Born to Lose: Goldman Sachs’ Abacus 2007 – AC1 and its victims.

SUMMARY: As the SEC investigates whether investors were defrauded by subprime mortgage security offerings, don’t forget about the other victims: the subprime borrowers.

Its in all the papers, including the New York Times. The SEC is charging Goldman Sachs with securities fraud because it sold mortgage-backed securities to overseas banks, insurance companies and other institutional investors without telling them the whole story. According to the SEC, the mortgages that backed these securities involved such extreme risks that Goldman knew there would be losses and secretly planned to profit on that information through a hedge fund.

The SEC claims that Goldman was betting that Abacus 2007 – AC1 and 25 similar pools of mortgage backed securities would fail. Thus, says the SEC, Goldman customers tallied big losses, while Goldman anticipated the losses and even arranged to turn a profit on the side.

The source of the loans pooled in Abacus 2007 AC1 was Countrywide Mortgage. Countrywide was closed by the FDIC in the aftermath of the 2008 crash and was acquired in a regulatory assisted merger by Bank of America.

Subprime mortgages were once in high demand. The high risk was supposedly balanced by the high return. If one failed, the ones that didn’t fail were supposed to earn enough premium revenue to balance the loss. This outcome was also offset by the much larger number of conventional mortgages, with reasonable underwriting standards and reasonable risk.

But the appetite of the market for securities backed by high yield/high risk mortgages was insatiable. Eventually, their numbers became so great that the pooled risks reached a tipping point. When the housing bubble inevitably burst, disaster followed.

Many blamed greedy homeowners, living beyond their means, for the cascade of events that nearly brought down the world economy. But the homeowner/borrowers simply snapped up the sometimes too-good-to-be true offers that were put together by lenders to the specifications of the people who packaged them for sale to investors. These borrowers could never have obtained such extraordinary deals if the securities market had not ordered them up in large quantities.

Mortgage brokers and bankers had also found ways to persuade nervous borrowers. Those without sufficient credit scores to qualify for low interest fixed-rate mortgages were told that they could use the opportunity to build better credit. Then, after making 12 successive payments on time, they would have a credit score sufficient to refinance at lower rates. Ideally, the refinance could be accomplished before the variable interest rate took its first jump.

That strategy often worked in the past. But times changed. Adjustable rate mortgagors increasingly found themselves stuck when the interest rate escalated. They couldn’t sell, they couldn’t refinance and they couldn’t pay. That meant one thing: default.

As we protect investors, it should be remembered that they were not the only victims of this chicanery. Countrywide and others procured subprime mortgages by the millions to meet the specifications of the securities bundlers. Every one of them involved borrowers who, more likely than not, were betting their economic future on the transaction.

What would have happened if these victims had been given disclosures that the people who put together the terms of the transaction actually expected them to default? Armed with that explosive fact, how many subprime borrowers would have decided to pass on the offer? We’ll never know.

CLT

Category: Uncategorized

Another Encore Post on Roethlisberger, from March 10.

GARLAND PREDICTS ROETHLISBERGER WILL NOT BE CHARGED. HOW COULD THAT HAPPEN? HERE’S HOW.

Posted By Cliff Tuttle | March 10, 2010

Consider the following excerpt from the Roethlisberger investigation coverage Pittsburgh Tribune Review:

“In an exclusive interview with the Tribune-Review, however, Roethlisberger’s newly hired attorney â€” prominent Atlanta criminal defense lawyer Edward T.M. Garland â€” rushed to insist that his client ‘is completely innocent of any crime.’

‘The truth of events will cause this investigation to end without a charge,’ said Garland.”

Mr. Garland, in case you hadn’t noticed, not only stated that his client was completely innocent of any crime, but predicts that at the end of the investigation his client will not even be charged with a crime.

Given what we know so far, how could this be possible?

The crime is alleged to have taken place in a dark location without security cameras. However, there were security cameras in other locations. In order for Roethlisberger to have committed the crime, both he and the victim would have to be absent from the view of the security cameras at the same time for a period of time long enough for the event to occur.

Of course, there were many witnesses present during that evening, including the victim’s friends, Roethlisberger’s entourage and other patrons of the bar. All that evidence can be pieced together to establish whether or not Roethlisberger and the victim were absent from the group at the same time. And, of course, the victim would have probably exited the bar shortly after the crime is alleged to have taken place and not be present on security tapes from that point onward. It is not too hard to imagine how film and eyewitness testimony could be combined to verify or disprove numerous details of the stories told by both the victim and the accused. If Roethlisburger was continuously on camera or in the company of many witnesses during critical times when the assault could have been committed, the investigators could well conclude that he was not the perpetrator of the crime.

Press accounts have reported that the victim was crying for a long period and concluded that this makes the allegations against Roethlisberger highly credible. The victim was well-known and respected in the student community as a person who would not seek public attention. But that does not rule out the possibility that her account of a sexual assault that actually happened was only partly true. The possibility has not been excluded that someone else committed the sexual assault.

If such inconsistencies in the evidence come to light, Garland’s prediction, that Roethlisberger will not be charged with any criminal act, could be borne out.

Please bear in mind that the forgoing is only a speculation. It is just like the theories constructed by people who, based on the fragmentary information available, have already decided his guilt. The outcome of the investigation, and perhaps the trial, will be determined by evidence not presently available to you and me.

Be patient. Think of it as a spellbinding mystery story, a real page turner, still in the early chapters, at a time when most of the clues have not been revealed.

CLT

Category: Uncategorized

Encore Post: Here’s What I said About the Roethlisberger Case On March 7.

ROETHLISBERGER MEDIA COVERAGE: A REFRESHER ON THE PRESUMPTION OF INNOCENCE.

Posted By Cliff Tuttle | March 7, 2010

As yet another high profile case gets big time media attention, it is necessary for us to remind ourselves that news coverage is not a trial and news reports are not evidence.

Recently, the story of an accusation of sexual assault at a nightclub in a Georgia college town hit the news before there was any substantive news to hit. The fact that one of the participants in the events of that evening was Ben Roethlisberger set off big time news coverage, despite the fact that no official accusation has been made by the police. No one has been arrested and no one has been charged.

A classic illustration of the reason behind the principle that accused persons must be presumed innocent until a fair trial has been conducted was the premature punishment of members of the Duke University soccer team by the University administration and unofficially by practically the entire community. The University administration couldn’t wait for a judicial determination to run its course and took hasty action without due process. Eventually, the prosecution case collapsed under its own weight. The prosecutor himself was eventually disbarred for falsifying evidence. We should always bear in mind that such things can and do happen. When they do, lives can be irreparably harmed and even destroyed.

News stories, even when carefully written are not evidence. The refusal of defense counsel to air his or her theory of the case in the press means nothing, except that the proper time and place is at trial. But, in case we have forgotten, the defense doesn’t have to say a thing, not even to the judge and jury. The prosecution must prove its case with probative and relevant evidence beyond a reasonable doubt.

Beyond a reasonable doubt: what does that mean? It means that, after hearing all of the admissible evidence, the finder of fact must find the accusednot guilty if there is room for reasonable doubt. The accused must be given the “benefit of the doubt”, provided that the doubt is reasonable.

The human mind automatically seeks to make sense out of the perceptions referred by the senses. Suspending judgment requires us to consciously hold this automatic tendency at bay. This is a mental discipline worth cultivating. It enables us to take a more considered view of other matters, matters within our personal sphere of influence, that can easily be misjudged before all of the facts are available.

In this media-driven world, there is plenty of opportunity to practice this skill.

Category: Uncategorized

Another Change at the Supreme Court

Justices on the United States Supreme Court are appointed for life. And as a group, they have shown remarkable longevity. But more than a few have voluntarily retired. The only Justice to hail from Pittsburgh, George Shiras, pledged to resign in ten years when appointed by President Benjamin Harrison in 1892. He kept that promise.

The resignation of John Paul Stevens comes 35 years after his appointment by Gerald Ford. That is a long time on the court — about as long as the great Chief Justice John Marshall who was appointed by John Adams as he was literally leaving office in 1801. Marshall would serve into the Jackson presidency, long after his Federalist Party had ceased to exist.

Stevens was not the longest serving member of the Court. That would be William O. Douglas, the “Liberal Lion” who authored a lion’s share of the most important opinions of the 20th Century. His tenure on the Court was almost 37 years. Stevens replaced Douglas in 1975 and that might have been on his mind when he first announced retirement. If Stevens didn’t retire soon, in a couple of years he would surpass Douglas in longevity on the Court. Is that what a man like John Paul Stevens would want to do? I don’t think that he would.

CLT

Category: Uncategorized

Deportation or Jail? The Padilla Case.

The US Supreme Court in Padilla v. Kentucky held recently that a legal immigrant was given ineffective assistance of counsel when advised to plead guilty to a serious criminal charge because it would not affect his status as a legal alien of 40 years duration. The truth was, as Justice Stevens’ opinion noted, that under current law, deportation was virtually automatic with a guilty plea to a serious charge, regardless of how long the alien had resided in the country.

The allegation of ineffective assistance of counsel is a primary avenue to a new trial following guilty plea or a conviction. A waiver of trial by pleading guilty must be knowing and courts frequently make queries on the record to establish that a guilty plea was given with full knowledge. Advice as to collateral matters, such as deportation, has not ordinarily been considered by courts in determining effective assistance. But now it must.

CLT

FOOTNOTE: This is not the Padilla who was involved in Padilla v. Rumsfeld, a well-known 2003 Supreme Court Case involving terrorism.

Category: Uncategorized

Scrabble on the iPad

As an avid Scrabbler, I can’t wait to try it on the iPad.

Picture this: the iPad is the board — the full board. Using a special iPhone app, you draw and shuffle your letters on your iPhone. Then you flick your word onto the board.

And, of course, you can consult the on-line dictionary in case of disputes.

I assume that the game keeps score, too.

CLT

Category: Uncategorized

Congratulations to Dean Kenneth Gormley.

Dean Kenneth Gormley has given a great deal to this legal community and he will undoubtedly continue to do so as Dean of the Duquesne Law School. He stepped up and took charge of a difficult situation when Donald Guter was forced out of office by the University. He has everything it takes to make his tenure, may it be a long one, a success.

CLT

Category: Uncategorized

Oil and Gas: PA Supreme Court Holds Lease Language is Consistent with Statutory 1/8 Royalty Requirement.

SUMMARY: PA Supreme Court in Kilmer v. Elexco Land Services, Inc. holds that the “net-back method” of calculating the value of gas at the wellhead (as opposed to the downstream point of sale) is consistent with the Statute requiring payment of a minimum 1/8 royalty to the landowner.

The operation of the Marcellus Shale in Western Pennsylvania has resulted in unheard-of royalties and bonuses being paid to landowners. Using modern hydrofracturing techniques and directional drilling, Marcellus wells can greatly out-produce traditional shallow wells in the same field.

One unanticipated consequence of the Marcellus boom is that landowners who had leased oil and gas (without limitation) to operators of shallow wells in fields where Marcellus plays are now happening started looking for ways to terminate their existing leases. One popular argument was that the old leases violated the Pennsylvania Guaranteed Minimum Royalty Act (“GMRA”) 58 P.S. § 33. The Supreme Court expedited the appeal of the Kilmer case from the Superior Court because there were 70 common pleas cases on hold, waiting for a decision.

According to the Plaintiff-appellants, the “net-back method” of calculation used to determine value of gas at the wellhead, embodied in the lease at issue and many others, violates the GMRA. This calculation involves subtracting from the final sales price at the point of sale all of the costs paid for transportation of the gas to the point of sale by pipeline and processing of the raw gas to commercial standards. According to the Plaintiff-Appellants, the lease calls for payment based upon the “sales price” and by calculating 1/8 royalties on an amount less than the actual sales price of the gas, the Defendant-appellees are violating the minimum royalty requirements of the GMRA.

The lease between Kilmer et al and Elexco Land Services stated:

“For all Oil and Gas Substances that are produced and sold from the leased premises, Lessor shall receive as its royalty one eighth (1/8th) of the sales proceeds actually received by Lessee from the sale of such production, less this same percentage share of all Post Production Costs, as defined below, and this same percentage share of all production, severance and ad valorem taxes. As used in this provision, Post Production Costs shall mean (i) all losses of produced volumes (whether by use as fuel, line loss, flaring, venting or otherwise) and (ii) all costs actually incurred byLessee from and after the wellhead to the point of sale, including, without limitation, all gathering, dehydration, compression, treatment, processing, marketing and transportation costs incurred in connection with the sale of such production. For royalty calculation purposes, Lessee shall never be required to adjust the sales proceeds to account for the purchaser’s costs or charges downstream from the point of sale.”

This language, said the Plaintiff-appellants, violated the statutory language, since the GMRA did not recognize deductions from the sales price:

“§ 33. Guarantee of minimum royalties. A lease or other such agreement conveying the right to remove or recover oil, natural gas or gas of any other designation from lessor to lessee shall not be valid if such lease does not guarantee the lessor at least one-eighth royalty of all oil, natural gas or gas of other designations removed or recovered from the subject real property.”

After a lengthy recital of the arguments presented under a variety of theories by both sides, the Court noted that at the time the GRMA was adopted in 1979, it was the practice to sell gas to the pipeline owner at the wellhead. In the 1980’s the federal government required the pipeline companies to grant access to the producers, in effect providing common carrier services of the producer’s gas to market. A small number of states, Colorado, Oklahoma, Kansas and West Virginia have held that the lessee is responsible under the lease for all production expenses until the product arrives at market. (“First Marketable Product Doctrine”) The Plaintiff-appellants argued that because Pennsylvania had long held that the lessee has an implied duty to market gas production for the benefit of both parties, the First Marketable Production Doctrine was a natural corollary. See: Iams v. Carnegie Natural Gas, Co., 45 A.2d 54 (Pa. 1899). However, the Court pointed out that the Iams case said nothing about calculation of royalty. On the contrary, interpretation of the statute, not caselaw, would determine the rule in Pennsylvania. Did the legislature intend that the minimum royalty be calculated free of costs and expenses incurred between the wellhead and the downline point of sale?

Jusice Baer held that the Pennsylvania legislature had not intended such an outcome:

“In 1979, the legislature was not faced with a choice of whether the calculation should be made at the wellhead or the point of sale because they were one and the same. Therefore, we can assume that the General Assembly intended both parties’ interpretation: that the royalty should be calculated at the wellhead and at the point of sale.”

CLT

Category: Uncategorized

#bonusgate tweets away.

Judge Lewis in Harrisburg permitted reporters to use Twitter to send reports from the Bonusgate trial of former PA House Whip Mike Veon, et al. The jury had been deliberating since last week. The dismissal of a juror late last week and the seating of an alternate required the jury to start again.

Yet, despite the setback, early this evening, March 22, word came down that the jury had reached a verdict. The assembled press corps began reporting in 140 character messages as the jurors arrived.

As the jury forman began to read the verdicts, Twitter messages from the courtroom piled up. Veon guilty on five, now ten, now half, finally 14 0f 59. Now to Cott. And so on. Soon readers started retweeting the courtroom reports to their followers. A cacophony of latest numbers, old reports (old is over 30 seconds), not so old reports, kept coming, but strangely out of chronology. Then the Twitterers began to tally the score. Meanwhile, old retweets kept flooding in. Then they started to discuss the significance of it all. Veon not guilty on the basketball dinners. At least one defense counsel was in the flock, declaring loudly that the mixed verdict was a victory for his client, sort of.

I had hoped to give readers a sample of these weird messages as they appeared, but there were just too many. When I tried to scroll to the beginning — too many pages to count — my web browser repeatedly gave up. And so did I.

Meanwhile, the Post Gazette somehow pulled together a website report on the verdicts and announced to the Twitter crowd that it would be ready soon. Everybody’s on steroids. Now they will run off to file their stories or set up for the eleven o’clock news.

Wow! What an exciting night! What a hoot!

Chances are, though, that most judges who hear about this incident will follow the lead of Westmoreland County and permanently ban tweeting from their courtrooms, especially during the solemn moments when the jury announces the verdict.

If we never again see such a tweetfest in court during the jury verdict, we saw it tonight.

CLT

Category: Uncategorized

Why Walmart Doesn’t Practice Law.

An opinion piece appeared in the Forum Section of the Post Gazette on Sunday March 21, 2010 asking the question why we can’t purchase legal services at Walmart. The answer, according to Gillian Hadfield, a Professor of Law and Economics at the University of Southern California who is visiting at Harvard, is that greedy lawyers are controlling the market and suing non-lawyers who dare to offer moderately priced competition.

She says that non-lawyers are providing legal services everywhere else in the world and that studies show that the work product is better.

Bunk!

First off, there are lots of laymen poaching on legal practice areas with official blessing. Non lawyers act as advocates in unemployment compensation hearings these days. The Pennsylvania legislature passed legislation to specifically authorize such activities. Non-lawyer advocates also represent homeowners in real estate tax assessment appeals. More residential real estate closings are handled by non-lawyers than lawyers. Other non-lawyers, such as real estate agents, prepare agreements of sale, deeds and other documents. There are companies who will help you plan your estate, settle with your creditors, mediate disputes, set up a corporation and who knows what else.

I have observed many such non-lawyer professionals. As long as their activities are confined to predefined narrow limits, they often perform reasonably well. However, often enough, they find themselves in deep waters without being aware that they are out of their depth. This can happen during seemingly simple tasks, like preparing a deed. While many deeds are simple exercises in copying prior instruments, there are times when a thorough understanding of specialized practice areas, even arcane ones, is required.

The dividing line that separates legal tasks that can be performed successfully by persons with limited training and without supervision of a lawyer from those that cannot is hard to define, since it varies with each case. Even if some supervisory power could state “go this far and no farther”, who enforces the rule?

And that is the crux of the matter. You cannot adequately represent a party who is facing imminent litigation unless you have the power to litigate. Too often such organizations stand by helplessly while creditors file complaints, take default judgments, issue writs of execution and conduct sheriff’s sales. That is not properly representing the client, even if the client doesn’t understand what is happening.

The idea that it is necessary to permit non-lawyers to compete with lawyers in order to drive down fees is ludicrous. For more than a generation, law schools have been flooding the market with new lawyers. In fact, there is a respectable body of opinion that the lawyer glut has lead to “over-lawyering”, whereby suits that should never have been brought clog up the dockets because all those surplus lawyers have to do something. I do not subscribe to this idea, but I do believe that there is a gigantic lawyer surplus which has kept fees low.

The law of supply and demand is alive and well in law practice, as every lawyer who has hung out a shingle can attest. Yes, there are still people giving up because they think they cannot afford a lawyer. However, I have some good news for them. There are lawyers around, good experienced ones, who will charge a reasonable flat fee and even let you pay in installments, perhaps with a credit card. I cannot imagine that encouraging persons of little training and professional qualifications to step in is going to improve the lot of the underrepresented. On the contrary, it will surely bring them more problems.

I wouldn’t expect a Harvard Law prof. to know any of this. She doesn’t hang out with too many Main Street lawyers, just Wall Street types and their social peers. Her theories can probably be applied very well to that crowd. But, then again, she probably doesn’t shop at Walmart too often either.

CLT

Category: Uncategorized

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Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

Pittsburgh Legal Back Talk

Legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus.

1410 Posts and Counting

Categories

Born to Lose: Goldman Sachs’ Abacus 2007 – AC1 and its victims.

Another Encore Post on Roethlisberger, from March 10.

GARLAND PREDICTS ROETHLISBERGER WILL NOT BE CHARGED. HOW COULD THAT HAPPEN? HERE’S HOW.

Encore Post: Here’s What I said About the Roethlisberger Case On March 7.

ROETHLISBERGER MEDIA COVERAGE: A REFRESHER ON THE PRESUMPTION OF INNOCENCE.

Another Change at the Supreme Court

Deportation or Jail? The Padilla Case.

Scrabble on the iPad

Congratulations to Dean Kenneth Gormley.

Oil and Gas: PA Supreme Court Holds Lease Language is Consistent with Statutory 1/8 Royalty Requirement.

#bonusgate tweets away.

Why Walmart Doesn’t Practice Law.

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