If you had used a Realtor when you made the Offer, and a CMA told you what the property was worth, then you might now own the house.
Don't blame someone else.
LA probably did not break the law,however, there are many things we don't and can't know at this point.
When we have a Short Sale or REO property many things come into play where offers are concerned. She may have had offers way out of the ball park, but when the offers were examined, they were not good ones. It's not unusual to get stacks of offers on a single property in this market. We had a property once that had over 50 offers!
I hope you are working with a professional Buyers Agent on this. You agent would have informed you to leave your offer on the table with a small good faith deposit while looking at other things. It's possible that the sister was always interested and when you pulled out, her offer was the best one standing.
Since you now say the property is somehow "back on the market" we can only assume the sister was not a qualified buyer either.
My suggestion is to retain an excellent "Buyer Agent" and start again on other property. If you can avoid shor-sales...so much the better. Standard sale homes are well priced right now, and interest rates are at an all time low.
If the buyer and you offered the same amount, then why do you deserve the home more than the other buyer?
I don't know how you have confirmed the LA and buyer are related, so I have no comment. But if true, some banks do not approve of "non-arms length" short sales.
What is the fraud you are claiming? What is you evidence?
Also, there may have been a higher offer, but you don't know whether it ailed to appraise, or what the circumstances of the deal are....
If you are still interested in the property, I urge you to get your own Realtor.
Diane Wheatley, Broker