Top feds scouring WaMu files for evidence of fraud

Federal agents and prosecutors are interviewing former Washington Mutual officials and combing through a staggering number of documents as they investigate whether fraud played a role in the largest bank failure in U.S. history.

A grand jury has been convened, and at least four of the most experienced complex-crime prosecutors in the U.S. Attorney's Office have been assigned to the probe, according to multiple sources.

The probe was announced by the U.S. Attorney in Seattle three weeks after the collapse of Washington Mutual last fall. Despite the official silence since then, interviews with federal law-enforcement officials familiar with the investigation show there's been plenty of activity behind the scenes.

Assistant U.S. Attorney Bob Westinghouse, who heads the office's Criminal Division and is its most senior prosecutor for white-collar crime, is overseeing the investigation personally.

He would not discuss specifics but said the probe is shaping into one of the largest and most complex ever undertaken in Western Washington.

"The sheer size of Washington Mutual and the inherent number of employees and documents involved make such an investigation a challenge, no question about that. There are literally hundreds of senior-level employees," he said. "We are using the tools and resources we have available to us to make this happen sooner (rather) than later."

Washington Mutual was seized in September by the Federal Deposit Insurance Corp. (FDIC), which stepped in after WaMu, weakened by deepening red ink on mortgage loans, lost nearly $17 billion in deposits in nine days.

JPMorgan Chase of New York bought the banking operations for $1.9 billion.

The remainder of WaMu — the Washington Mutual Inc. holding company and its investment operation — is in bankruptcy.

Like many other lenders, WaMu was seduced by the lure of huge profits from making subprime mortgages and other risky home loans. The bank sold many bundles of securities based on such loans to other financial institutions. If it turns out that company officials misled investors or federal regulators about those securities, that could be one basis for a criminal case.

Westinghouse said the probe will examine whether any events leading to WaMu's demise "were the result of obvious criminal wrongdoing."

Such investigations can last for years and don't always result in criminal cases. Westinghouse said he spent "at least 18 months" investigating the near-collapse of Seafirst Bank in the early 1980s after a sketchy loan portfolio forced its sale to Bank of America. No charges were filed.

The WaMu team has set up in a conference room in the U.S. Attorney's Office in the Federal Courthouse in downtown Seattle, where agents from the FBI, Internal Revenue Service and Securities and Exchange Commission are combing through thousands of documents, many seized at WaMu's downtown headquarters the day U.S. Attorney Jeffrey Sullivan announced the investigation

The October announcement itself underscored the significance of the inquiry — federal prosecutors usually don't publicly announce such investigations. Since fall, the Justice Department also has announced it is investigating the failures of IndyMac Bancorp and Freddie Mac, as well as mortgage giant Countrywide, which issued billions of dollars in risky loans.

New leads from lawsuit

A crucial part of the investigation is the evidence and witnesses beginning to emerge in a massive class-action lawsuit by shareholders against WaMu and its officers, which is playing out in U.S. District Court here. The so-called "multidistrict litigation" before U.S. District Judge Marsha Pechman combines 22 individual lawsuits alleging WaMu violated securities and pension laws.

The lawsuit runs to nearly 500 pages and quotes more than 90 unnamed "confidential witnesses" — including some identified as mid- and upper-level WaMu managers — who allege Washington Mutual lacked risk management, demanded that appraisers inflate home values to justify larger loans, and used "dangerously lax" underwriting standards.

Two sources involved in the nascent federal investigation say prosecutors are interviewing some of those witnesses, after obtaining their identities from plaintiffs' attorneys.

Brad Keller, a Seattle civil attorney who is acting as local liaison counsel in the multidistrict case, said he wouldn't comment about communications between plaintiffs and prosecutors.

Prosecutors also have contacted the New York Attorney General's Office, which in 2007 sued eAppraiseIT, one of the nation's largest real-estate appraisal companies. The lawsuit alleged the appraiser buckled to pressure from Washington Mutual to inflate home values so the bank could make bigger loans.

New York Attorney General Andrew Cuomo said the only reason he didn't sue Washington Mutual is that he lacked jurisdiction — regulation of banks and savings and loans falls mostly to the federal government. eAppraiseIT and WaMu have denied wrongdoing.

Westinghouse and others in the U.S. Attorney's Office traveled New York two weeks ago to talk to witnesses in the eAppraiseIT case, according to the sources. Westinghouse declined to discuss the trip.

One high-ranking Justice Department source familiar with the investigation said prosecutors are watching both the civil case in Seattle and the filings in the Washington Mutual bankruptcy in Delaware.

"Start with the little fish"

Despite the complexity and size of the investigation, the tactics used by agents and prosecutors are likely to be the same as in any large-scale fraud probe, said Lis Wiehl, a former Seattle prosecutor and law professor who is now a legal commentator for Fox News.

"You start with the little fish and work your way up," she said.

The Seattle-based investigation is not the only fraud probe involving Washington Mutual.

A former senior loan coordinator at Long Beach Mortgage — a WaMu subsidiary responsible for hundreds of millions of dollars in high-risk home loans — late last year pleaded guilty to lying to a grand jury in Sacramento, Calif., and admitted accepting more than $120,000 in kickbacks for approving loans that other lending institutions wouldn't touch.

John Ngo has agreed to testify against others involved, and his lawyer states in a recent filing that he is "cooperating with the government in an ongoing investigation and prosecution."

The attorney, Lorie Teichert, would not say more.

One other sign of the gathering criminal investigation is that potential targets are hiring criminal-defense attorneys. Several experts in white-collar criminal defense in Seattle acknowledged they either had been contacted or retained by former company officials, although none would identify their clients and most declined to say anything if they were going to be quoted by name.

An exception is John Wolfe, a former federal prosecutor and high-end criminal-defense lawyer, who in bankruptcy court documents disclosed he has been retained by Washington Mutual Inc., the holding company now in bankruptcy. Wolfe declined to comment on the record.

At least one WaMu official, former President Kerry Killinger, has hired a public-relations firm.

A telephone call about the criminal probe to his Palo Alto, Calif., securities attorney was returned by public-relations executive Roger Nyhus, who said that neither Killinger nor his lawyers would be talking.

Mike Carter: 206-464-3706 or mcarter@seattletimes.com