New allegations tied to a mortgage fraud scandal that rocked the industry and landed an executive in federal prison now implicate JPMorgan, the lender on the deal, and the borrower — New York’s Chetrit Group.
Wells Fargo, which filed suit in federal civil court as trustee on a $481 million CMBS loan, alleges JPMorgan knew the mortgage it made to Chetrit for a national multifamily portfolio was based on inflated financials. But it doled out the debt anyway.
The suit — first reported by Reuters — also alleges that the Chetrit Group was aware that the numbers had been fudged by the seller Roco Real Estate.
Roco and the 43-property deal have been central to a widening federal investigation into mortgage fraud. In 2023, Roco principal Tyler Ross pleaded guilty to one count of conspiring to commit an offense against the United States related to a previous financing of the properties. He was sentenced to a year in federal prison in September.
The Department of Justice and the Federal Housing Finance Agency have uncovered that in multiple deals, operators routinely manipulated property financials such as expenses to obtain larger loans from lenders than they would have otherwise secured.
So far, at least six real estate operators across the U.S. have pleaded guilty. The investigation is ongoing.
Wells Fargo’s filing marks the first major lawsuit against a lender in the broader commercial mortgage fraud scandal. Lenders have largely claimed to be victims of borrowers’ fraud.
JPMorgan declined to comment on the lawsuit, as did an attorney for Wells Fargo.
Chetrit, through a spokesperson, pointed the finger at Roco, calling itself “a victim of seller fraud, which was investigated by the U.S. Department of Justice.”
“Financial misrepresentations were made by the seller that we unknowingly relied upon when we purchased the property,” said a Chetrit representative in a statement.
“We suffered great financial loss due to the seller’s fraud,” the spokesperson said. “As a result of the fraud, the seller was convicted.”
The saga dates back to 2019 when Chetrit was shopping for debt to buy Roco’s apartment deal. Through due diligence, it allegedly found Roco had falsified trailing 12 month financial statements, notably inflating net operating income by 25 percent.
Chetrit found $3.5 million in reported income did not exist and $2.6 million in repair costs and expenses were missing, according to the lawsuit. It allegedly flagged the errors to Roco and the seller fessed up to the flubs, agreeing to slash the sale price by over $65 million.
