2 convicted in mortgage fraud case

A Beverly Hills real estate agent to the stars and an appraiser were convicted Monday on federal charges of conspiracy and bank fraud for their roles in a multimillion-dollar Westside real estate fraud ring, but jurors couldn’t reach a verdict on another prominent agent accused of being part of the scheme.

Real estate agent Kyle Grasso, 38, and licensed appraiser Lila Rizk, 42, were found guilty of multiple counts of conspiracy, bank fraud and loan fraud for their participation in a scheme in which banks lost more than $40 million on loans totaling $142 million.

The fraud ring included developers, agents and appraisers who bought relatively modest houses in some of the area’s most expensive neighborhoods. They then inflated the homes’ value to get loans.

Joseph A. Babajian, 56, the lead defendant in the case, was acquitted on 13 criminal counts, and the jury didn’t reach a verdict on eight other counts. Defense attorneys had argued that Babajian wasn’t involved in the day-to-day operations in his real estate office and wasn’t involved in illegal conduct.

Babajian and Grasso’s real estate clients included soccer star David Beckham and boxer Oscar De La Hoya.

U.S. District Judge Dean D. Pregerson declared a mistrial on the eight unresolved counts against Babajian, which included the conspiracy and bank fraud counts. Pregerson told prosecutors that if they chose to pursue a retrial, they faced “quite an uphill battle.”

Babajian “delegated the vast majority of the work to Grasso; that was the nature of the business,” Pregerson said the evidence showed. He called the prosecution’s theory that Babajian was motivated to commit fraud to win top agent awards “completely illogical.”

Richard M. Callahan, Grasso’s attorney, said his client was “devastated by the outcome.”

“The idea he would put his reputation and freedom on the line for an extra 7% of his income is ridiculous. We definitely plan to appeal,” Callahan said.

Rizk’s lawyer couldn’t be reached for comment.

The masterminds of the scam, developers Mark Alan Abrams and Charles Elliott Fitzgerald, and eight others pleaded guilty earlier to felony charges related to the scheme. Fitzgerald was sentenced to 14 years in prison, and the others are awaiting sentencing.

From 2000 to 2003, the group pumped up home appraisals and arranged straw purchases of houses in Beverly Hills, Bel-Air and other neighborhoods. After obtaining seven-figure mortgages on many of the properties, the agents and co-conspirators defaulted on the loans, taking millions with them and leaving the banks with houses worth far less than their inflated purchase prices.

Authorities alleged the fraud ring secured $142 million in bogus loans from Lehman Bros. Bank and another lender. The group bought relatively inexpensive houses in high-priced areas, then used trumped-up appraisals to take out mortgages worth far more than the properties -- sometimes nearly double the prices the ring paid for the properties.

A Bel-Air house the group acquired for $735,000, for instance, was resold to a straw buyer for $2.37 million with a $1.42-million mortgage. The ring performed 81 such transactions, authorities said.

Babajian and Grasso allegedly made millions of dollars through the deals, prosecutors said, and Grasso got his own Beverly Hills home with no money down. Rizk received hundreds of thousands of dollars in inflated appraisal fees, prosecutors said.

The scam was aided by the frothy real estate market at the time, when home values were skyrocketing.

By snapping up smaller, run-down houses in neighborhoods containing more opulent properties, the ring was able to convince lenders that the cheaper homes were of comparable value to luxurious houses nearby. Those inflated “comps” were cited as support for the exaggerated appraisals, and lenders didn’t second-guess the estimates.

Real estate agents in the Westside areas where the group was most active and on the Monterey Peninsula, where the ring also sold or bought properties, reported the suspicious deals to Lehman Bros. and local authorities. Prosecutors said Lehman brought the case to the attention of federal authorities.

Thomas Mesereau, one of Babajian’s attorneys, said there were two “legs” in the transactions.

One leg, in which Babajian was involved, was the legitimate initial purchase of the properties; the second leg was the inflating of values and mortgage fraud, he said.

The jury foreperson, interviewed after the trial, said the panel believed that there was enough evidence to link Grasso and Rizk to the illegal parts of the home sales, but that jurors were split on whether Babajian took part in the fraud.

The foreperson, who declined to state her name, said the jury was split 7 to 5 in favor of convicting Babajian on the unresolved counts.

Susan Yu, another of Babajian’s attorneys, said the evidence showed that Babajian was out of the office recruiting agents or working on other home sales deals during the period in which the fraud allegedly occurred.

“He was a target because of his name,” Yu said.

Babajian has represented Barbra Streisand, Bruce Willis, Warren Beatty, Lee Iacocca and many others in home sales deals, Mesereau said.

Michael R. Wilner, the lead prosecutor in the case, said the U.S. attorney’s office “is evaluating right now” whether to retry Babajian.

Wilner called the verdict “very satisfying.”

Grasso faces maximum sentences totaling 515 years. Rizk’s sentences could total 425 years. Sentencing is scheduled for Jan. 29.

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peter.hong@latimes.com