Episode I: PROMMISes To a Mississippi Bankruptcy Court
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Excuse me for taking a little poetic license to weave the diatribe from this case into a tale of intrigue, mystery, and greed. You could pick-up a cheap book of mystery and intrigue to read from your local bookstore at a little expense, or alternatively cuddle up to this all too real case transcript laying a case against a few greedy investment bankers and lawyers available at:
or… follow me as I weave the facts into a fictionalized Roman-a-clef, realizing a few names and places to incriminate the (alleged) guilty. All rights reserved. All wrongs reversed.
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As I read through the transcript I can’t help picturing a chauffeur driven black limousine driving down the most elegant streets of Atlanta to one of the city’s finest dining spots. Before arriving a call is made to a Blackrock investor from Dan Phelan – the man inside the limo, re-assuring the man on the other cell their investment with LPS / Prommis Solutions is sound. Everything is under control. In fact, he mused, the company would be bringing forth Promiss Solutions as an additional IPO soon to be tickered PRMS.
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Control. A word used frequently in a complaint set against Dan Phelan, his Great Hill Partners, Prommis Solutions Holding Corp, Johnson & Freedman, and LPS Default Solutions. Control. Something Dan Phelan kept close to his heart. Everything was always “under control”.
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Shortly after arriving he and his guests were seated around a reserved table where he ordered and sipped on an aged Chianti while devouring ribs cooked to perfection on a wood-fire grill. Although costly his dollars probably went further in Georgia than any other state and the country. Irrespectively, cost for dining and entertainment was of little consequence now that he had become a multi billionaire.
From whence had Phelan raised his good fortunes. It started with an ambition for wealth, and thinking big, very BIG. He made his immense fortune primarily skimming fees in the foreclosure / bankruptcy business that erupted due to the sudden end of an over heated market in home sales built on the back of fraudulent sales to people who could ill afford to buy homes, but fell into the trap of broken promises; cheap money; securitization; and pursuit of the American dream.
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When you first watched Star Wars Episode II you were undoubtedly awed as a JEDI ship dived into the depths of an immense ocean in an alien world named naboo. Their craft is chased by an immense monster named an opee sea killer where escape seems unlikely. Master Jedi Qui-Gon Jin turns to Jedi in training Obi-Wan Kenobi announcing “there’s always a bigger fish”. Suddenly, as if on, cue a gigantic Sando Aqua monster many times the size of the opee sea killer appears devouring the opee and saving the Jedi craft in the process.
How does one skim billions of dollars in fees from families turned to foreclosure and bankruptcy proceedings. Well …. you start with a premise that the market of properties dipping into bankruptcy… is priced in the trillions! That was a characterization Dan Phelan made, as dollar signs danced in his eyes.
“The largest mortgage servicer manages in excess of $2 trillion in loans.”
As presented in the transcript of formal allegations: “the fee income for default services is billions of dollars to the industry’s top players.”
To capture a big chunk of the cases facing courts for foreclosures and bankruptcy proceedings Phelan needed a hook. The hook would be to offer his services… to the “services” for “free”.
“To gain its incredible market share in the default servicing industry LPS had one thing it could offer that its competitors could not, the ability to perform its services for free”.
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In its own sworn testimony LPS Default acknowledges that it does not charge the mortgage servicer clients of its parent, LPS, any fee of any type for the services LPS Default provides to them through its contract with the mortgage servicers called a “Default Services Agreement” or DSA.
In reality
“Through this group of subsidiaries LPS attempts to provide as many services as possible for a fee to its mortgage servicing clients, a noble corporate ambition.”
His hook was successful:
“Within the mortgage marketplace the LPS software product MSP holds a dominant portion of market share for mortgage servicing software used by mortgage servicers”.
Section 2.5 of the DSA requires the servicer to select a law firm who has executed a “network agreement” with LPS Default and “LPS Default shall be responsible for managing Fidelity Network Law Firms”. This section goes on to provide that “Prior to performing any services, all Network Firms must have entered into the Network Agreement, and the servicer Local Counsel Agreement (the “LCA”) directly with the servicer.
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Because LPS Default made the offer to provide these services for free to mortgage servicers, the vast majority of national mortgage servicers were faced with the proverbial “offer they could not refuse”
As one would logically expect, the national mortgage servicers leapt at the chance to dump all their problem loans on LPS Default for free.
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The result of the contractual arrangements found in the DSA left LPS Default with the lion’s share of the market for “default services” as attested to by LPS in its SEC filings.
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The effective use of the DSA’s between LPS Default and the national mortgage servicers resulted in LPS Default having under its control and concurrent access the vast majority of the multibillion dollar default services fee market in the entire country.
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This effectively put LPS Default in the position of Mephistopheles to its “Network Firms” role of Faust.
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Perhaps the legal transcript’s characterization to the role of LPS as Mephostophiles is not inaccurate. The firm’s wealth grew quickly. They used the funds to purchase their network of referenced law firms giving them not only additional control over their fraud upon on the courts, but perhaps buying not only a set of able bodied lawyers..but also their very souls. They became the first publicly traded corporation of lawyers.
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In fact their MSP “cradle to grave” software served as a Trojan Horse, initially installed at the servicers, now easily accessed from a web browser, gives them complete access to their files, and the ability to mine the data for their own commercial use. Their “Promiss” Aptitude software provided LPS with unlimited and potentially unaudited remote access to nationwide servicer data. Not only could they access the data, but as you will find in a future episode they could add, change, and delete servicer data.
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Fees directed to LPS would be garnered by agreements by a network of law firms provided referrals. LPS created contractual clauses to keep the fee sharing agreements secretive because:
“the guidelines for mortgage servicing published by the GSE’s (Fannie and Freddie) generally take a dim view regarding referring work or services for a fee or kickback.”
Phelan was aware, fee sharing for such services was also illegal in every state of the union.
In a DSA contracted with their servicers (ie: GSEs) LPS falsely warrantees:
Section 5.4(e) of the DSA is a representation and warranty of LPS Default to the servicer that it is not the subject of investigation or litigation relating to claims that LPS Default is involved in (i) the unlawful referral of foreclosure, bankruptcy, or eviction matters, (ii) the unauthorized practice of law, and / or (iii) unfair or deceptive trade practices in the provision of the services set forth in the agreement.
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With respect to fee splitting:
In addition to the DSA, there is another central contract in this arrangement. This agreement is called a network agreement and it is executed between LPS Default and their “network law firms” such as the defendant Johnson and Freedman.
The network agreement sets forth the services LPS Default provides to the lawyers and the fees that the lawyers pay LPS Default.
The attorney’s fees that the servicer agrees to pay the network firms negotiated by LPS Default for the network firms and listed in the DSA under Schedule D.
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LPS and its Network Firms assiduously maintain the Network Agreements under a cloak of secrecy.
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When debtors request copies of any such agreements during attempts to contest the reasonableness or necessity of these fees and charges ,LPS Default and the Network Firms claim that they contain business proprietary secrets and thus are protected by a privilege of privacy, when in fact these defendants’ intention in keeping the agreements secret is to prevent disclosure of their illegal practices.
…continued in Tale of Greed, Episode II: Domination of Control
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Related Notes, Links, and Video Clips:
On the Retained Attorney Network – Claims of Abuse
Interviewer Paul Jay: Control Fraud: Fraud controlled at the highest level of institutions”
“80% of the losses occur when LENDER personnel are involved. These are frauds coming from the lenders overwhelmingly, not the borrowers. The only reason the other 20% by borrowers is possible is because the lenders deliberately gutted underwriting standards.”
“Even if they are not bailed out, the senior executives walk away rich. The failure of the firm IS NOT the failure of the fraud scheme.”
“This kind of accounting fraud is a SURE THING.”
“It’s a four part recipe”:
1. Grow like crazy. Have an exceptional growth rate. .. (Fits LPS)
2. “Make deliberately bad loans that are not going to be repaid – because you an charge higher interest rates for those”. .. (Fits the banks and GSEs using LPS services.)
3. Have extraordinary levarage. .. (Fits the banks and GSEs using LPS services.)
4. Don’t put loss reserves on your accounting books. That makes it looks like you are making profits. .. (Fits the banks and GSEs using LPS services, and possibly LPS.)
“Loss reserves fell to record lows even as they made these bad loans. That is why we have the catastrophic losses we do.”
“There’s something called the PROMPT CORRECTIVE ACTION LAW that mandated regulators shut down these insolvent banks. .. That law has been systematically evaded.”
“This has been done for the SOLE purpose to have us pretend there’s been a massive recovery in the banks, and to allow these banks to pay these bonuses Obama has called outrageous.”
“They are only possible because the rules were “GIMMICKED” for the benefit of the bankers.”
“We now have SOCIOPATHS in control of our major financial institutions.”
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Note: I do not accept donations at this time. However, you are welcome to make donations to the producers of these fine videos at The RealNews Network and PBS:
Bill Moyers Journal – FollowUp on Control Fraud / William K Black
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William K Black: Statements Before Congress on Lehman Failure
“Sad excuses. The SEC – we are told there are only 24 people in their “Comprehensive” program. Who decided the staffing? “THE SEC DID! To say there were only 24 people is not an excuse. It is to give an admission of criminal negligence! Except it’s not criminal – because you are a federal employee.”
His testimony is astonishing!! .. Bernanke sent ONLY TWO PEOPLE to monitor Lehman in-house, while Geithner claimed their failure sent their failure sent the economy into the brink of financial collapse!
“Central banks for centuries have gotten rid of the heads of financial institutions”. [sic: Had regulators forced corrupt executives at Fannie Mae and Freddie Mac to resign after putting the GSEs into conservatorship obscene, aggregious federal funding to defend them for their acts at trials would have been unnecessary. Instead they could have been investigated, charged, and indicted if determined to be guilty of criminal acts. ]
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William K Black: “FIRE HOLDER, FIRE GEITHNER, FIRE BERNANKE”
“There are millions of loan frauds” (Caused by actions of the lenders).
The Fed through Bernanke, the American Bankers Association and the Chamber of Commerce lead the cover-up. They extorted Congress and perverted the Financial Accounting Standards Board (FASB) to allow asset prices held by institutions to be fictionalized and hide losses by the banks. As a result they report fictional income and massive bonuses.
Ambac: 97% of the Loans Sold To it by Countrywide were sold under false reps and warranties.
Dylan Ratigan: A very REAL and NOT A DISMISSIVE response is required for this problem.
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