SANTA ANA, Calif. – An alleged car buying and loan scam which may have bilked credit unions and banks out of more than $4 million so far may be only the tip of the iceberg, according to a recently filed suit. “The biggest problem with this is the credit unions don't know what to do because they don't know what they don't know yet,” said attorney Barry A. Smith who heads up the credit union division at the Los Angeles law firm of Buchalter, Nemer, Fields & Younger. “They may be victims but they don't know it yet.” “Until you get burned, you don't know (you are a victim)” Smith said. Smith filed suit in Superior Court on behalf of Orange County's Credit Union in Santa Ana. It is the first such case to target what he said was “one of the more sophisticated” scams that he has seen in some 30 years of practice. “One of the purposes of this lawsuit is to alert not only the public but to alert financial institutions about these things,” said Smith, whose law firm is one of the largest in California representing credit unions. Smith said at least 20 banks and credit unions may have fallen prey to the scheme that so far involves 188 high-priced luxury automobiles. Orange County's CU`s suit involves six of the vehicles “that we know of” worth an estimated $285,000, Smith said. “Orange County's Credit Union decided to take a stand and not only attempt to recover their losses but also do what they can to put a stop to these illegal tactics,” Smith said. The suit names some 40 individuals and companies as defendants. Among those named are Duty Free Car Connection, Duty Free Car Payment, Duty Free Auto Club, DFCP Capital Investment Corp., and DFCP Financial Group. The suit alleges that car loans were obtained through fraudulent means and that the cars were then sold, leased, loaned or rented to others in violation of the terms of the loan contract. It said that Duty Free would continue for “a period of time” making payments on behalf of the original buyer even though the original buyer never took possession of the vehicle. Eventually, those payments would stop and the cars would disappear, the suit claimed. The suit alleges that the defendants conspired to obtain vehicle loans from financial institutions by falsifying income, employment and insurance information for buyers whom they recruited with a lure of interest-free loans, kickbacks, bribes or other monetary incentives. The defendants sought buyers with good credit and high FICO scores in order to obtain the loans, the suit said. To enhance the buyers' credibility, they would be listed as employees of one of the Duty Free companies at a salary which often was “three to 10 times higher” than they actually earned, the suit claimed. Smith said some buyers would purchase as many as 10 to 20 vehicles in one or two days – many from the same dealership – for Duty Free, then they would go to various credit unions and banks seeking loans with Duty Free holding power of attorney. Because income and employment verification was supplied by Duty Free, and the buyers already had good credit with high FICO scores which would be verified when running a credit check, the financial institutions would approve the loans, Smith said. “If you walk into a bank and you're making $100,000 a year and have excellent credit, aren't you entitled to a car?” he asked. Smith added that single purchasers, who he called the “straw buyers,” could qualify for numerous loans at different institutions because the loan information would not show up on a credit report for at least 30 to 45 days. The purchased cars were never driven by the original buyer, Smith said. Instead, the cars were delivered to a showroom in Orange County, where they were offered for lease, loan, rent or sale at exorbitant rates to people who would otherwise not qualify to buy them. Duty Free lured those customers by advertising that people with poor credit could “drive what you want, not what the bank tells you to drive” by joining the Duty Free Car Club, the suit said. The cars also were promoted to people who wanted to hide cash, whether it was obtained legally or illegally, Smith said. Duty Free advised its end-user customers that no credit checks were necessary to obtain the cars, that they could exchange vehicles as often as they wanted and that customers could select as many cars as they desired. The suit further contended that customers were promised a clear title to the vehicles at the end of the payment term and that Duty Free illegally altered the certificates of title to show that the company owned the cars free and clear. Some of the cars have been found abandoned at crime scenes, Smith reported. He said financial institutions that made the loans on the vehicles have no idea who currently owns the cars. “This is a very clever group of people,” said Smith, who represents several hundred banks and credit unions and handles numerous cases involving fraud and scams. “They have this really down to a science. They know what they're doing. They're very very intelligent. They've tried to cover themselves on the law.” The suit, filed Sept. 9 in Superior Court in Santa Ana, lists violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) as well as conspiracy, fraud and breach of contract, among other charges. The first hearing in the case was scheduled for Nov. 6, at which time Smith said he will seek a court order allowing the credit union to take possession of the cars on which it has loans, assuming the vehicles can be located. “The individuals, the `straw buyers' who we think are our customers, they don't have the cars,” he said. “We don't know where the cars are. We have no idea. We know there are cars that are now in New York, Chicago, Las Vegas. “After a while they stop paying on the cars,” he added. “So now that the bank or credit union goes to contact the individual `the straw buyer,' what are they going to get? They don't have anything. The cars are long gone. So what's happened to them we don't know.” The vehicles on which Orange County's CU provided loans include three 2000 Mercedes, a 2000 Jaguar, a 2002 Honda, and a 2001 Mercedes valued at $58,717. Overall, the losses to the credit union are more than $285,000, he said. “We don't know how big this is,” Smith said of the alleged scam. “We believe the (total) loss (so far) is over $4 million for the banks involved.” He said he was aware of similar operations in other parts of the U.S., but none that were as sophisticated as the one in Orange County. “I have seen a lot of scams and fraud over the years for the banks I represent and this is one of the most sophisticated ones,” he said. Smith said Orange County's CU would welcome other credit unions in its litigation. Smith can be reached at (213) 891-0700. -

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