DJSP sues David J. Stern alleging fraud in purchase of mortgage processing arm
DJSP Enterprises, the back-office arm of the Law Offices of David J. Stern, has sued Stern and his law firm, alleging fraud in the 2009 transfer of the mortgage document processing arm out of the firm and into a publicly traded entity. The lawsuit, filed Tuesday in a Broward County, Fla., state court alleges fraudulent misrepresentations and inducements to get DJSP to buy the nonlegal mortgage operations of the Stern law firm. DJSP notified the Securities and Exchange Commission of the lawsuit Wednesday in a regulatory filing. The lawsuit names Stern, the Stern law firm and several related companies as defendants. It also names as defendant P&M Corporate Finance, a Michigan-based firm "for its failure to act with due professional care" in designing and reviewing a financial model and in preparing pro forma financial statements that DJSP relied upon before entering into the transaction. Stern and P&M couldn't immediately be reached for comment. The deal to transfer the assets closed on Jan. 15, 2010. Stern was paid nearly $60 million in cash at closing, according to the suit. Stern's law practice boomed with the advent of the housing crisis, with its caseload rising from 15,000 in 2006 during the height of the housing bubble to 70,400 cases as of 2009, according to the lawsuit. The firm handled roughly 20% of all foreclosures in Florida, with clients that including all the nation's mortgage giants, including Fannie Mae, Freddie Mac, Citibank (C), Bank of America (BAC), Goldman Sachs (GS), GMAC (GJM) and Wells Fargo (WFC). The processing arm, later renamed DJSP after the transaction, was also flying high during that time, bringing in "a purported $260 million" in revenue in 2009, according to the lawsuit. But DJSP says defendants "fraudulently and artificially inflated the revenues" and "concealed material information regarding the unlawful foreclosure practices" to entice DJSP and its subsidiary, DAL, to buy the law firm's processing business, court documents allege. As part of the deal, the Stern law firm entered into an exclusive long-term agreement to use the publicly traded processing firm for all its nonlegal support services. The Law Offices of David J. Stern crashed in early 2011 in the wake of a Florida attorney general investigation into its foreclosure practices and the decision by Fannie, Freddie and large mortgage servicers to pull cases from the firm after allegations of mishandled foreclosure documents. The law firm ceased all foreclosure work in March 2011 and was last known to employ only a handful of people who were mainly processing documents related to more than 20 lawsuits that Stern filed last year against his former clients. The DJSP suit against Stern alleges the firm knew at the time of the transaction that it was filing forged foreclosure documents, forging signatures and robo-signing foreclosure affidavits without giving them a proper review. It also alleges the firm was prosecuting foreclosures without obtaining proper service of process and filing inaccurate and/or incomplete court documents. The suit details a process in which the firm inflated process fees using a firm called ProVest. The Stern entities allegedly caused each file to generate four or five separate fees for service of process for multiple defendants who all resided at the same address, the lawsuit contends. ProVest, in turn, kicked back some of these inflated fees to Stern's title and abstract company for skip-tracing that ProVest could have performed on its own. The law firm's demise "has directly and necessarily resulted in the destruction of DJSP's business," according to the lawsuit. DJSP halted trading on the Nasdaq in March 2011 and voluntarily delisted itself after receiving a warning from the exchange about its low stock price, which at the time was just 10 cents a share. In September, a lawsuit by former employees of the Law Office of David J. Stern and DJSP, received class-action certification in a Miami federal court. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.