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Wednesday, March 21, 2007

My Legal Quest to Hold Mortgage Lenders Accountable

As an attorney with a long track record of advocacy on behalf of individual investors wronged by their brokers, I am certainly proud of every judicial victory, big or small, scored on their behalf.

However, one in particular stands out as a career-defining moment. In 2001, I filed a complaint against Merrill Lynch on behalf of a New York doctor who lost $500,000 after following firm analyst Henry Blodget's tainted stock recommendations. That complaint became the catalyst for then New York attorney-general Eliot Spitzer's investigation into conflict-of-interest abuses on Wall Street and the subsequent $1.4 billion global settlement he wrangled from the top names in investment banking.

Having trod through some of Wall Street's muck as long as I have, I thought I had seen it all with respect to so-called financial professionals taking advantage of the Little Guy. Not quite.

I've uncovered a mortgage lending scandal on Long Island that I strongly suspect is indicative of widespread fraud and dubious lending practices throughout the industry. It is my sincere hope that a related lawsuit I filed today will similarly catch the attention of appropriate prosecutors and further fuel much-needed industry reforms, this time within the mortgage lending business.

Over the last five months, my firm has been conducting its own investigation on behalf of more than a dozen Long Island and Florida working-class retirees who collectively have been bilked out of more than $100 million by Peter J. Dawson, a once high-flying "financial planner" who is currently in jail awaiting trial on grand larceny charges. It gives me great pleasure to have been instrumental in putting him behind bars.

Dawson, president of BMG Advisory Services, worked out of one of Long Island's most prestigious office buildings, which gave him a patina of legitimacy. Over the course of 15 years, he convinced dozens of unsophisticated retirees to surrender their existing variable annuity policies and mortgage their paid-off homes so that he could invest the proceeds in new annuities on their behalf. Dawson promised that these annuities would pay a higher rate of interest than their home mortgages, thereby generating additional retirement income. Dawson assured clients that his office would pay the monthly mortgage bills.

Unfortunately for those he ensnared, he didn't invest all the mortgage proceeds. Instead, he siphoned off some $100 million to support his lavish lifestyle, which reportedly included several properties and a lavish antiques collection. His victims are now in danger of losing their own homes because they have little or no income to cover their monthly mortgage payments; foreclosure may be imminent. The victims are mostly retired senior citizens, including a legally blind firefighter, an electrician suffering from Lupus, an ailing sanitation worker, and even a priest.

Although Dawson masterminded the fraudulent scheme, about a dozen other mortgage companies were active participants, including well-known outfits like Countrywide Home Loans and Washington Mutual, two of the nation's biggest home lenders; PHH Corp., a NYSE-listed company that has agreed to be acquired by an affiliate of The Blackstone Group and the financing and asset management unit of General Electric; and The First National Bank of Long Island.

No doubt these mortgage company participants will dismissively invoke Sergeant Shultz's classic "I know nothing" defense if called on the carpet. After all, there are currently no hard and fast rules or regulations requiring mortgage lenders to determine whether the loans they make are “suitable” for their borrowers. Granted, it's quite possible that none of the lenders knew that Dawson was absconding with the monies they advanced, but they had plenty of reasons to be suspect of him.

Among the warning signs:

  • Prior to starting his own firm, Dawson worked at various brokerage firms. Dawson's U4 form, an easily available document that lists all previous charges made against a broker, contains four customer complaints, including an allegation that he induced a customer to take out a $250,000 mortgage to invest in an annuity whose interest rate was lower than the mortgage rates. "Unsuitable investments followed," according to the complaint.

  • The mortgage closings for Dawson's clients were typically held at his office, or in at least one highly irregular instance, a hotel room. None of Dawson's clients were represented by an attorney. Representing the mortgage lenders at most of these closings was an attorney named Ida D'Angelo or one of her associates. Ms. D'Angelo last year was indicted for mortgage fraud by the Deputy Attorney General in charge of the New York's Organized Crime Task Force for mortgage fraud. The indictment's complaint against D'Angelo does not pertain to her activities involving Dawson's clients.

  • In most instances, the mortgage monies were given directly to Dawson , not his clients, which also should have raised warning signs.

  • By any standard, none of Dawson's clients should have been granted mortgages. They had little or no income and there was no rational reason for them to assume mortgage debt given their late stage in life, and in several instances, their poor health.

Earlier today, I filed a lawsuit asking the New York State Supreme Court to issue a declaratory judgment ordering all the defendant banks and mortgage companies to void and cancel the mortgage loans they made to Dawson's clients and to immediately terminate and freeze all foreclosure proceedings against them.

Sadly, it shouldn't take a court order to force the defendant lending institutions to do what is so abundantly the proverbial "right thing". But morals and fairness have never been the hallmarks of the U.S. banking industry, especially when there is money at stake. The Dawson case underscores why Congress should impose suitability rules on all the nation's home lenders.

Whether Dawson's victims can ultimately keep their homes is in the hands of a Long Island judge. If a declaratory judgment is granted, it will establish a valuable legal precedent and put irresponsible mortgage lenders on notice that they will be held legally accountable for their wrongdoing. More important, it could serve as the catalyst for much-needed industry reforms that will level the playing field for unsophisticated borrowers who are otherwise at the mercy of ruthless financial planners who line their own pockets at the expense of those less financially savvy.

As we saw with my client's case against Merrill Lynch in 2001, it only takes a spark to light a fire.


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