The Amended Complaint by investors against LPS is a thing of beauty. It details some of the alleged illicit practices as buttressed by the testimony of 17 confidential witnesses, mostly ex-LPS employees with varying levels of duties and responsibilities. 5 20 2011 City-of-St-Clair-Shores-Employees-Retirement-System-v-LPS-et-al-Amended-Complaint-May-18-2011. Summary by Catherine Eckland:
LPS’ Illicit Practices:
- · Fabrication of documents
- · “robo-signing”
- · The forging of documents
- · Improper notarization
- · Violation of security protocols
- · The concealment of known mistakes from courts, attorneys and clients
When these problems were discovered by LPS’ internal auditors, LPS swept them under the rug
LPS employees were rewarded for their speed, which resulted in violation of security protocols and significant errors in the services they were providing
LPS’ stock price began to plummet in the fall of 2010.
LPS’ “Network” of attorneys
- · LPS created a “network” of attorneys to help services its clients’ foreclosure cases.
- o In order to join the network, attorneys had to execute a “Network Agreement” with LPS
- o These network lawyers were required to pay “referral fees” to LPS as legal work was accomplished in the cases they were working on
- o LPS required its attorneys to follow specific timeframes
- o LPS strongly discouraged its attorneys from communicating with clients (E.R. 1.4- Communication)
- o LPS managed the flow of information b/n attorneys and clients through its Desktop system- the work-flow processing web-based software application through which all atty.-client communications went through.
- o Network attorneys were kept in the dark by the limited information they received from LPS
- o LPS ranked its attorneys through an internal metric know as Attorney Performance Review (“APR”), which ranked attorneys based on how quickly they performed work on behalf of servicers (possible breach of attorney-client privilege- E.R. 1.6)
- o APR ratings were “strictly based on speed.”
- o The LPS Desktop system assigns a color to each firm: green for firms that turn out the work the fastest, yellow for the slower ones and red for those that take the longest.
- o Violation of 18 U.S.C. § 155, the Bankruptcy Code and numerous professional responsibility codes
- o In re Taylor, No. 07-15385 (Bankr. E.D. Pa. Apr. 15, 2009): Judge Sigmund stated that “the barrier that NewTrak supplies to obstruct client/attorney communications is contrary to the Model Rules of Professional Conduct. Since there is no client consultation and since the lawyer is simply tasked to file a motion based on a pre-coded event or a claim objection based on a claim not filed by that firm, the Rules of Professional Conduct appear to have been subordinated to this automated system.
- o The Network Firms were NOT “independent.” à LPS had control over the attorneys
- o Sharing legal fees with non-lawyers is illegal, and LPS is not a law firm.
E.R. 1.5, Comment  provides that “An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest.”
Violation of federal securities laws: LPS did not disseminate accurate and truthful information with respect to LPS’ financial condition and performance, growth, operations, financial statements, business, products, markets, management, earning, present and future business prospects, and to correct any previously issued statements.
- LPS did not charge its clients (the mortgage servicers and banks that hire it to do foreclosure work) fees.
- LPS gained revenues by charging referral fees (aka: “administrative fees” or “administrative support fee”) to attorneys in its “Network” and through illegal fee-splitting
- Bill Newland: V.P. of Operations of LPS Default Solutions, who handles the atty. management area
- According to Newland, these fees fund all of LPS Default Solutions’ activities, pay all of its overhead and comprise all of its profits.LPS fabricated missing assignments to foreclose on homeowners
- With DocX, LPS produced significant numbers of invalid assignments on behalf of banks so that its client could foreclose on homeowners.
- Services DocX offered for a fee:
i) Create Lost Note Affidavit
ii) Create Missing Intervening Assignment
iii) Cure Defective Assignments
iv) Recreate Entire Collateral File
- Data Entry employees did not perform any analysis or verify any information; they just pulled information from one screen and entered into another screen.
- After data was entered, the documents were printed out and taken into the “Signing Room” (aka: the “forging room”) at DocX, where a supervisor took the documents and handed them out to signers.
- Managers closed the door when clients came through so the clients would not see the signers.
LPS abused client authority and required employees to “Robo-Sign” documents
- CW 9 explained that there was a corporate resolution signed b/n DocX and their clients, giving DocX employees the authority to sign as a representative of the client, which was done solely to speed up the turnaround times of getting the documents completed and filed.
- CW 12 stated that each signer received a batch of documents and had to “sign whatever page” they had in front of them, even if it was not their name on the page. These pages were signed without be read or analyzed beforehand.
LPS requires employees to forge signatures through an arrangement called surrogate signing
- Through this process, LPS required employees to sign or forge the names of those individuals at the Company who had been given signing authority by clients.
- Whichever signature they could most closely emulate was the signature they were directed to sign, over and over again.
- According to Chris Pendley, in an interview for 60 Minutes, he alone signed 4,000 documents a day and DocX employees had to sign at least 350 documents per hour.
- Former LPS employee Cheryl Denise Thomas testified that she personally signed an assignment of mortgage as a V.P. for MERS, even though she was not a V.P. of MERS.
- Employees were routinely assured that everything was above board and legal.
- CW 12 explained that if you ever inquired as to the legality of the practice, you would be fired immediately.
The Company Encourages Improper Notarization (p. 41)
Company notaries would notarize documents, even though they never observed the actual signing nor verified the identity of the signer.
Although DocX was shut down, illicit practices continued and were widespread
LPS began shifting robo-signing operations to on-site client locations, where LPS’ signers and notaries continued to mass-produce the same type of deficient documents generated at DocX and LPS MN.
The company’s business model led to security breaches and significant errors
Employees were pressured to share passwords
Password sharing was widespread and constant
LPS put intense pressure on employees to do work quickly, rather than accurately
LPS demanded “mandatory overtime” so that employees could process all loan files that needed attention
Employees were often told by higher-ups that “other people want your job, we’ll just let you go if you don’t keep up.”
LPS employees were only allowed to look at a file for 2 or 5 minutes, in order to maintain high levels of speed in relation to processing.
“phantom referrals” went to attorneys who in turn would work on processes and file documents with courts alleging borrowers failures or defaults that were inaccurate (False statement to a tribunal and violation of E.R. 3.1: Meritorious Claims and Contentions)
LPS’ files had numerous errors
v E.R. 7.3: Direct Contact with Prospective Clients à “A lawyer shall not…solicit professional employment from a prospective client or employ OR COMPENSATE ANOTHER to do so when a motive for the lawyer’s doing so is the lawyer’s pecuniary gain, unless the person contacted is a family member or has a close personal, or prior professional relationship with the lawyer.”
LPS concealed errors at any cost
v Default Management Services was a core operation of the company during the class periods
v Defendants were aware of the illicit practices at DocX
v Carbiener would visit the offices regularly with Chan, including the DocX office
v Defendants also repeatedly acknowledged the problematic business practices at DocX and their internal investigation of this entity.
v Defendants knew of the company’s illicit practices from the constant media scrutiny, investigations, and litigation during the class period.