April 11 (Bloomberg) -- When Buck Meyer thinks about the $300,000 he lost after he bought a subprime mortgage lender's bonds, he doesn't hesitate to denounce financial titans Bear Stearns Cos., Credit Suisse Group, JPMorgan Chase & Co. and Morgan Stanley.

Like the thousands of people who snapped up American Business Financial Services Inc.'s notes yielding 10 times the going rate on Treasury bills, Meyer had no idea that the company was on the verge of bankruptcy. He wondered how something so celebrated as ``a kitchen-table startup'' by the Philadelphia Business Journal and so lucrative that it paid $50 million in fees to the four firms for its burgeoning credit, could default on his money.

``At what point did it become a Wall Street Ponzi scheme?'' said the 52-year-old Meyer, who almost wiped out the nest egg he received from selling his home in Doylestown, Pennsylvania, six years ago.

Whether Wall Street's best and brightest were reckless in their pursuit of profits and somehow responsible for the consequences will be decided in a Philadelphia court. That's where the four top brands of finance are accused of creating an ``illusion'' that American Business was a safe investment, according to a lawsuit filed on behalf of Meyer and more than 20,000 other individuals who held about $600 million of the company's bonds when it went bankrupt in 2005.

``The market needs to do a better job of policing than it has to date,'' said David Hendler, head of the group that analyzes the debt of financial services companies at CreditSights Inc. in New York.

High Yields

American Business was offering 13-month notes with a yield of 12.99 percent and an ``uninsured money market note'' with a yield of 6.05 percent three months before seeking bankruptcy, according to a filing with the U.S. Securities and Exchange Commission.

Bear Stearns, the largest underwriter of mortgage bonds last year, Zurich-based Credit Suisse, JPMorgan, the third- biggest bank, and Morgan Stanley, the No. 2 securities firm based on market capitalization, collected about $50 million in fees by lending money to American Business and repackaging home loans from the Philadelphia-based company into $3.6 billion of mortgage-backed bonds between 2000 and 2003, a period during which the suit says the company was insolvent.

Meyer, who has two children, planned to use the interest payments from the American Business bonds to cover the mortgage payments on his new home outside Chattanooga, Tennessee.

Blame Game

The American Services debacle came just before 23 so-called subprime companies catering to people with poor credit filed for bankruptcy since the start of 2006. A record 10 percent of the loans are delinquent or in foreclosure, according to UBS AG.

Anyone searching for someone to blame has an obvious target in the New York-based securities industry, which, according to estimates by Bear Stearns, earned $540 million last year turning subprime home loans into bonds.

The once-booming housing market contributed to the record earnings of Bear Stearns Chief Executive Officer James Cayne, JPMorgan CEO James Dimon and Morgan Stanley CEO John Mack. They each received at least $40 million in compensation last year, regulatory filings show. Credit Suisse Chairman Walter Kielholz was paid 16 million Swiss francs ($13.2 million).

26,534 Claims

George Miller, the court-appointed trustee for American Business creditors, is seeking $750 million from the bankers and former officers and directors in a lawsuit assigned to the Philadelphia Court of Common Pleas on March 15. Miller, an accountant with Miller Coffey Tate LLP in Philadelphia, said he received 26,534 proofs of claim from creditors as of January, many from retirees who invested their life savings.

Wall Street provides lenders with the funds to make more loans by purchasing mortgages. In some cases, such as with American Business, the firms also provided lines of credit. Subprime mortgages, which have rates as much as 3 percentage points above safer ``prime'' loans, accounted for 13.5 percent of all home loans last year, up from about 2.5 percent in 1998, according to the Washington-based Mortgage Bankers Association.

More than 40 subprime lenders have closed, shut operations or sought buyers in the past 12 months. Irvine, California-based New Century Financial Corp., the second-largest lender to people with poor credit behind the U.S. unit of London's HSBC Holdings Plc, filed for bankruptcy protection last week. Investors in mortgage-backed bonds may lose about $100 billion, Citigroup Inc. estimated last month.

`Running for Cover'

``There is the potential for a lot more of these cases to be filed as the subprime lenders continue to fail,'' said Charles Tatelbaum, a Florida lawyer who has represented creditors in some of the U.S.'s largest bankruptcy cases, such as Enron Corp., WorldCom Inc., Continental Airlines and TWA Corp. ``I'd expect to see companies like Bear Stearns and JPMorgan running for cover by negotiating quick settlements.''

In September 2006, Bear Stearns filed a motion to dismiss the suit and denied any wrongdoing. Spokesmen and women for Credit Suisse and Bear Stearns, JPMorgan and Morgan Stanley, all based in New York, declined to comment.

The Pennsylvania Securities Commission plans to sue some of the defendants in the American Business case, it said in a memo sent to Judge Thomas O'Neill of the U.S. District Court for the Eastern District of Pennsylvania, who remanded the case to the Philadelphia court.

Subpoenas Issued

The state securities regulator beginning in November 2005 issued subpoenas to some of the firms as part of a probe into how Pennsylvanians and other investors lost hundreds of millions of dollars, according to the memo, which was sent to Bloomberg News by the commission. The identities of the firms weren't disclosed in the memo.

American Business was founded by Anthony and Beverly Santilli at their kitchen table in 1985, according to a 1996 article in the Philadelphia Business Journal. In the five years before it filed for bankruptcy, the company made more than $6 billion of loans, the suit says. Between 2000 and 2004 the Santillis earned $9.9 million, according to data compiled by Bloomberg.

The Santillis and other former officers and directors of American Business are also being sued by the trustee. Their home phone number is unlisted and calls to their lawyers at Ballard Spahr Andrews & Ingersoll LLP and Conrad O'Brien Gellman & Rohn P.C. in Philadelphia weren't returned.

Newspaper Ads

American Business obtained funding for the mortgages from lines of credit provided by the Wall Street firms. The mortgages were then sold to trusts that issued bonds backed by the interest and principal payments on the home loans. The credit lines were secured by the mortgages.

The company also obtained funds by selling bonds to individuals through advertisements in newspapers such as the New York Times and USA Today and through telephone solicitations to existing investors, according to buyers of the notes. The company began registering its debt with the SEC in 1996.

``The basic credit fundamentals of mortgage lenders are weak,'' said Vincent Arscott, a director in the financial institutions group at Fitch Ratings in New York. That's why most don't issue long-term debt, he said.

American Business entered bankruptcy during the strongest housing market ever. Mortgage rates were near all-time lows set in 2003 and home sales set annual records that year.

`Too Many Eggs'

Investors snapped up the unrated American Business notes. Bonds with below investment-grade ratings yielded an average of about 7.2 percent at the time, Merrill Lynch & Co. index data show. Money market fund yields averaged 1.18 percent, according to the Money Fund Report.

``I knew I had too many eggs in one basket,'' said Meyer, a stay-at-home dad. Meyer said his wife, a chemist, may need to delay her retirement because of the losses.

Miller, the creditors' trustee, said the banks knew or should have known that the investors wouldn't be paid back and that a fraud was being committed. ``These guys control the market,'' said Miller. ``They may say their only responsibility is to their shareholders but they also have a responsibility to the public.''

In the three years before it filed for bankruptcy, American Financial was losing $200 million a year even though it appeared solvent, Miller said in the suit.

The company recorded as profit fees from administering mortgages that it would receive in coming years, using standard accounting rules, said Miller. The amount was inflated because American Business underestimated the rate of defaults, making it look like they would receive more fees and resulting in ``phantom'' gains from the sales of mortgages.

Last Filing

In the company's last quarterly filing with regulators, it listed more than $500 million of assets related to fees it expected to collect on the mortgages sold and its interest in the riskiest portions of the mortgage bonds that American Business kept for itself. Some 75 percent of the company's revenue in 2002 came from gains on the sale of its mortgages, Miller said.

The Wall Street firms ``knowingly participated in the wrongdoing because they profited substantially, while they were not at risk on any monies loaned'' to American Business, Miller said in the complaint.

Miller compared the process of assigning a value to those assets to putting a figure on a fleet of cars.

``You can say the average value of these cars is $65,000 if you're looking at nothing but Mercedes, but what if what you're really looking at is a bunch of 1993 Ford pick-ups?'' he said. ``If they had been valued at the appropriate values, the company would have been insolvent years ago.''

`A Stretch'

Suing securities firms because they didn't protect investors from buying the American Business notes ``is a stretch,'' said Harvey Miller, the partner at New York-based law firm Weil, Gotshal & Manges who handled the Enron and WorldCom bankruptcies. That may not protect the investment banks because juries can be unpredictable, especially in cases of ``monolithic lenders against widows and orphans,'' he said.

United Airlines flight attendant Bryce Russell of Coconut Creek, Florida, said he lost about $170,000 investing in the notes sold directly by the company.

Russell, 50, said he knows the 13 percent interest rates should have been a warning. ``If it sounds too good to be true, it usually is,'' he said.

`Decades of Savings'

Mark English, a 54-year-old chaplain who works with nursing home patients, invested $48,000 in American Business notes. The amount represented ``a couple of decades of savings,'' he said. ``I saw it as an alternative to the interest rate I could get from a bank.''

English, who lives in Perrysburg, Ohio, wanted to use the money to help pay for college for his three children, a new car and a second honeymoon. Instead, he has drawn on a retirement annuity to fund the college costs and his wife drives a 12-year- old car with 175,000 miles. The second honeymoon was canceled.

Carl Johnson, a New Jersey resident who invested $45,000 in American Business, said he was in contact with hundreds of noteholders following the bankruptcy. Johnson organized letter- writing campaigns to the SEC as well as to state securities regulators and attorneys general.

``I tried to mobilize noteholders so we could voice our concerns en masse but we were turned away at every point,'' said Johnson.

No Action

No formal action was taken against American Business, according to a search of the SEC's Web site. The commission doesn't discuss correspondence from private individuals or track complaints against specific securities issuers, SEC spokesman John Heine in Washington said.

Russell wrote to former SEC Chairman William Donaldson about American Business. The Office of Investor Education and Assistance replied, saying that the SEC doesn't inform investors about whether it looks into the issues they raise.

Joseph Funk, a 79-year old retiree who worked as a mechanic for soap-maker Lever Brothers in Baltimore, lost $70,000 in American Business notes. He says he became too confident and too greedy as the high-yielding notes continued to pay. Funk says the Wall Street firms were greedy too, yet didn't pay a price for it.

``These people are supposed to be the great financial minds of the world so they must have had some inkling that this was coming,'' said Funk. ``They got their money out before the little people.''

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: April 11, 2007 00:09 EDT