FOR IMMEDIATE RELEASE:
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:
As its source for alleged insider-trading evidence, Ervin referenced:
- 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.
- 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 http://www.solari.com/gideon.
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, email@example.com;
or 202/842-8807, firstname.lastname@example.org).