Payback time for execs? | ameriquest, million, lee, new, company - News - OCRegister.com
Friday, January 30, 2009
Lawsuits seek payback from financiers who got millions
Private lawsuits and government investigations go after executives who cashed in as their companies crashed.
The Orange County Register
Ameriquest Mortgage Corp. signed a contract to pay Wayne Lee $50 million for a "consulting agreement" after he quit as chief executive officer of the Orange-based subprime lender in 2005.
Lee's five-year deal barred him from competing with or disparaging Ameriquest while requiring him to work a maximum 25 hours every three months.
That meant Lee was paid $100,000 an hour â€“ about half as much as the $237,000 Los Angeles Lakers star Kobe Bryant earns per regular season game.
Many people have heard of Bryant, the National Basketball Association's 2008 most valuable player. Lee is less famous.
In fact, Ameriquest spokesman Chris Orlando said he couldn't find a photo of Lee, who worked for Ameriquest for 15 years, including a year as its CEO.
Lee's payday is now the target of a federal lawsuit brought by a group of Ameriquest borrowers in Illinois. The suit argues Ameriquest paid Lee "hush money" to keep its predatory lending secret and to keep cash away from others with claims against the company.
Bernard LeSage, an attorney for Ameriquest and Lee, called the lawsuit "hogwash" and said his clients will prevail.
"The bottom line is it's wrong and there are lots of factual and legal errors," LeSage said.
'THE HEIGHT OF IRRESPONSIBILITY'
Whichever side prevails, the case of Terry v. Ameriquest Mortgage Company has plenty of company in court â€“ and beyond. A rising tide of private lawsuits, government investigations and public pressure seeks payback from executives who received lavish paychecks for running companies that boomed and went bust when the financial bubble popped.
On Thursday, President Barack Obama showed a rare flash of anger over news that Wall Street financial houses doled out $18.4 billion in bonuses in 2004.
"That is the height of irresponsibility," Obama said. "It is shameful, and part of what we're going to need is for folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility."
Others aren't waiting for financiers to be responsible. Efforts to force executives to "disgorge" â€“ the legal term of art â€“ their millions are spreading across the legal and financial system as more news emerges about lavish paydays in hard times.
â€¢New York Attorney General Andrew Cuomo announced last week that he was investigating John Thain, the former chief executive of Merrill Lynch, who paid $4 billion in bonuses to executives for 2008, a year the company lost $15 billion. Thain gave the bonuses in December, before Merrill closed a deal to stave off insolvency by merging with Bank of America â€“ which later received $45 billion in federal bailout funds.
Thain, who also came under fire for spending $1.2 million to redecorate his office â€“ including spending $1,400 on a parchment trash can said he needed to pay the bonuses early to prevent an employee exodus. But Cuomo said he was concerned the bonuses came from taxpayers â€“ part of the $45 billion Bank of America received from the $700 billion bailout fund.
"The fact that Merrill Lynch appears to have moved up the timetable to pay bonuses before its merger with Bank of America is troubling to say the least and warrants further investigation," Cuomo said in a statement.
â€¢In November, American International Group, the insurance giant which received $150 billion federal rescue package, decided to forego executive raises and bonuses for 2008 after Cuomo wrote to AIG's chief executive that: "We believe top executives should shoulder their fair share of these difficult economic times."
â€¢In October, Countrywide Financial Corp. agreed to pay $8.68 billion to settle a predatory lending investigation by California Attorney General Jerry Brown, the largest predatory lending settlement in U.S. history. But Brown said his investigators will continue to probe Countrywide's founder Angelo Mozilo and its former chief operating officer, David Sambol.
Sambol sold shares worth $64 million before Countrywide's collapse. Mozilo cashed out stock worth $478 million.
â€¢Also in October, federal prosecutors in Washington State invited tips from the public for their probe into fraud at Washington Mutual Inc., the nation's largest savings and loan until it collapsed in September. A shareholders' lawsuit sought to recoup $46 million from former chief executive Kerry Killinger, who allegedly enriched himself by pumping up WaMu's high-risk loans that ultimately undermined the bank. In December, a federal judge tossed out the suit, because creditors in bankruptcy court have first claim on the money.
â€¢A shareholders' class action lawsuit against New Century Financial Corp. demands the founders of the Irvine-based subprime lender return $58 million in stock, dividends and bonuses they collected before the company filed for bankruptcy liquidation in 2007.
New Century's founders â€“ Ed Gotschall, who died in January, Brad Morrice and Robert Cole â€“ have said they were as surprised as other investors by the collapse, noting they lost more money than they cashed out. They also said the stock they sold was part of a planned divestment. The lawsuit, however, says that Cole and Gotschall altered their plans several times in 2005 and 2006 to accelerate stock sales as the company's finances deteriorated.
'A NEW OVERALL SENSE OF FAIRNESS'
Shareholder lawsuits are not new. The New York-based law firm of Milberg Weiss LLP pioneered class-action shareholder lawsuits in the 1960s and built a lucrative practice until 2008, when four of its principals pleaded guilty to paying people to be plaintiffs in their lawsuits. Other firms have filled the vacuum. In the past year, for example, the New York firm of Bernstein, Litowitz, Berger & Grossman filed class-action shareholder lawsuits against Bank of America, Washington Mutual, Lehman Brothers and AIG, among other firms.
But the track record of recovering executive gains is not great.
"Now it's set up so that even if an executive has committed fraud, he doesn't have to return the money," said Nell Minow, chairwoman of the Corporate Library, a corporate governance and executive compensation watchdog group. "But the courts may take a different look at these types of cases than in the past because there's a new overall sense of fairness."
What has changed? Unemployment soared. Stocks crashed. Home values plummeted as the number of foreclosures mushroomed. Companies filed for bankruptcy or liquidation. In some cases, former executives are the only ones with money for plaintiffs to go after.
"I see this as the crucial issue now," said Kurt Eggert, a professor of law at Chapman University in Orange. "How willing and able are government agencies and prosecutors to go after people who made money on subprime loans? And can investors recoup losses?"
'YOUR GOAL WAS TO GET AS RICH AS YOU CAN'
Eggert said the executives of subprime companies, such as New Century and Ameriquest, are poster children for the efforts to recoup executive riches.
"Your goal wasn't to run a successful company," Eggert said. "Your goal was to get as rich as you can before it collapses."
Ameriquest was the nation's largest subprime lender from 2003 to 2005, originating more than $160 billion in loans during the three-year period.
In January 2006, Ameriquest agreed to pay $325 million to settle claims by attorneys general in 49 states that it was running a boiler room operation and writing predatory loans that borrowers could not repay. The settlement cleared the nomination of Ameriquest's founder, Roland Arnall, to become U.S. Ambassador to the Netherlands. Arnall died in March and the size of his estate is a closely held family secret.
But Lee's fortune has been detailed in a series of lawsuits, which explains why the little-known ex-executive is named in the lawsuit in federal court in Illinois filed by 30 people who obtained mortgages from Ameriquest. Lee declined to comment for this story and referred questions to his attorney.
$34.5 MILLION IN 'HUSH MONEY'
In January 2007, Lee sued Arnall and Ameriquest in Orange County Superior Court claiming he received only $20 million of the $50 million owed in his consulting agreement. In the suit, Lee said he was hired to bring legal and financial discipline "in the wake of many investigations of improprieties that had plagued Ameriquest."
But "Arnall balked at the implementation of such procedures," Lee claimed, so he quit in June 2005 and Ameriquest agreed to pay him $50 million.
In March 2007, by which time most subprime lenders were collapsing, Ameriquest agreed to pay Lee an additional $14.55 million, according to a filing in Lee's divorce case.
"In the end, Lee was essentially paid $34.55 million in 'hush money' to prevent Ameriquest's customers, investors and the general public from finding out the ugly truth about Ameriquest and its affiliates," the lawsuit says. "This allowed Ameriquest to continue its scheme to defraud and attract new business to generate more profits."
Ameriquest ceased operations in August 2007 and "is conducting an orderly wind down" while it tries to settle litigation, Orlando said.
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