Taking On Lehman Over Ties to Lender
The legal posse that helped corral Big Tobacco has ridden into Orange County -- or, more precisely, descended in private jets -- for a shootout with Lehman Bros., the Wall Street investment firm that bankrolled now-defunct Irvine lender First Alliance Corp.
Mississippi lawyer Richard F. “Dickie” Scruggs is ensconced with various legal allies in 16th-floor suites at the Westin South Coast Plaza, looking down on John Wayne Airport, the Orange County Performing Arts Center and the glowing sign perched atop Ditech.com’s headquarters.
But when Scruggs and lead Lehman defense lawyer Helen L. Duncan pick a jury in Santa Ana’s beige marble federal courthouse this week, their sights will be set on a less flattering part of the Orange County landscape: a history of financial shenanigans, which has included Charles H. Keating Jr.’s collapsed Lincoln Savings and the largest municipal bankruptcy in U.S. history.
First Alliance, a bankrupt home-equity lender, and founder Brian Chisick coughed up $75 million last year to settle Federal Trade Commission charges of systematically cheating borrowers, mostly elderly homeowners, by concealing huge loan origination fees and sharply escalating interest rates. At the time, it was the largest lending-related settlement ever obtained by the national consumer protection agency.
Now, the borrowers have hired Scruggs, his old friend and legal collaborator Don Barrett, and a roomful of additional help to take on Lehman Bros. for its alleged role in the scheme.
Lehman, one of Wall Street’s oldest institutions, provided a $150-million credit line to First Alliance, bundled its loans for sale as securities and, the civil lawsuit contends, knew all along that the lender was so shot through with fraud that it had become a racketeering enterprise. In fact, the suit alleges, Lehman encouraged the deception, helping First Alliance extend its fraud across the nation.
The plaintiffs are seeking hundreds of millions of dollars in actual and punitive damages. They offered to settle the case for $500 million, according to people familiar with the matter, but Lehman rejected the overture.
Legal experts say it’s highly unusual to extend blame to a lender’s bankers in such circumstances, but the plaintiffs have unusual evidence: the results of Lehman’s own investigation of First Alliance.
The conclusion, according to a 1995 internal Lehman memo: First Alliance is “the used-car salesperson of B/C lending,” an industry term for loans to people with blemished credit ratings. “It is a requirement to leave your ethics at the door” to work for First Alliance, the memo said.
Lehman executives don’t deny the authenticity of the memo, which surfaced in court last year. At the time, however, Lehman spokesman William J. Ahearn said the questionable practices caused the firm to sharply curtail its business with First Alliance through 1997.
Only in late 1998, after becoming convinced that First Alliance had cleaned up its act, did Lehman step in as First Alliance’s chief lender and investment banker, the company maintained.
The plaintiffs are challenging that story. In January 1999, Lehman executive Eric Hibbert, who wrote the first memo, weighed in with a new report saying First Alliance at the very least was still violating the spirit of the federal Truth in Lending Act. And as late as 2000, according to Barrett, Hibbert was publicly describing First Alliance as a predatory lender.
“The fact is that these little fly-by-night mortgage companies are a dime a dozen,” Barrett said Friday from his Westin hotel room. “But Lehman has backed these people -- and turned them into organized crime.” Barrett’s firm, Barrett Law Office, is based in Lexington, Miss.
Lehman officials declined to discuss the case, and Scruggs also is maintaining a low profile.
In an unusual motion, Scruggs asked U.S. District Judge David O. Carter to ban any mention of “Mississippi lawyers” or “tobacco lawyers” during the trial. Scruggs said such remarks might cause jurors to consider “extraneous information they may have encountered about the Mississippi judicial system or the fees that have been earned by many of the lawyers” in cases there.
The size of the fees indeed could be a distraction: Scruggs’ law firm was a member of legal teams that were awarded an estimated $10 billion in fees for their work on tobacco litigation, according to American Lawyer magazine. As for Mississippi’s justice system, Scruggs noted that “60 Minutes” titled a recent examination of improprieties in the state “Jackpot Justice.”
Scruggs also asked Carter to keep the jurors from hearing about the FTC settlement, which, after legal fees, delivered checks averaging $3,300 each to 18,000 First Alliance borrowers. Lehman has opposed that motion, saying the jury instead should hear expert testimony that the borrowers already have been overcompensated by millions of dollars.
The final rules of engagement are to be ironed out at a hearing Tuesday, and jury selection is set to begin Thursday. The trial could be a long one, running well into the spring, according to estimates filed with the court.
But Scruggs & Co. is expected to argue its case in terms that may help hold jurors’ attention. “You can’t stop mushrooms from growing,” Barrett said in one representative volley. “But you sure can go after the guy watering them.”
