Former executives and mortgage-related firms fighting a barrage of civil lawsuits are frequently up against the government as plaintiff. Some of the investor activity is being fought in criminal court, and one criminal action alleges that the board of directors and management of a Texas firm were hijacked by an organized crime family as the assets were looted.
Cedar Funding was founded in 1980 and provided private-money lending services from Monterey, Calif. The firm connected residential real estate developers with individual investors. But investors were misled about the company.
According to the U.S. Attorneys Office for the Northern District of California, Cedar Funding Founder David A. Nilsen pled guilty on Oct. 24 to federal charges that he deceived investors. The plea agreement calls for $69,828,833 in restitution.
Nilsen admitted to hiding defaulted loans from investors and hiding the true condition of the company from 2004 through 2008.
“They failed to inform investors that borrowers had defaulted, that Nilsen had taken over many of the loans, and that Cedar Funding had advanced substantial additional investor funds into those loans,” the government alleges. “Nilsen further admitted in the plea agreement that the increasing loan balances, combined with the declining value of the underlying real estate collateral, resulted in the amount of the loan exceeding the value of the collateral.”
Co-defendant Manoel Errico, who along with Nilsen was indicted in September 2009, is on the lam.
A class action lawsuit alleging that E*TRADE Financial Corp. harmed investors by making sour investments in mortgages and home-equity loans has been settled by the New York-based company. In a filing Wednesday with the Securities and Exchange Commission, E*TRADE said it has entered into a memorandum of understanding in the Freudenberg Action agreeing to pay $79 million.
E*TRADE, which noted that insurance carriers will pay around $68 million of the settlement, said it continues to deny that it committed any violations of law or breached any fiduciary duty to shareholders. A definitive agreement is expected to be presented for court approval in the first quarter of next year.
A settlement with former directors and officers of Washington Mutual Bank was announced on Dec. 15 by the Federal Deposit Insurance Corp., which originally filed its lawsuit on March 16 in U.S. District Court for the District of Washington. The amount of the settlement is $64,721,195 including $39,575,000 from insurance proceeds, $425,000 in cash from the defendants and the $24.7 million face value of the defendants’ bankruptcy claims are pending in the Chapter 11 case of Washington Mutual Inc., the former parent of WaMu.
The defendants in the WaMu case are Kerry Killinger, his wife Linda Killinger, Stephen Rotella, Rotella’s wife Esther Rotella and David Schneider.
The SEC obtained an emergency court order in October that froze the assets of James G. “Jay” Temme and his company, Stewardship Fund LP. The SEC alleges that Temme, who has raised at least $35 million since 2008, deceived investors about using the funds to buy and restructure pools of nonperforming home loans.
“Investors and their advisers, including the bank representative, were told by Temme that he was using the investors’ money to purchase ‘tapes’ of non-performing mortgages from mortgage lenders at a discount and then paying returns based on principal and interest payments he collected from the homeowners, or based on the resale of the mortgages or underlying properties,” the SEC said. “In several instances, however, Temme was claiming to own mortgages he had never acquired or purporting to transfer the same pool of mortgages to multiple sets of investors. To carry out his scheme, Temme created false documents, made unauthorized financial transactions, and used new investor funds to pay off earlier investors.“
A judgment for $28,675,731 has been entered in a consumer protection lawsuit against jailed OPFM president Wesley Alvin Snyder, the Pennsylvania Attorney General announced last week. Snyder’s wife, Sydney Snyder, was also named in the judgment. The funds will be used to pay restitution for hundreds of victims.
OPFM promoted wrap mortgages and loan participation agreements as a way for homeowners to reduce their interest rates and shorten their loan terms. But the program turned out to be a Ponzi scheme.
A $241,163 judgment was entered against former OPFM bookkeeper Cheryl Ann Bennetch. In addition, collective judgments against five former mortgage consultants — Jacquelyn Hepford-Rennie, Kenneth Roger Bennetch, Julie Ann Musser, Susan Louise Hunt and Amy Lou Styer — totaled $1.2 million.
An associate of the Lucchese organized crime family was among 13 people charged with racketeering and related offenses in an indictment unsealed on Nov. 1 according to U.S. Attorney for the District of New Jersey Paul J. Fishman. The defendants are accused of using extortion to take over FirstPlus Financial Group Inc. then looting the company through a series of fraudulent consulting agreements and acquisitions involving companies controlled by Nicodemo S. Scarfo and Salvatore Pelullo.
“The indictment alleges that Mr. Scarfo and Mr. Pelullo used economic extortion and threats of violence to seize and maintain control of a publicly traded company, successfully removing its entire existing board of directors and management,” Assistant Attorney General Breuer said in a news release. “Once in control, they allegedly used their criminal enterprise to extract millions of dollars from the company to fund their lavish lifestyles.”
Morgan Lewis reported that the U.S. Court of Appeals for the Second Circuit joined five other circuit courts in ruling on Oct. 19 that employer stock in a 401(k) plans are subject to a “presumption of prudence” that a plaintiff alleging fiduciary breach can overcome only upon a showing that the employer was facing a “dire situation” that was objectively unforeseeable by the plan sponsor.
“The appellate court found the plaintiffs had not rebutted the presumption of prudence and so upheld the dismissal of their ‘stock drop’ claims,” Morgan Lewis wrote.
Judge Otis Wright II, of U.S. District Court for the Central District of California, ruled on Dec. 13 in the FDIC’s $600 million lawsuit against former IndyMac chief executive officer Michael Perry that California’s “business judgment rule” of its Corporations Code doesn’t shield former officers from liability for good-faith decisions, Thomson Reuters reported.
A $150 million lawsuit was filed on Dec. 7 by Silverman, Thompson, Slutkin & White managing partner Steven D. Silverman against IMPAC Mortgage Holdings Inc. The Maryland law firm says its complaint focuses on the breach of the provisions of two written contracts that each created a separate class of preferred stock. Class action certification is sought.
A rejection by U.S. District Judge Jed Rakoff’s of a proposed $285 million settlement between the SEC and Citigroup Inc. was appealed by the SEC on Dec. 15 in the U.S. Court of Appeals for the Second Circuit in New York, the Wall Street Journal reported. The SEC’s enforcement chief was quoted as saying that the “district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors.”
Hundreds of millions of dollars are sought in a lawsuit filed in October by the bankruptcy trustee of Irwin Financial Corp. from former chairman William I. Miller, former chief financial officer Gregory Ehlinger and former executive vice president Thomas Washburn, according to Indiana Public Media.
