Interview, MERS RICO complaint: Doug Welborn, State District Court Clerk vs. MERSCORP Shareholders & Trustees ("the banksters")
[A special hat tip to Stephen Malagodi, who answered my call for an interviewer, and also to CMike, who volunteered for transcription when I thought the original plans I had made had fallen through. It's the thought that counts! Some hours of professional time went into producing this piece; sociologists take note, these are strong ties, and not weak.
I should also mention that I need to turn an mp3 into a podcast. I thought that would be easy to do, and no doubt it is, but not for me. Readers? --lambert]
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PodCast, hat tip to Stephen Malagodi yet again:
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Yes, I know that Doug Welborn, East Baton Rouge Parish Clerk of Court vs. MERSCORP Shareholders and Trustees ("the banksters") is a bit unwieldy as a case name, but it's a lot less wieldy than the actual name -- [32 parish clerks in Louisiana, so far] vs. [16 big banks including TBTF poster weasels BAC, JPM, and WFC (but not GS)] -- so I think I'll just go with "Welborn" from here on in.
The triple damages claim under civil (sigh) RICO is a billion dollars or so for Louisiana alone -- real money -- which makes Welborn interesting. Even more interesting is that RICO, as a "theory of the case," is simple, clean, and easy to explain, unlike so many of our criminal banksters' crooked schemes. We caught up with the trial lawyer for Welborn, Ted Lyon, and interviewed him. Did I mention the claim is for a billion?
Skip ahead, if you want, to the interview, it's indented, but the backstory is important, too: Hat tip to alert reader Roger Bigod, who piqued my interest in comments with "county clerk's suit", leading to this link on Louisiana clerks suing the banks under RICO. So I searched the go-to site on foreclosure fraud and found this post (love the graphic!), which linked to this fine story in the Baton Rouge Advocate. The reporter, Bill Lodge, had some excellent quotes from Richard D. Faulkner, Esq., so I found Faulkner and called him. Faulkner was gracious enough to play phone tag with a pseudonymous blogger whose answering machine was full, and then to hear him out. He put me in touch with Ted Lyon, who's going to try Welborn. (It seems that these days there are very few lawyers who actually appear in court, but Lyon is one such. I note with pleasure that Lyons took a packet from Koch Industries for the death of a child.) I then arranged, on very short notice, for a professional interviewer (hat tip, SM) to speak with Lyon, and a professional transcriptionist (hat tip, KL), whose collaboration you see below. With more time, we'd have done more preparation and some editing, but think of any solecisms as signs of authenticity, like scars in fine leather.
I go through all this detail, not to bewail the rigors of a blogger's life, but to raise a single, simple question: Why does The New York Times give front page treatment to a $25 million bribery scandal run out of Bentonville, Arkansas, and no coverage whatever to the filing of a $1 billion dollar lawsuit over an accounting control fraud scheme run largely out of Manhattan? ("Your search - Baton Rouge RICO site:www.nytimes.com - did not match any news results"; 2:20AM, April 25, 2012.) A question that answers itself, once asked. Perhaps Krugman will cover the story in his blog.
So, to the interview, which took place yesterday, April 24,at 9:00AM EST. Note that one of our goals in the interview was to get the theory of the case explained in simple terms, so that we can explain it to our neighbors or in the coffee shop. After the interview there is a copy of the complaint, and so, readers, you may introduce as much complexity as you wish. (If the copy does not display in your browser, try the link.) Further, you will notice that Lyon seems to be familiar with the great Peggy Noonan's dictum It would be irresponsible not to speculate. And, quite properly for one in his position, to disagree with it completely. You, readers, however, may speculate freely!
SM: We're speaking with Ted Lyon of Ted Lyon & Associates. Mr. Lyon is filing a suit regarding the MERS, Mortgage Electronic Registration System. Thank you for joining us, Mr. Lyon.
TED LYON: Well, thank you.
Tell us what MERS is.
TED LYON: Mortgage Electronic Recording System is a system set up by a number of banking entities, primarily in New York, the large financial institutions, to avoid recording fees that they are due to pay across the United States every time they record a mortgage. This is tied back to the mortgage-backed securities that nearly brought the country to financial ruin. It was developed on Wall Street by a lot of folks in that industry, and each time you have a mortgage, by law in almost every state, the person that sells that mortgage or transfers it, in other words the bank, is supposed to pay a recording fee to your local county clerk so they can keep the title clean and record it. They set this system up so they wouldn't have to pay these fees, and we believe that eventually they have benefited to the tune of billions of dollars as a result of that, by not paying county clerks across the United States.
Well, let's back up just a minute. The actual system, the Mortgage Electronic Registration System, is a computer database, basically, but that was set up by one company. Why do you say that it was set up by banks? Isn't it a single company?
TED LYON: Correct. But all the evidence that we have developed shows that it was a scheme that was developed by the defendants that we have in this lawsuit.
Well, who are your defendants?
TED LYON: Well, I don't have the list here. There are several of them [see below. --lambert]
How would you describe them? Are they the big four banks, or who are they?
TED LYON: The defendants are the major banking entities in the United States as well as some other banking entities, but the largest ones in the United States, but almost all of them are very huge banking entities.
So is MERSCORP, Incorporated itself part of your suit or not?
TED LYON: Yes, it is.
So MERSCORP , Incorporated is the actual company that runs this database. They're included plus the major institutions in the banking industry, is that right?
TED LYON: Yes.
Okay. So, give me a little bit about the background of this case. How did it come about? Who's your plaintiff?
TED LYON: Well, right now we have a number of counties or parishes in Louisiana that have signed on with us. I think the number is over 32, and we have more coming in every day. And that's the basis of our lawsuit, because the county clerks, or the clerks of court is what they're called in Louisiana, they are required to record these mortgages and they have not been given that information. This is a very serious issue because if you have a house and you have a mortgage on it, you want to be sure that if you buy a house that has a mortgage on it you have a clear title to it. So by failing to do that recording, we believe it affects the title. I mean this has happened all over the country. And we also have a number of counties in Texas that we represent and we're going to be filing a suit in Texas here in the near future.
So you're filing on behalf of county – I would assume mostly county governments. Are there no individual homeowners that are involved in this?
TED LYON: No. Our case is we're representing the counties or the parishes. We're not representing any individual homeowners, even though they have been damaged also. That's not our lawsuit. Our lawsuit we think is on firmer footing, and what makes this different than most other lawsuits – there have been a number of lawsuits filed against MERS across the country, but they're basically all, almost all of them have been brought as a result of the individual homeowner. We're not going to go that route because that's just too time-consuming and also many of those cases have been lost.
So, given that, tell us the theory of your case, since it's not representing homeowners but it is representing local government entities. Tell us the reason for that approach.
TED LYON: Well it's pretty simple. We believe they're required by law to pay recording fees every time they change these mortgages. In other words, every time they transfer a mortgage they're supposed to pay a recording fee to the county, by law. And they set up this system to avoid that. And so each time they transfer a mortgage, instead of recording it with the county clerk or the parish, the clerk of court, they record it through MERS. And so they're avoiding paying the $150 each time they – and I'm giving you just a ballpark figure here, $150, maybe as much as $200 – each time they change that mortgage. So they don't pay that to the county clerk. So the county clerk, the county government, the parish government, loses that $150 to $200. And when you multiply that times the number of mortgages that are changed, that change hands in a county the size of some of the counties down in Louisiana, you're talking hundreds of millions of dollars.
Now, you say that the defendants set this system up to avoid the payment of these fees. The defendants may say that they set this up because the process is cumbersome, that they were trying to establish some efficiencies in the mortgage security market. So, do you have – (crosstalk)
TED LYON: Well, when you're talking about – yeah, sorry, go ahead.
I'm sorry. Do you have any evidence that the reason that they set this system up was indeed for the avoidance of paying these fees rather than, you know, inefficiencies in the business model?
TED LYON: Yes. Their website says it. And it said it for a number of years. As well as depositions that have been taken in other cases by some other chief executives.
So they specifically say themselves that the reason that they set this up was to avoid the payment of these local government fees?
TED LYON: Exactly.
Now, that probably isn't in itself against the law, trying to, you know, trying to maximize your profits. It's certainly not against the law in the United States. How – the simple fact that they may admit that they were doing this to avoid these particular fees, is that itself a basis for your suit?
TED LYON: No, they're required by law to record these mortgages with a county government official. There's no doubt about that. There is no – the federal law requires that. And they are not living up to the federal law. It's not – there isn't any, in our opinion as lawyers in this case, there's no debate over that. We know, based on federal laws, that they are required to record that with a local county government, and they are not doing that. They have not been doing that for over 10 years.
Is there a reason why you are filing this suit in Louisiana? Is there something particular about the law in Louisiana that is conducive to this suit?
TED LYON: Well, Louisiana does have very strong laws in this area and we have some very good local counsel in Louisiana that are helping us on the case, and we were able to get most of the local governments down there to sign on. I mean, we're in the process of doing the same thing in Texas, but it's a little more difficult in Texas because of you have to have so many different levels of local government agree, whereas down in Louisiana they can pretty much, if the clerk of court wants to agree to the lawsuit, it's a pretty simple matter. So in Texas or with some other states you have to go through the county attorney and then he has to go to the Commissioners Court – I mean, it's, I would liken it to herding cats to sometimes get all these local politicians to sign on. But it's coming along.
So, if your case in Louisiana is successful, will this have implications in other states?
TED LYON: Absolutely. If we're successful in Louisiana, it will have a ripple effect across the country.
In what way? I mean you just said that filing these suits in other states is much more complicated, so how would winning in Louisiana impact what the law is in Illinois, for instance?
TED LYON: Well, almost every state has the same recording requirement that they record those mortgages locally, so in every state they're not doing it. So it's a simple matter of proving to your local elected official that this is a case that they need to bring. And of course this is a test case, so if in fact we are successful, then we feel very confident that other states will follow.
How big is this suit? Is it going to be, does it have the potential to be another tobacco industry sized case?
TED LYON: I don’t want to compare it to that. We think it's huge. How big it is and how huge it may be is totally – it depends on whether or not we have the case. I mean, if we actually have the law right, and we think we do, then it's going to be huge. I won't characterize it as being as big as the tobacco litigation, though.
Well let's compare it, just for the sake of comparison, to the tobacco litigation case. That took a long time for those suits to finally succeed, I think 10 or 15 years. How long do you think this fight is going to drag out, at least in Louisiana?
TED LYON: Well, I think in Louisiana, and in federal court you have what is called a 12(b)(6) motion, and that's where they try and dismiss your case for lack of evidence, a good lawsuit. And this is the first one of these cases that's like this that's been filed. If they are successful, then it'll be over very quickly. If they are not successful, and we are successful, then from there you would spend probably a year or more determining the damages. The damages are relatively easy to figure. We can do that, you know, because everything is now recorded through computers. You can run these numbers very quickly. You can determine – for instance, wherever you live you have a county government, and they have, there are so many houses in that county, and we know, we can determine from our computer discovery how many times those mortgages have been sold. It's relatively simple to figure out how many times that house has been sold, what the recording fees would be, and then add that to the number that they would owe. And then in addition to that, under the federal RICO act, racketeering influenced corrupt practices act, you have treble damages on that, so you get your actual damages, then you treble those. And then you have attorneys fees, and those are kept up with on an hourly basis. So that would be a fairly – it's not like the tobacco litigation, because that took a long time to determine the damages. But this case is pretty simple from a damages standpoint.
Why isn't this a class action case, or is it?
TED LYON: It's not a class action in Louisiana because we didn't want it to be, and we wanted to have individual counties because we need their cooperation to come up with their damages, and we wanted to have a contractual relationship with each county that we represent down there. We don't want to have to – one of the problems that you have with a class action, if you have one in this area, is that you may have a county that doesn't want to cooperate, that doesn’t cooperate, it makes it real hard for your damages [for them?]. We want them to have some incentive to compute their damages.
Well you say the damages are fairly easy to compute. Have you computed them? Do you have any idea what the potential damages are?
TED LYON: We think in Louisiana the damages are over a billion dollars.
And that's just in Louisiana, and you say that if you win your suit that this will have import in other states, so if we're talking a billion dollars in Louisiana, we're talking a lot of money potentially nationwide, correct?
TED LYON: Correct.
Some people have speculated that if you win your suit and this does in fact go national, that the defendants in this case, basically the U.S. banking industry, is going to face a need for recapitalization. So, you know, what was too big to fail in 2008 and 9 and 10 is still too big to fail. So are we looking at the possibility of, you know, catastrophic banking failure if your suit succeeds and goes national?
TED LYON: No, I don't think so.
Do I detect a little hint of hopefulness there, that, no, you hope it doesn't, or – ?
TED LYON: No. No, I don't think so, at all.
Well, if we –
TED LYON: When you look at the national, when you look at the assets of every one of these defendants, they can afford to pay the damages that they have taken from the counties over a number of years and pay those back to the counties. And if they stole that money, which is what we're saying they did, they owe it. And they have made multiples off the money that they took from the counties, and their assets are well, well within the realm of paying these damages.
So you don't, you don't see any real dire consequences for the banking industry if this – if your suit and similar suits in other states succeed?
TED LYON: No. They have plenty of money to pay these damages.
Now you said, you mentioned earlier about possible RICO implications here. Yours is a civil suit, but can you see criminal charges coming out of your case through the discovery process? Have you, can you tell us what you expect to find in discovery?
TED LYON: No, I really don't want to speculate on that. We'll just have to wait to see what the evidence – where the evidence goes and what it points to.
So you just don't want to comment about the possibility of criminal charges coming out here?
TED LYON: No.
TED LYON: That would be pure speculation on my part.
Well thank you very much, Mr. Lyon. We appreciate it, and good luck with your case, sir.
TED LYON: All right, well you have a good day.
You too, sir.
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Here's a copy of the complaint:
Two points of interest:
1. I've extracted the list of defendants from the complaint document above. You'll notice they fall into two classes: Shareholders, and Trustees.
- BNY Mellon**
- Bank of America*
- HSBC Bank**
- J.P. Morgan Chase**
- Merrill Lynch*
- Washington Mutual*
- Wells Fargo*,**
* Shareholders of MERSCORP, and "MERS members" of Mortage Electronic Registration Systems
** Trustees of residential mortgage-backed securities
2. The following two causes of action seem especially salient to me (though legal experts will correct me):
64. All Defendants, together with Mortage Electronic Registration Systems, Inc. and MERSCORP, Inc., constitute an association-in-fact "enterprise" (the "MERS Enterprise") as the term is defined in 18 USC § 1964(4) [RICO], that engages in, and the activities of which affect, interstate commerce. The members of the MERS enterprise are and have been associated through time, joined in purpose and organized in a manner amenable to hierarchical and consensual decision-making, with each member fulfilling a specific and necessary role to carry out and facilitate its purpose. Specifically, Defendant Shareholders operated and directed the affairs of MERS to enable them to transfer mortages in a manner designed to unlawfully avoid payment of required recording fees, directed the publication of advertising materials to investors and the general public misrepresenting the need for properly recording mortgage conveyances, actively concealed the lack of valid assignments from investors, and mailed false notices, including, but not limited to, foreclosure documents, to Plaintiffs, homeowners and others. The Defendant Trustees conspired with the Defendant Shareholders to create the MERS scheme, and assisted in implementing the scheme by disregarding their duty as trustees to ensure proper perfection of the mortgages, facilitating the creation and profitability of mortgage-backed securities. The execution of the MERS scheme would have been beyond the capacity of each member of the MERS Enterprise acting singly and without the aid of each other.
I have to say, that if you want to slice the kleptos out of a kleptocracy, RICO would seem the perfect surgical tool. After all, what is a kleptocracy but a racket?
69. Further. each of the Defendants has conducted and/or participated in the conduct of the MERS Enterprise's affairs through a pattern of racketeering activity in violation of RICO, 18 USC § 1962(c), by engaging in numerous acts of mail fraud and/or wire fraud. False representations or fraudulent pretenses made by defendants include:
1) misrepresenting to homeowners, investors and MERS members the need for recordation of assignments in the parish records;
2) mailing and/or electronically transmitting false notices, including foreclosure documents, to Plaintiffs, homeowners and others;
3) actively concealing its lack of valid assignments from investors, Plaintiffs, and homeowners.
So the Tinkertoy-quality MERS website ("MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans") is a case of wire fraud? Too funny.
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When I was talking with Richard Faulkner I was reminded of this passage from Reflections on the Psalms, by C.S. Lewis. He wrote:
The Unjust Judge in the parable [Luke 18:8] is quite a different character. There is no danger of appearing in his court against our will: The difficulty is the opposite -- to get into it. It is clearly a civil action. The poor woman (Luke 18:1-5) has had her little strip of land -- room for a pigsty or a hen-run -- taken away from her by a richer and far more powerful neighbor (nowadays it would be Town Planners or some other "Body" [or "entity" -- lambert]). And she knows she has a perfectly watertight case. If once she could get it into court and have it tried by the laws of the land, she would be bound to get that strip back. But no one will listen to her, she can't get it tried. No wonder she is anxious for "judgement."
Behind this lies an age-old and almost world-wide experience that we [sic] have been spared. In most places and times it has been very difficult for the "small man" to get his case heard. ... Hundreds and thousands of people who have the right entirely on their side will at last be heard. Of course they are not afraid of judgement. They know their case is unanswerable -- if only it could be heard.
How many of us are in that position, literally and metaphorically! Our case is unanswerable. If only it could be heard. So let's hope for a favorable outcome for that 12(b)(6) motion.
NOTE Originally posted at Naked Capitalism.