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LandAmerica: The final days appeared like a Ponzi scheme
By Adrienne Gonzalez for ML-Implode. Adrienne is founding editor of Jr Deputy Accountant, 3x weekly columnist for accounting tabloid Going Concern and CPA Wrangler by day for Roger CPA Review.
If you haven't yet heard of the fall of Richmond, VA-based LandAmerica Financial Group (LFG), you really should. Landamerica Financial Group, Inc was classified as a Real Estate Title Insurance company founded in 1991. LandAmerica subsidiaries also provided mortgage origination and refinancing services, REO management, valuation, foreclosure, and bankruptcy services and lien reconveyance, and real estate tax services.
I'm here to tell you the tale of mortgage bundling, 1031 exchanges, and towards the end abject failure that may or may not turn out to be absolutely bone-headed, if not downright criminal.
Before we get into this, let's define "1031 exchange" for the uninitiated. Essentially, it's a way to flip property (or otherwise be deeply immersed in the real estate game for individuals) without having to pay those pesky capital gains on said property. 1031 funds are held in trust by the fiduciary and may be reinvested within a certain period without the investor having to pay said capital gains. It's basically a tax shelter, and with the 'benefit' of being essentially unregulated, the 1031 exchange market is ripe with predatory practices. In this particular crime scene, the fiduciary was supposed to be LandAmerica and this suspicious bad behavior feels a tad fraudulent to say the least.
The timeline goes something like this: September 2003, LandAm acquires 'mortgage credit reporting provider' Info1 - well that's a win for them then, isn't it?
LandAmerica had hoped to expand its credit reporting operations by streamlining the credit approval process, allowing it to bring credit quicker and easier to all sorts of mortgage applicants, including subprime borrowers.
In 2004, LandAmerica/Info1 made a great team, bringing easy credit to the ever-expanding housing bubble... isn't technology a beautiful thing? The faces are familiar, as LandAmerica Credit Services (the re-branded hybrid of LandAm and Info1) was the original e-MITS(R) (Electronic Mortgage Information and Transaction System) credit provider for IndyMac Bank, providing credit reports to IndyMac for 8 years before the merger.
In a teleconference to discuss the transactions, LandAmerica executives said part of the motivation for the deals was the ability to offer bundling of loan origination services. Mortgage bundling, huh? Well that's not criminal, especially when everyone else is doing it. Banks like Bear Stearns, Bank of America, Citigroup, and Morgan Stanley couldn't get enough of these securitizations and companies like LandAm were more than happy to keep the financial crack coming.
Beyond mortgage bundling, LandAm's other lucrative venture was of course their 1031 exchange arm. In the good old days, LandAmerica sought to reinvest 1031 exchange funds in supposedly liquid ARSs as a way to reinvest client money in money market-type accounts. The question of whether these funds were held in trust as LandAm exchange victims claim or freely pooled into a common account and reinvested without client knowledge is yet one more point to be hammered out after bankruptcy court. It appears as though LandAm executives entered into these ARS agreements with good intentions and believed Citigroup/SunTrust marketing materials that claimed money invested in such ARSs was highly liquid and could be pulled at any time. But then the ARS market froze.
At some point along the way, right about the time the auction rate security (ARS) market dried up, LandAm got in over their heads and began the death scramble to save the company. By then, LandAm had $400 million in investor money tied up in said ARS funds, and again it begs the question: was LandAmerica's behavior criminal or just terribly stupid? LandAmerica guaranteed customer funds, dismissing the frozen ARS market as an unfortunate and unforeseen consequence, claiming it had been deluded into believing these securities were not only safe but liquid. At bankruptcy, LandAm held ARSs with a par value of $202 million. Victims of the 1031 scam will be lucky to recover pennies on the dollar after the lawyers - approved by LandAm executives, of course - are paid off, not to mention the federal government and the execs themselves trying to get the pieces they are owed.
From LandAm's Q3 2008 results:
Commenting on LandAmerica's performance, Chairman and Chief Executive Officer Theodore L. Chandler, Jr. said, "This quarter we are taking a market value-driven, non-cash write-down of goodwill, other intangible assets, certain investments and deferred tax assets of $462 million."
Chandler added, "We are also further strengthening our reserves by approximately $90 million to account for adverse claims development. We continue to aggressively reduce our cost infrastructure to adjust for these exceptionally difficult real estate and credit markets and, as a result, incurred $12 million of exit and termination charges this quarter."
"On November 7, 2008, we signed a definitive merger agreement with Fidelity National Financial, Inc. to join the Fidelity family of companies. We believe that this combination is in the best interests of our shareholders, customers and employees and look forward to bringing the strength of our combined capabilities to the marketplace."
By that point, LandAm 1031 exchange money had long been pooled and invested in supposedly liquid auction rate securities with Citigroup and SunTrust. Was that criminal? Well it depends on who you ask.
See also the class action lawsuits: In Re: LandAmerica 1031 Exchange Services, Inc., Internal Revenue Services § 1031 Tax Deferred Exchange Litigation, United States District Court, District of South Carolina, Case Number 8:09-mn-02054-JFA, (the Consolidated Class Action).
LandAm exchange victims claim that LES marketing documents insisted their money would be kept in trust accounts and perhaps LandAmerica thought it was doing the right thing at the time, even as it took its client funds long after the ARS market dried up. Holding out for the Fidelity lifeline, LandAm execs likely did what they thought was right at the time, which meant buying time.
LandAm exchange victims, of course, consider this the criminal component of the operation, equating the entire thing to a giant Ponzi scheme. While I'm not sure if LandAm is a Bernie Madoff, there are certainly questions surrounding LandAm's last days. Richmond BizSense has done a pretty thorough job of covering the mess from lawyer fee drama to the accusations of Ponzi scheming from LandAm exchangers. You can also see LandAm CEO Ted Chandler begging Hank Paulson for a piece of the bailout pie to save his tail, a request which was promptly denied and left LandAm in the lurch.
When the ARS market froze in February of 2008, LandAmerica should have done the right thing and protected 1031 exchange funds as it was entrusted to do but instead used new client money to pay off current clients. If that isn't a Ponzi scheme, I'm not sure what is, regardless of LandAm's intention at the time.
Fidelity backed out (can you blame them?) after a little due diligence and ended up taking only the foie gras of LandAm's carcass: Lawyers Title Insurance Corp., Commonwealth Land Title Insurance Co., and United Capital Title Insurance Co. Instead of a $126 million merger, Fidelity bought LandAmerica's primary underwriting units for $298 million, creating the largest U.S. title insurer company. Does that make sense? Due diligence being what it is, I don't quite see why Fidelity would choose to pay twice as much for LandAm's good bits than it would have for the whole shebang unless, of course, Fidelity saw what LandAm exchange victims didn't.
"We have always had great respect for the Commonwealth, Lawyers and United commercial and residential operations and all three underwriters will emerge from the LFG bankruptcy proceedings as much stronger, stable and more valuable companies," said Fidelity chair William Foley "To the extent that it is legally permissible, we expect to immediately begin meeting with the Commonwealth, Lawyers and United managers, employees, agents and customers throughout the country to ensure a smooth transition after closing."
Naturally.
Sorry but I read that to say "we just wanted to get the good bits, and forget all the rest of that ARS junk. Let them figure that out in bankruptcy and good luck, b&#%^es!" or maybe that's just me.
In November of 2008, LandAm (with the good stuff already cleanly separated from the hot dog meat remaining) entered Chapter 11. The battle has been raging since, with LandAm executives hoping to make off with what's left hanging off the bone.
On November 24th, two days before LandAm declared bankruptcy in the Commonwealth of Virginia, it refused to release $81,666 in funds placed in trust by one LandAmerica victim who'd placed said funds with the company on October 15th. The victim, like so many others, claims that this was his life savings. Meanwhile, LandAmerica lawyers were signing off on millions in lawyer fees for the bankruptcy ahead and LandAm execs were planning their own looting of the carcass.
LandAm victims claim new investor money was being used to fill the gap for long-time LandAm 1031 exchange accounts which were supposed to be held in trust. Richmond Times-Dispatch:
Like others who deposited money with LandAmerica, he believes the company took his money even when its executives knew it couldn't repay it.
In a sworn affidavit, retired Army Col. Tracy Ralphs said the LandAmerica official who took his deposit told him on the day the Glen Allen firm filed for bankruptcy that one senior LandAmerica official knew as early as June that "this whole thing was going to blow up."
"It was just a Ponzi scheme," said Paul Busse, whose wife deposited money with LandAmerica in August 2008. "They were using money like my wife's to repay other investors."
Bankruptcies are never pretty but this one is special because it is a reflection of our tumultuous times; poor investment choices, floundering companies, and of course to make matters worse, LandAm's general counsel - who signed off on said bankruptcy lawyer fees numbering in the millions - is now working as General Counsel for the Federal Reserve Bank of Richmond. But we'll get to that particular bit later.
All of this just to defer some capital gains? A shame indeed... maybe a criminal shame at that.
For more on LandAmerica from Jr Deputy Accountant check out What In The Hell Happened to LandAmerica?, DoJ Failures and the Continuing Saga of LandAmerica, LandAm "Exchangers" Are Still Pissed Off: Who Signed Off on These Legal Fees?, and The Good, Bad, and Less Bad for Richmond Fed.
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