Oct. 19 (Bloomberg) -- For Americans, the foreclosure crisis has wiped out fortunes, bringing destitution and homelessness. For Florida attorney David J. Stern, it has brought mansions, a Bugatti sports car and a luxury yacht.
Florida has the third-highest residential foreclosure rate in the U.S., and Stern, 50, has made a fortune off the bust. His foreclosure-processing business has generated hundreds of millions of dollars in revenue preparing documents for the cases that his law firm brings on behalf of lenders seeking to reclaim homes from borrowers who can’t pay their mortgages.
Now his business is under scrutiny, as banks suspend foreclosures and evictions amid allegations that some home seizures were based on fraudulent documents. Attorneys general in every U.S. state have joined to probe foreclosure practices generally. Stern’s foreclosure firm and three others are under investigation by Florida Attorney General Bill McCollum.
“Some of these law firms we’re dealing with, we have reason to believe, actually forged documents, committed fraud, did all kinds of things,” McCollum said in an interview Oct. 15. “We don’t know where this is headed right now.”
Stern’s attorney, Jeffrey Tew, said Stern has used technology and a well-organized operation to efficiently process foreclosures. Stern gets a flat fee of about $1,400 a foreclosure, according to Tew, of Tew Cardenas LLP in Miami.
“David’s wealth is a reflection of his acumen and the tremendous volume of foreclosures,” Tew said in an interview yesterday. “He had something to do with the acumen part. He had nothing to do with the amount of foreclosures we have.”
Stern’s firm handles thousands of cases a month. It conducted a review of its files and found 21 had “issues with the affidavits,” Stern said in a Sept. 8 conference call to discuss second-quarter results for DJSP Enterprises Inc. DJSP provides non-legal foreclosure services, such as title searches, for his law firm, Law Offices of David J. Stern PA. Both businesses share the same Plantation, Florida, address.
Stern sold those operations this year in a transaction that formed DJSP, a publicly traded company incorporated in the British Virgin Islands. Stern, the chief executive officer of DJSP, declined through his attorney to be interviewed for this story.
Stern grew up in Liberty City section of Miami and worked his way through school, Tew said. He received his law degree from South Texas College of Law in 1986 and founded his firm in 1994. Before that, he worked for a law firm that specialized in representing mortgage lenders, according to a regulatory filing by the company that became DJSP.
Stern owns a $15 million mansion on an island in Fort Lauderdale, a $6 million beachfront condominium in the city, and a $6 million home in nearby Hillsboro Beach, according to property records. The mansion includes an adjoining property he bought in 2009 to make room for a tennis court and parking spaces, according to building records.
Cars registered under Stern’s name in Florida include three Ferraris, four Porsches, a Rolls-Royce, a Cadillac and the Bugatti, according to the state Department of Highway Safety and Motor Vehicles. He also owns a yacht, Tew said.
“He started from scratch and has built a wonderful legal practice and has made a lot of money,” Tew said. “That’s the American dream isn’t it?”
One in 34 housing units in Florida was in the foreclosure process or bank-owned as of Oct. 1, the third-highest rate in the country, according to Irvine, California-based RealtyTrac Inc., which monitors foreclosure data. State courts have hired additional judges to hear foreclosure cases and clear the backlog.
Foreclosures processed by Stern’s law firm more than quadrupled to 70,328 in 2008 from 15,332 in 2006, according to the regulatory filing. Revenue from non-law-firm operations jumped to $199.2 million in 2008 from $40.4 million over the same period, the filing said. DJSP depends on the firm for case referrals, according to the regulatory filing.
Stern’s law firm received more than 6,000 new foreclosure cases a month and managed 100,000 at any given time, according to the filing, which is dated Dec. 28, 2009.
“David and foreclosure lawyers are foreclosing legitimate mortgages that are in default,” Tew said. “And yet, they have been successfully villainized.”
According to the filing, the law firm has represented the biggest banks and mortgage servicers in the U.S., including Wells Fargo & Co.; Goldman Sachs Group Inc.’s Litton Loan Servicing, Countrywide Financial, now owned by Bank of America Corp.; and government-supported Fannie Mae, the mortgage-financing company. Stern was named Fannie Mae’s attorney of the year in 1998 and 1999, according to the filing.
State Bar Rebuke
The Florida Bar, which regulates lawyers in the state, has an open investigation into Stern, according to Karen Kirksey, a spokeswoman. She declined to comment on the nature of the investigation because it’s confidential. The Supreme Court of Florida approved a reprimand of Stern in 2002 after the bar said he submitted “potentially misleading” affidavits about his costs in foreclosure cases, according to court documents. He consented to the reprimand, court documents show.
At an investor conference in California in March, Stern told investors that rising foreclosures were the key to DJSP’s success, according to a securities lawsuit filed against Stern and DJSP filed in federal court in Florida in July. Foreclosures, he said, would stay high until 2017, even as President Barack Obama acted to keep people in their homes.
“No matter what the Obama administration brings our way, we have found the way to create a profit center on it,” Stern said at the conference, according to the lawsuit.
Hilton Wiener, a Florida attorney who has defended homeowners in foreclosure cases against Stern’s firm, described Stern’s operations as “more similar to a factory than a law firm.” The business, he said, depends on homeowners’ not contesting foreclosures so that cases can move quickly through the courts to judgment, Wiener said, basing his view on former Stern paralegals whom he has hired.
“This is like a production line,” he said. “The bank needs them to get certain results. It just becomes a foreclosure processing mill.”
Stern’s employees were under pressure to process cases as quickly as possible, according to a deposition of Tammie Lou Kapusta, a former paralegal in his law firm.
Under oath, Kapusta told lawyers for the Florida attorney general’s office that Stern’s business grew from about 250 employees in 2008, when she started, to 1,100 when she was fired in July 2009. She said she was fired after refusing to follow a practice that she said she believed was improper.
‘Getting the Judgments’
Employees repeatedly signed affidavits without reviewing them, forged signatures, and improperly notarized and backdated documents, she said, according to a transcript of the interview.
“Everything was about getting the judgments entered because we have to report back to the banks,” Kapusta said.
Tew, Stern’s attorney, declined to comment specifically on Kapusta’s allegations. He said that she was fired for cause and that she provided no evidence to back her claims.
Kelly Scott, a legal assistant who said she left the firm in February 2009 due to illness, made allegations similar to Kapusta’s in a sworn interview Oct. 4 with the Florida attorney general’s office.
Paralegals at Stern’s firm signed documents on behalf of bank employees and had the authority to do so, Tew said. In May 2009, they stopped that practice so that only bank employees now sign the documents.
Stern’s businesses are paid fixed fees for legal and nonlegal work, such as $400 for title searches, according to the regulatory filing and Stern’s remarks at the investor conference, as quoted in the securities lawsuit. Profit depends on cutting costs and boosting volume. The business is supported by an operation in the Philippines that provides data entry and document preparation, according to the filing.
This year, Stern made about $146 million when he sold his non-legal foreclosure operations to China-based Chardan 2008 China Acquisition Corp., a “blank check” company originally formed to do business in China, according to a regulatory filing. The company was renamed DJSP Enterprises.
Stern and his businesses were paid as much as $58.3 million in cash, given a note of at least $52.7 million and promised another $35 million in cash that must be paid in full within five years, according to the filing. He also received about 6 million common and preferred shares in the company. Stern is the seventh-largest shareholder of DJSP with a stake of 4.2 percent, according to Bloomberg data.
DJSP reported a profit of $3.8 million on revenue of $56.1 million in the second quarter.
On Oct. 14 DJSP said it was laying off 10 percent of its workforce because foreclosure referrals had “declined dramatically,” after lenders including Bank of America and JPMorgan Chase & Co. suspended foreclosures and evictions.
DJSP fell 15 cents to $1.45 at 11:29 a.m. New York time in Nasdaq Stock Market trading. The shares had dropped 82 percent this year before today.
Stephen J. Bernstein, the lead independent director, was appointed interim chairman of the company, replacing Stern, DJSP said today in a statement distributed by Globe Newswire.
The company also announced the voluntary resignations of the chief operating officer, chief financial officer and general counsel. Stern will remain as CEO, the company said. Chris Simmons, DJSP’s director of investor relations, didn’t immediately return calls seeking comment.
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