Lehman Says No Links to Fraud
Hard-luck former customers of First Alliance Corp. make sympathetic witnesses, but there is too little evidence to link the defunct Irvine mortgage company’s Wall Street backer, Lehman Bros., to systematic fraud, defense attorneys told jurors Friday at a class-action trial seeking damages from Lehman.
Lehman attorney Helen Duncan urged jurors not to be swayed by First Alliance’s many run-ins with regulators beginning in 1986, or the flood of lawsuits in 1998 alleging it failed to disclose huge origination fees on loans. Nor should the issue become the lofty salaries of Lehman executives who bundled the loans up for sale, she added during closing arguments of the three-month trial in the court of U.S. District Judge David Carter in Santa Ana.
“Maybe because these guys make so much money they’re not sympathetic,” she said. “But this isn’t a contest about who’s sympathetic.”
Duncan said the issues are narrow and urged the jurors to focus on Lehman’s knowledge and actions in 1999. That was when the securities firm, after years of lobbying for the job, became the chief backer for First Alliance, which specialized in debt-consolidation loans to so-called subprime borrowers with credit problems but large amounts of home equity.
The borrowers contend that First Alliance used a shifty sales pitch to deceive them into signing documents containing loan origination fees that sometimes added more than 20% to the balance of their loans.
Carter said jury deliberations would begin Monday. He told the 10 jurors they can award damages against Lehman only if they conclude unanimously that Lehman knew fraud was occurring at First Alliance and provided substantial assistance.
Duncan, trying to show that hadn’t occurred, recalled testimony that First Alliance had changed its allegedly deceptive lending spiel by 1999. She said Lehman hired a former U.S. prosecutor to look into the suits against First Alliance. She noted that the Wall Street firm had no direct contact with borrowers.
Even if systematic fraud occurred, Duncan contended, damages should be minimal, because many borrowers wound up with benefits such as lower monthly loan payments that offset the hefty origination fees.
Duncan also asked whether jurors believed the borrowers would have signed stacks of documents disclosing details of the loans without understanding the deals they were getting.
“We don’t point these things out to beat up on the poor borrowers, but you have to consider the facts,” she said.
When other Wall Street firms stopped working with First Alliance, Lehman provided a $150-million credit line and sold $400 million in mortgage-backed securities for the lender in 1999 and 2000. First Alliance sought bankruptcy protection in March 2000, and later settled the massive litigation, which had been consolidated with the Federal Trade Commission as the lead plaintiff.
A team of plaintiffs lawyers led by tobacco litigator Richard Scruggs has asked jurors to hold Lehman liable for $87 million in damages. It’s apparently the first time a major securities firm has been accused before a jury of aiding and abetting predatory lending. Scruggs said he intends to file more such cases.
At first, it appeared the proceedings might skid completely off track Friday morning, when Duncan moved for a mistrial on grounds the plaintiffs lawyer Joey Langston had told jurors they should punish Lehman for its misdeeds. Carter previously had issued a strongly worded tentative order that punitive damages would not be allowed.
After several hours of conferences, Carter allowed the trial to continue, telling the jury to disregard Langston’s entire speech.