BK Trustee Sues Investment Banks

The money, which included “underwriting fees, interest and other sums,” was “fraudulently transferred” to the five banks — US Bancorp, JP Morgan, Credit Suisse, Bear Stearns and Morgan Stanley — or their subsidiaries by American Business Financial Services after the lender became insolvent “around 2000,” according to a lawsuit filed by George L. Miller as trustee for ABFS.

The banks and subsidiaries — 15 companies in all — are specifically alleged to have engaged in “aiding and abetting breach of fiduciary duty,” the suit said — “aiding and abetting fraud” and in “civil conspiracy.”

And, along with the seven ABFS officers and directors, they are also alleged to have engaged in “fraudulent transfer” and “deepening of the insolvency” of ABFS.

ABFS filed for protection under Chapter 11 of the Bankruptcy Code on January 21, 2005. Those proceedings were converted to Chapter 7 on May 17, 2005 and Miller was then appointed as trustee for the ABFS bankruptcy estate. Miller is a partner with the Philadelphia accounting firm of Miller Coffey Tate, which specializes in bankruptcy, fraud investigations, business valuations and litigation support, according to the company’s Web site. Miller since been developing a list of ABFS’s creditors, including investors.

The suit alleges, according to a U.S. District Court summary, that in the five years preceding that bankruptcy ABFS’s officers and directors, with the assistance of the defendant financial institutions, caused ABFS to book more than $500 million of fictitious gains and more than $500 million of fictitious losses as part of an artifice and scheme to conceal losses and continue the illusion that ABFS was a financially viable company. This, according to the summary, allowed ABFS defendants and their enablers to continue to acquire millions of dollars at the expense of ABFS and its creditors.

The suit, originally filed in the Philadelphia Court of Common Pleas and then, at the request of defendants, moved to U.S. District Court for the Eastern District of Pennsylvania, was moved back to the Court of Common Pleas on March 15.

In a related case, ABFS and nine of its officers and directors, but no financial institutions, are named in a class action lawsuit filed in U.S. District Court as two suits but now combined into one suit. The class of plaintiffs were all investors in mortgage notes issued by ABFS and sold directly to investors by ABFS, “without the help of underwriters or brokers,” according to the suit.

In November or December 2004, ABFS stopped paying principal or interest on maturity on all or some of its notes and stopped honoring checks written on ABFS money market accounts, the suit alleges.

The suit, which seeks compensatory damages plus interest, alleges that the registration statements and prospectuses for those notes “contained untrue statements and omitted material facts about the Company’s delinquency experience” and also “omitted substantive discussion of the impact of deferment and forbearance arrangements, which the Company used to depress the reported delinquency rates.”

“The true purpose and effect of the forbearance arrangements were not as quoted [in the statements and prospectuses] but instead to improve the public perception of the quality of the loan portfolio,” the suit further alleges.

“We’re not bringing a fraud case,” Todd Collins, lead attorney for plaintiffs in the class action suit, told MortgageDaily.com, “we’re charging negligence against those who signed the registration statements.”

While the class action suit now names only ABFS and nine of its officers and directors as defendants, Collins, suggesting that the five banking institutions named in the trustee’s suit could be added as defendants in the class action suit, said “there may be other parties” added as defendants.

The two suits, a Credit Suisse spokesman told MortgageDaily.com, have “nothing to do with subprime loans” that ABFS originated.

“What it has to do with is that they [ABFS] were fraudulently representing their business to investors to whom, through newspaper ads, they independently sold securities without any underwriter and then went bankrupt,” he said, as he questioned Credit Suisse’s inclusion as a defendant and the implication that these suits represented another negative mark against subprime lending.

“We weren’t involved in the securities issuance at all,” the spokesman added.

Because the two suits name some of the same defendants, a bankruptcy attorney told MortgageDaily.com, they could be at odds with one another unless they reach some type of agreement. ABFS’s D&O insurance could also come in to play, he said.