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May 3, 2000

HUD Loan Sale Qui Tam Lawsuit Unsealed After Almost Four Years

Last week, the Department of Justice declined to participate in a qui tam lawsuit]filed by a private party who alleged that Hamilton Securities, HUD's lead financial advisor during 1994-1997 mortgage loan auctions, provided insider information to and rigged bids for Wall Street companies including Goldman Sachs, BlackRock Capital (PNC Bank Corp) and Ocwen Financial Corporation (formerly Berkeley Federal Bank & Trust). After DOJ notified the Court of the government's decision, United States District Court Judge Louis F. Oberdorfer unsealed the Complaint [Read the Complaint and the Amended Complaint]. Hamilton had filed a motion to unseal the entire file in May 1999, when the case was before recently retired Judge Stanley Sporkin.

"When the government decides not to intervene in a qui tam case, that usually indicates that the government doubts that the private party presented a legitimate claim worth pursuing," explains Hamilton's attorney, Michael J. McManus. "Unfortunately, they took far too long to reach that conclusion and a great deal of damage to Hamilton occurred during that time. A proper investigation would have reached the same conclusion years ago." The False Claims Act allows 60 days for DOJ investigations into qui tam allegations made by private parties. This suit was filed in June of 1996. DOJ's decision not to intervene in this case comes after a 1,400-day investigation, or 1,340 days beyond the investigation period envisioned by Congress.

Hamilton Securities consistently has maintained that the allegations in the qui tam complaint are not true and there is no evidence to support the false accusations. HUD security procedures and overlapping levels of review associated with the bidding process made the alleged bid rigging and insider trading impossible. The daily involvement in the loan sales of dozens of HUD employees, including representatives of the HUD Office of General Counsel and HUD's Inspector General's Office precluded this type of alleged fraud. This has been corroborated by HUD's own audits. The HUD Inspector General took the lead in the investigation of Hamilton, and her refusal to publish those exculpatory audits is the subject of a lawsuit brought by Hamilton to ensure that the true facts come to light.

Every year, HUD issues approximately $70 billion of mortgage insurance that guarantees mortgages used to finance homes, apartment buildings, nursing homes, assisted living facilities and hospitals. HUD pays out approximately $6 billion on claims on defaulted mortgages every year and receives a like amount in defaulted mortgages, which the agency then must manage at great cost to taxpayers.

Before the HUD loan sales, HUD was losing approximately 65 cents on the dollar on these defaulted mortgages. The loan sales improved HUD's recoveries significantly so that HUD lost only 10 to 30 cents on the dollar. Optimization bidding software and on line access to information permitted large and small investors access to a wealth of information on HUD and its portfolio and the opportunity to compete directly in the auctions. In October 1997, the Chairman of one oversight committee referred to the loan sales as generating "eye-popping" yields. From 1994-97, these "eye-popping yields" saved HUD approximately $2.2 billion on HUD's $12 billion mortgage portfolio. It also permitted HUD to issue far more new mortgage insurance at a lower cost.

HUD suspended the successful loan sales program due to the investigation. Prior to that suspension, the $2.2 billion in budgetary savings generated by the loan sales was money that could be used for other purposes useful to taxpayers such as deficit reduction or funding other HUD projects. The General Accounting Office confirmed the savings figures in July 1999.

Under the False Claims Act, a private party who files suit on behalf of the government can receive 15-30% of any recovery if the government's claim is successful. Ervin and Associates, Inc., the private party who filed this qui tam lawsuit, was a servicing contractor to HUD, essentially responsible for debt collection and landlord contract oversight. As the loan sales reduced HUD's portfolio of defaulted mortgages, Ervin's opportunity to do work for HUD diminished.

Pursuant to qui tam disclosure rules, Ervin disclosed that its sources for alleged bid-rigging evidence included:
  • Jeff Parker of the Cargill Group;
  • Terry R. Dewitt of J-Hawk (FirstCity Financial Corporation of Waco, Texas, a Cargill investment and joint venture partner); and
  • Michael Nathans of Penn Capital Corporation.
As its source for alleged insider-trading evidence, Ervin referenced:
  • William Richbourg of the FHA Comptrollers Office.

Since the loan sales commenced, in addition to this qui tam lawsuit, Ervin has sued HUD and several former HUD officials personally and - according to the General Accounting Office - filed 37 bid protests concerning HUD contracting actions.

Hamilton currently is pressing forward with litigation to recover money owed to Hamilton by HUD for work completed pursuant to Hamilton's contract to provide services on the loan sales. "HUD is withholding about $2 million of funds owed to Hamilton for services performed for HUD. Hamilton understands that this withholding is at the request of the Justice Department and the party who they delegated the investigation to, the HUD Inspector General," says Catherine Austin Fitts, President of Hamilton Securities and former Assistant Secretary of Housing - Federal Housing Commissioner in the Bush Administration. Hamilton also is moving forward with the suit it filed against Ervin last year for his tortious actions. Hamilton's total losses to date - including losses to former employees and shareholders - are approximately $250 million.

"As the lead investment banker on $10 billion of loan sales, we are pleased that we have been able to preserve the integrity of these transactions. We intend now to take whatever steps are necessary to ensure we do as good a job recovering our employees' and shareholders' value as we have done for the taxpayers. Step one is that the unsealing of the qui tam lawsuit should free HUD to meet its outstanding contractual obligations to Hamilton as quickly as possible", says Ms. Fitts.

For more information on the loan sales investigation, see All press inquiries should be directed to Hamilton's attorneys, Michael J. McManus or Kenneth E. Ryan at Drinker Biddle & Reath LLP (202/842-8830,; or 202/842-8807,

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