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Predatory Liability for Investment Banker

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A federal appeals court has held Lehman Bros. liable for “aiding and abetting” a multi-million dollar predatory lending scheme.

In a 60-page ruling, the 9th Circuit Court of Appeals in San Francisco found that Lehman Bros., one of Wall Street’s largest and best known financial services companies, played a role in the fraud by First Alliance Corp., a defunct subprime lender from California.

The court upheld an earlier ruling by a lower federal court.

Lehman Bros. has not issued a statement or commented on the ruling, which was filed on behalf of more than 4,500 lenders by plaintiffs lawyer Richard Scruggs.

“First Alliance committed fraud,” the appeals court said in the ruling. “Aiding and abetting fraud under California law requires a finding of ‘actual knowledge’ and ‘substantial assistance’. There was sufficient evidence of such knowledge and assistance to support the jury’s verdict against Lehman.”

First Alliance was a notorious subprime lender that attracted the focus of massive media attention from, among others, The New York Times and “20/20”, ABC’s investigative news program.

“In the late 1990s, First Alliance became subject to increasing scrutiny including allegations that the borrowers’ loans were fraudulently induced and that First Alliance deceived borrowers into paying large loan origination fees of which they were unaware,” the court of appeals said in its opinion.

Some of those hidden fees were as high as 24 percent, according to court documents.

In 2000, after unflattering media reports about its practices, First Alliance filed bankruptcy. The company was also under fire by states’ attorney general and the U.S. Justice Department, which had launched an investigation into the company’s practices.

The company ultimately paid nearly $75 million to settle fraud charges brought by the Federal Trade Commission.

“First Alliance … was driven into bankruptcy and subsequent liquidation by well-publicized and justified allegations of mortgage fraud,” the court said.

Lehman provided financing to First Alliance, loaning the company about $500 million in the late 1990s into 2000, according to court documents. The court said Lehman continued to lend the money even after it was aware consumers were being misled about the terms of their loans.

In the first trial Lehman’s lawyers denied culpability, saying the company believed First Alliance was no longer engaging in questionable practices.

The court did send one issue back to the lower court — how much to award in damages.

A jury in the lower court trial awarded damages to the plaintiffs of $51 million with Lehman responsible for 10 percent, or $5.1 million. The appeals court said Lehman should still be responsible for 10 percent of the amount, but that the overall amount was too high.

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