Lehman Execs and Auditors Face Civil and Criminal Inquiries and Lawsuits

This is pretty aggressive and pretty abusive. I don’t know how under GAAP this follows the rules whatsoever,” he said, referring to Generally Accepted Accounting Principles.“That reeks of an auditor who, rather than being really truly independent, is beholden to management,” he said, adding that the S.E.C. and the Justice Department should follow up on Mr. Valukas’s findings.

Executives at other Wall Street banks professed surprise at Lehman’s accounting maneuvers. Goldman Sachs, Barclays Capital and other banks said on Friday they did not use repos to hide liabilities on their balance sheets.

EDITOR’S NOTE: Surprised? Other than the people who thought they would not get caught, who is surprised by the fact that upon close scrutiny Lehman’s books were cooked and Ernst and Young “auditors” went along with it? Ask any “Joe” or “Jane” in the street if they are surprised.

So a few scapegoats are going to jail in the usual perp walk while most of the “masterminds” walk away with taxpayer money jingling in their pocket, with homeowners being bounced from their homes, with the economy in a death spin, and while their wallets bursting with cash, are replaced with more wallets in more places with more pockets.

Let’s put it very simply: If the experts are surprised they are not experts. Or, if they are experts, they are co-conspirators. To paraphrase Brad in the survey workshops they were either stupid or just plain lying.

But I didn’t post this because I am angry and outraged over the behavior of Wall Street, regulators, congress and the Obama administration. The reason I write this is to highlight the fact that persistence pays off. What was unthinkable, crazy, conspiratorial 3 years ago when i first started writing on this subject is now being accepted as axiomatically true.

If you persist in challenging the pretender lenders and demanding that the real creditor step forward, if you persist in getting a full accounting from the creditor (investor) down to the the debtor (borrower, homeowner), then you will magnify your chances of prevailing against a fraudulent foreclosure. Nearly all of the foreclosures during the past 3 years were fraudulent. Millions of people are thinking of their old homestead while they probably still own it, even though they left or were evicted.

Get your facts together, get that forensic analysis, get an expert to declare the truth, and get a lawyer who either understands securitized mortgage loans or is willing to learn. And don’t stop, don’t give and don’t leave until the last option of the last move has been played — because it is only THEN that the other side will cave in and offer you a reasonable settlement. And even then you still need to go to court with a quiet title action because the people offering you the deal are NOT your creditor and don’t know the name(s) of your creditor much less represent them.

March 12, 2010

Findings on Lehman Take Even Experts by Surprise

By MICHAEL J. de la MERCED

For the year that it took the court-appointed examiner to complete his report on the demise of Lehman Brothers, officials from Wall Street to Washington were anticipating it as the definitive account of the largest bankruptcy in American history.

And the report did just that when it was unveiled on Thursday, riveting readers with the exhaustive detail contained in its nine volumes and 2,200 pages. Yet almost immediately, it raised a host of new questions.

Now government regulators have what some lawyers call a road map for further inquiry into former Lehman executives like Richard S. Fuld Jr. and the auditing firm Ernst & Young.

Whether the Justice Department and the Securities and Exchange Commission will actually pursue their own legal actions is unclear. But legal experts said on Friday that the examiner, Anton R. Valukas, had provided plenty of material for civil regulatory action at the least with his findings of “materially misleading” accounting and “actionable balance sheet manipulation.”

“It’s certainly not helpful to any of them,” Michael J. Missal, a partner at the law firm K&L Gates and the examiner in the bankruptcy case of New Century Financial, said of some individuals accused of impropriety in the report. “It certainly assists private litigants and probably increases the pressure on the government to take some kind of action here.”

Representatives for the S.E.C. and the United States attorneys offices in Manhattan and Brooklyn declined to comment.

While Mr. Fuld and other former top Lehman officials are already defendants in a number of civil lawsuits, the new discoveries by Mr. Valukas have taken even veteran observers by surprise. Chief among these was the revelation of a particularly aggressive accounting practice, known internally as Repo 105, that Mr. Valukas said helped the investment bank mask the true depths of its financial woes.

Examiners in bankruptcy cases are appointed by the Justice Department to investigate accusations of wrongdoing or misconduct. Their job is to determine whether creditors can recover more money in these cases, and their findings often serve as guides for more lawsuits and even regulatory action.

What examiners are not asked to do is play judge and jury. Though the report contains strong language — Mr. Valukas deems Mr. Fuld “at least grossly negligent” in his role overseeing Lehman — it stops short of accusing anyone of criminal conduct or of violating securities law.

Patricia Hynes, a lawyer for Mr. Fuld, said on Thursday that her client “did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment.” She did not return an e-mail seeking additional comment on Friday.

Mr. Valukas’s findings have stirred loud discussion among legal and accounting experts over the ways Lehman sought to improve its quarterly results months before it collapsed.

Over hundreds of pages, Mr. Valukas details the genesis of and the process behind Repo 105. Based on standard repurchase agreements — short-term loans commonly used by many firms for daily financing needs, in which borrowers temporarily exchange assets in return for cash up front — Lehman took a particularly aggressive accounting approach to these transactions.

Here, the investment bank used repos to temporarily park assets off its books to make its end-of-quarter debt levels look better than they did — while calling them sales instead of loans.

The accounting tactic, first used by Lehman in 2001, had one catch, according to Mr. Valukas: no American law firm would sign off on its use.

Enter Linklaters, a highly respected British law firm that gave Lehman the answer it wanted. So long as the repos were conducted in London through the bank’s European arm, and so long as the company took other cosmetic steps to make these transactions appear to be sales instead of financings, Linklaters determined that they would pass regulatory muster.

A spokeswoman for Linklaters said on Friday that the firm was not contacted by Mr. Valukas and that its legal opinions were not criticized in the examiner’s report as wrong or improper.

Lehman also had the backing of Ernst & Young, which certified the bank’s financial statements despite receiving warnings from a whistle-blower who said there were accounting improprieties. An Ernst & Young spokesman said on Thursday that the firm stood by its work for 2007, the last year it conducted an audit of Lehman’s financial results.

But Lynn E. Turner, a former chief accountant for the S.E.C., accused Ernst & Young of abdicating its responsibility to the audit committee of Lehman’s board by not presenting the concerns.

“This is pretty aggressive and pretty abusive. I don’t know how under GAAP this follows the rules whatsoever,” he said, referring to Generally Accepted Accounting Principles.

“That reeks of an auditor who, rather than being really truly independent, is beholden to management,” he said, adding that the S.E.C. and the Justice Department should follow up on Mr. Valukas’s findings.

Executives at other Wall Street banks professed surprise at Lehman’s accounting maneuvers. Goldman Sachs, Barclays Capital and other banks said on Friday they did not use repos to hide liabilities on their balance sheets.

MERS AND COUNTRYWIDE V AGIN: THE DEVIL IS IN THE DETAILS

NOW AVAILABLE ON AMAZON KINDLE!

MERS and Countrywide v Agin Trustee D Ct Mass Aff’d B Ct on Avoidance Mtg 20091117

NOTE FROM EDITOR SEEKING HELP: Rumor has it San Diego has stopped all foreclosures. I need this corroborated or debunked quickly. Can I get a little help here?

The case in this POST comes out of Massachusetts where the cases are not quite stopped, but almost so — AND where property title insurance companies are NOT underwriting ANY policy that covers a home whose mortgage was securitized.

Many thanks to MAX GARDNER for this case and best wishes for his speedy recovery. He’s one of the titans of this movement. we want him around!

The primary point that needs emphasis here is that as you read this case you will see that if you give the Court something SOLID to hang its hat on, you can get the results you want.

The mistake being made repeatedly out there is simple: either the homeowner or the lawyer goes in with a legal argument addressing the conclusions of the case instead of directing the Judge’s attention to the beginning of the case — discovery, motions to compel, TRO etc. based upon discovery requirements.

The obvious requirement that you need to know in your mind what you are talking about it so you know the significance of the issue legally seems to  have escaped all but a few lawyers. Many lawyers are taking half baked “audits” going to court and making legal arguments about a report they have not read, do not understand and which does not contains all the elements needed anyway.

You must educate the Judge not lecture him. You must NOT rely on securitization in your preliminary arguments because it sounds like legal maneuvering to get out of a legitimate debt.

Unfortunately these mistakes are being made even by people who have attended our survey courses. So we are expanding our offering by adding DVDs, Boot Camps and home study.

Our own efforts at providing forensic review and expert support to lawyers has been challenged by the growing demand vs manpower limitations. Consequently, we will embark on efforts to increase the bandwith or resources in terms of people through educational programs. We will then start to refer cases to forensic analysts and lawyers.

We  are starting courses to train, and certify forensic analysts who pick up even the most minute flaw in a document — like a document you you know in your heart is fabricated and forged but feel intimidated by the process of proving it.

In conjunction with specific courses on training forensic analysts we will also offer addtional courses on how to be expert witnesses, how to prepare expert declarations and affidavits and how to defend your expert declarations in deposition or in an evidentiary hearing. The course is also for lawyers who feel they could use a little support on direct and cross examination of experts.


FOLLOWING THE MONEY — WHAT TO ASK FOR AND LOOK FOR

MANY THANKS TO DAN EDSTROM

Dan has put together a list which frankly I would like him to expand. Following the money means determining the party to whom you MIGHT owe money. It certainly isn’t the pretender lender and if you can fill in the blanks on this list you will be able to show that. Remember the burden is NOT on you to prove it, the burden is on you to ASK for it in qualified written request, debt validation letter and/or discovery (interrogatories, request to produce, subpoena duces tecum, and requests for admission). If you ever get someone the pretender lender offers to answer your questions at deposition make sure you specify that you will want the person(s) who are able to answer questions about the following items on this list.

Your forensic review can only estimate the some of the data. But the closer you get to answering more and more of these questions by aggressively enforcing their obligation to answer under federal law, state law and rules of civil procedure, the closer you get to proving that the wrong party is servicing the loan, the wrong party is collecting on the loan, and the wrong party is enforcing the note, while the obligation has been altered by events outside of the report that the foreclosing party is reporting to the court. Each time they fail to give you the right person or the information leading to the names of the investors/lenders, the amount still owed on the obligation (not the note), you will get the judge increasingly interested as to why they can’t come up with information they should have had when they started foreclosure. Remember this is not about getting a free house — it is about getting answers to your questions. You might end up with a free house as others have done or you might end up with a re-structured loan on terms you can afford. One thing is sure — when you DO have all the answers, the amount due is bound to be far different than the amount they are claiming.

Laymen will be confused by my distinction between the obligation and the note. Under law, the note is only evidence of the obligation and is often confused, even in court, with the obligation itself. It is that confusion that the pretender lender are leveraging so they can keep everyone’s eye off the ball — the true amount of the obligation, not the indisputable amount written on the note. By distracting the Judge into looking only at the note, they finesse the proof requirement as to what is really owed. The fact that the real lender has been paid or settled through federal bailout, insurance, credit default swaps etc., is kept off the table as long as you fall into the trap of looking at the note (merely evidence of the obligation) instead of looking at the entire transaction through the lens of the creation and payment of the obligation from all potential sources.

ITEMS TO DEMAND IN ACCOUNTING FOR THE OBLIGATION:

– Original face value
– Beginning Notional / Principal balance
– Pass-through rate
– Principal distribution
– Interest distribution
– Total Distribution
– Principal loss
– Interest loss
– Deferred Interest
– Ending Notional principal balance

– The accrual period
– Acrrual methodology
– Optimal Interest Amount
– Interest loss
– Deferred Interest
– Interest shortfall amt
– Other income
– Accrued certificate interest remaining unpaid

Other income detail:
– Certificate class
– Prepayment charge
– Remaining excess cash flow and OC release amount
– other income distribution

Interest shortfalls, compensation and expenses (per Group)
– Current prepayment interest shortfall amt
– Compensating interest
– net prepayment interest shortfall amount
– Civil Relief act shortfall count
– civil relief act shortfall amount
– Compensation
– – subservicer
– – master servicer
Advances by master servicer
– Allowable expenses per governing document
– non-recoverable advances

Prepayment interest and Basis risk/net WAC shortfall amount (by certificate class)
– [I will leave out this section)

Collateral summary
LOAN COUNT AND BALANCE (by group)
– original laon count / scheduled principal balance
– beginning loan count / scheduled principal balance
– scheduled principal
– curtailment
– payoff
– matured loans
– repurchases (by the way this is 0 for all months reported)
– beginning aggregate scheduled principal balance of liquidations (and?) charge-offs
– ending loan count scheduled principal balance

there is more, but I will just leave it at that. None of the information is specific to any one loan as I had hoped. But, they have to keep that info somewhere (use discovery) …

Thanks,
Dan Edstrom

Class Action Firm Seeks Central Missouri Homeowners

 Let’s do some networking here and help the lawyers who are helping us!

The lawyers in MISSOURI are seeking to make contact with homeowners in the central part of the State of Missouri in the following counties:

Howard, Boone, Callaway, Osage, Cole, Miller, Monteau, Camden, Hickory, Benton, Morgan, Pettis, Cooper.

Please send information to ngarfield@msn.com. All information will be kept strictly confidential.

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