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Financial Fraud Law

Biloxi Breach: Attorney Pleads Guilty to Trust Account Fraud

 An attorney in Biloxi, Mississippi, Stephen Richard Colson, has pleaded guilty in federal court to falsifying, concealing, and covering up material facts in connection with a scheme to defraud two banks and the bankruptcy court in violation of federal law.

The government indicated at the guilty plea that it would seek restitution on behalf of the victims in the amount of $7,749,576.65.

Colson, a settlement agent and closing attorney, owned Prestige Title Inc. and Advanced Title and Escrow, both headquartered in Biloxi, with 18 office locations in Mississippi, Alabama, Florida, Georgia, Louisiana, and Texas. These offices handled loan closings for new mortgages and the refinancing of existing mortgages. In addition, Colson served as escrow agent for several condominium developments on the Mississippi Gulf Coast. As settlement agent on loan closings, Colson was required to establish trust accounts from which to disburse funds exclusively for activities related to each individual loan. These trust funds were not to be commingled with other personal or business accounts. Prosecutors said, however, that a federal investigation into Colson’s activities revealed that Colson, through his business entities, willfully diverted funds from trust accounts for his own personal use and concealed shortfalls in those accounts by co-mingling funds from other accounts when making payments to financial institutions.

According to the government, the scheme began in the summer of 2004 when Colson obtained a mortgage loan from a federally insured financial institution, using property he had titled in his name as collateral. Colson, as an agent for a title insurance company, issued a loan policy on the mortgage. Colson sold the property in September 2005 for cash and should have paid off the mortgage. However, the government asserted, he concealed the sale of the property by continuing to make payments on the loan until he filed for bankruptcy protection in September 2009. The lender then learned that it did not have a valid lien or mortgage on the property. This delay in learning that the FDIC insured institution did not have a valid lien was as a direct consequence of Colson’s scheme to conceal the fact that he had already sold and pocketed the proceeds without paying off the mortgage, according to prosecutors. The title insurance company ultimately paid $133,600 to the FDIC-insured institution to settle the claim.

The government said that the count to which Colson pleaded guilty was part of a larger scheme wherein Colson, through his title businesses, used funds generated in new real estate closings to pay off earlier closings. According to prosecutors, the larger scheme was discovered following the December 22, 2008 acquisition of a title insurance company for which Colson served as agent by a successor company. On February 6, 2009, the successor title insurance company initiated an audit of Colson’s business records and discovered that Colson’s title companies had a shortage in funds for settlement of real estate closings, the government said. According to prosecutors, the successor title insurance company was forced to pay 54 claims from lenders, borrowers, and sellers and later prevailed in an adversary proceeding against Colson in bankruptcy court. Its claim of $4,904,627.37, plus attorneys’ fees and costs of litigation, were not discharged and will have to be repaid by Colson. The bankruptcy court also found that Colson’s use of his trust account “was akin to a Ponzi scheme in that Colson depended upon funds generated in new real estate closings to pay off earlier closings.”

In a separate adversary proceeding involving Colson, the bankruptcy court denied Colson’s attempt to discharge a private investor’s $2,000,000 claim.

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