Lehman dissection provides clues for discovery and motion practice

Challenge everything, assume nothing. The chances are that through this shadow banking system, your loan was paid in whole or in part through third party insurers, counterparties, federal bailout etc. Without an accounting from the CREDITOR, there is no basis for claiming a default. What the other side is doing is centering in on the note, which is only part of a string of evidence about the obligation in securitized debt. Your position is that you want ALL the evidence, so you can identify the CREDITOR,and pursuant to Federal and State law, either pay, settle, modify or litigate the case if you have legitimate defenses. You can’t do that if the party you are fighting has no power to execute a satisfaction of mortgage or release and reconveyance.
April 12, 2010

Lehman Channeled Risks Through ‘Alter Ego’ Firm

By LOUISE STORY and ERIC DASH

It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are.

Critics say that such deals helped Lehman and other banks temporarily transfer their exposure to the risky investments tied to subprime mortgages and commercial real estate. Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.

The Securities and Exchange Commission is examining various creative borrowing tactics used by some 20 financial companies. A Congressional panel investigating the financial crisis also plans to examine such deals at a hearing in May to focus on Lehman and Bear Stearns, according to two people knowledgeable about the panel’s plans.

Most of these deals are legal. But certain Lehman transactions crossed the line, according to the account of the bank’s demise prepared by an examiner of the bank. Hudson Castle was not mentioned in that report, released last month, which concluded that some of Lehman’s bookkeeping was “materially misleading.” The report did not say that Hudson was involved in the misleading accounting.

At several points, Lehman did transactions greater than $1 billion with Hudson vehicles, but it is unclear how much money was involved since 2001.

Still, accounting experts say the shadow financial system needs some sunlight.

“How can anyone — regulators, investors or anyone — understand what’s in these financial statements if they have to dig 15 layers deep to find these kinds of interlocking relationships and these kinds of transactions?” said Francine McKenna, an accounting consultant who has examined the financial crisis on her blog, re: The Auditors. “Everybody’s talking about preventing the next crisis, but they can’t prevent the next crisis if they don’t understand all these incestuous relationships.”

The story of Lehman and Hudson Castle begins in 2001, when the housing bubble was just starting to inflate. That year, Lehman spent $7 million to buy into a small financial company, IBEX Capital Markets, which later became Hudson Castle.

From the start, Hudson Castle lived in Lehman’s shadow. According to a 2001 memorandum given to The New York Times, as well as interviews with seven former employees at Lehman and Hudson Castle, Lehman exerted an unusual level of control over the firm. Lehman, the memorandum said, would serve “as the internal and external ‘gatekeeper’ for all business activities conducted by the firm.”

The deal was proposed by Kyle Miller, who worked at Lehman. In the memorandum, Mr. Miller wrote that Lehman’s investment in Hudson Castle would give the bank and its clients access to financing while preventing “headline risk” if any of its deals went south. It would also reduce Lehman’s “moral obligation” to support its off-balance sheet vehicles, he wrote. The arrangement would maximize Lehman’s control over Hudson Castle “without jeopardizing the off-balance sheet accounting treatment.”

Mr. Miller became president of Hudson Castle and brought several Lehman employees with him. Through a Hudson Castle spokesman, Mr. Miller declined a request for an interview.

The spokesman did not dispute the 2001 memorandum but said the relationship with Lehman had evolved. After 2004, “all funding decisions at Hudson Castle were solely made by the management team and neither the board of directors nor Lehman Brothers participated in or influenced those decisions in any way,” he said, adding that Lehman was only a tenth of Hudson’s revenue.

Still, Lehman never told its shareholders about the arrangement. Nor did Moody’s choose to mention it in its credit ratings reports on Hudson Castle’s vehicles. Former Lehman workers, who spoke on the condition that they not be named because of confidentiality agreements with the bank, offered conflicting accounts of the bank’s relationship with Hudson Castle.

One said Lehman bought into Hudson Castle to compete with the big commercial banks like Citigroup, which had a greater ability to lend to corporate clients. “There were no bad intentions around any of this stuff,” this person said.

But another former employee said he was leery of the arrangement from the start. “Lehman wanted to have a company it controlled, but to the outside world be able to act like it was arm’s length,” this person said.

Typically, companies are required to disclose only material investments or purchases of public companies. Hudson Castle was neither.

Nonetheless, Hudson Castle was central to some Lehman deals up until the bank collapsed.

“This should have been disclosed, given how critical this relationship was,” said Elizabeth Nowicki, a professor at Boston University and a former lawyer at the S.E.C. “Part of the problems with all these bank failures is there were a lot of secondary actors — there were lawyers, accountants, and here you have a secondary company that was helping conceal the true state of Lehman.”

Until 2004, Hudson had an agreement with Lehman that blocked it from working with the investment bank’s competitors, but in 2004, that deal ended, and Lehman reduced its number of board seats to one, from five, according to two people with direct knowledge of the situation and an internal Hudson Castle document. Lehman remained Hudson’s largest shareholder, and its management remained close to important Lehman officials.

Hudson Castle created at least four separate legal entities to borrow money in the markets by issuing short-term i.o.u.’s to investors. It then used that money to make loans to Lehman and other financial companies, often via repurchase agreements, or repos. In repos, banks typically sell assets and promise to buy them back at a set price in the future.

One of the vehicles that Hudson Castle created was called Fenway, which was often used to lend to Lehman, including in the summer of 2008, as the investment bank foundered. Because of that relationship, Hudson Castle is now the second-largest creditor in the Lehman Estate, after JPMorgan Chase. Hudson Castle, which is still in business, doing similar work for other banks, bought out Lehman’s stake last year. The firm’s spokesman said Hudson operated independently in the Fenway deal in the summer of 2008.

Hudson Castle might have walked away earlier if not for Fenway’s ties to Lehman. Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary. The loan was secured by part of Lehman’s investment in a California property developer, SunCal, which also collapsed. At the time, other lenders were already growing uneasy about dealing with Lehman.

Further complicating the arrangement, Lehman later pledged those Fenway notes to JPMorgan as collateral for still other loans as Lehman began to founder. When JPMorgan realized the circular relationship, “JPMorgan concluded that Fenway was worth practically nothing,” according the report prepared by the court examiner of Lehman.

How to Attack MERS and WIN!

 

NOW AVAILABLE OF AMAZON/KINDLE!

EDITOR’S NOTE:MY WIFE WILL KILL ME IF SHE FINDS OUT I’VE BEEN WORKING. SHHHHHHHHH.

This news is irresistible. MERS is all but dead with this single decision (see below). Here are the salient points:

 

  1. MERS is not a beneficiary even if the mortgage deed or deed of trust states otherwise.
  2. MERS lacks standing in bankruptcy to seek relief from stay.
  3. MERS lacks ANY financial interest in
    1. the obligation
    2. the note
    3. the mortgage
    4. any assignment, allonge (often misidentified as an assignment, indorsement etc.
  4. MERS cannot acquire rights to foreclose unless it acquires a REAL financial interest
    1. In a non-judicial state
    2. In a judicial state
  5. MERS’ Appearance on ANY instrument in the securitization chain clouds the homeowner’s title by extension of the reasoning set forth in the case decision reported below.
    1. MERS’ appearance on the deed of trust renders the mortgage deed or deed of trust invalid
    2. MERS’ appearance on the deed of trust renders the mortgage deed or deed of trust VOID
      1. This means there is no security instrument even if the obligation is still outstanding
      2. This means there is no security instrument even if the note is still outstanding
      3. This means the obligation arising from the funding of the “loan” or”security” to or for the benefit of the homeowner is UNSECURED.
      4. This means that there is no legal procedure to take property — real or personal, tangible or intangible — by virtue of using non-judicial procedure or judicial procedure — unless the creditor (i.e. — the one who advanced actual cash for the funding of the obligation) gets a money judgment against the homeowner — a process which by definition requires the creditor to use exclusively judicial procedures in which they must
        1. A Lawsuit properly served
        2. Allegations that if taken as true would entitle the creditor to a money judgment (e.g. “I gave money for the benefit of this homeowner and I never got the money back from anyone”). By the way this debt, even if they get ajudgment, is dischargeable in bankruptcy.
        3. Attachments to the lawsuit of ALL documents that conform to the allegations
        4. Your Defenses, affirmative Defenses and Counterclaims
        5. Discovery on both sides:
          1. Interrogatories — how they know, what they know, who they know, where did the person signing the interrogatories get their information — when were they hired, by whom, when did they work for MERS, how many paychecks did they get from MERS etc., what documents do they rely upon, what do THEY call those documents, where are those documents, who has them, what is the title of that person, by whom are they employed, what’s their telephone number address etc.
          2. Investigation: on any (AND ALL) signature follow the lead of one of our lead homeowners — find a mortgage or other document filed in the county recorders office and see if the signature matched the one in which they signed, notarized, or witnessed.
          3. Who prepared their website. Where is the source code? Who has the current source code, the prior source codes and any source codes or emails with meta data that will enable you to determine what parties were involved in the preparation of the website, where MERS, for example, advertises that you can use their name but they will never make a claim against the property or for the money.
          4. Request to produce using their answers to interrogatories
          5. Subpoena Third Parties for records with option to give you copies
          6. Request for admissions: VERY POWERFUL weapon when used properly
          7. Notice of deposition
          8. Request for access to their network servers and workstations for forensic examination
          9. Notice of deposition from the people identified in their answers to interrogatories
          10. Motions to compel
          11. Motions for Contempt
          12. Motions to Strike MERS pleadings
          13. Motions to Strike the pretender lender’s pleadings
          14. Motion to enter default after judge orders pleadings struck
          15. Motion to enter default final judgment
          16. Motion for Summary Judgment on your counterclaims including quiet title, money damages for violations of TILA, RESPA, SEC, etc.
          17. Recording final judgment in recorder’s office
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