Correction appended: See below for a correction to this story.

When Atlanta attorney R. Joseph Costanzo Jr. pleaded guilty to bank fraud this month, he did so as “a broken man,” Costanzo's attorney said.

The lawyer's prosecution by federal authorities for his role as a real estate closing attorney in a mortgage fraud ring left him “financially devastated … his career as an attorney over, medically and mentally severely impaired, and greatly suffering shame and remorse,” said his attorney, Edward T.M. Garland.

It also garnered Costanzo 41 months in federal prison and an order to pay jointly with his co-defendants more than $7.8 million in restitution to banking, insurance and investment firms—among them Bear Stearns Residential Mortgage. U.S. District Judge Beverly B. Martin sentenced Costanzo on Feb. 1. She entered the formal judgment last Thursday. Costanzo pleaded guilty to one count of conspiracy to commit bank fraud, mail fraud and wire fraud and one count of bank fraud.

For two years, Costanzo closed fraudulent loans for a mortgage fraud ring that federal authorities believe included at least 21 people—among them builders of multimillion-dollar homes in Atlanta's wealthy northern suburbs, according to a federal indictment issued in January 2005.

The fraudsters—many of whom, like Costanzo, have either entered guilty pleas or were found guilty by a federal jury late last year—stole more than $19 million from lenders by “flipping” properties, according to the indictment.

A property is flipped illegally when it is purchased from a seller and then rapidly, sometimes within hours, resold at an artificially inflated price to a middleman known as a “straw buyer.” Mortgages are then secured in the name of the straw buyer, who may use a stolen identity or who may have been paid to lend his name and credit rating to the scheme.

The resale loans, secured with the help of artificially inflated appraisals and false statements on loan applications and real estate closing documents, typically are used to pay the original sellers of the properties. The remaining funds are divided among the scheme's participants—who may include corrupt appraisers, real estate brokers, mortgage brokers, bank loan officers and real estate closing attorneys.

The multiple mortgages secured on the properties eventually collapse into foreclosure, and the banks, real estate title companies, and investment houses that purchased securities backed by those fraudulent mortgages are left to absorb the losses.

Named in the indictment along with Costanzo were builders Mohammad Amin Hassamadi, CEO of Polo Tech Construction Inc. and Hassan Nimapoo, CEO of Crown Custom Homes Inc.; Joseph Sterling Jetton, the owner of Precision Construction Co.; and Randall Tharp, vice president of Paddocks Development Inc. The federal indictment accused the builders of constructing high-dollar estates in places such as St. Marlo Country Club in Duluth, Litchfield Estates in Roswell and Cobblestone Farms in Alpharetta, then flipping them to straw buyers who included illegal aliens with stolen identities and at least one ring member's mother.

Costanzo would close the flip deals, often taking checks payable to him as down payments from his cohorts in lieu of the alleged home buyers, according to the indictment. He would then dispense the loan proceeds to members of the fraud ring and shell companies they had established for just that purpose, the indictment said.

Last Nov. 1, federal prosecutors dismissed charges against Hassamadi.

On Nov. 26, a jury convicted Jetton of conspiracy and multiple counts of bank fraud, wire fraud and mail fraud. He is slated to be sentenced next week, but a motion for a judgment of acquittal is pending.

Nimapoo's prosecution ended in a mistrial, and his attorney, Bruce H. Morris, has a motion for a judgment of acquittal pending. In that motion, Nimapoo claims that he was assured by Jetton and co-defendant Gregory Wings “that this business model was legal, had been used many times” and had been approved “by more than one attorney.”

Nimapoo also had been told that “Joseph Costanzo had blessed this procedure after checking with a HUD real estate expert who had said it was fine,” the acquittal motion stated.

Wings was convicted by the same jury that convicted Jetton and mistried Nimapoo. He is scheduled to be sentenced next month.

For his role in the fraud scheme, Costanzo earned about $28,700 for 14 transactions—an average of $2,050 per closing. Garland described those fees in his sentencing memorandum as “normal charges in line with the standard fees charged by closing attorneys in the Atlanta, Ga. area.”

Costanzo also bought one of the flipped homes in a fraudulent transaction in which he secured $316,819 then refunded a $66,000 down payment to one of his cohort's shell corporation and “loaned” another $35,000 to that same partner, according to court documents.

But while Costanzo attended the real estate closings, he knew little of the real estate business, Garland asserted.

A 1969 graduate of Emory University School of Law, Costanzo was, by trade, a corporate attorney who specialized in securities, according to the sentencing memo. In 1994, according to Garland, Costanzo left lawyering and went into the airport food concession business.

Costanzo returned to the law in 2002. But he was an alcoholic, Garland said in his memo. Sober since 1996, Costanzo began drinking again in the summer of 2004, about the time that he was drawn into the fraud conspiracy. By then, Costanzo had also been diagnosed as having bipolar disorder, the memo stated.

“As he fell into the full grip of alcoholism,” the memo said, “the psychiatric drugs created a disorienting cocktail which substantially impaired his judgment. It was during this vulnerable mental state that he became involved with Leon Lumsden and others as a closing attorney.”

Lumsden used his investment firm, LL & Associates, to provide false employment and salary information for straw buyers so that they could qualify for bank loans, according to the indictment. Lumsden pleaded guilty last year to conspiracy to commit bank fraud, wire fraud and mail fraud and one count of bank fraud. He is scheduled to be sentenced in March.

According to Garland's sentencing memo, “Lumsden realized that by giving a little pocket change to Mr. Costanzo and keeping him 'lubricated,' that he would be able to use Costanzo to carry out his schemes, and that Costanzo, in his alcoholic mindset, could be led to perform acts without reflecting on the significance of his wrong doing.” Lumsden frequently entertained Costanzo at a nightclub he bought called “South Beach.”

Costanzo knew little of real estate lawyering, Garland argued in the memo. Another real estate attorney, who has not been named as a defendant, “prepared all of the documents necessary to close a sale,” Garland asserted. That lawyer's trust account “was used to handle the money and issue the checks. Mr. Costanzo's function was merely to meet the clients at the closing table and have them sign on the designated lines, and to explain in a very summary fashion what the documents were. He possessed very little understanding of the whole process before becoming involved in these closings.”

Moreover, Garland continued, Costanzo “never solicited anyone to participate in the fraudulent schemes, and in fact, his role was that of a mere 'scrivener' who just told people where to sign their names on forms generated by the computerized closing software.”

Confronted with the fraudulent transactions, Costanzo immediately began cooperating with federal authorities, Garland wrote. “His conduct in this case is inconsistent with his life character, which is why he has suffered so intently with shame and remorse.”

Correction: A Feb. 12 story about mortgage fraud—“Fraud case ruins real estate lawyer, attorney says”—that said Randall Tharp of Paddocks Development Inc. had been indicted should have said also that he had been acquitted.

Staff Reporter R. Robin McDonald can be reached at rmcdonald@alm.com