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Servicing Drags Down Company

Wealthbridge laying off employees following failed acquisition

Sept. 27, 2010 (updated 7:20 pm)

By staff

After years of operating successfully as an originator, a mortgage banking firm operating from Oregon decided to get into distressed servicing. But a deal with a hedge fund, a failed acquisition and dissatisfied insiders helped bring down the company -- which still hopes to salvage its production operations through an asset sale.

In a Worker Adjustment and Retraining Notification filing Friday with the Oregon Department Community Colleges & Workforce Development, Wealthbridge Mortgage disclosed it was laying off 109 employees as a result of an office closing.

The office location of the layoffs is Beaverton, Ore., where the company's headquarters are located.

But Wealthbridge President Scott Everett says the company is not necessarily closing down.

"There's a chance we're going under," Everett said in a phone interview. "We've got some things we're working on. But, frankly, we're preparing to transition, do an asset sale and open as a different branch."

Everett co-founded the company with his brother Craig as Gateway Financial Services in 1994. It changed its name to Wealthbridge in 2007. Earlier this year, Wealthbridge became part of the Lenders One Mortgage Cooperative.

The lender was "plugging along" generating 20 percent growth in retail residential originations when Everett became interested in refinancing distressed assets. In the development of business a couple of years ago, he met Joseph D'Urso, who worked across town at Merrill Lynch subsidiary Wilshire Credit Corp. In a public profile, D'Urso says he was with Merrill Lynch from 2006 to 2009.

Everett said D'Urso agreed to help Wealthbridge raise capital for the purchase of distressed assets. D'Urso had a handshake agreement and a $50,000 preferred stake in Wealthbridge -- an amount Everett referred to as "barely anything."

Another Wilshire executive, Ken Frye, reportedly agreed to help Wealthbridge build a servicing platform. His public profile indicates that he was a senior vice president at Wilshire and worked there for 11 years. Frye was an employee who had no equity interest in Wealthbridge, though he is a board member, according to Everett.

The trio began the servicing venture in early 2009. The first deal was 68 severely distressed loans from Fortress Investment Group LLC subsidiary Fortress Credit Corp. The deal, negotiated with Fortress Managing Director Michael Fallacara, went well and led to an agreement for Fortress to immediately give Wealthbridge 1,000 loans, including pre-paid servicing fees to help with boarding expenses, and follow that up with another 1,000 loans. In return, Fortress was to receive a warrant to acquire stock in Wealthbridge.

As part of the original Fortress agreement, Wealthbridge agreed to a consent clause that would require the consent of Fortress if Wealthbridge was to be sold.

But while the Fortress deal went well, Everett claims D'Urso was bringing in deals that would "keep blowing up."

In a statement made following the publication of this story, D'Urso said he stands to lose money if Wealthbridge fails.

"I am not a voting equity holder, an officer, an employee or a
board member of Wealthbridge and have no control over the decisions that Scott Everett makes," D'Urso stated. "Beyond that, I have no comment."

Meanwhile, the servicing division was losing a "couple hundred grand a month," primarily from payroll expense, and the origination division wasn't making enough to offset the servicing losses. The deterioration in the balance sheet began to concern the company's warehouse lender, GMAC.

The deal with Fortress helped cut the monthly losses to around $100,000.

But a slowdown in originations earlier this year cut into critically needed revenue and led to a covenant breach with GMAC. Everett said he warned D'Urso that it one of his deals didn't close -- the company would have to be sold.

Nothing closed.

So Everett sought a suitor and found one: publicly traded DJSP Inc.

But D'Urso and Frye didn't see that deal as great for themselves.

"Ken told me, he said, 'Scott, I didn't quit a half a million dollar a year job at Wilshire not to hit a home run,'" Everett stated.

"They ended up going behind our back, going to Fortress telling Michael Fallacara that if we did that deal, that Ken was leaving here, and if he left here, the servicing platform was gonna to blow up, and it was going to cause Michael, in Michael's words, 'all kinds of brain damage,'" Everett said.

Because of the consent clause, Fortress had to approve any sale to another company. But D'Urso and Frye were pushing another an acquisition by another group led by Brian Plunkett, though Everett suggested that deal was fraudulent because the acquiring group was dragging its feet as Wealthbridge was quickly sinking.

Frye could not be reached for comment.

"My feeling was Joe D'Urso was just doing whatever it took to blow up this other deal with the publicly traded company so he could, behind the scenes, try to put something together," he added.

Fearful of a legal battle with Fortress, DJSP pulled out of its potential acquisition.

One week ago, the Plunkett deal being pushed by D'Urso and Frye blew up. That was followed by a notice of non-renewal with GMAC when the warehouse line expires in October. In addition, bonding issues have been arising.

So Everett shut down the servicing division.

He speculates that, through a possible asset sale, Wealthbridge could become an affiliate or branch of another company.

Out of 130 employees, Everett hopes to keep 80 production jobs intact. Around 30 of the employees were in servicing, and the rest were in administration and operations.

"It's a tragedy that didn't need to happen," Everett said. "It's all about greed and hubris."

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