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Lehman Faces New Charges

Florida officials contend that the Wall Street firm knowingly financed predatory lending at First Alliance.

June 19, 2003|E. Scott Reckard | Times Staff Writer

New fraud charges surfaced Wednesday against brokerage Lehman Bros., which was held liable by a Santa Ana federal jury this week in a suit charging that 4,500 borrowers were systematically cheated on mortgages.

Florida officials said they have filed a similar suit against Lehman under a state deceptive-practices law, accusing the Wall Street firm of knowingly financing predatory lending at First Alliance Corp., a now-bankrupt Irvine-based mortgage lender.

"We believe the evidence will show that it couldn't have happened without Lehman's complicity," Florida Atty. Gen. Charlie Crist said in a statement.

The suit, filed in a Florida state court, seeks $20 million in damages on behalf of about 1,000 borrowers, and $10 million in fines and penalties, a Crist spokeswoman said.

Lehman spokeswoman Kerrie Cohen in New York declined to comment.

Florida and five other states previously filed and settled fraud cases against First Alliance and its founder, Brian Chisick.

First Alliance, a specialist in debt-consolidation loans to borrowers under financial stress, marketed itself to homeowners with considerable equity in their property. For that reason, many elderly people were among the Florida victims, officials said.

The loans were made from late December 1998, when Lehman became First Alliance's main financier, through March 2000, when First Alliance sought bankruptcy protection in the face of a welter of lawsuits and negative news stories.

The suits against First Alliance accused the firm of using a tricky sales pitch to conceal huge loan-origination fees. The cases were combined last year with the Federal Trade Commission as lead plaintiff. Chisick settled by paying $20 million into a fund for borrowers. The company settled by agreeing to pay as much as $60 million.

In a separate case that ended Monday in Santa Ana, jurors found Lehman liable for helping to fund First Alliance, and assessed the brokerage $5.1 million in penalties. Jurors said Lehman "substantially assisted" First Alliance's deception.

The verdict marked the first time that a financial backer of an abusive lender has been held liable for fraud. Some experts said it could open the door to more suits against brokerages.

Lehman is expected to appeal the Santa Ana verdict.

A key piece of evidence in the Santa Ana case was a 1995 internal memo by Lehman executive Eric Hibbert, who investigated First Alliance and likened the firm's practices to those of a "used-car salesperson." Chisick, he wrote, "will never admit it, but I am sure they make loans where the borrower has no real capacity for repayment but their property has a lot of equity."

That memo, originally obtained by the Florida attorney general's office, is cited again in the state's suit, although Hibbert testified at the trial in Santa Ana that his assessment of First Alliance later softened.

Lehman also faces a significant claim by the trustee in First Alliance's bankruptcy case, who contends that because of "inequitable conduct" the brokerage should return $77 million, plus interest, that it was paid during the Chapter 11 proceedings. Before shutting down, First Alliance had used $77 million of a $150-million Lehman credit line to fund its mortgages.

The judge in the case said he expected to rule on the claim within several weeks.

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