Property Owner Debarred for Violating Federal Housing Administration Insurance Requirements for Multifamily Properties

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                U.S. DEPARTMENT OF
                               HOUSING AND URBAN DEVELOPMENT
                                        OFFICE OF INSPECTOR GENERAL

                                            September 9, 2015
                                                                                             MEMORANDUM NO:

TO:            Craig T. Clemmensen
               Director, Departmental Enforcement Center, CACB

FROM:          Kimberly Randall
               Director, Joint Civil Fraud Division, GAW

SUBJECT:       Property Owner Debarred for Violating Federal Housing Administration
               Insurance Requirements for Multifamily Properties


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General,
assisted the U.S. Attorney’s Office, Northern District of Illinois, in the investigation of Lakeview
Sheridan, LLC, and Fremont Sheridan Properties. Lakeview Sheridan is a multifamily property
located in Chicago, IL, and Fremont Sheridan was the management company for Lakeview


Under section 223(f) of the National Housing Act, HUD insured the mortgage on Lakeview
Sheridan in May 2006 through its Federal Housing Administration (FHA) insurance program.
Section 223(f) of the Act insures lenders against loss on mortgage defaults. The program allows
HUD to insure long-term mortgages of up to 35 years. To participate in the program, Lakeview
Sheridan was required to execute a regulatory agreement with HUD. The agreement required
Lakeview Sheridan to use tenant rent payments only for payments on the HUD-insured mortgage
or to pay for reasonable and necessary expenses and necessary repairs to the property. Payments

                                                    Joint Civil Fraud Division
                                     400 State Avenue, Suite 501, Kansas City, KS 66101
                               Visit the Office of Inspector General Web site at www.hudoig.gov.
made from property rents for items other than those defined by the regulatory agreement could
be paid only from surplus cash. 1

Beginning about February 2008, Lakeview Sheridan defaulted on its HUD-insured mortgage.
However, the property continued to collect tenant rents and generate income. At the time of
default, the property did not have surplus cash.

                                     RESULTS OF INVESTIGATION

In June 2014, a former owner of Lakeview Sheridan pled guilty to equity skimming, 2 under 12
U.S.C. (United States Code) 1715z-19, and wire fraud, 3 under 18 U.S.C. 1343, for fraudulently
diverting Lakeview Sheridan rents, assets, proceeds, and income. Specifically, from February
2008 through June 2009, the former owner violated HUD’s regulatory agreement by using the
property funds for a luxury car purchase, a personal PayPal account, and other expenses not
related to the insured property in lieu of paying the HUD-insured mortgage.

In January 2015, the former owner was sentenced to 78 months incarceration and ordered to pay
restitution of more than $1.86 million to multiple entities, including $543,214 to HUD. Our
office recommended that HUD’s Departmental Enforcement Center take administrative action
against the former owner based on his guilty plea and the resulting sentence imposed by the U.S.
District Court.

In April 2015, the Departmental Enforcement Center notified the former owner of his proposed
debarment from future participation in procurement and nonprocurement transactions, as a
participant or principal, with HUD and throughout the Executive Branch of the Federal
Government. In July 2015, HUD affirmed the proposed debarment and notified the former
owner that he had been debarred.


HUD has already taken corrective action; therefore, there are no additional recommendations at
this time.

  Surplus cash is defined as the cash remaining after all necessary and reasonable expenses of the project have been
   paid or funds have been set aside for such payment. Specifically, the regulatory agreement defines surplus cash as
   any cash remaining after (1) the payment of all sums due under the terms of any mortgage, all amounts required
   for any reserve accounts, and all obligations of the project and (2) the segregation of an amount equal to the
   aggregate of all special funds required to be maintained by the project and the segregation of all tenant deposits
   held. Surplus cash is computed as of the end of an annual period.
  Equity skimming is the illegal use of any part of the rents, assets, proceeds, income or other funds derived from an
   FHA-insured multifamily property for purposes other than to meet actual or necessary expenses.
  Wire fraud occurs when fraud is committed using means of electronic communication, such as telephones or