Talking about the seedy side of subprime lending at the height of the bubble seems redundant -- like talking about Jeffrey Dahmer's dark side. But a piece in BusinessWeek looks at an especially sleazy side of the industry: "Dozens of former brokers and wholesalers say the trading of sexual favors was so common that it came to be expected."

Wholesalers reportedly offered loan underwriters sexual favors in exchange for approving questionable mortgage applications.

The scenes described in the piece sounds like something straight out of the movie Boiler Room: brokers sitting in the middle of an office shredding some documents and altering others in plain view of their supervisors and harassment and termination for anyone who protested the illegality.

While there were scattered lawsuits and reports of impropriety while all this was happening, no one really paid attention to it until after the music had stopped. A huge portion of the homeowners who are currently facing foreclosure participated in some form of mortgage fraud that was condoned by industry insiders.

In October of 2004, Chris Swecker, former FBI Assistant Director of the Criminal Investigation Division, told House Financial Services Subcommittee on Housing and Community Opportunity that "The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market."

That's exactly what happened, but too much money was being made, and too many lap dances being given, for anyone to care.

I recently talked to a business owner who was in the process of raising capital. To this end, she paid a $20,000 upfront fee to a finder (a person who brokers equity investments and loans).

The result? Nothing. The finder said that a variety of banks were not interested in the deal.

Oh, and that $20,000 fee? Unfortunately, that was non-refundable.

With the credit crunch -- and slowing economy -- entrepreneurs are certainly having trouble raising money. But, there also appears to be a rise in so-called "advance fee schemes" (this is according to a recent piece in the Wall Street Journal, which is a paid publication).

In fact, the FBI is investigating the matter (and also has some helpful resources on its website). Although it could actually be pretty tough to prove fraud. Essentially, there must be evidence that the finder had no intention of raising the capital.

A lot of people have believed that Countrywide (NYSE:CFC) could not have come by all of those profits during the last few years without looking the other way on some loans. Indeed, according to The Wall Street Journal, "A federal probe of Countrywide, the nation's largest mortgage lender, is turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers."

In the cases of may of these mortgages, borrowers did not have to show proof of income or tax returns.

The FBI, which has been looking into all of this, believes that there was some fraud in the level of income loan officers reported that their clients had. That would make getting a mortgage easier, assuming the lender lied in the right direction.

The probe also raises the question of whether Countrywide had to say something about these loans and their problems in its public company filings.

These investigations always go the same way. The government finds that some mid-level people played fast and fancy with the rules. Then they want to know how far up the chain the practice was approved.

Maybe some people in the Countrywide executive suite are sweating.

Douglas A. McIntyre is an editor at 247wallst.com and author of the Ten Stocks Under $10 Letter.

The FBI says that deceptive practices at hedge funds and some banks may have made the subprime disaster worse. According to Reuters, the head of the agency said the bureau's investigation of potential fraud in the U.S. home mortgage industry now encompasses 19 companies in "cases that may have a substantial impact on the marketplace."

While insider trading and accounting fraud may be part of any charges which emerge, one of the biggest single issues may be the sales practices of the firms which sold subprime paper to their clients. The subprime instruments were often presented as having high credit ratings and safe risk profiles. Of course, it didn't work out that way. Another problem may be whether mortgage banks were completely honest in what they told home-buyers about how their loans would work as their interest rates increased over time.

Some of the investigation is a witch hunt. Large banks which took subprime instruments onto their balance sheets had plenty of genius-level analysts who could have examined the products. At most firms, so one skipped that part. Caveat emptor and all that. Individuals who took on home mortgages sold by people who did not want them to read the small print is another matter.

Rumors are that Goldman Sachs (NYSE:GS) and and Morgan Stanley (NYSE:MS) could be targets of the probe. Countrywide (NYSE:CFC) is already under investigation. One news report on the potential scandal said that FBI head man Robert Mueller told a meeting of lawyers "that their corporate clients should come forward and admit any wrongdoing before the FBI or Justice Department become involved.."

That'll be the day.

Douglas A. McIntyre is an editor at 247wallst.com.

The FBI is probing whether Countrywide Financial (NYSE: CFC) committed securities fraud by making false statements about the mortgage bank's deteriorating financial position.

The Wall Street Journal (subscription required) reports that a "potential issue facing the company is whether it has been candid in its accounting for losses. People familiar with the matter said that Countrywide's losses may be several times greater than it has disclosed."

Aside from the potential civil and criminal issues at stake, the investigation could kill the takeover of Countrywide by Bank of America (NYSE: BAC). It is not clear whether the mortgage company can make it as an independent operation if the big bank withdraws it offer. If auditors and the government determine that CFC losses are much greater than represented, it might drive the mortgage firm into insolvency.

The Bank of America deal is probably the only way that Countrywide shareholders can get any money for their shares. The company's stock has dropped from a 52-week high of $42.24 to just above $5, which is not much above its 52-week low.

The news reports of the FBI probe is likely to push shares lower. If new, significant losses have to be reported, the price of CFC's stock may go to zero.

Douglas A. McIntyre is an editor at 247wallst.com.

Government officials have a way of grandly stating what everyone else had known to be obvious for a long time. In this case, FBI director Robert Mueller called the epidemic of mortgage fraud that rose with the real estate bubble a "substantial problem."

The FBI is teaming up with the SEC to investigate 14 companies. According to the Associated Press, "As the nation's housing crisis worsens, there has been a dramatic spike in the number of mortgage fraud cases under investigation. An FBI spokesman said 1,210 such cases are open, up from roughly 800 a year ago."

The FBI has raised the number of its white-collar agents looking at mortgage fraud from 7% to 28% since 2003, and the case load has risen substantially as well. Back in December, Lita Epstein wrote about the soaring levels of mortgage fraud that are driving foreclosure numbers.

It's interesting to think about how much of a role mortgage fraud played in the housing bubble. Rampant lying on loan applications allowed people with shaky credit to buy houses they had no business buying. The effect was to flush tons of funny money into the housing market, causing a huge increase in home prices.

Bubbles and fraud seem to have gone together well throughout history, something I wrote about back in December. The effect of fraud is not just that it rips off the people who are defrauded; it creates a fundamental lack of balance in the market that leads to booms and busts.

MAJOR PAPERS:

• The Wall Street Journal reported that the FBI has opened criminal inquiries as part of an investigation over subprime mortgage issues. The probe into 14 companies will focus on accounting fraud, insider trading and securitization of loans.
• The Wall Street Journal also reported that Merck and Co Inc's (NYSE: MRK) osteoporosis treatment Fosamax is facing increasing scrutiny and lawsuits, as a growing number of patients allege the drug causes a condition called ONJ.
• According to a Federal judge, antitrust supervision of Microsoft Corporation (NASDAQ: MSFT) should be extended for two years longer than originally planned, until November 2009, the Financial Times said. The supervision was imposed as part of its landmark settlement in 2002, when Microsoft was accused of failing to produce an adequate licensing arrangement for certain protocols essential for rivals to work their own products through the Windows operating system.

OTHER PAPERS:

• The Economic Times reported that Ford Motor Company (NYSE: F) has decided not to retain any stakes in its Jaguar and Land Rover divisions after selling them to India's Tata Motors Limited (NYSE: TTM), according to sources.

Just in case you thought our public officials were doing a decent job, here's some more evidence that they're not: a Justice Department audit released today found that FBI wiretaps set up to eavesdrop on suspected criminals are sometimes cut off by the phone companies because the agency doesn't pay its phone bills on time.

This is our Federal Bureau of Investigation -- I can't even imagine what kind of gaffes happen at other agencies. According to the Associated Press: "In at least one case, a wiretap used in a Foreign Intelligence Surveillance Act investigation 'was halted due to untimely payment,' the audit found. FISA wiretaps are used in the government's most sensitive and secretive criminal investigations, and allow eavesdropping on suspected terrorists or spies."

Great -- the agency's failure to pay bills results in lost evidence, and sometimes prohibits us from learning about terrorist activities. There was even one FBI employee who stole money that was supposed to be used to pay for wiretaps.

This is indicative of some internal controls problems in Washington, and as politicians talk tough about keeping tabs on terrorist activities, remember -- it's all just talk if they don't pay the phone bills.

Thanks to the blog of the brilliant Floyd Norris over at the New York Times for this fascinating tidbit.

The FBI set up a fake hedge fund to invest in crappy penny stocks with the intent of losing a ton of money. It also cut a deal with a shady stock promoter to receive a kickback for buying the shares -- a pretty clear case of market manipulation.

The investment declined in value from $91,580 to $12,800 -- and the promised kickback never came. Great work guys! As Norris writes, "taxpayer dollars at work."

I'm all for cracking down on stock fraud, but you really have to wonder about this -- did the FBI really need to blow nearly $80 thousand of our money to prove that microcap fraud is alive and well? And if the promoters involved are like a lot of other promoters I've read about, the money probably went right up his nose or offshore somewhere -- and no matter what any order to "disgorge ill-gotten gains" says, that money is probably gone.

But still: Another good reason to avoid heavily promoted penny stocks. If the FBI invests in them for the sole purpose of losing money, that's probably a bad sign.

Maybe that was the reason all those state pension funds bought subprime debt. If not, it should have been.

WellCare Health Plans Inc. (NYSE: WCG), a provider of managed care services to government-sponsored healthcare programs, closed at $115.17. The U.S. Department of Justice announced that law enforcement personnel with the FBI, the U.S. Office of Inspector General and Florida Attorney Generals Medicaid fraud control unit participated in the execution of a federal search warrant of WCG's Florida headquarters. WCG option volume was heavy over the last five trading days. WCG overall option implied volatility of 44 is above its 26-week average of 35 according to Track Data, suggesting larger price risks.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

In a move that many consider to be long overdue, the FBI appears to finally be getting serious about spammers and their corrupt and deceitful practices. According to a press report on the issue, the FBI has 70 active investigations looking into spam related crimes.

The FBI is not only targeting spammers using networks of computers to send their messages, but it's also going to start getting more aggressive with stock spam campaigns. On Tuesday, the FBI even pressed charges against two Texas stock spammers who pumped 13 different penny stocks according to reports.

Anyone with an email and any interest in finance seems to find himself loaded with spam emails promoting stocks with guaranteed growth and gains to come. In fact I received a stock-pumping email just yesterday. Below is a sample from the email received, I've left out the company's name to ensure I don't give the pumpers the attention they're craving:

The Federal Bureau of Investigation says that the Internet has all but dissipated the international boundaries to crime. The nature of today's free world trade and the infrastructure that trade freedom requires have opened wide new avenues of exploitation for crooks and confidence games of many kinds. The worst part is that yesterday's mugger with a mask and a gun has become today's friendly banker who is offering you a low interest loan. The tactics are changing but the result is the same. Someone wants a chunk of your bank account... or the whole thing.

The Internet Crime Complaint Center, a partnership between the FBI and the National White Collar Crime Center issued a composite list of the top ten Internet facilitated crimes. Of all Internet associated crimes reported, auction fraud was number one, holding that spot with 44.9% of the total reported crimes. Non-delivery of goods came in a distant second at 19% of the total. Check fraud, credit card fraud and computer fraud combined for about 12% of the total. Financial center fraud, identity theft, investment fraud and child pornography rounded out the field with about 5% combined total.

In architecture and construction there is an old adage that comes to mind regarding the personal privacy we are afforded from Google or any other large organization, 'If water sits, water leaks.'

To paraphrase, 'If information sits, information leaks.' Well Google Inc. (NASDAQ: GOOG) has a database of user information that is growing exponentially faster than the company. It is increasing the amount of data it has and that it collects faster than its share price has climbed, faster than the number of employees have grown and faster than cash flows in the door. Tom Barlow discussed Google's ever-expanding interest in your personal internet travels and specific interests when he posted Google: Big Brother's tattletale son? last week.

From the beginning Google has always wanted to be viewed as playing fair and feigned a passive quality so as not to sound any alarms. No doubt it had good intentions and no doubt it also knew it might become the 800 lb gorilla in the room.

Beazer Homes USA Inc (NYSE: BZH), following in the footsteps of other home builders, has been reporting awful results. However, to add more fuel to the fire, a report by the Charlotte Observer wrote the FBI and the U.S. attorney's office in Charlotte, N.C., along with the Internal Revenue Service and the U.S. Department of Housing and Urban Development, launched an investigation of Beazer Homes last week. OUCH!

Everyone is going after this homebuilder. This is as bad as the political backlash following the tech bubble imploding which led to Sarbox.

Look for other district attorneys around the country to start going after other homebuilders and their relationships with mortgage brokers and lenders. Do you think homebuilders reduced lending standards in order to get rid of excess inventory? Why not when you can dump the loan in the secondary market.

The housing industry is getting uglier and uglier, as we have been blogging about for a long time. No need to bottom fish yet. Wait for the political backlash to crescendo before looking at this group again.

As Tom Taulli wrote earlier today, the number of accounts being infiltrated by computer hackers in Eastern Europe and Asia continues to rise, and your accounts at an online brokerage firm may be at risk. While E*Trade, TD Ameritrade, Schwab and Fidelity have promised to reimburse customers who lose money in their accounts due to fraud, the problem continues to grow. Who knows what the thieves will do with the information once they've gotten it by infiltrating your account?

E*Trade reported on a conference call last week that it spent $18 million in the third quarter to compensate customers affected by trading fraud, according to a report from Bloomberg. TD Ameritrade also admitted to losses, but gave no numbers. We may get more details when it reports its numbers, expected later today. Charles Schwab told Bloomberg that it didn't see "anything unusual enough to warrant a financial disclosure." Well, if I were a Schwab customer and my account were infiltrated, I certainly would consider it important enough for disclosure. I hope Schwab is being more candid with its customers. Fidelity did not comment on Bloomberg's story.

Bloomberg also reported that the FBI, the SEC and the NASD are trying to unravel exactly what is happening and how its being done. There are actually two types of fraud they are seeing. One is a classic "pump and dump," where hackers are opening an account in someone else's name and using it for illegal trading to pump up a stock. The person whose name was used for the account looks like the one responsible for the crime. Was the information used to open the account initially obtained by infiltrating an account at another online broker? No one knows for sure yet how it's done. The second type of fraud is straight theft, where hackers use personal information such as social security numbers to break into accounts. Once they have control, they sell securities and then wire the proceeds outside the U.S.

Javelin Strategy and Research of Pleasanton, California, estimates that identify theft will cost Americans $56.6 billion this year, according to Bloomberg. That doesn't even begin to account for the time it takes to clean up the mess after you've been a victim of identity theft. It can take years and hundreds of hours to get your financial history back on track. Good information about how to prevent identity theft and what to do if you are a victim is available from the U.S. Department of Justice.