A federal investigator who applied for a search warrant days ago alleged that two of Robert C. Morgan's relatives – son Todd and nephew Kevin – may have committed bank and wire fraud as the Morgan real estate empire expanded across 14 states.
The accusation, contained in an affidavit by a special agent for the Federal Housing Finance Agency's Office of the Inspector General, goes on to describe ways in which the two allegedly misled lenders to provide larger loans for properties owned by Morgan Communities and Morgan Management, both headed by Robert C. Morgan.
In one apartment building, the document alleges, they turned on radios in empty units, placed shoes outside the doors and staged apartments to make it appear as though vacant apartments were occupied during a lender-required inspection.
The matters raised in agent Erik Lars Hansen's affidavit are consistent with reports published by The Buffalo News in 2017 and this year. The News previously reported that Morgan's companies had obtained loans that appeared to exceed either the purchase price recorded on government documents or at least 80 percent of the property's value, the cap that most banks use when deciding how much to lend.
The Federal Housing Finance Agency oversees Fannie Mae and Freddie Mac, which repackage residential mortgages for sale on the open market as regulated securities. Many of Morgan Management's mortgages have been resold to investors, mostly by Freddie Mac.
The FHFA has been working with FBI agents on an investigation into Morgan-company transactions. On Monday morning, the FBI swept through the suburban Rochester headquarters of Morgan Management and hauled away boxes filled with company items. A local FBI spokeswoman said the agents were conducting court-authorized activity at that location.
Morgan previously told The News there is nothing unusual or suspect about the way his companies obtain their mortgages. When reached by email Monday, he declined to discuss the search. Attempts to reach his son and nephew or their attorneys have so far been unsuccessful.
Real estate professionals in Western New York are abuzz this week with the developments concerning Morgan's companies. He is a large presence in residential development, said commercial mortgage broker Joseph Janowski of Buffalo. Morgan's companies own some 36,000 units in 14 states, and they own or manage about 3,500 apartments around Buffalo.
"Given the size of Morgan's multistate holdings, which are extensive across upstate New York, the scale and scope of these activities would appear to be unprecedented," said Janowski, whose company, Multifamily Advisory, specializes in the sale and refinancing of multifamily properties.
Hansen's affidavit was not the one written to obtain the search warrant for Morgan headquarters. Documents related to Monday's search remain sealed. Hansen wrote his affidavit in order to gain access to the email accounts of Kevin Morgan, a company vice president, and Todd Morgan, a project manager.
U.S. Magistrate Judge H. Kenneth Schroeder signed the warrant for the email accounts on May 10, though Hansen's report made clear investigators had many of their emails in hand.
Hansen wrote that Kevin and Todd Morgan worked with two officials at Buffalo mortgage broker Aurora Capital Advisors – owner Frank Giacobbe and employee Patrick Ogiony. Those four and others "conspired to provide false information to financial institutions to overstate properties' incomes," according to the document. They did so to induce financial institutions to lend more money or to provide money they would not have loaned "had they been provided with truthful information," he said.
Specifically, Hansen said, Aurora and the two Morgan cousins gave false rent rolls, income statements and other documents to "mislead appraisers, lenders and investors into believing that properties were generating more income than they were."
In his affidavit, Hansen noted that he was not including all the information that had come from a continuing investigation of Morgan Management but enough to qualify for a search warrant. The affidavit does not accuse Robert Morgan of wrongdoing, but it shows he received a number of emails that Hansen cites to obtain the search warrant.
'Not the time for the TRUTH'
Hansen, in the document, told the story of Rochester Village, a multifamily apartment complex in Cranberry Township, Pa. As they sought a mortgage on the property, cousins Kevin and Todd Morgan and Aurora's Ogiony in 2014 inflated Rochester Village's "rent roll," a key document lenders use to determine how much money to offer when complexes are purchased or refinanced, Hansen said.
"The conspirators," Hansen wrote, "reported that units in one of the buildings at Rochester Village were occupied and earning rental income before the Cranberry Township Planning and Development Department issued a certificate of occupancy permitting those units to be occupied."
As Kevin and Todd Morgan and Giacobbe sought to inflate Rochester Village's income from storage units, Giacobbe sent one email telling them: "Guys now is not the time for the TRUTH,'' the affidavit reports.
Eventually, would-be lender Deutsche Bank "became aware of discrepancies in the rent roll," Hansen wrote. So the Morgans and Aurora Capital Advisors turned to one of the institutions authorized to issue and sell loans for Freddie Mac, Berkadia Commercial Mortgage. Berkadia, headquartered in New York City, is partly owned by Berkshire Hathaway, owner of The Buffalo News.
For a lender-required inspection, Kevin and Todd Morgan and Aurora's Giacobbe made vacant apartments appear occupied, Hansen alleged. They turned on radios in empty units, placed shoes outside the doors and staged apartments to make them appear lived in, Hansen wrote. When an appraiser asked if the property had become stabilized – meaning at least 95 percent occupied – Giacobbe sent an email telling the appraiser, "falsely," that the " 'site became 100% occupied the month of October.' "
An appraiser later placed the property's value at $64 million, and Berkadia in May 2015 loaned $45.79 million for Rochester Village, Hansen said in the affidavit. The loan was purchased and securitized through Freddie Mac. Both the appraiser and the lender told federal investigators they would have reversed course had they known they were supplied false information.
The affidavit includes details about an apartment complex in Canonsburg, Pa., known as Southpointe. Hansen said that Giacobbe, Kevin and Todd Morgan worked to conceal from lenders that cable TV was included in the rent.
Hansen included an email from Giacobbe to his two contacts at Morgan Management as they agreed they had to make the complex appear more profitable. One way to do that was to make a lender believe that income was not being spent on free cable TV for tenants.
"Guys," Giacobbe wrote, "we need to be on our A game to get max dollars."
Telephone messages left by The News for Giacobbe and Ogiony were not returned Wednesday.
A widespread practice?
In his affidavit, Hansen said that what happened at Rochester Village, Southpointe and other Morgan-company holdings "occurred across the Morgan Management/Morgan Communities portfolio." For evidence of that, he cited two emails that Kevin Morgan sent to Morgan Management employees, including Todd Morgan and Robert Morgan, in April 2016.
In the emails, Kevin Morgan said he wanted to make sure the company always provided lenders with documents to show a project had enough income to repay its loan, a ratio summarized by the term "debt service coverage ratio," or DSCR. Lenders generally require a minimum ratio before extending a loan.
"DSCR should be reviewed prior to sending in," Kevin Morgan wrote in his second email, "and if we do not meet the requirement, we need to make adjustments so we do meet it."
The News reported in October that federal investigators, including those at the Federal Housing Finance Agency, were examining financial transactions by Morgan's companies as they purchased or refinanced properties. The article also discussed Morgan Management's decades of growth, and the business relationships Morgan had created in the eastern half of the United States.
His partners said they liked him for his candor and because he always brought his own financing whenever he joined a project.
In an interview last year, both Kevin and Robert Morgan saw it as a point of pride that they have relationships with myriad lenders and can take on many projects or buy many properties because they can always get loans. They said it has been a key to their growth.
Said Kevin Morgan: "When someone is thinking about selling, their first phone call is to Bob Morgan."