"Bear Stearns ignored the proposals (made
by the heads of its due diligence department) to track the override decisions,
and instead took the opposite tack, adopting an internal policy that directed its due diligence managers to delete
the communications (with its due diligence firms) leading to its final loan
purchase decisions, thereby eliminating
the audit trail."
This is
fraud. Why? Because in its agreements with investors,
Bear promised to conduct "due
diligence"; it also promised to conduct "quality
control" testing of the loan pools from which it was bundling mortgages
into mortgage-backed investment securities (MBSs). In addition, it promised to
"repurchase" defective loans, and finally it also promised to
implement "seller monitoring," so as to prevent the securitization of loans
from bad suppliers.
But it not
only didn't do any of these things, it knowingly
covered up its fraud by deleting any communications referring to its deliberate
failure to do what it had contractually promised to do!
Verschleiser
was personally named in the evidence offered in the Ambac suit. In a letter to Ambac, Bear's Investor
Relations managing director Cheryl Glory wrote that "Jeff will... provide you with the due diligence reports of
all three deals once they are complete."
But this is
the same "Jeff' who we now have, in writing, saying this about those
promised due diligence results: "We are wasting way too much money on Due
Diligence," and "We're just burning money by hiring (companies to do
this for us)."
Obviously Bear
was not upholding its contractual obligations when it provided to Ambac what it
(Bear) acknowledged in memos to be "bad due diligence". At the very least, this is actionable.
Verschleiser
undermined due diligence in other ways as well.
One good one was to demand that his due diligence people operate at such
rapid speeds as to make genuine due diligence impossible.
At one point
during these deals, Verschleiser scolded his immediate subordinate, co-head of
mortgage finance Baron Silverstein, over the "problem" of the due
diligence department taking "too much time" to do its work. In response, Silverstein then issued the following tirade to Bear's VP for Due
Diligence, demanding that he not get in
the way of Bear's (criminally inspired) goal of creating a next-to-impossible 500
new mortgages each day. (Many of these mortgages were extremely risky,
given the rate at which marginally qualified borrowers had to be found, so that
the maximum number of such crap mortgages could be bundled into toxic MBSs each
day, to be quickly sold to unsuspecting investors).
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