Wall Street Lender "Aided and Abetted"
Subprime Lenders Fraud on Consumer Borrowers
We get a new twist: “aiding and abetting fraud” liability of secured lenders to a bankrupt subprime lender. In a recent decision of great import, the Ninth Circuit has held that the lender’s lender can be stuck with huge tort liability—as a virtual co-conspirator in its borrower’s fraud upon consumers. Subprime Lenders Fraud on Consumer Borrowers
The Ninth Circuit Case
In re First Alliance Mortgage Co., 471 F.3d 977 (9th Cir. 12/8/06), First Alliance was a subprime mortgage lender to home-equity-rich borrowers who had shaky credit ratings because they were cash-poor. First Alliance originated, sold and serviced residential mortgage loans in the subprime market through a network of retail branches throughout the country, utilizing a methodology designed to target individuals—particularly seniors—who had built up substantial equity during the housing boom that began in the late 1990s. Then the loan officers would employ a standardized sales pitch to persuade consumers to obtain loans with high interest rates and hidden high origination fees and various “junk” fees of which most borrowers weren’t aware. The court summarized: “The key to the fraud was that loan officers would point to the ‘amount financed’ and represent it as the ‘loan amount,’ disregarding other charges that increased the total amount borne by the borrowers.”
The trial court found that First Alliance trained its loan officers to follow a manual and script, known as the “Track,” that was “unquestionably designed to obfuscate points, fees, interest rate, and the true principal amount of the loan.” Truth in Lending disclosures were presented in a way that many borrowers didn’t realize they were being charged points and other fees.
The Court’s Four Holdings
There were two suits filed against Lehman. The first suit was a class action brought by the consumer borrowers based on an “aiding and abetting” theory. The second suit, brought by First Alliance’s trustee in bankruptcy, sought to set aside payments received by Lehman in the course of its financing relationship with First Alliance on theories of equitable subordination and fraudulent conveyance.
Sufficient evidence supported the claim that First Alliance committed fraud on a class-wide basis.
An “aiding and abetting” claim under California law requires a finding of “actual knowledge” of the fraud and “substantial assistance.” There was sufficient evidence of such knowledge and assistance to support the jury’s verdict against Lehman.
Moreover, Lehman’s actions had to provide “substantial assistance” to First Alliance in the carrying out of its fraud. Lehman must have known more than that “something fishy was going on.”
The jury found that Lehman had knowledge of First Alliance’s fraud and had a hand in furthering that fraud during the period between 1998 and 2000. Throughout its due diligence investigations of First Alliance, Lehman received reports that detailed First Alliance’s fraudulent lending practices.
