves; buyers and sellers of homes who lied to extract equity from homes; real estate investors who lied to finance property flipping schemes; home builders who lied and used straw buyers to get properties off their books; organized crime associates who used fraudulently obtained financing to buy houses to use as indoor marijuana farms; and even a policeman who is charged with submitting false information to obtain two different mortgage loans." Wagner, 50, served 18 years in the Sacramento office as an AUSA before President Obama appointed him to the top job in November 2009. Ironically, he'd begun his career on Wall Street, doing corporate finance work at New York's Cahill Gordon & Reindel. "There's not a day that goes by since I came to the U.S. Attorney's Office that I've regretted the decision," Wagner says in an interview. "We're here to do the right thing, so there's a moral clarity to this job that's rare in the legal profession." Yet when it comes to mortgage fraud, U.S. Attorney's offices must navigate muddy terrain. The most recent example involves the question of when a lender can lawfully foreclose on a property. After revelations that lenders in some states transferred ownership of the underlying mortgage documents electronically and without proper notarization, major banks declared temporary moratoriums on judicial foreclosures across the nation. If affidavits that a notary had reviewed documents and authenticated signatures prove false, hundreds of thousands of at-risk homeowners may have claims for injunctive relief. And prosecutors may have to distinguish potentially criminal acts from administrative shortcuts. Borderline practices include hiring undertrained employees to fast-track foreclosures, and securitizing massive numbers of risky loans and then unloading on them on investors. Faced with this enormous task, Wagner appears both resolute and resigned. "I've never viewed my role as only being society's avenger, out there to sweep the riff-raff off the streets," he says. But he adds, "Standards got so loose and people talked so openly about cutting corners that I think the sort of normal inhibitions to fraud began to erode." Criminal prosecution, Wagner says, "is typically a lagging indicator, because reports filter through to law enforcement very late in the game." He defines his office's goals in modest terms. "Fraud flourishes when people think they can get away with it," he says. "If we can identify some of the bad actors and take them out of the system, it can help restore confidence a little bit in the real estate industry." Crimes related to the Central Valley's housing boom were a priority in the Eastern District even before Wagner's appointment as U.S. Attorney. In 2007 his predecessor, McGregor Scott, now a partner at the Sacramento office of Orrick, Herrington & Sutcliffe formed one of the first mortgage fraud task forces in the nation. Working with local and state law enforcement, Scott says, was an "all hands on deck" effort to combat what he regarded as a white-collar crime spree. "On the front end, we had mortgage origination fraud, either by the borrower or the mortgage broker," Scott recounts. "Then we got foreclosure fraud, where borrowers would get cold calls from people who offered to help save their houses. The latest were builder buyout schemes, where developers and builders would use straw buyers to get houses off their books." Wagner, who had been Scott's chief of special prosecutions, says a decade of explosive population growth in the Central Valley provided ideal conditions for mortgage fraud. "The builders created a huge inventory of houses that they had to get rid of," he says. "That produced a feeding frenzy by mortgage brokers and lenders to get loans out. It meant a lot of money was being made, and I think everybody wanted a piece of the action." As long as the lenders got their money and the borrowers saw the value of their homes continue to rise, there were few complaints. "When the market is going up, everybody is making money and nobody cares," Scott says. "But when the market turns, all of a sudden people are losing money, and they start reporting it." According to the FBI, there were 67,190 suspicious activity reports (SARs) by financial institutions nationwide in fiscal year 2009 - up 5.1 percent from FY 2008 and a 44 percent increase from FY 2007. SAR filings in the first six months of FY 2010 were more than 4,400 ahead of their pace in the same period the previous year. "I was down in Merced a few months ago in an area that had been built up, and it looked like a war zone," Wagner says. "There were a few houses that were lived in, and a whole bunch that had been foreclosed or that had fallen through in mid-construction and never [were] finished." For federal prosecutors, figuring out the hallmarks of a good mortgage fraud case involved "a bit of a learning curve," Wagner admits. "Until recently, real estate fraud was not something that we were deeply involved in," he says. "For the most part, the transactions are regulated by state officials. There's the Department of Real Estate, the licensing board for real estate brokers and appraisers - those are all state functions." The most recent sweep by Wagner and the DOJ Task Force - Operation Stolen Dreams, between March and June 2010 - produced 823 federal indictments, charging 1,517 defendants nationwide. "During that same time period, we got 391 guilty pleas or convictions and 245 individuals were sentenced," he says. The indictments concern both mortgage schemes designed to defraud lenders, and phony foreclosure-rescue schemes targeting distressed homeowners. The majority of those cases were brought under mail or wire fraud statutes (18 U.S.C. § 1341 and § 1343), and so far only a few have reached trial. "We're really looking at the career people who are scamming banks, perhaps in multiple jurisdictions," Wagner says. "In those kinds of cases, local investigators are not as well situated as we are to gather evidence." Assistant U.S. Attorney Russell L. Carlberg, the lead prosecutor on several high-profile cases in Wagner's office, has seen the results of the Central Valley housing bust first hand. "We've photographed affected neighborhoods so the jury will be able to see the impact of these [schemes]. I have cases where entire subdivisions were all mortgage fraud. Nobody ever moved in. It was just a big scam to flip the houses and extract the equity." Currently, more than half of Carlberg's work involves mortgage fraud. In one case, ten Chico-area defendants are charged with participating in a massive builder-bailout scheme that defrauded lenders of more than $4 million (United States v. Gililland, No. Cr. 08-376 (E.D. Cal. superseding indictment filed June 17, 2010)). He's also investigating a multi-tiered Ponzi scheme that, according to a forfeiture complaint, spans five states, involving several hundred properties and potential losses of tens of millions of dollars. Directors of Roseville-based Loomis Wealth Solutions are accused of loan and credit fraud; identification document fraud; mail, wire, and bank fraud; and money laundering (United States v. Approximately $133,803.53, No. 09-00254 (E.D. Cal. filed Feb. 17, 2009)). "There's a cookie-cutter aspect to many of them," Carlberg says. "Generally speaking you'll have falsified income, falsified employment histories, false assets stated on the loan applications, and false declarations of primary residence. Often with a straw buyer, they'll buy four houses at the same time, all as a primary residence. The difficulty is that because there are so many people in the underwriting process, attributing knowledge and criminal intent can be an evidentiary challenge. People can insulate themselves by never putting something in email, or by being very careful about what they say on the phone." In an ongoing investigation led by the FBI in collaboration with AUSA Boone in Fresno, five former employees of Bakersfield's Crisp & Cole Real Estate have admitted scheming to defraud lenders. The two principals of the firm, David Crisp and Carl Cole, lost their real estate licenses but have not been criminally charged. "White-collar cases are so different from other criminal prosecutions," Boone says. "DAs have guns and knives as evidence. We get checks - a lot of checks." One of Carlberg's most document-heavy and complex cases at present is the Gililland prosecution. The 50-count indictment alleges mail fraud, false statements on loan applications, money laundering, bulk cash smuggling, and criminal forfeiture. According to the indictment, between approximately October 2006 and May 2008 real estate broker Garret Griffith Gililland III allegedly recruited straw buyers for various properties, conspired with the builder/owner of the homes to inflate the selling prices, created false loan applications for the higher amounts, and then credited a percentage of the difference between that price and the true market value to himself and his co-defendants. According to Carlberg, some checks were cut directly to Gililland from entities owned by Anthony Symmes, a Chico homebuilder, but "never disclosed to lenders, for $60,000 per transaction." After agreeing to cooperate, Gililland and his wife fled to Spain, where he allegedly had $20,000 cash sent to him in a Pringles potato chip can. The couple were extradited and are now in custody awaiting trial. Symmes has pleaded guilty to one count of conspiracy to commit mail fraud and one count of conducting a monetary transaction in property derived from unlawful activity. He has also paid $4 million into a restitution fund; according to Carlberg, Symmes is cooperating with the prosecution and likely won't be sentenced until after the Gililland trial concludes. Scott Tedmon, Gililland's Sacramento-based defense lawyer, admits that the indictment has a gripping story line, but he points out that his client was charged with only substantive counts of fraud. "Rather than attempt to prove conspiracy to commit fraud," Tedmon says, "it's probably just cleaner for [the government] to go after the straight fraud allegations." Tedmon adds, "I'm not big on casting a political light on why the U.S. Attorney's Office files certain cases. But from a global perspective, there's no doubt that judicial policy can't be separated from the realities of politics. That's why they have task forces. That's why they target certain types of criminal activity. Say what you want, there's a political side to it." (Tedmon has a point. When Attorney General Holder announced the results of Operation Stolen Dreams at a press conference in June, the Gililland case was one of three examples he cited of schemes responsible for more than $2.3 billion in losses nationwide.) When Carlberg is asked to describe the characteristics of some defendants, he recalls the grifters from Boiler Room, a film about a pump-and-dump stock scheme. "They're twentysomethings, very intelligent," Carlberg says. "They seem not to have wanted a college degree or a W-2 job. They wanted to hit it big. They're hard workers - but they apparently have no moral regulator telling them that lying and Photoshopping documents is any kind of problem." Still, he says, "I don't think they did anything that was radically different from what a lot of industry professionals were doing at the time. I think they took certain loose practices of the industry and just took it to a new level." Federal prosecutors, Carlberg says, are to some extent forced to "regulate by indictment" due to a failure to regulate the financial industry as a whole. In September, Phil ANGEL- ides, former California state treasurer and chairman of the congressional Financial Crisis Inquiry Commission, expressed similar views in Sacramento at the commission's final public hearing; it will issue a report next month. "What's disturbing about [the financial crisis] is that we so lowered the ethical standard. We made acceptable and legal conduct that was inappropriate, damaging, and devastating," Angelides says in an interview. "Some law enforcement agencies appear to have adopted a narrow definition of mortgage fraud that focuses primarily on borrowers and brokers." "It's quite striking that the prosecutions of the 1980s were of the people running the companies," Angelides adds. And today? "Zero! Zip! Nada!" he says. Wagner was one of the officials who testified at that Sacramento hearing. In a dialogue that was respectful - but which seemed at times to be spoken in different languages - Angelides pressed him to explain why his office wasn't going after the industry's top dogs and financial institutions. "It seems the opportunity [to prosecute] for fraud is ripe," Angelides said to Wagner. "To what extent can this be attacked systemically?" "I don't know the answer to that," Wagner replied in level tones. "We are not market regulators. We prosecute criminals. We have to find cases we can prove beyond a reasonable doubt to the satisfaction of a unanimous jury, as opposed to making assessments of the state of the industry." Afterward, Wagner showed frustration over the exchange. "The crimes Mr. Angelides is talking about would be crimes committed by the higher-ups at the bank - not the people who originated the loans but people who were packaging the loans and selling them to Wall Street," Wagner says. "There's a lot of clamor out there for another Enron. We want heads to roll. We want to see a perp-walk." But he says his office can't prosecute someone just for creating an environment that invites fraud. As for Angelides's comment about relaxed ethical standards, Wagner says he understood the drift of the commissioner's remarks but disagreed. "The federal statutes didn't change when underwriting standards became more lax or when people started issuing no-doc loans," he says. "The problem is when the whole industry - or large portions of it - acts in a reckless manner. It becomes more difficult to prosecute and convict people of criminal activity. It's not that legal standards changed, but that identifying those who are the true criminals - separating their conduct from everyone else's - becomes, just as a proof issue, more difficult." Once again defending the limits of his office, Wagner says his prosecutors pursue a realistic goal: "We're trying to at least rein in mortgage fraud so that people don't think they can just act with impunity. But we're not going to litigate ourselves out of this crisis." Marilyn Berlin Snell is a San Francisco-based freelance journalist.