Lehman Bros. Held Liable in Fraud Case
A federal jury Monday held Lehman Bros. Holdings Inc. accountable for fraud at an Irvine mortgage company it helped finance, saying the investment bank aided and abetted a First Alliance Corp. scheme to cheat borrowers.
The verdict marked the first time a financial backer of an abusive lender has been held liable, carving out a new area of vulnerability for Wall Street. The 10-person jury in Santa Ana said Lehman not only knew that First Alliance engaged in fraud but also "substantially assisted" the deception.
The jurors awarded $51 million in damages to about 4,500 borrowers, assessing 85% to First Alliance and its executives and 10%, or $5.1 million, to Lehman.
For Wall Street firms doing business with shady lenders, the verdict is a wake-up call, experts said. Critics of what they see as Wall Street greed and arrogance praised the jury's decision.
"I think Wall Street will take notice. This is kind of a warning shot across the bow," said Kurt Eggert, a Chapman University associate law professor who has represented victims of lending abuse and has published law-journal articles about sub-prime mortgage securities.
According to testimony, First Alliance used a lengthy and intricate sales pitch to conceal the fact that it was adding as much as 24% in fees to the balances of the mortgages it refinanced for hard-pressed borrowers.
First Alliance founder Brian Chisick and his company last year settled fraud charges filed by the Federal Trade Commission for about $75 million and won't have to pay the damages assessed Monday.
The jury apportioned 5% of the damages to MBIA Insurance, which had insured First Alliance's mortgage securities, but because it wasn't a defendant, it won't have to pay.
Lehman attorney Helen L. Duncan portrayed the size of the damage award as a win for Lehman but said it would appeal. The firm said in a statement that its employees were "never aware of any wrongdoing that may have been committed by individual loan officers at First Alliance."
Lead plaintiffs' attorney Richard Scruggs, who helped devise the legal strategy that led to $246 billion in judgments against tobacco companies, said the precedent was important, especially because the verdict was handed down by a jury in Orange County, regarded as a conservative, pro-business area.
