Wire Fraud: Are Realtors® at Risk?

Contributed by Brett M. Woodburn

The statistics about the rise of wire fraud in real estate transactions are staggering. Recent reports released by the FBI suggest that more than 9,600 real estate consumers were victimized for more than $56,000,000 in 2017 alone. According to the 2017 Internet Crime Report, which was released by the FBI earlier this year, Pennsylvania is ranked 5th with over 11,000 victims of cyber-crime (not all real estate-related); and it is ranked 12th overall, with our citizens suffering more than $36,000,000 in losses.  https://pdf.ic3.gov/2017_IC3Report.pdf

These numbers are so large that it is difficult to grasp and relate their significance to our daily practices. Real estate brokers and agents, especially those who have ownership interests in title agencies, need to pay particularly close attention because on June 25, 2018, a listing broker was found to be 85% responsible for a buyer’s loss resulting from a wire fraud scam.

The Buyers, Jeffrey and Jennifer Bain, contracted for the purchase of a residential property in Kansas City, Missouri. First National Bank of Omaha (“FNBO”), was the lender and entity that wired the proceeds; Continental Title Holding Company (“Continental”), was the title agency; and Platinum Realty and Kathryn Sylvia Coleman (“Sylvia”), were the listing broker and agent.

The Buyers were helping a family member buy a home; he needed their help because he was going through a divorce. The Buyers were not represented by a real estate agent in the transaction, because they believed they would have better negotiating power in determining the purchase price of the property. The Buyers secured a line of credit from FNBO to purchase the property, rather than using a more traditional purchase-money mortgage. Ms. Sylvia was the listing agent and the primary point of contact for the Buyers. She used a free web-based e-mail account through Yahoo, rather than a company-based e-mail account. The evidence that was presented indicates that all of the parties, including the title agent, Realtor® and lender, communicated with the Buyers through unsecured email transmissions.

At some point in the process, Ms. Sylvia received an e-mail from the Buyer, and that included the family member who was ultimately going to live in the property, requesting a copy of the closing statement and wire instructions. Unfortunately, Ms. Sylvia did not verify that the e-mails were authentic; one letter in each of the sender’s e-mail address had been changed. Ms. Sylvia requested the information from Continental, and received an e-mail that included a copy of the closing statement and wiring instructions from the title agency. Or so she thought. Once again, Ms. Sylvia failed to verify that e-mail address was authentic; it, too, had been altered. Ms. Sylvia forwarded the e-mail directly to the Buyers without making any attempt to verify its accuracy or authenticity.

As settlement drew closer, pressure was applied to the Buyers to wire the proceeds to the title company sooner than initially expected. The Buyers received an e-mail from Ms. Sylvia’s Yahoo account informing them the title company required the funds to be delivered to it no less than 48 hours before closing. Ms. Sylvia argued that she was not the sender of the e-mail; her account had be ‘hacked’! It is undisputed that the e-mail originated from her Yahoo account. The parties were not able to ascertain who the actual sender of the e-mail was, in part because Ms. Sylvia deleted many of the e-mails relevant to this transaction shortly after the theft was discovered.

The evidence presented at trial clearly established several critical facts: (i) Continental, FSBO and Ms. Sylvia were communicating with the Buyers and with each other through unsecured e-mail communications; (ii) Ms. Sylvia was using a free web-based e-mail account, and her account was compromised; (iii) none of the professionals in this transaction appear to have used any type of voice authentication or verification protocols. There is no evidence to suggest that either Continental or Ms. Sylvia advised the Buyers of the risks of wire fraud, or counseled them on how to avoid becoming victims of wire fraud.  Ultimately, the Buyers wired $196,622.67 directly to a thief.

Continental and FNBO settled with the Buyers before trial.

At trial, the Buyers successfully proved that Ms. Sylvia and Platinum Realty were guilty of negligent misrepresentation. Ms. Sylvia argued that she was not responsible for the Buyers’ loss because she was not the actual sender of the e-mail that included the fake wire instructions. The jury, and the court that reviewed the jury’s findings, found otherwise. The court summarized Ms. Sylvia’s arguments as follows:

[The] hacker sent the fake wire instructions to Mr. Bain, and [ ] because Ms. Sylvia’s e-mail with the fake instructions went elsewhere, she never actually sent the fake instructions to Mr. Bain – which would mean that she did not make any representation to the Plaintiffs concerning where the money should be wired, and thus cannot be liable for negligent misrepresentation.

Bain v. Platinum Realty, LLC, 2018 W.L. 310 5376, *2 (D. Kansas, June 25, 2018).  The jury didn’t buy it, do you?

The court affirmed the jury’s finding that by supplying the wiring instructions to the Buyers, Ms. Sylvia was verifying their authenticity. The court seemed to conclude that Ms. Sylvia had a duty to verify the source and accuracy of the wiring instructions, if for no other reason than she voluntarily assumed responsibility for being the point of contact between the title company and the Buyers. Importantly, the judge, the jury, and even by Ms. Sylvia herself, believed that it was reasonable for the Buyers to rely on information that she sent to them.

These facts could potentially lead to a similar result in Pennsylvania. Brokers should be considering, at what point will the absence of policies or procedures implanting commercially accepted security protocols rise to a violation of licensing laws, or even the NAR Code of Ethics? Ms. Sylvia and Platinum Realty now have 196,129 reasons to consider this.

What are YOUR protocols?

For more information contact Brett Woodburn.