Law Professor and Criminologist William K Black has provided many lectures and written many articles covering the crimes of “Control Fraud”. Crimes alleged to have been committed at the highest echelons of government and some of the largest corporations in America.
When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse
Let us deal with the “borrower fraud” argument first because it is the area containing the most erroneous assumptions. There was fraud at every step in the home finance food chain: the appraisers were paid to over value real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers’ incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.
That homeowners would default on the nonprime mortgages was a foregone conclusion throughout the industry — indeed, it was the desired outcome. This was something the lending side knew, but which few on the borrowing side could have realized.
…
When the overburdened homeowner began missing payments, late fees and higher interest rates kicked-in, boosting the stated income of mortgage servicers and the value of the securities. Not coincidentally, the biggest banks own the servicers and could maximize claims against the mortgages by running up the late fees. It was quite convenient to “misplace” mortgage payments, so even homeowners who were never delinquent could get hit with fees and higher rates. And when payments were received, the servicers would (illegally) apply them first to the late fees, meaning the homeowners were unknowingly still missing mortgage payments. The foreclosure process itself generates big fees for the SDI banks.
My focus in this series is on only one, based on multiple lawsuits and allegations made against one of the largest corporations of lender foreclosure processing services in the nation: LPS; Dan Phelan; and Great Hill Partners.
The allegations of Control Fraud have been made by plaintiffs that include the US Bankruptcy Trustee for the Northern District of Mississippi as outlined in this case transcript.
LPS is a publicly traded corporation with control exercised by founder, Chairman, and former CEO Dan Phelan, members of Great Hill Partners, Jeff Carbiener. (Alternatively spelled as C-A-R-B-I-N-E-R by an LPS employee based on testimony provided at a deposition).
.
Dan Phelan characterized himself in LPS literature thus:
Quote:
In 2005, GHP was looking for a way to invest in the expected downturn in residential housing when Chairman and former CEO Dan Phelan was contacted. Phelan, a lawyer by training, had built a large processing business providing foreclosure and bankruptcy technology for the residential real estate market. Interestingly, the operations were co-mingled inside a working law firm. In order to provide founder liquidity and prepare for a national business expansion, Phelan interviewed several private equity firms to lead a transaction. GHP worked with Phelan to create a stand-alone commercial enterprise in a novel “spinout” from the law firm. Importantly, GHP was able to introduce a CFO and CIO from a prior successful portfolio investment to work with Phelan on the project.
.
As Phelan parted the restaurant he may not have informed guests at the table of being scorned by paramour Fannie Mae. There were issues of more immediate concern. He needed to contact associates in Las Vegas. Their services would be needed to attend to a matter that might send terror down the spines of some lawyers. D-I-S-C-O-V-E-R-Y had been granted to plaintiffs in Nevada. Their services would be needed to take a deposition in Reno.
.
Previously, in a different case another deposition had been taken at an Alabama courthouse in July of 2009. Pieces of a puzzle were coming together against “the firm”, that would be assembled into a formal complaint with plaintiffs that would include a US Bankruptcy Trustee.
The formal complaint, undoubtedly including fruits from their discovery, in various places, reflected verbatim, indicates:
***
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.
LPS Default used its offer to the national mortgage servicers to manage these defaulted loans “for free” to capture the lion’s share of the default mortgage servicing market for its LPS Desktop software product.
In the registration statement filed by Prommis Holdings related to its proposed initial public offering Prommis Holdings states that the services that Prommis Solutions provides to its purchased law firms have been deemed to be the practice of law in many instances.
Nevertheless, the incredible cash flows and profit opportunities presented by this “high-speed and high-volume” default servicing business caused all of these parties to cast aside the concerns over the illegality of this arrangement.
In its desire to shield Great Hill from the liability its actions were bringing on itself, Great Hill sought to create a corporate structure which would provide the requisite control over this transaction but would appear to be a legitimate corporate shell for this otherwise illegal conduct.
Great Hill Partners hoped that structuring the Prommis transaction in this manner would protect it from legal liability for its intentional conduct and actions in the creation of this illegal enterprise.
Great Hill Partners intent in structuring this transaction in this manner was to manufacture for itself “cover” in the form a controlled corporation which could be easily cast aside in the event legal or regulatory authorities came after this transaction.
In effect Great Hill needed absolute control but in the form of a separate corporate structure which could be discarded in a quick and dirty bankruptcy filing if the deal went bad without Great Hill being subjected to liability directly for its wrongful conduct.
This domination and control is so complete that Great Hill has de facto control over both of these entities employing the Rockefeller corporate mantra of “control everything”.
This structure was created as a corporate sham for an illegal purpose in an effort to make these companies appear independent when in fact Great Hill maintains complete control over its quarter billion dollar investment.
By purchasing the four law firms through the Prommis structure it is clear that Great Hill intended to reap a much higher return on its investment by controlling a national operation with much higher income.
The SEC filings by Prommis Holdings lay out in keen detail the clear fact that Great Hill structured the Prommis transaction as a vehicle for Great Hill to control this illegal business model while attempting to protect Great Hill from financial penalty in the event that the scheme was uncovered.
“Great Hill will, for the foreseeable future, have significant influence over our reporting and corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval .Great Hill is able to, subject to applicable law, designate a majority of the members of our board of directors and control actions to be taken by us and our board of directors, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of all or substantially all of our assets. The directors so elected will have the authority, subject to the terms of our indebtedness and the rules and regulations of the New York Stock Exchange, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions.
These actions may be taken even if other stockholders oppose them. Great Hill’s ownership of a large amount of our voting power may have an adverse effect on the price of our common stock. The interests of Great Hill may not be consistent with your interests as a stockholder. After the lock-up period expires, Great Hill will be able to transfer control of us to a third-party by transferring their common stock, which would not require the approval of our board of directors or our other stockholders.
our restated certificate of incorporation will provide that the Delaware General Corporate Law doctrine of “corporate opportunity” will not apply against Great Hill, or any of our directors who are employees of, or affiliated with, Great Hill, in a manner that would prohibit them from investing in competing businesses or doing business with our customers. It is possible that the interests of Great Hill may conflict with our interests and the interests of our other stockholders, including you.
We will be a controlled company within the meaning of the New York Stock Exchange rules, and, as a result, we will be excused from compliance with certain corporate governance requirements that apply to other listed companies.
Because Great Hill owns a majority of our voting equity, we will qualify as a “controlled company” for the purposes of the New York Stock Exchange listing requirements. As such, we will be exempt from the New York Stock Exchange corporate governance requirements that our board of directors, our Compensation Committee and our Nominating and Corporate Governance Committee meet the standard of independence established by those corporate governance requirements.
The New York Stock Exchange independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. Accordingly, for so long as we are a controlled company, holders of our common stock will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.
*** The structure of this arrangement begs the logical questions:
a. May a non-lawyer entity create, finance, control and dominate another non-lawyer entity for the purpose of:
1. Purchasing law firms; 2. Engaging in the unauthorized practice of law; 3. Illegally splitting attorneys fees and 4. escaping liability by virtue of placing the intermediate non-legal entity between itself and the illegal activity to give the appearance that the “mastermind entity” is not directly involved in the illegality?
***
Through the business model Great Hill Partners is directly engaged in the unauthorized practice of law and illegal fee splitting by exercising dominant control over Prommis Holdings, Prommis Solutions and the law firms “purchased” by Prommis Holdings.
These firms sold out their professional obligations in exchange for the flood of default related work controlled by LPS Default through its monopolistic control of the default services market.
In furtherance of, and in full blown demonstration of, their professional failings to the Bench and the Bar, these network firms, including Johnson & Freedman, shirked their ethical obligations and began to repeatedly seek fees from this Court and others without disclosing the existence of these agreements and these express arrangements to share compensation.
The plaintiffs allege that Great Hill Partners, along with Dan Phelan, a founder of McCalla Raymer and the Chairman of the Board of Prommis Holdings, engaged in “control fraud” as that term has been defined to control the actions of Prommis Holdings, Prommis Solutions and Johnson& Freedman for the purposes of engaging in an otherwise illegal course of conduct.
Each of the elements elicited in the description of control fraud by Mr. Black are present in the case before the Court and are being wielded by Mr. Phelan and Great Hill through the Prommis entities and the law firms they “purchased” to commit an ongoing fraud on the Bankruptcy Court.
Each of the elements elicited in the description of control fraud by Mr. Black are present in the case before the Court and are being wielded by Mr. Phelan and Great Hill through the Prommis entities and the law firms they “purchased” to commit an ongoing fraud on the Bankruptcy Court.
***
The fraud is anti-consumer. It is in effect a “tax” on those less fortunate souls who find themselves in difficult economic straits and who seek protection under the Bankruptcy Code.
Mr. Phelan and Great Hill have formed a cartel of ethically compromised law firms and “vendors” (LPS Default) who are working together to maximize the fraud.
The Cartel is defrauding consumers through a scam about the veracity of the fees being sought by the cartel members in official Court proceedings. There is procurement fraud by the Cartel because the Court as the “buyer” of the false representations of the Cartel is unwittingly approving fees which the Court would never authorize with full knowledge of the fraud.
The control fraud is predatory in that it exacts predatory fees for its profits from our nations most economically distressed population.
The Fraud creates and betrays trust by hinging upon them is representations of officers of the Court who, unbeknownst to the Court, have become members of the Cartel and are actively facilitating the Fraud for their own economic benefit. The gain to the Cartel is far smaller than the loss to the victims because the innocent users of the Court system become unwitting victims of plunder and the Court is misled into allowing predatory practices to go on in its very presence thereby degrading and debasing the very Halls of Justice for the advancement of a fraud.
The Fraud has created economic inefficiency because the fraud has limited those officers of the Court representing these Creditors to only those attorneys and firms who are susceptible of being ethically compromised rather than choosing Counsel on merit and ability and other natural economic forces.
The fraud and resulting losses to the Court and the class members is far greater because Mr. Phelan and Great Hill are in control of and utilizing all of the resources of the Prommis entities including the law firms to further the fraud.
***
This fraud has enabled the Cartel to reap “supra-normal” profits through its fraud conduct and endangers public safety by undermining the integrity of the Court and the Court system.
Perhaps no clearer validation of Mr. Black’s definition could be had than his statements from paragraph 379(g) herein “Whenever fraud creates real cost savings an additional problem arises…..frauds that produce a competitive advantage must be vigorously prevented by public authorities or they will create an incentive for rivals to emulate the fraud.”
LPS Default has created its own fraudulent cartel of “network firms” which has gone unpunished with its monopolistic competitive advantage for a number of years.
This control fraud has also corrupted and defiled the Court by virtue of the Cartel using the tool of fraud on the Court in its filings before the Court as a means to secure its illegal profits and impose its tax on the class members under the apparent authority of the Court.”
***
In a recent article William Black and Randall Wray opined:
“a few judges began to question the foreclosures, as they saw case after case in which the banks claimed to have lost the paperwork or submitted amateurishly forged documents. Or, several banks would go after the same homeowner, each claiming to hold the same mortgage (Bear sold the same mortgage over and over). Insiders began to offer depositions exposing fraud and perjury. It became apparent that in many and perhaps most cases, the trusts responsible for the securities (often these are “special purpose” subsidiaries of the banks) never received the “notes” signed by the borrowers — as required by both IRS tax code and by 45 of the US states. Without the notes, billions of dollars of back taxes could be due, and the foreclosures violate state law.”
***
I’ll cover some of those and other issues as they apply to LPS in future episodes.
Dan Phelan returned to his limo, instructing his driver to head home; breathing a sigh of relief into the raspy Atlanta air. As the black limo sped into the sullen night it crossed many streets. Had Phelan looked down one of the streets he might have noticed a shadowy figure rummaging through a trash can; reaching in; and devouring a morsel of another’s “left overs”.
A victim of the firm’s abusive bankruptcy fees. If not for the abusive fees the shadowy figure could have held onto his job and afforded a rental. Without a rental holding onto his steady job proved impossible. Without the income he was tossed into the streets of despair and violence where each day is a chore of survival. Too embarrassed to ask for handouts his empty stomach cried out for sustenance. He could only hope the morsel of food extracted from a trash can was safe for human consumption.
It’s a sad period of time in America; that closely mirrors the great depression. Over 40 million people live on food stamps. Some, like the shadowy figure mentioned above, may not even have food stamps – for one reason or another.
In an age of irrational exuberance thousands of people were sold homes. They were told they could afford them. They were told home prices would never go down. They were sold the American Dream.
All too sadly, instead the homes they purchased were so dramatically inflated in value by fraudulent appraisals there was absolute certainty of their ultimately becoming underwater.
…
***
Lenders who gave loans to borrowers they knew could never afford the dream homes they “purchased”. Borrowers who only know LTV as three letters in an English alphabet. Many had been charged excessive and abusive fees, but were too illiterate, too exuberant, or too irrational to recognize they had been “conned”.
Forced into bankruptcy and/or foreclosure by servicers and “firms” like LPS the same borrowers were ripe for additional abuse. Charged a second round of abusive fees, fees often split with multiple parties that turned the American Dream into an unending nightmare.
Many blame themselves. Having fallen back on mortgage payments they were or are unaware claims against them might be made against them by parties unknown; back-dated assignments to and from lenders that no longer exist; notary stamps bearing signatures from non-notaries, forged signatures …. and sometimes even wholly forged documents !
twainsthoughts.wordpress.com 