Scruggs said he would pursue other firms that "decide to provide funding for rogue companies" if the conduct was as deceptive as he said Lehman witnessed at First Alliance. "It has got to be egregious for me to want to do it," Scruggs said.
In their suit, the plaintiffs contended that First Alliance -- which specialized in loans to so-called sub-prime borrowers, those with poor credit -- would have been out of business had Lehman not provided a $150-million credit line and bundled its mortgages into securities that were sold to investors.
Lehman funded First Alliance in 1999 and through March 2000, when First Alliance filed for bankruptcy protection.
So-called warehouse lenders such as Lehman, which provide credit lines to mortgage companies and sell their securities, have always considered the risk they would run if borrowers defaulted on their loans. But they haven't had to worry about liability related to whether loan originators were complying with laws protecting consumers, noted Ronald Bendalin, an attorney specializing in mortgage finance at Akin Gump Strauss Hauer & Feld in Dallas.
Monday's verdict, Bendalin said, could have a "major impact on the sub-prime securitization market," which packaged $160 billion in mortgages for sale last year.
The trial began in February and played out over 36 days of action in court and 19 days of jury deliberations. The plaintiffs had asked the jury to award $87 million, including $47 million in origination fees charged to borrowers during the 15-month period before First Alliance collapsed amid a welter of lawsuits filed by several state attorneys general, borrowers' groups and the AARP.
U.S. District Judge David O. Carter told the three-man, seven-woman jury that to find liability they must all agree that Lehman knew of "systematic" fraud and had "substantially assisted" it. After the verdict, Carter said the case was important because it was the first time a claim involving such secondary liability had gone to trial.
First Alliance, founded in the 1970s, got a big boost in the '90s as Wall Street began providing funds to sub-prime lenders and packaging their loans into securities that traded like corporate bonds.
By the end of the '90s, Lehman had become the No. 1 underwriter of these securities, according to Thomas A. Myers, a Golden, Colo.-based white-collar crime expert who testified for the plaintiffs. He said Lehman created $11.5 billion worth of sub-prime mortgage securities in 1999, including $344 million for First Alliance.
