No free munch for Maryland pitbulls

There is long and old common law to the effect (differently worded) that domesticated animals are presumed tame, therefore, to prove negligence, some distinctly undomesticated act must be proved to show that the unsafe keeping of such an animal is grounds for a negligence claim if the animal should (again) prove itself to be vicious. It's given rise to the short hand lore, "every dog gets at least one bite".

Well no more, at least not in Maryland, and at least as long as the recent 4-3 decision of the State's highest court lies undisturbed by an "activist" legislature. Oooops, It's courts what be derogotorally "activists". Legislatures are supposed to be non-derogotorally "activist", which they can't be if all they are is obstructionist. But Guambat digests.

The case is Tracey v. Solesky(COURT OF APPEALS OF MARYLAND No. 53, September Term, 2011):

In Maryland the vicious mauling of young children by pit bulls occurred as early as 1916. Over the last thirteen years, there have been no less than seven instances of serious maulings by pit bulls upon Maryland residents resulting in either serious injuries or death that have reached the appellate courts of this State, including the two boys attacked by the pit bull in the present case. Five of the pit bull attacks in Maryland have been brought to the attention of this Court, and two have reached the Court of Special Appeals.

The present case involves an attack by a pit bull named Clifford. Notwithstanding his
relatively benign name, Clifford possessed aggressive and vicious characteristics. He escaped twice from an obviously inadequate small pen attacked at least two boys at different times on the same day.

Here, the trial court granted a judgment for the defendant landlord at the close of the Plaintiff’s case on the grounds that, according to the trial judge, the evidence was insufficient to permit the issue of common law negligence to be presented to the jury.

On the state of the common law relating to dog attacks in existence at that time, the trial court was correct.

We are modifying the Maryland common law of liability as it relates to attacks by pit
bull and cross-bred pit bull dogs against humans.

With the standard we establish today (which is to be applied in this case on remand), when an owner or a landlord is proven to have knowledge of the presence of a pit bull or cross-bred pit bull (as both the owner and landlord did in this case) or should have had such knowledge, a prima facie case is established.

It is not necessary that the landlord (or the pit bull’s owner) have actual knowledge that the specific pit bull involved is dangerous. Because of its aggressive and vicious nature and its capability to inflict serious and sometimes fatal injuries, pit bulls and cross-bred pit bulls are inherently dangerous.

The dissent pointed out that hard facts make bad law, and the making of bad law was the perogative of the legislature.

It's an interesting and easily readable (if not digestible) opinion.

Guambat points out that no one is ever liable if that child-friendly, lovable peace-nik pitbull behaves itself.

Maricopa prosecuter benched

Andrew Thomas and his erstwhile assistant Lisa Aubuchon, both lawyers, have been ordered disbarred. The Godsheriff's Counsel will lose their day jobs. Will Jumping Up and Down Joe be next?

Good bloody riddance, Guambat reckons.

The context for this immorality play is in these two posts from way back in 2009, here and here. The arm of the law is sometimes long, most always slow to embrace.

First, a bit of the nastiness that got them here.

Thomas, Arpaio raise the stakes by blogger Robert Robb.

County Attorney Andrew Thomas and Sheriff Joe Arpaio are alleging that there is a massive corrupt conspiracy involving at least four Superior Court judges, the entire Board of Supervisors and senior county management.

The heart of the Thomas-Arpaio conspiracy claim, as advanced in the federal racketeering case they filed, is the allegation that the judges and the Board of Supervisors entered into a corrupt bargain: The judges would shield the supervisors and senior county management from investigations and charges of criminal wrongdoing and the supervisors would fund a new office building for the judges.

Thus far, Thomas and Arpaio have adduced very little evidence to support this claim of a corrupt bargain involving the judges. All they have advanced are three circumstantial factors: (1) the judges ruled against Thomas and Arpaio; (2) the judges engaged in conduct that Thomas and Arpaio believe showed bias against them; and (3) the judges and the Board of Supervisors shared a law firm (Polsinelli Shughart) that worked on both the new court building and disputes between Thomas-Arpaio and the supervisors.

None of these circumstances, standing alone, even remotely constitute criminal behavior.

A judge making an erroneous decision isn't a criminal act. And there's a remedy. It's called an appeal.

A judge exhibiting bias isn't a criminal act. And there's a remedy – a complaint filed with the Commission on Judicial Conduct.

A law firm having a conflict isn't a criminal act, and there are remedies: a bar complaint against the firm or a complaint with the Commission on Judicial Conduct if a judge doesn't properly disclose a relationship with a law firm appearing before him.

But for the residents of Maricopa County, here's what it comes down to: either we have a massively corrupt judiciary and county government, or we have a prosecutor and sheriff assaulting the independence of the judiciary and the rule of law.

Fast forward.

Thomas, Aubuchon to be stripped of legal licenses

Only Thomas would not indicate Tuesday whether he would appeal, but he called his disbarment "a political witch hunt." He is expected to hold a news conference today to discuss his case.

While the sanctions may be appealed to the state Supreme Court, it is at the court's discretion whether to consider the appeals. The court can uphold the disciplinary ruling without comment, remand the case to the disciplinary judge for further consideration or accept jurisdiction and write an opinion with or without holding further hearings.

Aubuchon's attorneys have so far handled her case for free, but Maricopa County administrators must now decide whether to continue to pay the legal bills for Thomas and Alexander.

"We've given this guy far more than we've received from him in terms of benefit of the doubt," said county Supervisor Andy Kunasek. "I cannot in good conscience spend any more taxpayer money when they found beyond a reasonable doubt that he's abused his office and abused his obligations as a lawyer."

The actions of Thomas and Arpaio against the Board of Supervisors, judges and others have cost county taxpayers at least $10.6 million, mostly in legal bills, according to a Republic analysis. A legal settlement reportedly imminent with Supervisor Mary Rose Wilcox, who was targeted by some of their activities, could raise that figure by $1 million, The Republic has learned.

[Read more; click the article headline link. Look, ALWAYS do that in this blog. It shouldn't have to be repeated.]

Ex-Lawyers of the Day: Baby, You Did (Many) Bad, Bad Things

The former Maricopa County attorney and one of his deputies were disbarred for a strikingly long list of ethical violations (a second deputy’s law license was suspended as well).

It sounds like working in the Maricopa County Court system was more like Robespierre’s Reign of Terror than it does Phoenix. Hopefully this shakeup will improve the overall morale of the courts there, and lead to a better local justice system for everyone involved.

[Read more; click the article headline link. OK, you understand the drill from now on.]

OPINION AND ORDER IMPOSING SANCTIONS (Excerpted and re-contextualized. Again, read the whole bloody piece at the link. It's a 247 page indictment.)

Pursuant to Article VI of the Arizona Constitution and by Administrative Order No. 2010-41 entered on March 23, 2010, Chief Justice Rebecca White Berch of the Arizona Supreme Court appointed the Colorado Supreme Court Office of Attorney Regulation under the direction of Regulation Counsel, John Gleason, as Independent Bar Counsel.

The Hearing Panel was comprised of a volunteer public member, the Rev. Dr. John C. N. Hall, a volunteer attorney member, Mark S. Sifferman and by virtue of his position, the Presiding Disciplinary Judge, William J. O’Neil.

Formal hearings were held before the Hearing Panel over 26 days commencing September 12, 2011 and concluding November 2, 2011. The alleged violations included, but were not limited to, Conflict of Interest and Prosecutorial Misconduct.

Until one decides that virtue matters—until it becomes a personal mission—no training will produce the commitment needed to pursue or maintain integrity. While in a discipline case conduct is measured against rules and standards, it is more than those regulations.

At some point in his career, a leak formed in the dike of Andrew Thomas’s ethical restraint. In short time, it rapidly grew. Whether known or not, intended or not; it was existent and became obvious. When it formed it may have been impossible to ascertain. That it formed and accelerated at an alarming rate is beyond any reasonable doubt. Complacency to such an increasing loss of ethical restraint is perhaps the greatest enemy to integrity. He seemingly became complacent to the legion of structural fractures throughout his character that followed. Within a few short years the hole had become a radical moral dislocation.

We note that any referral to the bar against him was viewed by Mr. Thomas as a form of “intimidation” and a “threat”. Yet Mr. Thomas ordered Ms. Alexander to research any negative comments regarding him and he formed an “ethics” committee of his deputy county attorneys to consider whether to file a complaint with the Commission of Judicial Conduct regarding the behavior of judges in cases or others”. Thomas Testimony, Hr’g Tr. 25:1–4.

Hypocritically, he did not view these actions as intimidating or threatening. It is another insight into his ethical ruin.

Mr. Thomas began with an evisceration of the protective shield of experienced supervision, accountability reviews and proper protocols long existent in the Maricopa County Attorneys’ Office. Those with the most experience were removed from oversight.

Mr. MacDonnell and others straightforwardly informed Mr. Thomas that Lisa Aubuchon was in a fundamental way not ethically capable. They cautioned Mr. Thomas that she was too willing to prosecute regardless of the evidence. She did not seek justice but rather to win. For her, winning justified any means.

The need for such fundamental integrity was clear to his experienced attorneys, but sadly its absence was attractive or wanted by Mr. Thomas. He found her willingness to charge ahead without investigating or fundamental analysis, to be “brave.” The result was Respondents became alive in imagined interests of others that never existed. Evidence of the truth was never needed for such vain imaginings and more importantly, never sought nor wanted. For Respondents it did not matter how they produced their results as long as their desired outcome could be achieved.

They prosecuted innocent people, without evidence, and did not blink.

Unshackled, a treacherous power to “get” people, regardless of the fact that they were innocent,was set loose. The result is unmistakable from the hundreds of exhibits and the mountains of transcripts within this case. Rather than do the serious work of real investigation and evidence based analysis, they discarded such required effort with a vengeance and replaced it with any gossip or innuendo that would serve their goal.

They knew there was no evidence to find. News releases preceded news conferences and the news reports that followed became their verification. There was an intentional abandonment of even a semblance of true investigative techniques. They pretended to see “corruption” in everyone who disagreed with them and declared that vision as a noble cause.

Consistently, when any word of criticism was leveled at his actions, or State Bar inquiries submitted to Respondents, a committee of high level prosecutors was marched out and instructed to consider filing complaints. Millions of public dollars were spent not only to defend but root out such “corrupting forces.”

Mr. Thomas chanted his mantra that unnamed “retired judges” had complained to the State Bar regarding their actions and the Chief Deputy Sheriff, un-summoned we are told, appeared to investigate, demanding answers. Mr. Thomas’s testimony was clear; reporting him to the Bar “was potentially criminal.” Thomas Testimony, Hr’g Tr. 197:13–25, Oct. 26, 2011.

But the evidence in these proceedings was also clear: his premise was a public ploy. That unknown, unnamed “retired judges” had reported him was completely unsubstantiated, the details unremembered by Sally Wells and completely and consistently denied from the beginning by the purported source, Mr. Kanefield.

The threat of criticism against him still propels a powerful response to invoke his ever dominant weapon of “potential criminal prosecution” to punish those who dare exercise their constitutional right to differ with him.

Former Maricopa County Attorney defiant at disbarment ruling

Former Maricopa County Attorney Andrew Thomas says he is the victim of the very corruption he fought as the county attorney.

Thomas, speaking publically [sic; Guambat has also been caught up by Ms Spellchecker for like error] for the first time since a state bar tribunal stripped him of his law license says, “The rule of law is no more in Maricopa County.”

Thomas angrily denounced the decision saying, “As a result of what happened yesterday, our system of justice has been destroyed. I did my job and we were stymied every step of the way.”

He attributes the ethics investigation to a state bar and judiciary angry because his investigations uncovered evidence implicating senior judges and other friends of the court in corrupt behavior.

Thomas vowed to continue fighting. He says, “Other men far greater than I have gone to jail in defense of principles they believe in and so they would not kowtow to a corrupt order.

"People like Gandhi, Dr King. People who stood for something, and I will tell you that there are some things that are worth fighting for and

someone has to clean up this town. I’m going to stand firm.”

Thomas defends record as chief county prosecutor

He complained that the county had repeatedly fired his lawyers, "stacking the deck" against him. And, as evidence of ongoing corruption, he criticized current County Attorney Bill Montgomery and Arizona Attorney General Tom Horne for not prosecuting politicians who accepted free tickets to sporting events.

He struggled to be heard over the noise of the protesters. The activist gadfly Randy Parraz of Citizens for a Better Arizona repeatedly interrupted Thomas' remarks to ask why Sheriff Joe Arpaio was not in attendance. Thomas looked uncomfortable when his own supporters shouted Parraz down, calling out epithets against illegal immigrants and even calling the counter-protesters "communists."

"Someone has to fight for justice," he said. "I've stated my case. I did my job. The loser is the people of Arizona."

Moments later, Aubuchon, also ordered disbarred, took the podium to say she would likely appeal because, among other reasons, Chief Disciplinary Judge William O'Neil had played a part in the events that led to her disbarment. He presided over a hearing in which a judge targeted by her and Thomas was granted a restraining order against criminal charges.

"Unfortunately, Judge O'Neil didn't have the courtesy to learn how to pronounce my name," Aubuchon said. And in fact, all through the proceedings, which spanned from September to Tuesday, he repeatedly called her something that sounded like "Ms. Am-bi-shan."

Another Thomas supporter, Paul Yoder, said the liberal media and "corrupt" state Supreme Court are too focused on discrediting Thomas. "There are elements in our justice system in Arizona much more interested in discrediting Sheriff Joe and our side than in giving true justice to Arizona," Yoder said. "You can't get true justice in Arizona, and that's why" Thomas was ordered disbarred.

State Bar links Arpaio to actions that led to Thomas downfall

The panel concluded there was enough evidence from other sources to make the determination that Arpaio, his former chief deputy David Hendershott, Thomas and his former deputy Lisa Aubuchon, worked in unison to frame retired Maricopa County Superior Court Judge Gary Donahoe.

“That’s their opinion,” Arpaio told the Arizona Capitol Times.

But former U.S. Attorney for Arizona Paul Charlton said the finding was striking because the panel said the conspiracy could be proven beyond a reasonable doubt in a criminal trial.

The panel found Thomas and Aubuchon violated seven ethical rules in connection with the prosecution of Donahoe. Two of those rule violations were for “violation of a criminal law,” which in this case involved perjury and a federal law that makes it illegal to conspire against a person’s constitutional rights.

Thomas charged Donahoe with bribery, hindering prosecution and obstructing a criminal investigation on Dec. 9, 2009. The charges stemmed from the judge disqualifying the County Attorney’s Office from investigating the financing of a planned downtown courthouse and other legal decisions that were unfavorable to the county attorney and sheriff.

Donahoe had previously scheduled a hearing on the day he was charged to hear arguments on the dispute between the county and Thomas over his authority to appoint special prosecutors to investigate County Supervisor Don Stapley.

Investigators from the County Attorney and Sheriff’s Office testified that there had been no investigation of Donahoe that could legitimately lead to charges, and that Aubuchon and Hendershott were insistent that the charges be filed immediately.

The text from an old State Bar of Arizona complaint Hendershott filed against Donahoe was copied onto the criminal complaint and served as the basis for the charges, but none of the investigators would attest to the truthfulness in court. Aubuchon eventually found a detective, Gabe Almanza, who reluctantly signed the criminal complaint.

“Mr. Thomas and Ms. Aubuchon are criminally accountable for the conduct of Detective Almanza because they knowingly caused him to sign and file a false sworn document and/or they ratified his conduct after he had signed the complaint,” the panel wrote.

The panel concluded there was absolutely no evidence to charge Donahoe and the only reason it was done was to prevent him from holding the hearing involving Stapley.

The concluding pages of the Opinion and Order of disbarment linked above wraps up this story.

The purpose of attorney discipline is to maintain the integrity of the profession in the eyes of the public, protect the public from unethical or incompetent lawyers, and deter other lawyers from engaging in illegal or unprofessional conduct.

We find they knew they had no evidence and prosecuted people anyway. There was no “noble cause.” There was only self–interest. The harm done to the public, individuals, and the profession was stunning on every front.

Ironically, counsel for Lisa Aubuchon, who has aided both plaintiffs and defendants throughout his long career, well–identified the concern.

The facts should be developed by a fair and impartial investigation, which compiles all of the facts, including exculpatory facts, and presents them to the probable cause panel. The developed facts should be just that - “facts” and not simply conclusions of the investigative body.

The Concurring Opinion of Public Panelist Rev., Dr. John C.N. Hall, concluded,

In reading through the thousands of pages of stipulated exhibits in the hearing of this matter, one exhibit seems exceptionally poignant.

On December 28, 2010, a letter was written by Paul K. Charlton to Sheila Polk requesting her to dismiss the Stapley I matter that Andrew Thomas had transferred to her. In the letter, Charlton speaks of how Andrew Thomas' behavior reminded him of a speech by former U S Attorney General Robert H. Jackson, who later became a Justice on the U. S. Supreme Court and the lead prosecutor at the Nuremberg war crimes trials.

Jackson's words speak clearly to the prosecutorial misconduct and ethical violations of the respondents in this hearing. The expanded quote that Charlton shares from Jackson follows:

“If the prosecutor is obliged to choose his cases, it follows that he can choose his defendants. Therein is the most dangerous power of the prosecutor: that he will pick people that he thinks he should get, rather than pick cases that need to be prosecuted.

With the law books filled with a great assortment of crimes, a prosecutor stands a fair chance of finding at least a technical violation of some act on the part of almost anyone. In such a case, it is not a question of discovering the commission of a crime and then looking for the man who has committed it, it is a question of picking the man and then searching the law books, or putting investigators to work, to pin some offense on him.

It is in this realm—in which the prosecutor picks some person whom he dislikes or desires to embarrass, or selects some group of unpopular persons and then looks for an offense, that the greatest danger of abuse of prosecuting power lies. It is here that law enforcement becomes personal, and the real crime becomes that of being unpopular with the predominant or governing group, being attached to the wrong political views, or being personally obnoxious to or in the way of the prosecutor himself.

[… T]he best protection against the abuse of power, and the citizen’s safety lies in the prosecutor who tempers zeal with human kindness, who seeks truth and not victims, who serves the law and not factional purposes, and who approaches his task with humility.”

They're not rock stars

WaPo commentator Chris Cillizza finds it very disturbing that Supreme Court justices are unknown to the public generally. He posts what he calls the most amazing Supreme Court chart maybe ever. See it here.

Guambat, on the other hand, takes great solace in the almost anonymity of the Court. It is not who they are that is important. They are not rock stars, nor are they elected, if even electable, personalities.

It is their opinions that count. The slow, dry, reasoned if disagreeable exposition of a subject is important. It is necessary to distance discourse from the stump, from the howling mobs. That can only be done when it is their words we look to, not the person.

In a media age where looks and form and twits count more than substance and character and analysis, Guambat is mightily comforted by that chart.

Washington tends to be way to close to the sticks and branches to see the tree, let alone the forest, Mr. Cillizza. Fix that.

Of public capital and public interest

First, on the matter of public capital, we are the 99.9%, according to this Forbes article/opinion piece carried on Yahoo Finance, excerpts extracted:

The Top 0.1% Of The Nation Earn Half Of All Capital Gains

The top 0.1%-- about 315,000 individuals out of 315 million-- are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.

The [Bush 2003]reduction in the [capital gains] tax from 20% to 15% continued the step-by-step tradition of cutting this tax to create more wealth. It had first been reduced from 35% in 1978 at a time of stock market and economic stagnation to 28%. Again 1981, at the start of the Reagan era, it was reduced again to 20%-- raised back to 28% in 1987, on the eve of the October 19 th-- 23% crash in the market [obvious transcription error in article here]. In 1997 Clinton agreed to reduce it back to 20%, which move was an inducement for the explosion of hedge funds and private equity firms-- the most "rapidly rising cohort within the top 1 per cent."

The facts are clear according to the Congressional Budget Office more than 80% of the increase in income inequality was the result of an increase in the share of household income from capital gains. In fact, you can go so far as to claim that "Capital Gains income is the most unevenly distributed-- and volatile-- source of household income," according to Laura D'Andrea Tyson, University of California business professor and former chairwoman of the Council of Economic Advisers under President Clinton.

I commend you to the late Justice Louis Brandeis warning to the nation that " We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both."

Coincidentally, Guambat finally received his New Yorker magazine for October 24 in the mail today (thank you Captain Jack), and found resonance with its cover:



As as to public interest in those capital gains (and losses), consider the opinion of US District Court Judge Jed S. Rakoff, when asked to rubber stamp a "settlement" of a complaint by the SEC against Citibank. On October 19, 2011, the U.S. Securities and Exchange Commission
(the "S.E.C.") filed lawsuit [as well as a parallel Complaint filed the same day against Citigroup employee Brian Stoker], accusing defendant Citigroup Global Markets Inc. ("Citigroup") of a substantial securities fraud. Excerpts, snippets and such follow.

Although this would appear to be tantamount to an allegation of knowing and fraudulent intent ("scienter," in the lingo of securities law), the S.E.C., for reasons of its own, chose to charge Citigroup only with negligence.

The Court turns first to the standard of review. In its original Memorandum in support of the proposed Consent Judgment! filed before the case had been assigned to any judge, the S.E.C. expressly endorsed the standard of review set forth by this Court in its Bank of America decisions, i.e., "whether the proposed Consent Judgment ... is fair, reasonable, adequate, and in the public interest."

In its most recent filing in this case, however, the S.E.C. partly reverses its previous position and asserts that, while the Consent Judgment must still be shown to be fair, adequate, and reasonable, "the public interest ... is not part of [the] applicable standard of judicial review." This is erroneous.

As a fall-back, the S.E.C. suggests that, if the public interest must be taken into account, the S.E.C. is the sole determiner of what is in the public interest in regard to Consent Judgments settling S.E.C. cases. That, again, is not the law.

[A] court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest. Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensable attribute of the federal judiciary.

Before the Court determines whether the settlement is fair, it must ask a preliminary question: fair to whom? As the holding of Trucking Employers quoted above makes plain, the answer is fair to the parties and to the public.

Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt,3 the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.

Applying these standards to the case in hand, the Court concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest. Here, the S.E.C.'s long-standing policy - hallowed by history, but not by reason - of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations,4 deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.

As a matter of law, an allegation that is neither admitted nor denied simply that, an allegation. It has no evidentiary value and no collateral estoppel effect.

As for common experience, a consent judgment that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies. This, indeed, is Citigroup's position in this very case.

Of course, the policy of accepting settlements without any admissions serves various narrow interests of the parties.

In this case, for example, Citigroup was able, without admitting anything, to negotiate a settlement that (a) charges it only with negligence, (b) results in a very modest penalty, (c) imposes the kind of injunctive relief that Citigroup (a recidivist) knew that the S.E.C. had not sought to enforce against any financial institution for at least the last 10 years, and (d) imposes relatively inexpensive prophylactic measures for the next three years.

In exchange, Citigroup not only settles what it states was a broad-ranging four-year investigation by the S.E.C. of Citigroup's mortgage-backed securities offerings, but also avoids any investors' relying in any respect on the S.E.C. Consent Judgment in seeking return of their losses. If the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business.

It is harder to discern from the limited information before the Court what the S.E.C. is getting from this settlement other than a quick headline. By the S.E.C.'s own account, Citigroup is a recidivist [external link added], and yet, in terms of deterrence, the $95 million civil penalty that the Consent Judgment proposes is pocket change to any entity as large as Citigroup.

While the S.E.C. claims that it is devoted, not just to the protection of investors but also to helping them recover their losses, the proposed Consent Judgment, in the form submitted to the Court, does not commit the S.E.C. to returning any of the total of $285 million obtained from Citigroup to the defrauded investors....

the Court is forced to conclude that a proposed Consent Judgment that asks the Court to impose substantial injunctive relief, enforced by the Court's own contempt power, on the basis of allegations unsupported by any proven or acknowledged facts whatsoever, is neither reasonable, nor fair, nor adequate, nor in the public interest.

It is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations? It is not fair, because, despite Citigroup's nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged patent. It is not adequate, because, in the absence of any facts, the Court lacks a framework for determining adequacy. And, most obviously, the proposed Consent Judgment does not serve the public interest, because it asks the Court to employ its power and assert its authority when it does not know the facts.

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts - cold, hard solid facts, established ei by admissions or by trials - it serves no lawful or moral purpose and is simply an engine of oppression.

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.

the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.
Accordingly, the Court refuses to approve the proposed Consent Judgment. Instead, the Court hereby consolidates this case with the Stoker action, adopts the Case Management Order in that action as equally applicable to the instant case, and directs the parties to be ready to try this case on July 16, 2012.

Clearly, the Court believes the public not only can handle the truth hidden by settlements such as this, but they are entitled to know it. We need more same same decisions.

OK, which of these 2 stories will grow legs?

From today's San Fransisco Chronicle, which Guambat only rarely reads since Herb Caen passed away:

Barry Bonds guilty of obstruction of justice

Barry Bonds, the former Giants outfielder and baseball's all-time home-run leader, was convicted Wednesday of obstruction of justice for giving evasive answers to a federal grand jury that questioned him about his use of performance-enhancing drugs.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/04/13/MN491J01BR.DTL#ixzz1JTL9Vhos

Goldman Sachs Misled Congress After Duping Clients, Levin Says

Goldman Sachs Group Inc. misled clients and Congress about the firm's bets on securities tied to the housing market, the chairman of the U.S. Senate panel that investigated the causes of the financial crisis said.

The Michigan Democrat also said federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chief Executive Officer Lloyd Blankfein and other current and former employees who testified in Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/04/13/bloomberg1376-LJM1ZZ1A1I4H01-0493A7DJR7692BN3LRLEGM0701.DTL#ixzz1JTLcT2g6

Bonds and Blankenfeld, both accused/guilty of bald-headed lies. Which one will we still be talking about in six months?

Sigh.

Oracle tries green persimmon effect

Over 50 years ago, Guambat spent one of his most valuable summers of his life on his great-uncle's farm in Western Tennessee. He chopped cotton, worked the plow horse, carted 'maters, pulled 'tators, shucked corn -- and learned you cain't whistle Dixie, or anything at all, after chomping down into a green persimmon.

This last lesson was one of seemingly hundreds learned that summer. It came about as Guambat and his uncle were traipsing through a wooded area. Guambat delighted in the free fruit market that was his uncle's farm, and usually he'd find stone fruit, apples, berries of many sorts, and the odd run-away strawberry or what not. On this occasion, he came across a tree with some lovely green fruit, one of which he plucked.

He asked his uncle what is was. "It's a persimmon" said he, "but folks like to call 'em pawpaws." What a lovely name either way, Guambat thought. Must taste as lovely.

"Are they good to eat?", he asked his uncle. "Delicious when they're ripe", says he. "But I bet you can't eat a bite of that one and then whistle me Dixie".

So young Guambat, being ever so plucky, and after finding so many good things to eat on a Tennessee farm, ever so fatter, chomped off a crackling nice chunk of green persimmon.

Not only could he not whistle Dixie, he could hardly form a word. Nary a pucker came to his lips.

Had Guambat had access to the web back then, and taken notice, he would have known that the old uncle was just playing another trick on his city-fied nephew. See, Pucker up, it's persimmon time in Tennessee! from Hillbilly Savants' blog:

I can remember my cousin Danny saying; “Oh, Tug, these persimmons are delicious, you’ve got to try one!” Then he held one up to his mouth and pretended to take a bite and acted like it was the best thing he had ever tasted in his life. Of course I, not wanting to look stupid in front of my hero cousin, took a big bite. If you have never bitten into a green persimmon before, you don’t know what you are missing. Or rather I should say you don’t want to know what you are missing! It takes no more than one bite into one to turn your mouth completely inside out. It has the similar effect of biting into a lemon, only worse! The first thing you want to do after trying one is to stick your tongue out and start slapping it. That is hard to do because your lips are now drawn into a frozen pucker, making this nearly impossible.

You need to read that article, because it is full of beautiful pictures of the fruit and other memories and uses of it.

And so what does all this home-spun humour have to do with Oracle? Well, Oracle is trying to trick the Federal government into making State Attorneys General take a great big bite of green persimmon. Oracle wants to stop the whistleblowers.

But first, for background, see this blog post for the context:

Government not most favored customer of Oracle.

Oracle Seeks to Bar U.S. From Giving States Whistleblower Data

Oracle, accused in a U.S. lawsuit of overcharging the government on software contracts worth $1 billion, will argue in a hearing in Alexandria that U.S. Magistrate Judge Thomas Jones should block the Justice Department from sharing confidential company information with state attorneys general.

Lawyers specializing in whistleblower cases said Oracle’s request to shield documents from state governments may be an attempt to limit the company’s liability, which some attorneys not involved in the case said could be as much as $1 billion in the U.S. lawsuit alone.

The lawsuit was filed under the False Claims Act in 2007 by Paul Frascella, a former Oracle employee, and joined by the Justice Department on July 29. The act lets citizens sue on behalf of the government and share in any recovery, while the government has the option of intervening in a case. The U.S. is seeking triple damages and can collect as much as $11,000 for each false billing.

Oracle is accused of inducing the General Services Administration, or GSA, to buy $1.08 billion in software from 1998 to 2006 by falsely representing that the government was receiving the same discounts as most-favored commercial customers. Oracle instead gave companies discounts of as much as 92 percent, while the government’s reductions ranged from 25 percent to 40 percent, the U.S. claims.

On Jan. 31, Oracle America Inc. agreed to pay $46 million to resolve claims that Sun Microsystems Inc., which merged with Oracle last year, paid kickbacks in an attempt to get government contracts and submitted false information to U.S. contracting officers.

The case is United States of America v. Oracle Corp., 07- cv-00529, U.S. District Court, Eastern District of Virginia (Alexandria).

You can get a direct link to that case, and a wealth of further information, by reading the whole Bloomberg article.

Fannie closes doors on foreclosure law firms

Foreclosure law firm lays off nearly half of its staff, after losing Fannie Mae

A Hollywood [Florida] law firm that processes thousands of foreclosures for major lenders laid off almost half of its 568 employees Monday, days after the government-owned mortgage giant Fannie Mae pulled its files from the practice.

Monday's layoffs echoed the massive job cuts that the law office of David J. Stern and public-traded affiliate DJSP Enterprises instituted after Fannie Mae and Freddie Mac, the other federal mortgage guarantor, dumped them. Fannie and Freddie comprised the bulk of Stern's business. About 700 Stern employees lost their jobs, according to regulatory filings.

Lawyer held in contempt over 'fraud' in foreclosure filing

Miami-Dade Circuit Judge Maxine Cohen Lando expressed her displeasure Friday in a case that involved a property in Homestead with a $265,134 foreclosure judgment issued in July.

Lando said the so-called original note and original mortgage were filed months after the bank said those documents were lost.

"That in itself is a fraud upon the court," Lando wrote in an order to show cause as to why she should not hold Ben-Ezra & Katz attorneys in contempt.

But, she added, the action "pales in comparison" to the fact that the mortgage and note are to a different property in Lehigh Acres, and that the documents are improperly signed and notarized. Lando said her verbal contempt finding on Friday would be followed by a written order.

The judge dismissed the foreclosure case and banned the lender from refiling it.

See, The Ball and Chain of Title

Suite deal or abuse of process?

Payments to U.S. Rivals Let Chinese Furniture Makers Skirt Import-Duty Review (WSJ)

Each year since 2006, U.S. furniture "makers" have asked the Commerce Department to review the U.S. duties paid by Chinese manufacturers on imports of wooden bedroom furniture. Many Chinese firms, fearing a steep rise in duties, agreed within months each time to pay cash to their U.S. competitors in return for being removed from the review list.

"Everybody in the industry in the U.S. and China understands that these payments are clever shakedowns," said William Silverman, a lawyer representing U.S. furniture retailers, big importers of Chinese products, at an October hearing of the U.S. International Trade Commission.

Representatives of the furniture makers, including La-Z-Boy Inc. and Vaughan-Bassett Furniture Co., say the payments are legal. Late last month, those two companies and about 15 other U.S. furniture makers sought the latest review, listing 110 Chinese firms.

In a note included in a December ITC report, Commissioner Daniel Pearson said the settlements create "additional costs and distortions" in furniture trade, "with little evidence that these distortions have yielded any benefits to the industry overall, the U.S. consumer, or the U.S. taxpayer."

Commissioner Charlotte Lane said at the October hearing that she was "very, very troubled" by the settlements, adding: "I cannot figure out for the life of me how they are actually legal."

She might consider "abuse of process" to figure out if they are not.

Maybe if US furniture "makers" actually made furniture ...?

Foreign corrupt practices? It's negotiable.

At one time long ago, there was an advertisement, for a cigarette as Guambat vaguely recalls, whose theme was "I'd rather fight than switch".

The theme of this post is that, when it comes to foreign corrupt practices, big corporations would rather not fight, but don't really want to switch too much, either.

It pisses them off to get caught in the "no-fly" zones of the foreign corrupt practices law (FCPA), so they are arguing the law should be renegotiated so it won't catch so many of them with hands near, if not exactly, maybe, in the cookie jar.

It's the thin end of the wedge of a plan to gut the law. The better option is to test it.

Swiss Shipper Finds Resistance Futile in U.S. Bribery Probe

The U.S. and 37 other countries are fighting transnational bribery through the Paris-based Organization for Economic Cooperation and Development.

FCPA enforcement is a rising priority at the Justice Department, where about 30 to 40 lawyers might work at any time on FCPA cases, including 15 who are full-time. The SEC has assigned more than 30 lawyers to FCPA cases, and the Federal Bureau of Investigation has an entire squad of agents on foreign anti-bribery cases.

The Sarbanes-Oxley Act, passed in 2002, added to the burden with tougher standards for internal controls. Companies also faced more exposure to FCPA charges as businesses expanded internationally.

More than 50 people were charged with FCPA-related crimes in the past two years. A married couple who worked as Hollywood film executives were convicted at trial last year of violating the FCPA, and another man was convicted in a separate case of conspiring to violate the anti-bribery law.

Former U.S. Congressman William Jefferson was convicted of soliciting bribes, racketeering and conspiring to violate the FCPA. In January, the U.S. charged 22 people after an FBI undercover operation that focused on the military and law- enforcement products industry.

Panalpina World Transport Holding Ltd., like Siemens AG and others before it, faced potentially crippling penalties when U.S. prosecutors began investigating the bribes it paid to government officials around the world.

In December 2008, Siemens, Europe’s largest engineering company, agreed to pay $800 million to the U.S. and $814 million to German authorities. The company said it spent another $1 billion on lawyers and accountants and on strengthening internal controls.

In three other settlements, joint venture partners who built liquefied natural gas facilities in Nigeria admitted using agents to funnel $182 million in bribes to government officials for $6 billion in contracts. The partners agreed to pay a total of $1.28 billion, with Houston-based Kellogg Brown & Root LLC settling last year, and Paris-based Technip SA and Amsterdam- based Snamprogetti Netherlands BV reaching accords this year.

In the Panalpina case, the company admitted bribing government officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan. The bribes from 2002 to 2007 let its clients, most in the oil and oil-services business, avoid the customs process, pass off phony documents or smuggle contraband including medicines and explosives, Panalpina said in a statement of facts.

Settlements this year involved BAE Systems Plc, Europe’s largest defense company, which agreed to pay $400 million; Daimler AG, maker of Mercedes-Benz cars, which will pay $185 million; and Royal Dutch Shell Plc, Europe’s largest oil company, which agreed Nov. 4 to pay $48.1 million.

The U.S. Chamber of Commerce’s Institute for Legal Reform said the Justice Department and the U.S. Securities and Exchange Commission, which has civil authority in FCPA cases, “almost exclusively” define gray areas of the law without judicial oversight.

Congress should clarify ambiguities in the law that “have had a chilling effect” on U.S. businesses, some of which have “ceased foreign operations rather than face the uncertainties of FCPA enforcement,” the institute said in a paper last month.

Michael Koehler, an assistant professor of business law at Butler University in Indiana, assails settlements reached without judges having input on questions such as whether employees of state-owned companies are foreign officials. Many instances of “clear-cut bribery,” as in Siemens, are resolved through lesser books-and-records or internal controls charges, he said.

“The most egregious cases are not being resolved under the FCPA’s anti-bribery provisions,” said Koehler, who writes the FCPA Professor blog. “These untested and dubious legal theories have increased the compliance burden on companies.”

“Prosecutors know from the outset that they hold the upper hand because companies have to find terms to which they can agree,” said George Terwilliger III, a lawyer at White & Case LLP.

Surrender by companies such as Panalpina and Siemens is now the norm under the 33-year-old Foreign Corrupt Practices Act.

No company has risked an FCPA court fight in two decades out of fear that a conviction could lead to a loss of public contracts and higher penalties, lawyers said.

“Publicly traded companies cooperate in FCPA matters because they can’t afford the potential consequences of fighting with the government,” said Kirk Ogrosky, a partner at Arnold & Porter LLP who supervised Justice Department fraud cases.

Denis McInerney, chief of the US DOJ’s fraud section,said any company is free to defend itself in court.

“The courts are available to companies if they dispute the department’s interpretation of the law,” McInerney said.

Professor Mike Koehler, in his FCPA Professor blawg, puts the FCPA actions under his legal microscope and sees scope for misuse of the FCPA enforcement powers, accusing the government of asserting uncontested but contestable areas of law, particularly the nuanced or border-line factual issues that are critical to some of the definitions that make a "foreign corrupt practice". That is what was meant by the "no-fly" characterization above.

In a November 5 post, he described the latest round of enforcement actions.

Major Shipment - Customs Cases Bring In $236.5 Million

The pipeline that contains pending FCPA enforcement actions burst yesterday as the DOJ and SEC announced enforcement actions against 13 separate entities.

In enforcement actions that have long been anticipated, Panalpina entities, as well as several others, settled DOJ and SEC enforcement actions principally focused on customs and related payments in Nigeria, but also including alleged improper conduct in Angola, Brazil, Russia, Kazakhstan, Venezuela, India, Mexico, Saudi Arabia, the Republic of Congo, Libya, Azerbaijan, Turkmenistan, Gabon and Equatorial Guinea.

The combined DOJ/SEC settlement amounts total $236.5 million.

Your FCPA scorecard thus shows that since June 28th, the U.S. government has brought FCPA enforcement actions totaling approximately $1.1 billion. With numbers like these, aggressive FCPA enforcement based on, often times, dubious legal theories (more on that later) seems like the most profitable government program ever conceived.

That post, and the many other posts in the Professor's blawg, provide the kind of detail that put real flesh to the bones of MSM reports.

The Professor may be on to something with his observation/characterization that enforcement is "based on, often times, dubious legal theories", but his blawg also clearly reveals that, often times, actions taken upon which enforcement is undertaken, sail pretty close to the wind, and for the most part seems to be a pretty clear business calculation as to the cost of the action taken compared to the expected benefits.

For instance, he spends several posts explaining the various actions taken against companies who provide rigs for oil services, in actions he terms "CustomsGate". The circumstances are that some countries charge a tax for importing these rigs, which is not assessed if they are only imported temporarily. To make it temporary, the imported rig must be exported within a certain amount of time, then it is free to come back in, again, temporarily.

The companies, evidently, pay a local customs agent to fill out some paper work that suggests the rig is temporarily exported, which it isn't, and to file the paper, along with some other script, with the right persons or bodies who give their stamp of approval.

In the legal language used to describe this transaction:

According to the Statement of Facts, "whenever a TIP (and related TIP extensions) expired for a rig in Nigeria, the Nigerian Customs Agent, with the knowledge of Noble Nigeria, engaged in a process of submitting false paperwork on Noble Nigeria's behalf to avoid the time, cost, and risk associated with exporting the rig and reimporting it into Nigerian waters" - the so called "paper process" or a "paper move."

The Statement of Facts further assert that the "Nigeria Customs Agent, with the knowledge of Noble Nigeria, created and caused to be presented to the [Nigeria Customs Service] NCS documents that reflected that the rig had been physically exported and reimported, when, in fact, the rig had remained in Nigeria."

According to the Statement of Facts, the Nigeria Customs Agent included a line item in its invoices for "special handling charges" and "Noble Nigeria personnel were informed by the Nigerian Customs Agent that all or part of the 'special handling charges' would be paid by the Nigeria Customs Agents to NCS officials."

Further, the Statement of Facts assert that "Noble Nigeria personnel approved the payments to the Nigerian Customs Agent with the knowledge that some or all of the payments would be paid to NCS officials."

"Manager A" (a U.S. citizen and a former manager in Noble's Internal Audit Department) "interviewed several Noble-Nigeria employees who explained that false paperwork had been created and submitted to NCS officials through the Nigeria Customs Agent in connection with the process of securing TIPs" and that Manager A "also learned that the Nigeria Customs Agent in the past had charged a fee of approximately $75,000 per TIP to secure the TIPS."

Manager A provided a written summary to Executive A (a U.S. citizen, an officer of Noble, and Head of Internal Audit).

Executive A discussed Manager A's findings with Executive B (a U.S. citizen, an officer of Noble, and the Vice President-Eastern Hemisphere with management responsibility for Nigerian operations). Executive A then informed the Senior Executive (a U.S. citizen, an officer of Noble, and the former Chief Financial Officer).

Corrective action was contemplated, such as permanently importing rigs or moving them to a free trade zone, but Manager A and Executive B "decided that due to the time, cost, and risk of permanently importing or moving the rigs, the paper process would be used for three rigs for which TIPs had expired."

There's much more, but you get the idea, and if not or remain curious, please spend some time in the Professor's excellent blawg.

Professor Koehler has written an article recently, abstracted in his blawg, which claims FCPA enforcement action is a facade:

Against the backdrop of aggressive enforcement and the resulting multi-million dollar fines and penalties is the undeniable fact that, in most instances, there is no judicial scrutiny of the FCPA enforcement theories.

FCPA defendants are nudged to accept resolution vehicles notwithstanding the enforcement agencies’ untested and dubious enforcement theories or the existence of valid and legitimate defenses.

The end result is often the facade of FCPA enforcement.

in the absence of substantive FCPA case law, these privately negotiated resolution vehicles have come to represent de facto FCPA case law. The facade of FCPA enforcement also breeds inefficient overcompliance by risk averse business actors fearful of enterprise–threatening liability because of the enforcement agencies’ untested and dubious theories.

This article does not argue, or even suggest, that every FCPA enforcement action is unwarranted or that no company or individual has ever violated the FCPA.

Rather, this article demonstrates that a significant majority of recent FCPA enforcement actions are a facade—including those that allege clear instances of corporate bribery—yet are resolved without FCPA anti-bribery charges.

This article exposes the facade of FCPA enforcement, argues that addressing the facade and subjecting FCPA enforcement actions to greater judicial scrutiny is in the public interest, and encourages more FCPA defendants to challenge the enforcement agencies and further expose the facade of FCPA enforcement.

Guambat wholeheartedly agrees.

Much better a proper open legal forum than sending the American Chamber of Commerce off to the halls of Congress to do some deal and pull some string behind some locked door, which, Guambat must reckon, does not run foul of FCPA.

Cases, such as the CustomsGate cases, ought to be "vigorously contested". These are actions that cry out for judicial inquiry, both as to the facts and the law. Those companies should stop rolling over. Stop the shake-downs. Stand up and defend those actions!

Like that one hero the Professor mentions in this post, a US citizen representing a US corporation in Haiti (actually, it involved quite a few US individuals and corporations): Esquenazi Challenges DOJ's "Foreign Official" Interpretation.

The charges in the case include purposefully concealed payments of bribes of several hundred thousand dollars and other things, such as a Rolex watch, in return for lowered telephone rates, in breach of the FCPA.

Well, gosh darn it, however corrupt that may be, the FCPA charges are baseless if the Professor knows his peas, in this case, is a state-owned corporation employee a "foreign government official". As he put it,

Joel Esquenazi allegedly violated the FCPA's anti-bribery provisions by providing something of value, not to a foreign government official, but to an employee of an alleged state-owned or state-controlled enteprise ("SOE").

He also noted,

an interesting twist is that Haiti Teleco is currently 60% owned by Viettel, a telecommunications company run by Vietnam's military

Yes, yes, but all that aside, assuming the allegations to be true, is that a violation of the FCPA? Or does the DOJ have some luft in its sails.

Maybe that's why there are additional charges in the complaint for money laundering and conspiracy as well. There is usually some other basis on which to indict, and the argument is not whether the girl is pregnant, but how pregnant?

And maybe that is one reason why, when the DOJ holds up its mighty finger and says J'accuse!, companies would rather switch than fight.

Where there's (cigarette) smoke, there's usually fire.


FURTHER READING:

The long arm of the law of procurement fraud

Detecting a climate of procurement fraud

MERS eat notes

Mairzy doats and dozy doats and liddle lamzy divey
A kiddley divey too, wooden chew?

If the words sound queer and funny to your ear, a little bit jumbled and jivey
Sing "Mares eat oats and does eat oats and little lambs eat ivy"

Mairzy Doats

There's a guest/ghost author on Barry Ritholtz' blog today, who knows his oats from his ivy league.

What Is MERS and What Role Does It Have in the Foreclosure Mess? (Hint: It Holds 60% of All Mortgages, But Has ZERO Employees)

You’ve heard the name Mortgage Electronic Registration Systems or “MERS” mentioned in relation to the foreclosure problems in the residential real estate market.

But what is MERS?

It is the company created and owned by all of the big banks to process title to property in the U.S. Approximately 60% of the nation’s residential mortgages are recorded in the name of MERS.

MERS, the banks and the mainstream financial press all say that it was simply to save fees by digitizing mortgage electronic.

But as Ellen Brown notes, there is in reality a very different reason that the big banks created MERS:

The rating agencies required that the conduit be “bankruptcy remote,” which meant it could hold title to nothing ….

Indeed, the secretary and treasurer of MERS admitted this in a deposition

MERS is a shell corporation with no employees, but thousands of officers.

Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each. Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.

As the treasurer and secretary of MERS admitted in a deposition:

Q Does MERS have any salaried employees?
A No.
Q Does MERS have any employees?
A Did they ever have any? I couldn’t hear you.
Q Does MERS have any employees currently?
A No.
Q In the last five years has MERS had any
employees?
A No.
Q To whom do the officers of MERS report?
A The Board of Directors.
How many assistant secretaries have you
appointed pursuant to the April 9, 1998 resolution; how
many assistant secretaries of MERS have you appointed?
A I don’t know that number.
Q Approximately?
A I wouldn’t even begin to be able to tell you
right now.
Q Is it in the thousands?
A Yes.
Q Have you been doing this all around the
country in every state in the country?
A Yes.
Q And all these officers I understand are unpaid
officers of MERS?
A Yes.

In another deposition, a legal assistant at a law firm initiating 4000 to 7000 foreclosures per month in Florida held herself out as “vice president” and “assistant secretary” of MERS. She testified:

Q: The question was you have no job duties as an assistant secretary of MERS, correct?
A: I do not have any job duties other than signing the assignments and mortgage. Does that help?
Q: Yes. Here, I’ll try to rephrase this. Do you attend any board meetings at MERS?
A: No, sir.
Q: Do you attend any meetings at all at MERS?
A: No, sir.
Q: Do you report to the secretary of MERS?
A: No, sir.
Q: Who is the secretary of MERS?
A: I have no idea.

***

Q: Where are the MERS offices located?
A: I can’t remember.
Q: How many offices do they have?
A: I have no idea.
Q: Do you know where their headquarters are?
A: Nope.
Q: Have you ever been there?
A: No.
Q: How many employees do they have?
A: I have no idea.

The “vice president” and “assistant secretary” MERS signing sworn statements under penalty perjury was simply making it up and doing what she was told.

And as a a forthcoming article in the Real Property, Trust and Estate Law Journal notes, saving fees was another motivation for the giant banks in running mortgages through MERS, but in a way which is shadier than routine cost-cutting efforts.

In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages.

Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system.

Worse, MERS may have literally “split the baby” and rendered millions of mortgages unsecured:

Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. Restatement (Third) of Property (Mortgages) § 5.4. Comment. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Id. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. Id. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.

The mortgage industry has premised its proxy recording strategy on this separation despite the U.S. Supreme Court’s holding that “the note and the mortgage are inseparable.” If today’s courts take the Carpenter decision at its word, then what do we make of a document purporting to create a mortgage entirely independent of an obligation to pay? If the Supreme court is right that a “mortgage can have no separate existence” from a promissory note, then a security agreement that purports to grant a mortgage independent of the promissory note attempts to convey something that cannot exist.

While this argument will surely strike a discordant note with the mortgage bankers that invested billions of dollars in loans originated with this simple flaw, the position is consistent with a long and hitherto uncontroversial line of cases. Many courts have held that a document attempting to convey an interest in realty fails to convey that interest when an eligible grantee is not named. Courts all around the country have long held: “there must be, in every grant, a grantor, a grantee and a thing granted, and a deed wanting in either essential is absolutely void.”

The article itself is full of citations and quotes from various sources, and Guambat has made a hash of identifying what is from where. Much like MERS itself.

You will have to read the article directly to be better educated that this hack cut and paste job has done. You won't regret it.

Sarbox at your cervix, sir.

Sarbanes-Oxley meets servicer execs

Sarbox, enacted in 2002 in response to corporate fraud at firms like Enron, mandates increased personal liability for senior managers. And we should be clear here — it doesn’t seem to be Sarbanes-Oxley per se that could come back to haunt mortgage servicer execs accused of shoddy practices, but rather Sarbox-type agreements they may have signed as part of the US Treasury’s various housing programmes.

Servicing executives were required by the Treasury Department to sign Sarbanes-Oxley-type agreements by Sept. 30 certifying they were in compliance with the Making Home Affordable Program. Some servicing executives initially balked

it does state that the “servicer is in material compliance with, and certifies that all services have been materially performed in compliance with all applicable federal, state and local laws, regulations, regulatory guidance, statutes, ordinances codes and requirements.”

The issue then is that some mortgage servicer execs could face personal lawsuits brought under the False Claims Act — if they guaranteed that their own internal servicing processing satisfied that applicable law compliance requirement.

Badges! We don't need no steenking affidavits

There's a bit of a con game going on with the foreclosure issues, as you would expect given Wall Street's involvement and the heaps of money at stake. The con is that this is just a case of a little bit of paperwork error and that we need to sweep it all under the rug because we don't need to spend all this time and money protecting admittedly defaulting homeowners.

The truth is, this is about getting a quick fix to paper over the paper gufflaw to protect Wall Street.

Here's the con, the "insignificant" paper error and the merit-less defaulting owner (the payoff to the banks is down below):

A Primer On The Foreclosure Crisis

So what’s going on here? Why is the foreclosure machinery of our nation’s largest banks suddenly grinding to a halt?

In 2007, a federal judge held that Deutsche Bank lacked standing to foreclose in 14 cases because it could not produce the documents proving that it had been assigned the rights in the mortgages when they were securitized.

Now, Guambat can digress to tell you, in days gone by he has had to pursue many collection cases, most of them default, and in every case he had to prove his claim, under penalty of perjury and loss of professional license, if not further penalty to both Guambat and Guambat's client, whose claim he was averring.

The federal judge's decision against Deutsche Bank is entirely consistent, routine and unremarkable in Guambat's admittedly limited experience.

Maybe in other places the courts just take the lawyer's word for everything.

Now wouldn't that be a happy world!?

But back to the CNBC Primer:

Every time a mortgages changes hands, the new owners are supposed to receive an “assignment” of the mortgage notes from the buyers. The assignment is typically a short little document signed by both the seller and buyer of the mortgage acknowledging the sale, which is then attached to the mortgage documents themselves and delivered to the new owner.

When a mortgage is securitized it is typically sold to a Wall Street firm, which pools the mortgage with thousands of others. Investors buy slices of the pool, entitling them to cash-flows from the mortgage payments. The actual mortgages are assigned to a newly created investment vehicle. A servicer is tasked with ensuring the payments to borrowers get divided up properly and that delinquent borrowers get foreclosed upon.

Here’s where things get tricky. When a mortgage is securitized, the investors in the mortgage bonds don’t get assignments or notes. The investment vehicle doesn’t get the assignments or notes either. Instead, the physical notes are typically sent to a document repository company. The transfer of interests is noted in an electronic database.

For most mortgages, the note probably still exists somewhere.

Guambat can only day dream about telling the judge that a contract or a mortgage or an assignment must surely exist somewhere. Oh what a wonderful place where judges say, "no problemo, Counselor: proceed".

And it is in this sarcastic world that some of the commentators actually live, lost in the daydream, as this following comment from a Bloomberg report illustrates.

A complete halt would be “catastrophic” for the U.S. economy and hurt home sales, said a statement today from President Tim Ryan at the Securities Industry and Financial Markets Association, Wall Street’s biggest lobby.

SIFMA, which represents Wall Street securities firms, banks and asset managers, said a moratorium would “unjustly” create losses for housing market investors, including workers with pensions, retirement accounts or mutual funds, and “further constrain consumer credit and spending” because of uncertainty in the securitization market.

Thomas Brown, chief executive officer of Second Curve Capital LLC said “People on average have not been paying for a year and a half and that’s not in dispute,” Brown told Tom Keene and Ken Prewitt on “Bloomberg Surveillance” this morning. “A third of these homes that are in foreclosure are completely empty, so people have already left or they never actually owned them because they were investors.”

So, why even bother with all that "proofy" stuff?

Just go take it away; won't take long to sort this out. We don't need no steenking poofy proofies. It ain't nuthin' more than paper work, anyway. Hey, give a bank a break!

"Rocket Docket" rushing foreclosures, lawyers say

With 15,000 open foreclosure cases in Duval County, it's staffed by retired judges with a goal of resolving 25 cases an hour, leading some critics to label it the "Rocket Docket," and there are harsher descriptions as well.

"The fundamental problem," said Chip Parker, an attorney who specializes in foreclosure defense, "is that for the first time, this court was created with the specific goal of reducing foreclosures 62 percent."

"If they find for the defendant, the plaintiffs [usually lenders] just refile," he said. "The only way to reduce [the case load] is to give it to the plaintiff. It's designed with a result in mind, and that's not how justice is supposed to work."

Now, here's the payoff for the con, saving Wall Street's ass -- again. At our expense -- again.

Don't Underestimate the Fauxclosure Mess

Massive liability for banks

Washington Post writer Ezra Klein spoke with Congressman Brad Miller (D-N.C.) about what this mess could mean for the banks. According to Miller:

There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn't meet certain requirements, then the securitizer would buy them back.

There's been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections.

If the private investors can break through that defense and require the mortgages that don't meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

The controversy also raises more questions about investment banks such as Morgan Stanley and Goldman Sachs that securitized these mortgages in the first place.

BUT WAIT, THERE'S MORE:

Foreclosure Fear: Q&A Risk Analytics Chris Whalen

All the documents are questionable.

If the lien wasn't changed, you can't go into court and foreclose. You can't stand up in front of the judge and say "I am the party who owns the mortgage your honor." He's going to look at the docket and if the record in the New York State courthouse doesn't say that he's the owner - he may not agree.

So when you have an imperfection in the record, you're in big trouble as a lender. You basically have an unsecured loan. That's the issue that's really going to commit the banks this year and next year.

Investors are going to sue them [banks] because they were sold a security that was fraudulent. It was not collateralized. And the underwriter of the security did not take the steps required to go out there and perfect the collateral lien, because they wanted to keep the extra half point for themselves as profit in the underwriting instead of having it as the expense for the underwriting.

The fact of bad documentation does not change the fact that the mortgage is bad.

The fact that Wall Street didn't want to spend an extra half point when they did a mortgage-backed security to send paralegals around the country to change the collateral lien on the mortgage - nobody noticed.

Factbox: The role of MERS in foreclosure furor

WHAT IS MERS?

MERS, based in Reston, Virginia, is a private company owned by leading banks and mortgage processors. They founded it in 1995 to speed up legal record-keeping of mortgages and sales of mortgage loans through securitizations. Its main purpose was to be an electronic registry that would keep track of repeated sales of mortgage loans as the number of new mortgages and refinancings boomed.

WHY IS MERS FACING LEGAL CHALLENGES AND GOVERNMENT INQUIRIES?

MERS, on behalf of the banks and myriad trusts that own the mortgage loans, has initiated thousands of foreclosure actions around the country, as the "mortgagee of record" listed on homeowners' mortgages. Homeowners' lawyers and advocacy groups contend that MERS has no right to initiate the actions because it doesn't own the mortgage loans. Lending laws specify that only the actual owner of the loan can file a foreclosure action. Lawyers also have alleged that MERS bypassed laws requiring mortgages and refinancings to be recorded in county recorders offices. Issues have been raised in several court cases about whether MERS misled courts about ownership of the loans.

More on the ball and chain of title

In Guambat's prior post, he probably overly laid out the current confusion in the mortgage world. It's a complex web of financial, political, housing and legal issues. At its base are the legal issues, at least in the current climate: it could grow into a rather nasty financial and political one.

David Reilly, in the WSJ Heard on the Street column, sums up the legal issues simply enough:

U.S. Banks Get Boxed In on Foreclosures

What is the foreclosure problem?

"Is there a question about who owns things?" said Christopher Peterson, a law professor at the University of Utah who has studied securitization and mortgage-title issues. "If you don't think so, you're kidding yourself."

In some cases, as part of foreclosure proceedings, banks submitted affidavits that were flawed. That could be an administrative issue. However, consider that the affidavits often were submitted in place of promissory notes that cover the actual debt. It is possible the promissory notes, in some cases, actually were mislaid or destroyed as lenders tried to keep pace with the frenzied housing boom.

While that wouldn't in itself negate a mortgage claim, it could mean the bank needs more documentation to proceed with a foreclosure. Given sometimes haphazard record keeping, even that may not be possible in some cases. At the least, such problems give attorneys representing homeowners more chances to contest and lengthen foreclosure proceedings. At worst, they can freeze them altogether.

Meanwhile, legal issues are swirling around the role of a company known as Mortgage Electronic Registration Systems, or MERS. It played a key role in the mortgage boom, helping firms package and sell mortgages without having to record each transaction with county offices.

This was done by showing MERS as the holder of the mortgage, something that confers the right to foreclose and seize the underlying property, even as the promissory note was transferred to third-party investors.

The trouble is that MERS's legal standing has been questioned because it doesn't also own the actual debt; traditionally, the mortgage and note weren't split between different parties. Top courts in four states have said MERS can't foreclose.

Again, that raises the prospect of higher legal fees for banks, or worse. It isn't clear who is on the hook for these extra costs: banks or the investors in mortgage-backed securities they represent through their servicing arms.

Also, is it possible that securitization trusts may find they have provisions to put back more bad loans to the banks because of such problems with the documentation.

Guambat notes another issue: professional legal liability and ethical violations.

California, and perhaps elsewhere, has seen an number of lawyers booted out of the profession in so-called mortgage relief mills. The usual interface between the legal liabilities and legal rights of banks and mortgagors is the legal profession.

Many of the lost documents, fraudulent affidavits and other issues arose inside legal offices. See, for instance, this article, with a surprising (to Guambat) Guam connection:

Ex-employee says foreclosure firm forged signatures

If the law firms and lawyers who are doing some of the flawed things that seem to be happening get drawn into professional negligence claims and professional responsibility actions taken by Bar Associations, there will be a further grinding to a halt as these people are the only ones who should be in a position to know where the bodies lie, and the documentation which may be needed in one action gets tied up in another.

As they defend their own arses, they will have little desire to help out the rest of the players in this drama.

Sorta like Watergate.


FURTHER READING:

Foreclosure Fraud For Dummies, 1: The Chains and the Stakes

Barry Ritholtz writz:

The Rule of Law is Sacrosanct: Our system of private property has developed due to the rule of law. The ability to demonstrate ownership, pass clear title, resolve disputes has worked for 100s of years. The recent frauds we have seen from law firms, process servers, bank legal departments, even drive through RE courts has put the nation at risk of becoming a lawless banana republic.

There is only one solution to this threat: For the rule of law to be in force, those people who violate it — previously known as “criminals” — must suffer the painful consequence of their illegal actions.

If you falsified documents that where used in foreclosures, you must be prosecuted for criminal fraud. If your firm’s primary purpose was this illegal activity, it must be put down. This means loss of professional licenses, corporate death penalties and jail time for offender . There is no deterrent to criminality of there are no significant penalties.

The Ball and Chain of Title

It has been talked about round the blogosphere for yonks now that the financial gamesmanship of mortgage securitization, almost from the beginning, was running well in advance of the legal niceties.

In the olden days when Guambat was a young lawyer, a loan was made, attached to a promissory note and secured by a piece of property in a solemn, monogamist and ever-lasting marriage. Hardly any action involving title could be finalized without producing every piece of paper signed off by every interested party, notarized and certified under penalty of perjury.

But securitization tore apart that happy home, slicing, dicing, and re-splicing all the rights, powers and interests in ways previously seen as impractical legally, if not a bit over the top in a sluttish sense.

Whereas the one heretofore monogamist mortgage once knew its related parts, now who knew who owned, controlled or beneficially or otherwise benefited from capital, income or pee stream?

And if the marriage broke up for whatever reason, what King could possibly put the Humpty Dumpty melange of interests together again?

Well, it's beginning to look like a King-hit on the entire mortgage industry. The second fallout from the screaming securitization of the financial wizards.

Will this one be as bail-outable as the first? Shall Guambat begin passing the plate?

The Foreclosure Scandal Begins to Hit Home

In foreclosure controversy, problems run deeper than flawed paperwork

Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans.

Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.

These fundamental concerns over ownership extend beyond those that surfaced over the past two weeks amid reports of fraudulent loan documents and corporate "robo-signers."

The court decisions, should they continue to spread, could call into doubt the ownership of mortgages throughout the country, raising urgent challenges for both the real estate market and the wider financial system.

For struggling homeowners trying to avoid foreclosure, it could mean an opportunity to challenge the banks they argue have been unhelpful at best and deceptive at worst. But it also threatens to leave them in prolonged limbo, stuck in homes they still can't afford and waiting for the foreclosure process to begin anew.

For big banks, "there's a possible nightmare scenario here that no foreclosure is valid," said Nancy Bush, a banking analyst from NAB Research. If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities - an expensive and potentially crippling proposition.

The company, known as MERS, was created more than a decade ago by the mortgage industry, including mortgage giants Fannie Mae and Freddie Mac, GMAC, and the Mortgage Bankers Association.

MERS allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands, lawyers say.

The idea behind it was to build a centralized registry to track loans electronically as they were traded by big financial firms. Without this system, the business of creating massive securities made of thousands of mortgages would likely have never taken off. The company's role caused few objections until millions of homes began to fall into foreclosure. In August, the Maine Supreme Court threw out a foreclosure case because "MERS did not have a stake in the proceedings and therefore had no standing to initiate the foreclosure action."

In May, a New York judge dismissed another case because the assignment of the loan by MERS to the bank HSBC was "defective," he said. The plaintiff's counsel seemed to be "operating in a parallel mortgage universe," the judge wrote.

Also in May, a California judge said MERS could not foreclose on a home, because it was merely a representative for Citibank and did not own the loan.

On the other hand, Minnesota legislators passed a law stating that MERS explicitly has the right to bring foreclosure cases. And on its Web site and in e-mails, MERS cites numerous court decisions around the country that it says demonstrate the company's right to act on behalf of lenders and to undertake foreclosures.

Kentucky lawyer Heather Boone McKeever has filed a state class-action suit and a federal civil racketeering class-action suit on behalf of homeowners facing foreclosure, alleging that MERS and financial firms that did business with it have tried to foreclose on homes without holding proper titles.

"They have no legal standing and no right to foreclose," McKeever said. "If you or I did this one time, we'd be in jail."

Flawed Foreclosure Documents Thwart Home Sales

With home sales this past summer at the lowest level in more than a decade, real estate is ill-prepared to suffer another blow. But as a scandal unfolds over mortgage lenders’ shoddy preparation of foreclosure documents, the fallout is beginning to hammer the housing market, especially in states like Florida where distressed properties are abundant.

Three major mortgage lenders — Bank of America, GMAC Mortgage and JPMorgan Chase — have said they are suspending foreclosures in the 23 states where they first need a judge’s approval. They are also waving off Fannie Mae from selling any of the foreclosed homes whose loans they sold to Fannie.

The companies say they are reviewing their operations after disclosures that employees signed documents without determining the accuracy of the material, as is required by law.

Those reviews are throwing into limbo hundreds of thousands of foreclosures and pending home sales, analysts estimate, though the lenders and Fannie Mae have been mostly silent about precise numbers and other specifics.

More broadly, the revelations about the sloppy paperwork are emboldening homeowners and law enforcement officials in many states to question whether lenders rightfully hold the notes underlying foreclosed properties — further chilling the housing market.

Ohio Attorney General Sues GMAC Over Improper Affidavits; Maximum Damages Exceed $10 Billion

So much for the idea that the affidavit problem is a mere technicality and a mere operational hassle for the banks. They had clearly viewed complying with their own agreements as an option, not a requirement, with the savings for cutting corners only somewhat offset by the costs of getting caught from time to time.

Some jurisdictions aren’t buying the banks’ “crime pays” logic. These abuses challenge the basic principles of the rule of law.

Admittedly, the affidavit problem is a secondary front in the overall bank “my dog ate your mortgage” mess. But the fact that a supposedly minor problem may not prove to be so minor illustrates that all these battles will be hard fought and thus more costly than the banks’ breezy assurances would lead one to believe.

The ultimate objective is to break the excuses that the banks have been using to avoid doing serious principal writedowns. If one state is able to get a mass settlement, whether in the course of private action or state attorney general suits and investigations, it will be a precedent that other banks will find difficult to ignore.

Ohio Attorney General Sues GMAC, Seeks $25,000 Per False Affidavit

Richard Cordray, the Attorney General for the state of Ohio has filed a lawsuit in Lucas County (Toledo) Common Pleas Court against GMAC Mortgage and their parent company Ally Financial, in a suit which names Jeffrey Stephan, the infamous “robo-signer” who signed off on up to 10,000 foreclosures a month across the country with affidavits, without verifying the information in the foreclosure documents. The lawsuit alleges fraud on the part of GMAC, along with violations of the Ohio Consumer Sales Practices Act, in filing false affidavits to mislead the courts in what they describe as “hundreds” of Ohio foreclosure cases. And, the Attorney General is treating every single false affidavit filed in an Ohio court as a separate violation, with a fine of up to $25,000, plus additional restitution for the homeowner of an unspecified amount.

“It is now becoming clear that fraud, deception, and an utter disregard for accuracy are in part to blame for our national foreclosure disaster,” Cordray said in prepared remarks. “What we are seeing and hearing strikes at the very foundation of the rule of law in our court system… Clearly any fraud or deception that has contributed to this state of affairs must be stopped, and those responsible must be held accountable.”

When challenged by one reporter about the fact that the borrowers were in fact delinquent and that merits some action on the part of the lender, Cordray struck back. “What each side merits is that proper legal processes be carefully followed… If we would file a case with an affidavit we know to be false, that is seen as a very serious matter by the court. I don’t see why this should be taken any more lightly.”

Is HR3808 The Equivalent Of TARP 2 And Obama's "Get Out Of Bail" Gift Card For The High Frequency Signing Scandal?

Now that the High Frequency Signing (HFS, not to be confused with HFT) scandal is mainstream, and virtually every single foreclosure in the US in the past several years is under question, with the impact on mortgage servicers (who just happen to be the TBTF banks) could be just as dire as the fallout from the credit crunch, it appears that the get out of jail card for the banking syndicate has once again materialized, this time in the form of bill HR3808: Interstate Recognition of Notarizations Act of 2009, sponsored by Republican representative Robert Aderholt.

In summary, the bill requires all federal and state courts to recognize notarizations made in other states. That's the theoretical definition: the practical one - the legislation, if enacted, could protect bank and mortgage processors from liability for false or improperly prepared documents.

Bank foreclosure cover seen in bill at Obama's desk

The timing raised eyebrows, coming during a rising furor over improper affidavits and other filings in foreclosure actions by large mortgage processors such as GMAC, JPMorgan and Bank of America.

"It is troubling to me and curious that it passed so quietly," Thomas Cox, a Maine lawyer representing homeowners contesting foreclosures, told Reuters in an interview.

A deposition made public by Cox was what first called attention to improper affidavits by GMAC. Since then, GMAC, JPMorgan and others have halted foreclosure actions in many states after acknowledging that they had filed large numbers of affidavits in which their employees falsely attested that they had personally reviewed records cited to justify the foreclosures.

Cox said the new obligation for courts to recognize notarizations of documents filed by big, out-of-state companies, would make it more difficult and costly to challenge the validity of the documents.

The law, the "Interstate Recognition of Notarizations Act," requires all federal and state courts to recognize notarizations made in other states.

The law specifically includes "electronic" notarizations stamped en masse by computers. Currently, only about a dozen states allow electronic notarizations, according to the National Notary Association.

After languishing for months in the Senate Judiciary Committee, the bill passed the Senate with lightning speed and with hardly any public awareness of the bill's existence on September 27, the day before the Senate recessed for midterm election campaign.

The bill's approval involved invocation of a special procedure. Democratic Senator Robert Casey, shepherding last-minute legislation on behalf of the Senate leadership, had the bill taken away from the Senate Judiciary committee, which hadn't acted on it.

The full Senate then immediately passed the bill without debate, by unanimous consent.

Boiler Rooms and Foreclosure Mills: A Brief History of America's Mortgage Industry

Just about every corner of America's mortgage industry has been blemished by significant levels of fraud over the past decade.

On the front end of the process, for example, many mortgage pros used "boiler-room" salesmanship to peddle loans to borrowers who didn't understand what they were getting and couldn't afford their loans in the long run. To make these deals go through, some workers forged borrowers' signatures on key disclosure documents, pressured real estate appraisers to inflate home values, and created fake W-2 tax forms that exaggerated loan applicants' earnings.

At Ameriquest Mortgage, one of the companies I focus on in my new book about the subprime mortgage debacle, The Monster, this sort of cut-and-paste document production was so common employees joked that the work was being done in "The Lab" or the "Art Department."

Little was done to stop the bad practices when they were happening. Former Federal Reserve Chairman Alan Greenspan would later explain to CBS' 60 Minutes: "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006." The Fed took no action even when it became aware of the problems, he said, because "it's very difficult for banking regulators to deal with that."

Congress and other powers in Washington failed to get the facts and act the first time around -- when lenders were engaged in a frenzy of predatory lending. The foreclosure scandal is a second chance for lawmakers and bureaucrats to prove that they can ferret out the truth and take action.

In the Last Four Months, Three Homeowners Have Sued Bank of America for Mistakenly Foreclosing on Their Homes

Some 2.8 million homeowners faced the threat of foreclosure last year, but it wasn't supposed to happen to Charlie and Maria Cordoso. In 2005, the New Bedford, Mass. couple paid in full -- in cash -- for a house in Springville, Fla., and rented it out with plans eventually to use the home as a retirement getaway.

They said they were shocked to learn earlier this month that Bank of America had locked them out and removed their clothing and furniture from the property.

"It's a national issue," said Joseph deMello, one of lawyers representing the Cordosos.

Bank of America actually had planned to foreclose on a property about 10 houses away but mistakenly went after the Cordosos' home instead, deMello said.

Foreclosure experts like Rick Sharga, of California-based foreclosure tracking firm RealtyTrac, say cases like these are symptomatic of a broken system strained by the housing boom and bust.

Banks have been "unable to efficiently handle the volume of distressed assets that are coming through," Sharga said. "We also are seeing the results of what had been less-than-rigorous paperwork and documentation management over the last decade or so as loans became commodities that were packaged, sold, repackaged and resold."

Sharga said that while human error contributed to errant foreclosures in the past, they're happening with greater frequency now as banks find themselves overwhelmed with delinquent mortgages.

Updating the US foreclosure scandal

Bombshell of Foreclosure Fraud – Full Deposition of TAMMIE LOU KAPUSTA Law Office of David J Stern