Tuesday, December 7, 2010

MUKASEY involved in S&L ruling 1993

First Nationwide Bank, a Federal Savings Bank, a Federalstock Association, Plaintiff-appellant, v. Gelt Funding Corp., Allen I. Gross, Ralph Herzka, Shimoneckstein, 505 Realty Associates, Prospect Realty Associates,judah Wolf, Meir Unsdorfer, New Heights 765 Riversidelimited Partnership, New Heights (765 Riverside) Managementcorp., 1691 Eastburn Realty Co., Sol Gross (a/k/a Eugenegross), Joseph Friedman, 1261 Central Avenue Owners Corp.,65-11 Realty Co., Aviezier Cohen, Elaine Cohen, 730 Realtyassociates, David Malek, Peter Rebenwurzel, 36 Plaza Streetowners Corp., Robert Wolf, 350 Sterling Associates, Edithgross, Brookhaven Realty Associates, Crown Equities Limitedpartnership, Adar Two Realty Co., 100 Realty Company, Esthershur, E. Phillip Weingarten, New Heights (173-174) Limitedpartnership, Temple Apartments Management Corporation, 740realty Associates, 2344 Davidson Associates, Jacobrabinowitz, 1958 Realty Associates, Menachem Halberstam,mordechai Halberstam, 273 Realty Associates, 2608 Realtyassociates, Solomon Werdiger, Esther Werdiger, Defendants-appellees

United States Court of Appeals, Second Circuit. - 27 F.3d 763

Argued Oct. 18, 1993.Decided June 9, 1994

James L. Stengel, New York City (Andrew M. Calamari, Jodi E. Freid, Deanna R. Waldron, Donovan, Leisure, Newton & Irvine, New York City, Roger B. Mead, Folger & Levin, San Francisco, CA, of counsel), for plaintiff-appellant.

Lewis R. Clayton, New York City (Mark A. Silberman, Paul, Weiss, Rifkind, Wharton & Garrison, of counsel), for defendants-appellees Gelt Funding Corp., Allen I. Gross, Sol Gross a/k/a Eugene Gross, 350 Sterling Associates, Edith Gross, Brookhaven Realty Associates, 2608 Realty Associates, Solomon Werdiger, and Esther Werdiger.

Nathan Lewin, New York City (Miller, Cassidy, Larroca & Lewin, Washington, D.C., Sara Moss, Howard, Darby & Levin, New York City, of counsel), for defendant-appellee Ralph Herzka.

Edward D. Fagan, New York City (Fagan & Associates, New York City, of counsel), for defendants-appellees Shimon Eckstein and 505 Realty Associates.

Rosenfeld & Maidenbaum, Cedarhurst, NY (Meir Rosenfeld, New York City, of counsel), for defendant-appellee Judah Wolf.

Robin Feingold Singer, New York City (Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, of counsel), for defendants-appellees New Heights 765 Riverside Ltd. Partnership, New Heights 765 Riverside Management Corp., New Heights (173-174) Ltd. Partnership, Temple Apartments Management Corp. and Crown Equities Ltd. Partnership.

Irving P. Seidman, P.C., New York City (Irving P. Seidman, of counsel), for defendants-appellees 1261 Central Avenue Owners Corp., 36 Plaza Street Owners Corp., and Robert Wolf.

Sheldon Rudoff, New York City (Goodkind, Labaton Rudoff & Sucharow, Mark S. Arisohn, James W. Johnson, of counsel), for defendants-appellees 730 Realty Associates, David Malek, Peter Rebenwurzel, Adar Two Realty Co., 740 Realty Associates, and 2344 Davidson Associates.

Before: MAHONEY and WALKER, Circuit Judges, and METZNER, District Judge.*

WALKER, Circuit Judge:


This appeal raises issues surrounding the requirements for pleading a private civil cause of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Sec. 1962(c) and (d). Principal among these is whether, where the predicate to the RICO claim is fraud by a borrower in misrepresenting the value of collateral, the fraud is complete before any actual loss is realized because the lender incurs additional concealed risk. Plaintiff-appellant First Nationwide Bank ("FNB" or the "Bank") appeals from a judgment of the United States District Court for the Southern District of New York (Michael B. Mukasey, Judge ), dismissing its complaint for failure to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6). In its amended complaint, FNB alleges that the defendants misrepresented the value of properties pledged as collateral to secure nonrecourse loans, and thereby fraudulently induced FNB to make loans it otherwise would not have made. FNB claims that it was damaged in an amount equal to the fraudulently induced portion of the loans. The amended complaint contains two counts under RICO, 18 U.S.C. Sec. 1962(c) and (d), and seven pendent state law claims.


The district court concluded that FNB had not sufficiently alleged: (1) that it suffered an injury cognizable under RICO; (2) that the alleged fraud proximately caused FNB's loss; or (3) that the eighteen borrowers named as defendants were part of a RICO enterprise. The court thus dismissed the RICO counts of the amended complaint, and absent a substantial federal question, the pendent state law claims as well. Because we agree that FNB has not adequately plead injury and proximate cause, we affirm.




We review de novo the district court's dismissal under Rule 12(b)(6), taking as true the factual allegations in the complaint, and drawing all reasonable inferences therefrom in FNB's favor. Ferran v. Town of Nassau, 11 F.3d 21, 22 (2d Cir.1993).


FNB is a federal stock association based in San Francisco, California with offices in New York City. Prior to 1985, FNB's business consisted primarily of making purchase money mortgage loans to individuals. In 1985, FNB's parent corporation, First Nationwide Financial Corp., was purchased by Ford Motor Company. In May of that year, FNB began a significant expansion of its lending activities in New York by offering nonrecourse mortgage loans to owners and purchasers of commercial properties, principally multi-unit apartment buildings. Over the next five years FNB made over 1,000 nonrecourse loans to commercial property investors in the New York Metropolitan area in an aggregate amount of approximately $1.3 billion. In November 1990, in the midst of a severe downturn in the New York real estate market, FNB phased out its commercial lending business and stopped making commercial loans through its New York office.


Defendant Gelt Funding Corp. ("Gelt Funding") is a commercial mortgage broker that represents owners and potential buyers of commercial property, and helps them obtain financing for their transactions. Defendants Allen I. Gross and Ralph Herzka are Gelt Funding's principals: Gross its president and principal or sole shareholder, Herzka an officer and employee. Between 1985 and 1990, Gross and Herzka cultivated a lucrative relationship with FNB on Gelt Funding's behalf in which Gelt Funding served as mortgage broker for borrowers of about $900 million in loans comprising roughly seventy percent of FNB's commercial mortgage portfolio. Eighteen of those borrowers are alleged to have supplied fraudulent information in their loan applications and are named as defendants in this action. The remaining individual defendants are alleged to be partners in, or otherwise affiliated with, one or more of the defendant borrowers.


FNB made all the loans in question on a nonrecourse basis. In a nonrecourse loan transaction, the lender gives up its right to sue the borrower personally upon default, and is confined to recourse against the collateral property. Because the lender's remedy upon default is limited to the value of the property, that value is critical to the lender's decision whether to make the loan. Accordingly, before making a loan, FNB required borrowers to supply information about the property's operating income; the price for which the property was to be purchased; sale prices for the property in the previous three years; and whether the borrower intended to encumber the property with additional debt. FNB ordinarily would not make a nonrecourse loan unless the collateral property's net operating income was at least 1.05 times greater than the combination of principal and interest due on the loan, and the property value exceeded the loan amount by at least twenty-five percent.


During an audit of its commercial loan portfolio in 1991, FNB determined that a higher proportion of loans brokered by Gelt Funding had defaulted compared to other loans. In January 1992, FNB filed its original complaint in nine counts consisting of two RICO counts and seven state common-law claims. The first RICO count was brought against Gross, Herzka, and Gelt Funding (collectively, the "Gelt Defendants"). The second RICO count named, in addition to the Gelt Defendants, all the borrower entities and affiliated individuals (the "Borrower Defendants") who allegedly operated as a single organization, the so-called "Borrower Enterprise." The remaining seven state law counts alleged fraud, conspiracy to defraud, negligent misrepresentation, conversion, conspiracy to convert, unjust enrichment, and breach of fiduciary duty.


In its complaint, FNB alleged that Gross and Herzka used Gelt Funding to obtain nonrecourse loans by misrepresenting information pertinent to FNB's lending decision. Specifically, FNB claimed that Gross and Herzka intentionally misstated the operating income of the properties and concealed both the borrowers' intention to use the property to secure additional debt and the fact that artificial sales transactions were used to overstate property values. The complaint also alleged that FNB was led to believe that the borrowers and Gelt Funding were independent entities, when in fact Gross, Herzka, and a small group of undisclosed principals controlled most of the borrower entities.


Judge Mukasey dismissed FNB's original complaint without prejudice primarily on the ground that FNB had not adequately alleged two essential elements of a RICO claim--injury and proximate causation--because there were no specific allegations concerning the magnitude of the alleged misrepresentations or whether there was a causal connection between those misrepresentations and FNB's loss. First Nationwide Bank v. Gelt Funding, Inc., No. 92 Civ. 0790 (MBM), 1992 WL 358759 (S.D.N.Y. Nov. 30, 1992). FNB then filed an amended complaint which set out in detail the current status of thirty allegedly fraud-tainted loans. FNB claimed that the thirty loans were representative of other fraudulent loans that FNB eventually would aver and prove at trial. For each of the thirty loans, FNB stated the original loan amount, the outstanding balance, the current market value of the property, and the amount of loss FNB attributed to the defendants' alleged fraud as opposed to declines in the real estate market.


The amended complaint relied on two injury theories to support the damages element of FNB's claims. First, FNB claimed that because the value of the collateral properties was overstated, FNB loaned more than it would have if it had known the true value, and was therefore undersecured for the additional amounts (the "Excess Loan Loss"). In calculating the Excess Loan Loss, FNB estimated the true value of the collateral properties at the time the loans were made, the amount FNB would have loaned if it had known the true value, and the loss it claims it would have sustained if it had not loaned the greater amount in reliance on the defendants' representations. By subtracting this estimated loss from the actual loss FNB claims it sustained on the loans, FNB arrived at its Excess Loan Loss. Second, FNB asserted that upon discovering the alleged fraud in 1991 it was required to restrict its use of additional assets to adhere to the federally mandated level of capital reserves. This, FNB claims, necessarily reduced the income it otherwise would have earned if it had loaned out the restricted funds (the "Excess Reserve Loss"). FNB includes this lost income as a consequential damage from the alleged fraud.


The district court again dismissed FNB's complaint. First Nationwide Bank v. Gelt Funding, Corp., 820 F.Supp. 89 (S.D.N.Y.1993). Upon careful review, Judge Mukasey found FNB's additional fact allegations and injury theories still insufficient to overcome the deficiencies found in the first complaint; namely, the failure to allege RICO injury and proximate cause. Moreover, the district court held that FNB's second RICO count was incomplete because FNB did not sufficiently allege that all the named defendants constituted a RICO "enterprise." This appeal followed.




On appeal, FNB continues to press the injury and proximate cause issues raised in the district court. We hold that to the extent FNB's complaint is predicated on loans that have not been foreclosed, its claims are not ripe for adjudication because it is uncertain whether FNB will sustain any injury cognizable under RICO. Furthermore, even where FNB relies on loans that have been foreclosed, its complaint still must be dismissed because, as Judge Mukasey correctly concluded, the complaint does not adequately allege proximate cause.


RICO Standing


In examining FNB's standing to assert its RICO claims, we begin, as we must, with the language of the statute. The private civil cause of action under RICO provides that:


Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.


18 U.S.C. Sec. 1964(c). From this language, courts have extracted the conditions a plaintiff must meet to satisfy RICO's standing requirements: "(1) a violation of section 1962; (2) injury to business or property; and (3) causation of the injury by the violation." Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23 (2d Cir.1990). Most important for purposes of this appeal are the two elements relied on by the district court in dismissing FNB's complaint, injury and causation.


FNB contends that its claims with respect to all fraudulent loans were "ripe" for suit the moment the loans were made, regardless of whether the borrowers presently were in default or whether FNB completed efforts to foreclose on the collateral properties. FNB asserts that although several of the loans in the amended complaint have not been sold, foreclosed, or restructured, FNB has standing to assert a RICO claim with respect to those loans, as well as other similar loans FNB might discover in the future. We find FNB's hypothesis that it may assert a RICO claim based on unforeclosed loans to be inconsistent with this circuit's precedent governing RICO standing and insufficient to support an allegation of injury under RICO.


Under its Excess Loan Loss theory, FNB would classify all excess amounts loaned as fraud damages, recoverable even if the borrower repaid the loan in full with interest. FNB argues that any amounts recovered through foreclosure on the collateral properties would be applied in mitigation of damages, and are irrelevant to the determination of whether FNB has been or will be injured. According to FNB, it suffered immediate quantifiable injury when the loans were made because the loans were undersecured, FNB assumed additional risk of loss, and "[f]or all practical purposes, the[ ] additional funds were lost the moment the loans were made." We find this argument unpersuasive.


The general rule of fraud damages is that the defrauded plaintiff may recover out-of-pocket losses caused by the fraud. See Disher v. Information Resources, Inc., 691 F.Supp. 75, 79 (N.D.Ill.1988), aff'd, 873 F.2d 136 (7th Cir.1989). In this case, the damages issue arises in the specific context of a fraudulently induced loan. In such cases, although the loan is procured through fraud, any amounts paid on the debt reduce the amount the plaintiff can claim as damages resulting from the fraud. See Hermes v. Title Guarantee & Trust Co., 282 N.Y. 88, 93, 24 N.E.2d 859, 861 (1939); Sager v. Friedman, 270 N.Y. 472, 480-81, 1 N.E.2d 971, 973-74 (1936). Thus, the amount of loss cannot be established until it is finally determined whether the collateral is insufficient to make the plaintiff whole, and if so, by how much. Sager, 270 N.Y. at 482, 1 N.E.2d at 974 ("[T]he value of the stock ... deposited as collateral for the loan, and the value it would have had if the defendants' representations as to the financial condition of that company had been true, furnishes no measure of any loss suffered by the plaintiff through wrongful inducement to make the loan.").


In determining fraud damages, any amount recovered by the fraudulently induced lender necessarily reduces the damages that can be claimed as a result of the fraud. Because the fraud defendant is not liable for all losses that may occur, but only for those actually suffered, only after the lender has exhausted the bargained-for remedies available to it can the lender assert that it was damaged by the fraud, and then only to the extent of the deficiency. FNB does not allege actual injury by simply claiming that it incurred additional risk of loss as a consequence of the fraud. See Berg v. First State Ins. Co., 915 F.2d 460, 464-65 (9th Cir.1990) (rejecting corporate directors' claim that they suffered injury when insurance policies protecting them against risk of loss from shareholder derivative suit were cancelled, even though suit resulted in no award against them). Thus, we reject FNB's novel theory that it was damaged simply by being undersecured when, with respect to those loans not yet foreclosed, the actual damages it will suffer, if any, are yet to be determined.


The rule of fraud damages described above has been adopted by this court in the context of deciding whether a defrauded plaintiff has standing under RICO. A RICO plaintiff "only has standing if, and can only recover to the extent that, he has been injured in his business or property by the conduct constituting the violation." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985); see Hecht, 897 F.2d at 23. Furthermore, as a general rule, a cause of action does not accrue under RICO until the amount of damages becomes clear and definite. See Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1106 (2d Cir.1988), cert. denied, 490 U.S. 1007, 109 S.Ct. 1642, 104 L.Ed.2d 158 (1989). Thus, a plaintiff who claims that a debt is uncollectible because of the defendant's conduct can only pursue the RICO treble damages remedy after his contractual rights to payment have been frustrated. See Stochastic Decisions, Inc. v. DiDomenico, 995 F.2d 1158, 1166 (2d Cir.), cert. denied, --- U.S. ----, 114 S.Ct. 385, 126 L.Ed.2d 334 (1993).


For example, in Stochastic Decisions the plaintiff, a judgment creditor of a bankrupt company, brought a RICO action claiming that the company fraudulently conveyed assets to prevent the plaintiff from collecting on several judgments. We held that to the extent plaintiff successfully collected on the judgments, those amounts would reduce the RICO injury pro tanto, before any trebling occurred. Id. at 1165-66. Because plaintiff's collection efforts were ongoing and the actual amount of its injury was indefinite and unprovable, plaintiff did not yet have standing under RICO.


Similarly, in Commercial Union Assurance Co. plc v. Milken, 17 F.3d 608 (2d Cir.1994), RICO plaintiffs argued that they were "entitled to a trebling of their damage award before any offset through settlements, restitution, recoupment or otherwise." Id. at 612. The plaintiffs maintained that they were fraudulently induced into investing approximately $10.5 million, none of which had been recouped when they initiated suit, and that they were entitled to trebling of this sum even though the entire amount subsequently was repaid with interest. Citing Stochastic Decisions, we rejected this claim and held that to the extent the plaintiffs received the return actually bargained for, they had suffered no compensable RICO injury. Id.


In this case, the loss FNB would suffer as to those loans FNB has not finally foreclosed cannot yet be determined. Only when FNB's actual loss becomes clear and definite will the claims be ripe for suit. Until that time, FNB lacks standing under RICO to assert claims as to those loans.


Even with respect to those loans that have been finally foreclosed, FNB's complaint suffers from the equally fundamental defect of not adequately alleging proximate cause. RICO provides a civil remedy only to those persons injured "by reason of" the defendant's predicate acts. To show that an injury resulted "by reason of" the defendant's action, and therefore to have standing under RICO, the plaintiff must allege "that the defendant's violations were a proximate cause of the plaintiff's injury, i.e., that there was a direct relationship between the plaintiff's injury and the defendant's injurious conduct." Standardbred Owners Ass'n v. Roosevelt Raceway Assocs., L.P., 985 F.2d 102, 104 (2d Cir.1993). This requires a showing not only that the defendant's alleged RICO violation was the "but-for" or cause-in-fact of his injury, but also that the violation was the legal or proximate cause. Holmes v. Securities Investor Protection Corp., --- U.S. ----, ---- - ----, 112 S.Ct. 1311, 1316-18, 117 L.Ed.2d 532 (1992); Standardbred Owners, 985 F.2d at 104; Hecht, 897 F.2d at 23.


In the context of predicate acts grounded in fraud, the proximate cause requirement means that the plaintiff must prove both transaction and loss causation. Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir.1992); Bastian v. Petren Resources Corp., 892 F.2d 680, 684 (7th Cir.), cert. denied, 496 U.S. 906, 110 S.Ct. 2590, 110 L.Ed.2d 270 (1990). Thus, in addition to showing that but for the defendant's misrepresentations the transaction would not have come about, the defendant must also show that the misstatements were the reason the transaction turned out to be a losing one. K-H Corp., 968 F.2d at 1495; Bastian, 892 F.2d at 684. Furthermore, when factors other than the defendant's fraud are an intervening direct cause of a plaintiff's injury, that same injury cannot be said to have occurred by reason of the defendant's actions. See Brandenburg v. Seidel, 859 F.2d 1179, 1190 (4th Cir.1988).


The purpose of the proximate cause requirement is to fix a legal limit on a person's responsibility, even for wrongful acts. See Holmes, --- U.S. at ----, 112 S.Ct. at 1318; Sperber v. Boesky, 849 F.2d 60, 63 (2d Cir.1988). Central to the notion of proximate cause is the idea that a person is not liable to all those who may have been injured by his conduct, but only to those with respect to whom his acts were "a substantial factor in the sequence of responsible causation," and whose injury was "reasonably foreseeable or anticipated as a natural consequence." Hecht, 897 F.2d at 23-24. Although we are mindful of the admonition that RICO is to be liberally construed, the foregoing holds true in a RICO setting because proximate cause, a common law concept, exists independently of the statute. See Sperber, 849 F.2d at 60; Brandenburg, 859 F.2d at 1189 n. 11.


Many considerations enter into the proximate cause inquiry including "the foreseeability of the particular injury, the intervention of other independent causes, and the factual directness of the causal connection." Brandenburg, 859 F.2d at 1189. We have recognized that the proximate cause determination "is not free from normative legal policy considerations," Hecht, 897 F.2d at 23, and indeed involves a judgment based upon " 'some social idea of justice or policy.' " Sperber, 849 F.2d at 63 (quoting W.P. Keeton, D. Dobbs, R. Keeton, D. Owen, Prosser and Keeton on the Law of Torts 264 (5th ed. 1984)). The key reasons for requiring direct causation include avoiding unworkable difficulties in ascertaining what amount of the plaintiff's injury was caused by the defendant's wrongful action as opposed to other external factors, and in apportioning damages between causes. See Holmes, --- U.S. at ----, 112 S.Ct. at 1320. Although the likelihood that the injury would result from the wrongful conduct is a consideration, the rule often has as much to do with problems of proof as with foreseeability. See Imagineering, Inc. v. Kiewit Pac. Co., 976 F.2d 1303, 1312 (9th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1644, 123 L.Ed.2d 266 (1993); Sperber, 849 F.2d at 65-66.


In examining the issue of whether the defendants' alleged fraud was the proximate cause of FNB's injuries, Judge Mukasey articulated a three-part test:


[A] borrower who misstates the value of loan property or its rental income proximately causes injury to a bank when (1) the misrepresented value of the property was substantially above its actual value at the time of the misrepresentation, (2) the injury was sustained soon after the misrepresentation, and (3) external factors did not contribute to the injury.


1992 WL 358759, at * 5. While these factors do not constitute an exhaustive list of the considerations that go into the proximate cause calculus, they do provide a useful guide for evaluating the sufficiency of FNB's proximate cause allegations. In determining whether the required directness is present in the context of a fraudulently induced loan, important considerations are the magnitude of the misrepresentations, the amount of time between the loan transaction and the loss, and the certainty with which the loss can be attributed to the defendant's conduct. With these precepts in mind, we turn to the question of whether FNB adequately pleaded proximate cause.


At the outset, we are unable to tell accurately whether the alleged misrepresentations "substantially" overstated the value of the collateral properties because FNB's complaint provides no reliable measure of the alleged misrepresentations. The district court dismissed FNB's original complaint because in pleading causation it failed to provide any "order of magnitude" for the misrepresentations to support FNB's assertion that they were material. The court concluded that "[t]he bald assertion that misrepresentations were material is not a fact."


In response, FNB's amended complaint provides, for each of the thirty representative loans, a schedule purporting to set out the approximate amount by which the defendants overstated the property values. The value and profitability of multi-unit apartment complexes in New York, however, depend upon many factors that influence the general real estate market including changes in rent control laws, property taxes, vacancy rates, the level of city services provided, and increased operating expenses including electric and heating oil prices. Given the complexity of the New York real estate market, and the fact that FNB's losses came in the wake of a downturn in the real estate market, FNB must allege loss causation with sufficient particularity such that we can determine whether the factual basis for its claim, if proven, could support an inference of proximate cause. See Finkel v. Stratton Corp., 754 F.Supp. 318, 330 (S.D.N.Y.1990). FNB's attempt to meet this burden suffers from several defects.


First, as with any estimate, the result of a property appraisal is only as reliable as the information used and the manner in which it is employed to approximate the factors that influence property values in the real world. Given the number of variables that can influence real estate values, an estimate necessarily involves a substantial amount of guesswork about how both present and future conditions will impact on the market, making it difficult to construct a reliable model. Cf. Collins, A Question of Value, 51 Mortgage Banking 33 (July 1991).


Second, FNB's task is made more difficult since it is attempting to reconstruct the value of the collateral properties at the time the loans were made, without accurate information regarding many of the variables that would go into that calculation. For instance, FNB's calculation of the "actual," as opposed to represented, property values when the loans were made, relies in turn on another estimate of the property's "true" net operating income ("NOI") at that time. See Amended Complaint p 70. The Bank's NOI estimate was based on rent roll figures compiled by the New York Department of Housing and Community Renewal ("DHCR"), which often understate rental incomes and thus would understate property values, in some cases by a significant amount. Since the Bank's NOI figures were lower than the actual NOI, its estimate of the amount of fraud damages must to some extent be artificially high. Unfortunately, the same problems that hinder FNB in trying to estimate these figures also prevent us from determining the actual degree of discrepancy.


In addition, the amount of damages FNB claims to have suffered from the defaults is distorted because it includes contractual charges and penalties that are not generally recoverable under RICO as damages caused by the fraud. See Sager, 270 N.Y. at 481, 1 N.E.2d at 974 (damages for fraud do not include benefit of contractual bargain). For example, with respect to one loan made in December 1985, FNB claims that it loaned $485,000 based on a represented property value of $850,000, whereas if it knew the property was worth only $260,000 (according to FNB's post hoc estimate), it would have loaned only $170,000. Despite the fact that the loan was paid for six years without default, FNB alleges that the amount due on the $485,000 loan in December 1991 was approximately $551,000 including penalties and charges.


It is also apparent that FNB's methodology does not adequately account for the contribution of external market factors to the loss. For instance, with respect to the loan previously mentioned, FNB claims that the property value according to its latest appraisal is $400,000, fifty-three percent higher than its purported value of $260,000 in 1985. FNB advances this position despite the fact of a general decline in the real estate market during which other collateral properties, by FNB's own account, lost fifty percent of their value or more. It is also noteworthy that despite the fact that most of the properties listed in the complaint are alleged to have suffered a significant decline in market value since the loans were made, with respect to only three loans does FNB attribute any of its own loss to market decline.


The guesswork and inconsistencies in determining the magnitude of the alleged misrepresentations highlights the difficulty of proving damages in this case with a reasonable degree of certainty. Nor is FNB's complaint rescued by the principle that in deciding a Rule 12(b)(6) motion all reasonable inferences must be drawn in FNB's favor. Under Rule 12(b)(6), "the well-pleaded material allegations of the complaint are taken as admitted; but conclusions of law or unwarranted deductions of fact are not admitted." 2A Moore & Lucas, Moore's Federal Practice p 12.08, at 2266-69 (2d ed. 1984); see Fleming v. Lind-Waldock & Co., 922 F.2d 20, 23-24 (1st Cir.1990). This principle applies with even greater force in a fraud case governed by the more stringent pleading requirements of Fed.R.Civ.P. 9(b). See O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676-77 (2d Cir.1991); McCoy v. Goldberg, 748 F.Supp. 146, 155 (S.D.N.Y.1990). The amended complaint does allege that FNB's "losses are not the result of any general decline in the real estate market." Amended Complaint p 67. However, this conclusory statement is based on FNB's faulty damages theories and its unsupported claims regarding the "actual" value of the collateral properties when the loans were made. See id. In the absence of a factual basis underlying FNB's causation claim, we cannot accept its allegation as fact. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir.1994) (dismissing fraud complaint where facts alleged did not support inference that defendants knew "continuing erosion of the real estate market would render the loan portfolio precarious"); Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 445 (2d Cir.1971) (conclusory allegation of fraud insufficient where facts alleged did not support inference thereof); see also Kadar Corp. v. Milbury, 549 F.2d 230, 233 (1st Cir.1977) ("[C]ourts do 'not accept conclusory allegations on the legal effect of the events plaintiff has set out if these allegations do not reasonably follow from his description of what happened....' ") (quoting Wright & Miller, Federal Practice and Procedure: Civil Sec. 1357).


The methodology employed by FNB in determining the magnitude of the defendants' alleged overstatements of income is so defective, and the conclusions reached so defy logic, that no "reasonable inferences" can be drawn therefrom. No amount of detail can save FNB's complaint when the detail is based on flawed and unreasonable methodologies that lead to unsupported conclusions.


B. Temporal Connection and Intervening Factors


Even if we were to accept FNB's questionable methodology for alleging the magnitude of the defendants' alleged fraud, the complaint still falls short of pleading proximate cause because FNB's alleged injury was insufficiently close in time to the alleged misrepresentations to warrant the inference of a nexus between the two. The second and third factors relied on by Judge Mukasey, dealing with the time lapse between the alleged fraud and the plaintiff's injury and the presence of external factors, are related. When a significant period of time has elapsed between the defendant's actions and the plaintiff's injury, there is a greater likelihood that the loss is attributable to events occurring in the interim. Similarly, when the plaintiff's loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff's loss was caused by the fraud decreases. Bastian, 892 F.2d at 684.


In this case, the substantial period between the alleged fraud and FNB's loss, coupled with the concurrence of that loss with the real estate market crash, is additional support for the conclusion that the fraud was not a substantial cause of FNB's injury. Despite FNB's allegation that the net operating income for most of the collateral properties was insufficient to service the principal and interest payments due on the loans, few of the properties went into default until mid-1990, when the real estate market collapsed. We agree with the district court that the five year interval between the bank's losses and the defendants' alleged misrepresentations strongly suggests that external factors were a substantial cause of those losses.


As noted above, the proximate cause determination necessarily involves a component of policy. See Hecht, 897 F.2d at 23. Here, "[n]o social purpose would be served by encouraging everyone who suffers an investment loss because of an unanticipated change in market conditions to pick through [loan applications] with a fine-tooth comb in the hope of uncovering a misrepresentation." Bastian, 892 F.2d at 685. As in Bastian, FNB may "have alleged the cause of [its] entering into the transaction in which [it] lost money" but it has not alleged "the cause of the transaction's turning out to be a losing one." Id. at 684. FNB's claims fail because it has not adequately plead facts which, if proven, would show that its loss was caused by the alleged misstatements as opposed to intervening events.


We do not mean to suggest that in all cases a fraud plaintiff will be unable to plead proximate cause when the claim follows a market collapse. In this case, it is the cumulative effect of the considerations discussed above, rather than any single factor, that compels our decision.




With respect to those loans not foreclosed, FNB has not alleged an injury ripe for suit under RICO. As to those and the other loans enumerated in the complaint, proximate cause has not been adequately alleged. Accordingly, the judgment of the district court is affirmed.

J.P. Morgan Getting Squeezed In Silver Market?

It is widely known that J.P. Morgan (NYSE: JPM) holds a giant short position in silver. Furthermore, some observers are accusing the bank of acting as an agent for the Federal Reserve in the market - every tick higher in the price of silver undermines confidence in the U.S. Dollar. A lower silver price helps keep the relative appeal of the U.S. dollar and other fiat currencies high.

By selling massive amounts of paper silver in the futures market, JPM has been able to suppress the price of the precious metal. It is believed that these short positions are naked (i.e. they are not backed by any physical silver). In fact, reports indicate that JPM is short more paper silver than physically exists in the world.

An article by Max Keiser which appeared in the Guardian on December 2, 2010 claims that the size of the short position is 3.3 billion ounces of silver.

In recent days, rumors have been swirling on the internet that JPM's massive short position is about to blow up in their face in the form of an almighty short squeeze and potential COMEX default as large traders demand physical delivery of silver that COMEX does not have in their vaults.

J.P. Morgan is currently under investigation by the CFTC for allegedly manipulating the price of silver. The investigation into the bank can be traced back to November 2009 when London metals trader and whistleblower Andrew Maguire contacted the CFTC to report market manipulation prior to it actually occurring.

Maguire had been told by J.P. Morgan commodity traders that the bank was manipulating the price of silver and subsequently reported this to the CFTC. He also gave the CFTC two days' notice about an impending silver manipulation that would take place around the Nonfarm payrolls number on February 5, 2010.

The manipulation played out EXACTLY as Maguire had predicted. You can find the emails between Maguire and Ramirez here. Shortly after this information came to light, the whistleblower was involved in a bizarre hit and run accident in London which caused him and his wife to be hospitalized.

The price of silver has absolutely exploded in recent months as these reports have surfaced and it is clear that blood is in the water. The predator (J.P. Morgan) has now become the prey. Every tick higher in the price of silver brings more pressure on the bank to cover their short position. This in turn puts more upward pressure on the silver price.

It is not clear if JPM has been actively trying to reduce their exposure or not - but something is definitely going on. The price of the widely traded iShares Silver Trust ETF (NYSE: SLV), which tracks the spot price of the precious metal, has exploded in recent months.

On August 23rd, the SLV closed at $17.61. The ETF closed on Friday at $28.60 and the price of silver is now trading at 30 year highs. Over the last three months, SLV is up over 47%.

In the overnight futures session on Sunday night, silver is currently trading 2.27% higher at $29.935. SOMETHING IS GOING ON. Making matters worse for JPM is the fact that a viral campaign (Crash JP Morgue Video) to buy physical silver and "crash" the bank is now spreading like wildfire on the internet. Just Google Crash J.P. Morgan Buy Silver.

Furthermore, it appears that significant physical silver shortages are developing in the marketplace and the metal is being sold well over spot where it is available. Shortly after popular financial blog ZeroHedge posted the "Crash The JP Morgue" video (linked to above), the website which created the video, goldsilvergold.com, reported that it was sold out of inventory and will not be taking new orders until December 6.

Another report indicates that JPM may really be on the ropes with their short silver position and are attempting to hedge themselves by buying $1.5 billion worth of copper. According to the Telegraph, the bank has bought "between 50% and 80%" of the 350,000 tonnes in reserve at the London Metal Exchange.

ZeroHedge opines that "JP Morgan is now intent on cornering the copper market, as the monopolist firm stretches its FRBNY-facilitated muscles in an attempt to stem the massive losses incurred via its silver short."

Readers who are interested in learning more about this story are encouraged to do follow up research and post comments. Those who wish to participate in squeezing the living daylights out of JPM, may want to consider buying physical silver, silver futures and SLV.

Keep a close eye on this market during the coming week...

The choice is made: banks over people

There is a press analyst in Brussels who has stopped explaining the meaning of contagion to his bosses. The word, not new, but unsurprisingly encountering a massive upswing in popularity at the moment, describes the knock-on effect of failing economies; first Greece, then Ireland, then Portugal, Spain, Italy and the rest of the Eurozone. It's the old domino theory, except with capitalism in place of communism, the single currency in place of democracy.

It is possible that in time contagion will become a buzzword, a fad for a specific era; but right now everyone is using it, it beefs up stories and gives apparent credence to economic analysis. It's like Glasnost and Perestroika during the tail-end of the Soviet Union, no story about the financial markets can resist using it, and its sudden ubiquity has meant that even non-native speakers have quickly grasped the meaning of this once-obscure word.

Contagion can be described variously. Most commonly, it is the communication of a disease, but can also be the medium through which a disease is transmitted , a harmful influence or the transmission of an idea; all of which can be applied with varying degrees of accuracy to banks and market speculation. The latter of which has become a popular parlour game, with Portugal odds-on favourite to go bust next, and the European Central Bank keen to steady the waters with thoughtful and calm, strategically-timed announcements.

With Spain confidently predicted to be 'too big to fail', second of the PIGS, Italy, is under scrutiny. Based on political instability,the country, it seems, is a prime target for economic meltdown. Likewise, according to some media commentators and based on a similar premise, is government-less Belgium. But despite its estimated 6% deficit, Belgium's financial problems are not based on extraneous pressures from banks, unlike Portugal or Ireland.

Banks are really what this is about; it's the reason for the Irish bailout and bilateral assistance from the UK (and non Eurozone countries Sweden and Denmark, who have also chipped in). The banks cannot be allowed to fail, if they do a catastrophe of Biblical proportions will be unleashed. But in doing this, the citizens are to suffer; society can crumble, but the banks must be steadfast. “The purpose of the external financial support is to return our economy to sustainable growth and to ensure that we have a properly functioning healthy banking system”, an Irish government statement read. They made the choice; of the total bailout fund, €35 billion will go towards bank recapitalisation.

The Irish Prime Minister, Brian Cowen, is confident that his government made the right choice; after all, by raiding the pension reserve fund and other domestic revenues, the bailout amounts to a mere €67.5 billion. Ireland, he assures us, is not so much under the EU-IMF yolk after all, and even Greece is envious of Ireland's 7-year payback terms at 5.8%. He now faces the people in a new year election.

The strange coalition of anti-government protesters, comprising of wounded, right-wing nationalists and a motley crew of left-wing agitators, is expecting big change. It looks like they will be disappointed. No future government can magic away the debts. The best, we are told by the parties in waiting, is a sensible approach to the future economy; which is not something that inflamed passions want to hear right now, but come election time, will probably be the byword that will quell fears of a civic meltdown. Whoever is perceived to be the most sensible will win the election, it is the analgesic for the age, the contagion from politicians to public.


Britain: New protests as fees vote looms

The cities and towns across the UK are bracing for more student protests ahead of a crucial vote in Parliament on plans to increase university tuition fees.

The British student groups and university professors have vowed to step up pressure on Members of Parliament (MPs) to vote against any motion that tightens grip on the students and their families, British media reported.

The pledge came after the country was rocked with a wave of demonstrations and occupations in recent weeks, some of which flared into violence.

A vote on the controversial plan to increase university tuition fees in England and Wales is expected on Thursday, December 9.

The new policy on fees will allow universities to double the current tuition fees from £3,290 per year to around £6,000. Some universities will also be allowed to get special approval from the Office For Fair Access (OFFA) to raise their fees to £9,000 per year.

If approved, the new fee procedure will be applicable by law from the beginning of the academic year of 2012-13.

The University and College Union (UCU) and the National Union of Students (NUS) on Monday announced their plans for the week's protests in their joint campaign against education cuts.

They revealed plans for demonstrations at universities across the country on Wednesday ahead of Thursday's vote.

"These proposals, if they go through, will change the entire landscape of education in this country and we must continue to oppose them. We need to expose the damage they will do to our universities, colleges and communities. MPs must be left in no doubt of the strength of opposition to these plans and the consequences of voting for them. We have been overwhelmed by support from people across the country against these plans and we hope they will all join us in making their voice heard this week," said UCU general secretary, Sally Hunt.

"The joint NUS and UCU march that brought together 50,0000 people on 10 November has provided the spur to a new wave of activism and lobbying, placing the Government's policy on fees and student support policy under huge pressure. This week we must keep that pressure up as the vote approaches. MPs can be left in no doubt as to the widespread public opposition to these plans or of the consequences of steamrollering them through Parliament," said NUS President Aaron Porter.

Some trade unions are also urging their members to join the protests, maintaining that students are in the front line of opposition to the government's massive cuts in public spending.

"This campaign is very much in the front line of the fight back against the ConDem cuts and has united pensioners, students and trade unionists in an imaginative and co-ordinated coalition of resistance. It has exposed the lies and hypocrisy of the LibDems and has opened up serious cracks in the coalition that we can all drive a wedge into,” said Bob Crow, general secretary of the Rail Maritime and Transport (RMT).

"RMT was delighted to have students supporting our picket lines during the last Tube strike and we will make sure that there is a high-profile presence from RMT supporting the students in their action this week," he said.


Fed President Richard Fisher: Even We Can't Print Enough Money "To Compete With The Enormous Flood Of Borrowing Coming From The United States Treasury

Video - Interview with Dallas Fed President Richard Fisher

Considering Bernanke's statement last night that the Fed isn't printing money, we thought it would be interesting to revisit Fisher's comments on the matter.

Quotes inside.


Source - Bloomberg

The Federal Reserve isn’t capable of offsetting the “flood” of U.S. Treasury borrowing with its bond-purchase program, which is helping to revive credit markets, Dallas district-bank President Richard Fisher said.

  • “The program has had its impact,” Fisher said today in an interview with Bloomberg Television. “At the same time, you cannot counter this enormous flood” of borrowing “coming from the United States Treasury.”
  • The Fed won’t “monetize” the fiscal deficit by effectively printing money to finance the shortfall, and there’s been no “pressure” from the Obama administration to do so, said the Dallas bank chief. Fisher, 60, also dismissed the concerns of some central bank watchers that its record purchases of assets will cause inflation to soar.
  • Policy makers are “constantly aware” of the need to consider an exit strategy from their unprecedented emergency initiatives during the crisis, and will end the programs at an appropriate time, he said. “We have to apply our judgment. There’s nothing that tells us how to do this.”

Fisher, who describes himself as among the most hawkish members of the Federal Open Market Committee on inflation risks, said it’s inappropriate to be a “screeching hawk” on price pressures now because of the amount of “slack” in the economy. He said he isn’t surprised by rising yields and reiterated his position that deflation, or an extended and broad decline in prices, is a greater risk than inflation.

“Long term, we all know inflation is a monetary problem, and you could have inflationary pressures,” he said. Still, “that is not the issue right now.”


Silvergoldsilver.com Runs Out Of All Precious Metals In Hours

Since Zero Hedge posted (unsolicited and uncompensated) the "Crash The JP Morgue" now-viral video late last night , it appears that among the tens of thousands of viewers who have subsequently gone to the goldsilvergold.com website, there have been quite a few conversions. So much so that as of today, the company is not taking any orders and is sold out of all products. The company goes on to say that it will not be accepting any new orders until December 6. We can only hope that the profits JPM will make in its copper market manipulation will be sufficient to offset the ever increasing pain it will experience courtesy of what is gearing up to be a massive margin call.

« And Now A Word From Henry Paulson (PBS News Hour Interview, Nov. 13, 2008) »

Video: Hank Paulson with Jim Lehrer -- Defending TARP

Transcript is below.

Watch how neatly the narrative changes, from buying toxic assets - the Federal Reserve and Fannie & Freddie would eventually assume that responsibility - to capital injections and common stock purchases. Some have since conjectured that he planned it that way from the beginning.

Paulson says:

  • "The interbank credit market was frozen; banks weren't lending to each other."

Some would call this reckless hyperbole. But it is just another lie.

Get that man a chart:

The truth about interbank lending during the crisis:


Former Goldman Sachs CEO and current Treasury Secretary Henry Paulson announced a major shift in the government's bailout program Wednesday, saying the $700 billion rescue package will not be used to purchase troubled assets as originally planned.


Economists discuss Treasury Secretary Henry Paulson's announcement Wednesday that the government will shift its focus from buying troubled assets to shoring up institutions that manage credit cards, auto loans and other types of borrowing.


The Senate on Wednesday approved a financial rescue package that could cost up to $700 billion -- the largest government intervention in U.S. history. Analysts discuss whether the plan will be enough to fix the ailing economy.


Partial Transcript - A True Must Read

JIM LEHRER: Is it correct to say at this point, Mr. Secretary, that the $700 billion rescue plan has not worked?

HENRY PAULSON: Oh, I wouldn't say that at all. I would say quite the opposite, that what we've been able to do since that legislation has been passed is stabilize our financial system. And I think that was very important.

The financial system was at the tipping point. The interbank credit market was frozen; banks weren't lending to each other. That situation has resolved itself. When you look at the Fed funds rates and the interbank rates and so on, that market is working better.

Now, I would say that the economy has some very significant challenges, and the financial markets have some significant challenges, and they will for some time. We're not going to work through these stresses until the biggest part of the real estate price correction is over, and it's going to take -- it took a long time to build these things up, and it's going to take a while to work through them.

JIM LEHRER: But the expectations -- would you not agree, Mr. Secretary, when in September, when you and others, everybody was saying, "Hey, we've got to pass this rescue plan. If we don't, things are going to get worse."

The plan was passed, and things have gotten worse in the financial markets, in the economy. Everything is -- every measurement is worse, is it not?

HENRY PAULSON: Yes, I think in the economy that's right. The economy has worsened. But I think what we sure tried to say is that, if this isn't passed, things are really going to get worse, because we need a stable financial system that is functioning.

And so part of the issue we always had was, I think, to the American people generally, they look at the equity markets, some of them going up and down. They're not focused on the interbank funding or the credit markets or the banking system.

But what we saw when we went to Congress was we saw that the markets were frozen, lending had stopped, the economy was turning down, so we could see all of this happening. And we knew how severe it was going to get if we didn't stabilize the system.

But I never intended to say -- nor did I ever say -- that the process of recovery and repair was going to be a quick one. The situation we've confronted is the kind of thing that happens once or twice every 100 years.

JIM LEHRER: But the lending, for instance, that was a key part of the rescue plan. I almost said "bailout." I know that's a bad word. But at any rate, they're still not lending. People still can't borrow money. They can't buy a house, or buy a car, all those things.

HENRY PAULSON: Well, let's go back. Lending is going to be a key part of this. And what happens when you're in a period of financial stress, banks pull in their horns, regulators reinforce it, as banks are concerned about continuing slowdown in the economy and credit losses that is restricted.

What we have done by taking steps to make sure the banks are well capitalized. And let's remember that we are still in the process of getting that money out.

The nine big banks have $125 billion, and they account for 55 percent of the assets, and we've got another 20 or so out the door. But we've got much more to go there.

But, again, to get back to your point, the thing that I will say, if this works, if this works, lending will be much more than it would have been, OK, than it would have been.

But the key is that, if the banks are confident and people are confident in dealing with the banks, there's going to be more lending. But the first benefit is the stability of the system.

And let me say one other thing about lending, which I think is very important and it happened this week, that I can exhort banks to lend, but I'm not a regulator.

And what happened this week -- which was for the first time I've ever heard of -- we had a statement come out, signed by the four regulators in this country -- the Fed, OCC, OTS, and FDIC -- that addressed four things.

It addressed lending. It addressed compensation practices. It addressed dividend policy and the area of mitigating foreclosures. And it was a strong statement focused on the need for prudent lending.

Now, for that statement to come out is one thing. And then when you look at what the regulatory supervisors will do, I think will make a meaningful difference.

But, again, you should not take my comment as meaning that this credit is immediately going to become available like it used to be and that the economy is going to turn around right away.

Revising the approach

JIM LEHRER: All right, yesterday you announced a whole change in your approach. You said the first part was not working, and so now you're...

HENRY PAULSON: No, I did not say that.

JIM LEHRER: Well, you -- well, all right. Say what you did say.

HENRY PAULSON: OK, because it was very clear. I didn't say the first part wasn't working. When we went to Congress, we pointed to the fact that there was a great deal of illiquid assets in financial institutions. And...

JIM LEHRER: Illiquid assets, meaning money that can be lent, right?

HENRY PAULSON: Holding mortgages, mortgage-related assets, money tied up in this. And we said something at that time which was a very good idea, and it still is a good idea, which is, if we bought those assets, invested in them, this would put capital into the banks and there'd be a price discovery process that would cause more capital to go into the banks.

But what happened is the situation worsened. As it took a good while to get through Congress, the situation worsened.

By the time we had that legislation passed on October 2nd, I had concluded that, when you looked at the finite amount of resources we had, that the more powerful way to deal with the issue, because the problem was of a greater magnitude, and to protect the taxpayer was to go the capital route. And...

JIM LEHRER: Which means you put the money directly in the banks.

HENRY PAULSON: Put the money directly in the banks, which then puts them in a stronger position to sell the illiquid assets and continue lending. The money will go further.

So what we said -- so what I said yesterday -- so we, right out of the legislation, we moved with lightning speed to begin implementing this program 10 days after the legislation, getting the money in the nine largest banks, we're working on that.

So what I said yesterday was, after, again, looking at the problem we have before us and looking at the TARP resources, and how best to use...

JIM LEHRER: TARP, that's the name of the bill -- the legislation, right.

HENRY PAULSON: Yes, of the rescue package. And let me also say, on these investments, this is money the taxpayer will get back. These are investments. These preferreds in these banks are well protected, and I believe that will be a good investment.

But what we've said is, looking at what we've got before us, the best thing we can do is have additional money, ample additional money to continue to put equity into financial institutions, if needed, and also equity to put into institutions if there's a systemic event and there needs to be a rescue.

And so what we said is we want to evaluate this first plan once it's done and then determine the best way to go forward as needed with additional capital programs.

JIM LEHRER: But it is correct to say, is it not, Mr. Secretary, that everything that's been done up until now has not resulted in the kind of lending that this whole thing was designed to free?

HENRY PAULSON: I take big issue with that.


HENRY PAULSON: Because what I say is we were clear from day one we were talking about stability of the system, that this system was at a -- at a tipping point.

And this plan -- thank goodness Congress enacted it. And I also am very grateful that we were able to see the size of the issue in front of us and move as quickly as we did to -- to stabilize the financial system with the actions the FDIC took, in terms of hardening the bank guarantees, and the capital program.

Now, what you were saying -- which I agree with -- is that the economy is having a tough time, that credit is being restricted. We're not seeing the kind of lending we'd like to see. And that is clear.

Now, I will say to you, it's going to take a while. The banks just got these funds. And even if this is working better than expected, you're still going to see lending restricted to more than we would like given the severity of what's going on in the economy.

Banks' legal right to foreclose is questioned in testimony before House panel

Washington Post Staff Writer
Thursday, December 2, 2010; 8:20 PM

The system of pooling and selling mortgages around the world has caused widespread confusion about who owns the loans and raises questions about whether banks in some cases have the legal standing to foreclose, a state judge and consumer attorneys testified before Congress on Thursday.

New York State Supreme Court Justice Dana Winslow said that "standing has become such a pervasive issue" in the cases he sees "that I frequently use the term 'presumptive mortgagee' " to describe the entity trying to foreclose.

Rep. John Conyers Jr. (D-Mich.), chairman of the House Judiciary Committee, emphasized that as of last year, about 2.5 million homes were lost to foreclosure and that projections estimate that as many as 13 million homes will be lost to foreclosure by the time the crisis abates.

"Yet the big Wall Street firms, other mortgage lenders and servicers, and Fannie Mae and Freddie Mac - all of whom received taxpayer bailouts to the tune of billions of dollars over the last couple of years - have in many instances turned a blind eye toward homeowners in similar financial distress," Conyers said.

Winslow, academics and attorneys defending homeowners described a fundamental problem that goes beyond recent revelations of shoddy paperwork and "robo-signing" in foreclosure cases. They said there is a much broader question about the legality of designating a single company, Mortgage Electronic Registration Systems (MERS), as the holder of mortgages and then trading these loans to investors around the world without updating the ownership documents in local clerk offices.

They said it is unclear whether using this system has stripped those investors of the right to foreclose on homeowners who miss their payments.

University of Utah law professor Christopher L. Peterson said MERS has a "problematic legal foundation" because it undermines state recording laws. Peterson called MERS a "deceptive" and "anti-democratic" institution because it also uses thousands of employees who work for mortgage lenders, servicers and law firms to sign mortgage paperwork in the name of MERS. That practice is also clouding the ownership of the loan, he argued.

"How is a homeowner to understand with whom they can negotiate a settlement, or from whom to obtain additional information, or how to distinguish a legitimate employee from the thousands of mortgage-related con artists and charlatans?" Peterson asked.

Merscorp, which owns MERS, and the financial services industry have said that numerous courts have upheld the legality of the system they use to track and transfer mortgages.

"The chain of title starts and stops with Mortgage Electronic Registration Systems, Inc. as the mortgagee. MERS, as the agent for the note-owner, holds legal title for the note-owner in the land records," the company said in a recent statement. "The use of MERS is in compliance with the statutory intent of the state recording acts."

Peterson called on Congress to bar Fannie Mae and Freddie Mac from purchasing MERS-recorded loans, echoing legislation introduced by Rep. Marcy Kaptur (D-Ohio) last month. The industry has designated MERS as its proxy in jurisdictions across the country, and the company's name appears on about 60 percent of all U.S. mortgages.

Fannie and Freddie own or guarantee the vast majority of mortgages that are originated today.

Welfare Fraud at its worse

Submitted by: Edward Moore

Things are getting out of hand! This letter came from a doctor in Danville, IL.

Dear Mr. Limbaugh,

I was speaking to an emergency room physician this morning. He told me that a woman in her 20’s came to the ER with her 8th pregnancy. She stated “my momma told me that I am the breadwinner for the family.” He asked her to explain. She said that she can make babies and babies get money for the family. The scam goes like this: The grandma calls the Department of Child and Family Services and states that the unemployed daughter is not capable of caring for these children. DCFS agrees and states that the child or children will need to go to foster care. The grandma then volunteers to be the foster parent, and thus receives a check for $1500 per child per month in Illinois. Total yearly income: $144,000 tax-free, not to mention free healthcare (Medicaid) plus a monthly “Linx” card entitling her to free groceries, etc, and a voucher for 250 free cell phone minutes per month. This does not even include Wick and other welfare programs. Indeed, grandma was correct in that her fertile daughter is the “breadwinner” in the family.

I hope you share this story with your listeners so that they know how the ruling class spends their tax dollars.

Also, many thanks for the fine service you provide in educating people about the merits of conservative thinking.


Sebastian J. Ciancio, M.D. Urologist, Danville Polyclinic, LTD.

Is the Internet 9/11 Under Way?

by Zen Gardner

Think about it. Where is this seemingly staged Wikileaks furor taking us? While we participate in digging into the juicy tidbits of information that incriminate just about anybody and everybody, where is it all going?

Lessons of 9/11

While 9/11 served as a wake up call to those awake and aware enough to see the obvious demolitions and misinformation and resultant "Pearl Harbor" effect, most of the world fell for it. And now people are literally bending over, as in airport 'screenings', to the onslaught of police state fascism worldwide. It's staggering. In fact, it's Orwellian. The armies, police and private sector are at war with the vague concept of terrorism - an unbeatable enemy in a war that can be drawn out indefinitely and fought in any arena necessary.

And what was the result of this declared war on terrorism? Not a war on terror, but an increase in fear and terror, all to justify the economic, social and political clampdown that has followed.


What will the Wikileaks debacle herald?

You guessed it--the last bastion of freedom of information and expression, a free Internet, will topple. After all, if information is now the enemy, we must carefully police any and every aspect of this dangerous medium--all for the safety and protection of 'we the people'.

Oh, we'll still have the Internet, just like you can still fly. You'll just have to be on the "approved" list, screened, stamped, zapped, mugged and molested if you want to get "on the net". No biggie. Thanks Julian--job well done.


Warning Signs

#1. Wikileaks---WAY too approved and publicized. Every TV and cable network, press worldwide, official recognition from every level of government. Heck, he even does a TED talk! Where's anyone else trying to expose the agenda? Only Julian. Hmmm.

#2. Biggie: This supposed system fighter says the 9/11 truth issue is "a distraction". Mustn't step on your bosses' toes now, should we Julian.. Very suspicious if you ask me.

#3. Wikileaks and Assange's sketchy background:

The WikiLeaks website first appeared on the Internet in December 2006.[15][16] The site claims to have been "founded by Chinese dissidents, journalists, mathematicians and start-up company technologists, from the US, Taiwan, Europe, Australia and South Africa".[5] The creators of WikiLeaks have not been formally identified.[17] It has been represented in public since January 2007 by Julian Assange and others. Assange describes himself as a member of WikiLeaks' advisory board.[18] (Wikipedia)

Also, Assange reportedly wrote for both the New York Times and the Economist which is fishy as well--not a real enlightened or 'alternative' mindset. His mysterious persona also plays well to the Wikileaks furtive image so people won't expect to know too much, which also is very 'convenient' for keeping anything hidden.

[NOTE: There doesn't have to be deliberate, conscious involvement in some agenda on Wikileaks' part, but it helps. He, they, could be 'useful idiots' whose program has been conveniently co-opted by the controllers to serve their purpose. Either way, look for the pattern and the effects.]

#4. Watch the hype: There's a growing crescendo of anger and hate that is now being whipped up--to the point that Assange is being called a new kind of terrorist--and more disturbingly, and as expected, the comparison is now being drawn between Assange and Bin Laden:

Social Media Leaks Categorize Julian Assange As the Osama Bin Laden Of The Internet

The founder of WikiLeaks is not only a wanted man by the American authorities, his now infamous Web site

WikiLeaks is also under attack by notorious hackers, while its services are being cut-off by Amazon and EveryDNS.net. Although not officially announced, Julian Assange might be considered today's public enemy number-one, taking the place of the illusive Osama bin Laden. Not since 9/11 has any one figure reached such notoriety due to what many consider acts against a state.

Like bin Laden, Assange has no permanent address, does not maintain a headquarters, employs only a select few confidants and has taken to hiding in covert areas. Younger than bin Laden, Assange at 39 years-old may be a little more mobile than the 53 year-old, choosing to hopscotch the globe versus hibernating in the mountains of Pakistan and Afghanistan.

While his face resides on the covers of magazines and newspapers around the world, similar to a Wild West 'Wanted' poster, little is known about his day-to-day activities. Like bin Laden's video addresses, while the CIA and other mercenaries are seeking his where-a-bouts, it's amazing that he still finds ways to release updates justifying his actions.

Notice also how we've been hearing about Wikileaks' exploits for a few years now, giving us time to make the connection between it and sensational and 'destructive informational terrorism'. Similarly we heard about Osama through the Yemen and Nairobi attacks being attibuted to him, imprinting his "brand" on the collective mind which led to the foregone phony conclusion that he had masterminded the 9/11 attacks.

Ah, 'But what about these apparent exposures? Would they attack their own?'

Could all these serious indictments against their own just be a deflecting smokescreen to hide the real purpose? Sure worked last time. So why wouldn't they risk taking down some of their own to give this psychological operation credibility?

Pentagon strikes 'its own' on 9/11---need I say more?

The Tactic Is Very Familiar - Know Your Enemy

First there's the Hegelian Dialectic - create a problem, provoke a reaction and then implement the pre-planned solution. The staged 9/11 attacks, including the internationally inhabited World Trade Center, 'justified' the ensuing wars and worldwide clampdown on freedoms in the name of 'security', including the horrendous Patriot Act that was already written and just waiting for an excuse to be signed and implemented.

Similarly, this attack over the international Internet and drawing in diplomatic communities worldwide by exposing state secrets from a variety of countries will greatly help usher in international measures in the name of 'security', probably spearheaded once again by the fascist US government with coinciding EU, Canadian & Australian measures. It's already under way with the Department of Homeland Security confiscating websites.

All they need is 'the right incident" to justify bringing on full control. Like "Internet Terrorism"? They just can't use that term enough now, can they. After all, it's a war on terror, and "if you're not for us, you're for the terrorists." The ultimate false choice, just like everything else they foist on the human consciousness.

Pretty clever these ol' boys. It's in their blood.


Those manipulating world events belong to a cult, a brotherhood that hides behind many names and guises, and to which they pledge their absolute loyalty above everything, even their own flesh and blood. Commonly referred to as the Illuminati, this cult has an agenda they work to fulfill using certain rituals, methods and tactics.

One of their central themes and modus operandi is "Ordo Ab Chao"-- order out of chaos. Create the chaos, pitting anyone against anyone while controlling and fomenting both sides--hence the double headed red phoenix symbol-- for any reason, even killing or exposing their own, to create an illogical madness that they think only they can see through and understand. All the while they are manipulating world governments, banks, armies and corporate leaders and drawing the net on the outcome they have already planned.

Fear and confusion is the climate they love to foment. As long as there's a confused and uninformed populace, the ignorant and fearful masses will be crying out for help from the 'powers that be' - the very "powers that be" that caused all the problems in the first place.

They're not out to help, they're out to control. At any cost, by any means necessary.


Government can’t print money properly

As a metaphor for our troubled economic and financial era -- and the government's stumbling response -- this one's hard to beat. You can't stimulate the economy via the money supply, after all, if you can't print the money correctly.

Because of a problem with the presses, the federal government has shut down production of its flashy new $100 bills, and has quarantined more than 1 billion of them -- more than 10 percent of all existing U.S. cash -- in a vault in Fort Worth, Texas, reports CNBC.

"There is something drastically wrong here," one source told CNBC. "The frustration level is off the charts."

[Related: Money fair showcases $100,000 bill]

Officials with the Treasury and the Federal Reserve had touted the new bills' sophisticated security features that were 10 years in the making, including a 3-D security strip and a color-shifting image of a bell, designed to foil counterfeiters. But it turns out the bills are so high-tech that the presses can't handle the printing job.

More than 1 billion unusable bills have been printed. Some of the bills creased during production, creating a blank space on the paper, one official told CNBC. Because correctly printed bills are mixed in with the flawed ones, even the ones printed to the correct design specs can't be used until they 're sorted. It would take an estimated 20 to 30 years to weed out the defective bills by hand, but a mechanized system is expected to get the job done in about a year.

[Related: Design firm seeks to rebrand dollar with Obama's image]

Combined, the quarantined bills add up to $110 billion -- more than 10 percent of the entire U.S. cash supply, which now stands at around $930 billion.

The flawed bills, which cost around $120 million to print, will have to be burned.

The new bills are the first to include Treasury Secretary Tim Geithner's signature. In order to prevent a shortfall,the government has ordered production of the old design, which includes the signature of Bush administration Treasury Secretary Henry Paulson. That, surely, is not the only respect in which the nation's lead economic officials would like to turn back the clock to sometime before the 2008 financial crisis.

[Rewind: Another printing snafu delays $100 bill]

(AP photo of older $100 bills rolling off the presses: Doug Mills)