Court Holds Lehman Liable for Lender Fraud

A U.S. appeals court in San Francisco has affirmed lower court decisions that Lehman Brothers, as a warehouse lender, is liable for the actions of a subprime lender that is engaged in fraudulent lending practices."We affirm the holdings of the district court imposing liability on Lehman for aiding and abetting a class-wide fraud perpetuated by First Alliance," Circuit Judge Richard Clifton says in Henry v. Lehman Commercial Paper. First Alliance Mortgage Co. filed for bankruptcy in 2000 to escape class action lawsuits, and a jury found Lehman was liable for $5.1 million in damages as FAMC's sole warehouse lender. The jury concluded that Lehman officials were aware of FAMC's lending practices. The appeals court overturned the $5.1 million award, however, with instructions to the district court to reduce it. Lehman Brothers declined to comment. Nevertheless, the Lehman decision puts wholesale lenders on notice that they have to act if they have knowledge of fraudulent practices. "If you have evidence to suggest that you actually know of a material violation, then you have to act on that knowledge," said Larry Platt, a partner at Kirkpatrick Lockhart Nicholson Graham in Washington.