Forensic Briefs

Money for Nothing and... Foreclosures for Free? (3 of 3)

Completing the discussion of similarities and differences between the 1980s S&L crisis and the current deterioration credit market, we now broach the topic of litigation. As we have stated before, despite the subtle differences between today’s credit downturn and previous downturns, litigation will ultimately take the same form. This is evidenced by the host of recent law suits that have emerged naming as defendants everyone from the brokers who originate loans to the Wall Street Investment Banks that sold them. Some examples include:

In Cleveland vs. Deutsch Bank, et al, the city of Cleveland has named nearly every Wall Street Bank and mortgage company as a defendant, alleging that the banks focused on the Cleveland area for sub-prime lending despite its troubled economic situation. They are seeking compensation for expenses (e.g., fire protection and police expenditures) related to the increased number of vacant homes and lost tax revenue as a result of declining property values adjacent to foreclosed homes.

In Dennis Koesterer vs. Washington Mutual the plaintiff is suing Washington Mutual (along with company executives) for making false representations in press releases, financial statements, and earnings conference calls by claiming compliance with company ethics practices and Sarbanes Oxley. The law suit cites The People of the State of New York vs. First American, et al, as a source where First American (specifically their appraisal unit eAppraiseIT) is accused of improperly increasing the appraisal values on homes at the request of Washington Mutual employees to ensure that loans closed.

In the “2008 Parente Randolph Forensic Accounting & Litigation Annual Survey to Attorneys,” approximately 63% of the respondents indicated that cases related to “Fraud – Subprime Loans” will be the prominent area/issue of litigation this year. Furthermore, given the complexity of these structured investments, a legal team (including forensic accounting experts) well versed in structured products and structured finance will be critical in successfully prosecuting and defending these cases.

Money for Nothing and... Foreclosures for Free? (2 of 3)

Like the 1980s our current economy is following the same pattern of a crisis preceded by a real estate boom. Certainly, financial institutions’ willingness to lend money and increase profits has led to the amazing run up in the housing and construction markets. Consequently, this has also ushered in a precipitous drop in real estate values with the median home price declining 5.8% in the fourth quarter of 2007 and some forecasts for another 15% drop during 2008.¹

And of course, no credit market meltdown would be complete without the collapse of a high profile bank. Enter Bear Stearns. Beginning the week of March 10th the Company was valued at $8.5 Billion. One week later an acquisition by JP Morgan netted $236 million, or about one sixth of the estimated value of Bear Stern’s Madison Avenue headquarters. Like Drexel Burnham Lambert, Bear Stearns was a victim of its own concentration. Bear’s focus on the issuance of mortgage backed securities and trading in credit markets ultimately led to the deterioration of the company’s capital reserves as these markets dried up. As we have seen already, a plethora of lawsuits will follow its collapse.

Despite the credit market freeze, real estate meltdown, and volatile stock market performance the US economy is in somewhat better shape at the moment than it was in 1981. For example, while 4th Quarter GDP growth seemed week at a paltry 0.6% annualized rate² (GDP growth was 2.5% for all of 2007), GDP contracted by 2.5% between 1981 and 1982. Furthermore, with the current Fed Funds rate of 2.25% (over 15% below the June 1981 rate) and the current 12-month trailing inflation rate of 4.3%³ (7.5% below the June 1981 inflation rate) one can hardly say we have reverted to the S&L crisis, even when taking into account current expectations. Our next issue looks to the trends in litigation that have occurred during our current turmoil.

1 http://money.cnn.com/, February 25, 2008.
2 Estimate. http://bea.gov/
3 Increase in CPI February 2007 to January 2008.

Money for Nothing and... Foreclosures for Free? (1 of 3)

While the latest class of financial prospectors may or may not double as guitar-toting band members, they have certainly reaped substantial rewards from the surge in mortgage originations over the past 5 years. Unfortunately, it looks like the song is over and it may in fact be time to pack up the band and asses the damage and communicate to all involved. A good example of this involves Countrywide Financial’s recent layoffs of 11,400 people and the decision to cancel the annual mortgage banker ski trip.These signs are just the beginning as other companies will undoubtedly feel the impact from this most recent upheaval in our financial institutions, leaving everyone to wonder what is the next shoe to drop.

Of all the publications we have come across however, we have seen little in the way of comparison to the S&L crisis of the 1980s. History does repeat itself and the current climate of lender and borrower behavior is very familiar to those of us who remember the past. While some of the same underlying issues exist today we argue that this time it could be different (more on this over the next two weeks), although this will have little impact on the litigation to follow. While, most S&Ls of the 1980s held on to their mortgages for better or worse, the advent of structured products have allowed financial institutions to off-load this debt in the form of Collateralized Debt Obligations (CDOs) and conduit vehicles to pension plans, foundations, endowments and the like. In addition, there may be corporate securities litigation from a variety of plaintiffs crying foul (e.g., I am a 65 year old widow that thought I was invested in municipal bonds v. sub-prime hedge funds). And while these financial institutions have recently been plagued with large write downs, they pale in comparison to the amount of debt originated, packaged, and sold by these very banks, leaving some unanswered questions:

1.Who really got left holding the bag?

2.Who is going to pay for it?

3. Will a return to the dire straits of the 1980’s occur?

In the next two issues we will discuss the economics and recent litigation of the credit crisis issues that are facing our legal system.

Micek Joins Dallas Office

Robert P. Gray, Principal, Parente Randolph, recently announced that Eric M. Micek has joined the Firm as a senior associate in Parente’s Forensic & Litigation Services office in Dallas, Texas.

In his new position, Micek will be responsible for preparing expert reports and accompanying schedules, building financial models and conducting financial analyses for damages, and assisting in the preparation of expert testimony. His areas of focus will include special investigations, shareholder/partnership disputes, intellectual property, construction litigation damages, and health care litigation.

Micek brings years of industry expertise to his position with Parente Randolph, most recently serving as an analyst for a Dallas, TX advisory firm focusing on corporate restructuring and distressed investment banking. He also held the position of senior analyst for a consulting group within an international bank focusing on providing fiduciary and asset management consulting on corporate pension and 401(k) plans, insurance and cash management pools, and state-run endowment funds.

Micek earned two degrees, a Bachelor of Science in Electrical Engineering and a Bachelor of Science in Mathematics, from Southern Methodist University.

Parente’s Principals Present at National Fraud & Litigation Conference

Robert Gray served as co-chair of the AICPA National Conference on Fraud & Litigation Services in San Diego on September 27 and 28. Glen Newman served with Gray on the conference committee and also presented on the topic of Intellectual Property Damages. The highly attended conference covered emerging fraud topics including hedge funds, money laundering, computer crimes and advanced interviewing.  One of the keynote speakers at the conference was Gary Collins, Director of Compliance for GE Energy Financial Services and co-chair of the American Bar Association’s white-collar crime committee.  Joseph L. Ford, Associate Deputy Director of the FBI provided the keynote address and addressed the Bureau’s white-collar crime initiatives.

Gray was asked to co-chair next year’s conference, which is scheduled to be held in Las Vegas. For more information on the conference, please contact Glenn Newman at 215.972.2354 or Robert Gray at 214.681.0920.

Nelson Earns CPA Designation

Nicole Nelson, a Senior Associate in our Philadelphia Forensic & Litigation Services, successfully completed both the CPA Exam and the required public accounting hours qualifying for licensing as a Certified Public Accountant, a valuable designation in our field. Nicole has been a Parente Randolph team member since July of 2002.

As one of the world’s leading licensing examinations, the CPA Exam serves to protect the public interest by helping to ensure only qualified individuals become licensed as CPAs. The four-part exam structure includes sections on Auditing & Attestation, Financial Accounting & Reporting, Regulation, and Business Environment & Concepts. Successful completion of the exam requires intensive studying in all areas mentioned above.

Gray to Serve as Co-Chair of AICPA National Conference

Mark your calendars for the upcoming AICPA National Conference on Fraud and Litigation Services. The conference will be held September 27-28 at the Sheraton San Diego Hotel & Marina in San Diego, California. This year, Parente Randolph’s own Robert Gray, a member of the AICPA’s Forensic & Litigation Committee, serve as Co-Chair of the Conference.

What makes the AICPA’s conference unique is that is the only one covering two key and related areas geared to CPA experts and attorneys. The various seminar offerings provide the solutions and resources needed to meet the very real challenges practitioners face, including fraudulent activities, litigation and clients' liabilities. In addition, individual tracks give the flexibility to customize a program to suit your needs.

Conference highlights include:

• Mock Trial – Intensive 5 part session (NEW)
• Emerging Fraud Issues (including an outlook from the ABA’s White Collar Crime Committee Chair)
• Deposition Do's and Don'ts
• Investigating Fraud as a Small Practitioner
• New Bankruptcy Law and Bankruptcy Consulting Services
• Build Your Niche in Litigation Services (including follow up consulting by the expert to 10 lucky winners)
• Data Analytics How To
• Computer Crime
• Sublime Lending Problems and Their Affect on Economy and Business

In addition to Robert Gray’s involvement in the conference, Glenn Newman will be presenting on the subject of Intellectual Property Damages. For more information, to download a brochure or to register for the conference, please click here.

Gray Quoted in Accounting Today Article

Bob Gray, CPA/ABV, CFE and principal at Parente Randolph was recently quoted in an article in Accounting Today titled "Litigation Support: Can I Get a Witness?"

An AICPA Forensic Accounting Certification?

At the spring meeting of the American Institute of Public Accountant’s (“AICPA”) Council, Robert Harris, chair of the National Accreditation Commission (“Commission”), indicated that the Commission has received very good feedback on the AICPA’s establishing a designation for forensic accounting, including on the possibility of partnering with another organization to create the designation.

Further study is expected to result in a business plan for the Council to consider at the fall meeting, and thus decide if the AICPA should proceed with a forensic accounting certification.

Texas Governor Signs CPA Mobility Bill

On June 15th House Bill 2144 was signed into law by Texas Governor Rick Perry. The law eliminates unnecessary red tape for out-of-state CPAs who practice in Texas and requires out-of-state CPA firms to have a Texas license to perform audits on Texas companies. For all other services, CPAs with qualifications that are substantially equivalent to those in Texas may practice in the state without notice or license. Accordingly, the CPA becomes subject to Texas laws and rules, including the jurisdiction of the Texas State Board of Public Accountancy. Texas is the seventh state to ease restrictions on interstate CPA practice joining Ohio, Indiana, Wisconsin, Missouri, Virginia and Tennessee.