B of A Files Fraud Suit Against Firms, Fires 5 Over $95-Million Loss
Bank of America filed suit Friday against three companies and their officers, alleging that they defrauded the bank of $95 million through an elaborate mortgage-securities scheme.
Named in the suit, filed in U.S. District Court in Los Angeles, were National Mortgage Equity Corp. and its president, David A. Feldman; West Pac Corp. and its president, Kent B. Rogers, and the Chicago law firm of Lord, Bissell & Brook and partner Leslie W. Michael.
The nation’s second-largest bank also said it fired five employees and demoted a sixth, accusing them of “gross negligence” in their handling of the mortgages. They and two insurance firms that wrote policies protecting the bank against employee misconduct were sued in state court in a separate action to recoup the bank’s losses.
The two cases seek recovery of the $95 million, plus $100 million in punitive damages and triple damages under federal racketeering laws.
Questions Remain
“The bank has been victimized in this affair and we intend to go after every appropriate source of recovery,” said Samuel H. Armacost, president and chief executive of BankAmerica Corp., the bank’s parent.
The lawsuits spell out the bank’s current understanding of the chain of events that led to its losses. They do not, however, answer questions about possible relationships between the individuals who packaged the mortgage loans and the bank officers who agreed to accept escrow and trust responsibilities for them.
Unclear also is how the bank became involved in the syndication of $133 million in mortgage loans representing property worth, by current bank estimates, no more than $38 million.
Bank of America has repaid investors in the pools, primarily 19 Eastern thrifts, the full $133 million face value of the mortgage paper and is now the unintended holder of nearly 1,000 properties in California and Texas, bank officials said.
“The federal lawsuit represents the bank’s determination to pursue vigorously all parties who were responsible for perpetration of this massive fraud,” said Winslow Christian, Bank of America’s director of litigation. He added that no bank employees are being accused of fraud “at this time,” but that the six workers named in the suit are legally responsible for losses caused by negligence.
The bank is insured against such losses and is seeking recovery from Wausau Insurance Co. of Wausau, Wis., and First State Insurance Co. of Boston. Officials of both firms declined to comment on the lawsuit.
The fired bank employees, according to the bank, are:
- William T. Powers, vice president and former manager of Bank of America’s Inglewood branch, whom the suit says approved the relationship with National Mortgage.
- Mary R. Brown, director of the escrow department at the Inglewood branch.
- Shirley E. Stahlman, vice president and Los Angeles district trust officer responsible for approving new trust relationships.
- John W. Smythe, vice president and district officer responsible for out-of-state and unusual trust arrangements.
- Eileen J. Smith, district trust administrator.
The sixth employee, Beverly E. Hegg, succeeded Powers as manager of the Inglewood branch. She has been demoted and reassigned, the bank said.
Two Resignations
In addition, the bank accepted the resignations of two other managers who it said were not directly involved with the mortgage pools but who failed to exercise proper managerial oversight.
The officers, a senior vice president and a regional trust officer, were not named.
Laurie Belger, attorney for Mary R. Brown, described his client as “despondent” over Friday’s news.
“She did nothing wrong. She was at the low end of the totem pole, just doing the paper pushing. For them to fire her for the negligence of her supervisors is nothing short of amazing. They’re hanging the soldiers and promoting the generals.”
None of the other employees named by the bank could be reached for comment.
The companies and individuals named in the federal fraud suit were reluctant to discuss the specific charges in the lawsuit, saying they hadn’t seen it.
“I am confident that the facts that will come out in litigation will demonstrate that we performed our duties in a proper and professional manner,” said Joseph Coughlin, a partner in the Lord, Bissell firm. He said he was speaking also for partner Leslie W. Michael, first cousin of David Feldman and former owner of a one-third interest in National Mortgage.
A secretary at National Mortgage, based in Palos Verdes Estates, said Feldman was not available and referred all questions to the firm’s attorney, Charles Wehner.
Wehner said he would not talk about the case until he had a chance to review the complaint.
Rogers, president of Orange-based West Pac, is in federal prison at Lompoc, Calif., serving a sentence for an unrelated bankruptcy fraud conviction and did not return numerous phone calls. Floyd C. Anglin, a West Pac consultant who is selling the firm’s assets, was also not available for comment.
Last week, however, anticipating Bank of America legal action arising from the mortgage-pool losses, Anglin said: “The $95 million has nothing to do with West Pac. Not one dime.”
The fraud suit describes a complex chain of transactions beginning with West Pac’s purchase of run down residential properties in Texas and California and ending with Bank of America’s $133-million repurchase of certificates of participation in mortgage-loan pools from investors.
The suit alleges “a series of fraudulent activities undertaken by the defendants that included the calculated concealment and suppression of material information, the accumulation of secret profits, numerous instances of self-dealing among related entities and the repeated use of false and fraudulent pretenses, representations and promises.”
It charges that loans on the properties were based on grossly inflated appraisals, that phantom loans were transferred to the mortgage pools, that multiple loans were “stacked” on single pieces of property and insurers backing the mortgages were related to the parties to the fraud and never had the resources to pay in the event of default.
“In short, the (National Mortgage) transactions were a sham and a fraud designed to enrich the defendants at the expense of the investor institutions and the bank,” the suit says.
The suits were the outcome of a broad internal investigation that began last October and involved as many as 100 Bank of America employees.
Derrald Johnson, supervisor of the inquiry, said: “The investigation continues and will for months. The rest will consists of tracking the funds--where the money went, who benefitted, whether more parties were involved. A great deal of work remains to be done.”
Times staff writer Kathleen Day also contributed to this article.
