FASB on Sham Transactions

See AU Section 332 Auditing Derivative Instruments, hedging Activities and Investment in Securities.
Every written instrument is by definition the memorialization of an event. Absent the event in the real world, the instrument is worthless at best and at worst fraudulent. This is derived from the my knowledge of generally accepted accounting principles (GAAP) as enunciated by the Financial Accounting Standards Board (FASB) supported by the American Institute of Certified Public Accountants (AICPA).
In any audit of bookkeeping and/or accounting records written instruments are the starting point for inquiry as to whether the documents represents a true and fair representation of an actual transaction. While the auditor may be aware of certain legal presumptions concerning the validity of a facially valid instrument, the auditor is tasked with testing all transactions including those that appear to possess the attributes of facial validity.
Specifically the audit process for alleged transactions relating to derivative securities (mortgage backed bonds, for example) goes further than standard auditing confirmation under the rules recognized as nationwide and binding. In large part because of the admissions or quasi admissions in settlements with government regulators, attorneys general and investors, it has become obvious that transactions that are related to activity in the derivative marketplace are subject to special scrutiny. Auditors are required to test the following, among other things:
  1. Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity.
  2. Completeness. All transactions and events that should have been recorded have been recorded.
In the definition of the confirmation process required by auditors, it is clearly stated that a plan of confirmation is to be used. Facially valid documents are not excluded from the confirmation process. And as seen above, transactions relating to alleged securitization are subject to specific testing. The courts are out of their element in assessing the risk of fraudulent representation because the Courts’ inquiry generally starts and ends with the written instrument.
The Auditor wants to know if the transaction memorialized in that instrument actually took place and wants to see evidence to that effect — i.e., the money trail as represented by cash flow, balance sheet and income statements as well as the general ledger (and supporting documents, bank statements and receipts) of the entity that claims to have been a party to a transaction and now claims an asset as a result.
These sections are the beginning point for discovery and the foundation for objections when “business records” are proffered at trial as exceptions to the hearsay rule.
The big question is whether the transactions that are represented in court as loans or assignments or endorsement are actually reflected on the general ledger, bookkeeping records and accounting records of the party who was supposedly involved in any of those transactions is proffering false testimony or fabricated documents into evidence.
The answer is simple: based upon reliable sources the facts are that the big banks have produced a convoluted set records of loosely connected entities. One fact is clear: the acquisition of loans is generally not found in their records nor supported by any entry reflecting a financial transaction. The little originators and banks are generally buried after having gone out of business, but the ones that are left will show that most originated “loans” did not result in the flow of cash from the originator to the alleged borrower.
My recommendation is that foreclosure defense attorneys employ the use of CPA’s who have specific auditing experience and knowledge. The testimony of these experts might be invaluable to the discovery process and lead the opposing side to soften their approach.

10 Responses

  1. § 3-501. PRESENTMENT…….
    (2) Upon demand of the person to whom presentment is made, the person making presentment must (i) exhibit the instrument, ** (ii) give reasonable identification** …………..

    ** no one ever knows if “BS BSBS Trust 2005-11 Series 3” even exists.
    What is admissable evidence of the current existence of this trust (assuming arguendo it ever existed)?

  2. And don’t forget – it’s illegal to keep false records in private books.
    These laws were originally enacted in regard to money laundering, but they apply just as much to transactions that never happened in this arena also. If a party carries a note on its books as an asset when it has no real interest in the note, it’s a crime.

  3. @ Kalifornia, or scot, or Iam Lazarus,

    Most cases I’ve seen in judicial foreclosure states are pleaded pursuant to UCC Article 3 as 1) plaintiff is the owner and holder, and entitled to enforce, a note executed by defendant, or 2) plaintiff is in possession, and entitled to enforce, a note executed by defendant, or 3) plaintiff is entitled to enforce a note executed by defendant but is not in possession as the note has been lost, destroyed, or stolen.

    For each of the above what is defendant’s counter argument under either 1) a “convertible promissory note” theory, or 2) a theory of “defendant is the owner of the note,” or 3) a theory of “bailment for hire?”

  4. To Scott re: convertible prom notes and the question of wether we signed a conversion agreement; within every mortgage there lies a POA claws which allows the bank to do what ever is needed on our behalf, I would imagine this would be where the conversion agreement gets is authority- through the vested POA claws?

  5. @ Randall Stephens

    [attribution goes to “scot” & “Iam Lazarus”]

    As a matter of law, a PROMISSORY NOTE (NOTE) is a LEGAL INSTRUMENT that is the PERSONAL PROPERTY of the MAKER (OWNER) that was executed in consideration for some performance in a BAILMENT-for-hire relationship with the assumed ORIGINAL BAILEE/lender/creditor/FUNDER/holder of the NOTE at the ORIGINATION of the transaction.

    A purported subsequent HOLDER of the NOTE is NEVER AN OWNER thereof; but may be an assignee for the VALUE PAID, if any, for possession of the OWNER’s NOTE in the form of a documented and verifiable TRANSACTION transferring the interest in the ORIGINAL BAILMENT if, and only if, they can prove-up the admissible evidence in support of a legitimate chain of documentation providing the legal authority and paid-for-interest to do so.

    Of course each party purported to participate in the negotiation/transfer/delivery transaction for the transfer of interest in the BAILMENT can only deliver whatever it is that the transferor has paid for and legitimately received as a verifiable legal interest in, if any at all. Only then may a subsequent transferee be a HOLDER of the PERSONAL PROPERTY — the OWNER’s NOTE — which must be ultimately returned to the OWNER’s possession upon PERFORMANCE of the NOTE (which may have occurred without the knowledge of the OWNER). Otherwise, the NOTE is likely to be circulated in COMMERCE, along with the likelihood that a subsequent HOLDER [“servicer”] will assert a claim against the OWNER of the NOTE.

  6. scot,

    Please provide support for your statement “You are the owner of the note.”

  7. @Neil … thank you for the article.

    @Scot … thank you for what I believe will be [very] useful information, especially in a bankruptcy claims process.

    Add to this; for those alleged securitized notes, violations of the “Consumer Credit Protection Act” for [every] recorded assignment by a servicer. (Title 15 U.S.C. Chapter 41 section 1641(f) & (g))

  8. PS. A party/bank cannot securitize a promissory note that it does not own without a signed Securitzation Conversion Agreement by the owner of the note/borrower. You are the owner of the note. That is why once the note is paid off or in this case securitzed the note is by law to be canceled and returned to you the owner.

  9. Neil, you are getting real close to showing the people how to defeat the banks. Its all in the ledgers. The problem is you have to get the courts to allow this type of discovery and you need a qualified accountant that can be trusted not to be bought off. This all costs money. Money most homeowners don’t have. If you are lucky enough to get the records that will show that there were no transactions, no assignments on record you most likely will have to go to trial. Which again cost more money. Lawyers have to eat to. But you need a competent lawyer. They are far and few in between. So if you do have the resources to fight you still need a lawyer you can trust.

    I believe you should go back even further in faux transaction to the alleged trust itself. You should demand to see the trust agreements. You want to see who the owner of the trust is. The investors are not the owners they allegedly bought bonds that were sold to them via the trust. The PSA does not tell you who owns the alleged trust but it does name the parties that are to perform duties on behalf of the trust.

    But lets get back to this post. There are no records. Why are there no records. It has been the banks position that the promissory notes have been securitized. If you look up the definition of securitization in a Blacks Law Dictionary you will see that it means to convert. In other words to convert a promissory not to a stock or bond. But in order to do this your promissory note must be a”Convertible Promissory Note” see an example here, https://www.sec.gov/Archives/edgar/data/1137399/000119312504108220/dex1020.htm

    Convertible Promissory Notes are usually used by companies that allows the holder of the note to convert the note into stocks or bonds that are issued by the borrowing company instead of payments. Once the conversion has taken place the Promissory Note is canceled and the holder of the note has been paid in stock and or bonds.


    Did anyone of you sign a Promissory Note Conversion Agreement that would allow the banks to securitize your note. Every one should be asking for the Promissory Note Conversion Agreement. Everyone should also be using the Freedom Of Information Act to request a copy of the Promissory Note Convesion Agreement from the SEC.

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