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From a fees standpoint, white-collar defense lawyers couldn’t be blamed for casting hungry eyes at the subprime mortgage mess. Take New Century Financial Corp. In February, just as the mortgage meltdown began, the Orange County-based subprime lender announced it would restate earnings by an as yet undetermined amount. That caught the Securities and Exchange Commission’s attention. A federal grand jury in the Central District of California fired off a subpoena. That has quickly translated into a classic white-collar boondoggle, generating work for defense lawyers at multiple big firms. San Francisco-based Heller Ehrman partner Michael Shepard conducted the company’s internal investigation. Top executives lawyered up, hiring Los Angeles-based practitioners at Latham & Watkins; Munger, Tolles & Olson; Skadden, Arps, Slate, Meagher & Flom; and Proskauer Rose. The company, which subsequently filed for bankruptcy protection in Delaware, is represented by O’Melveny & Myers partner Alejandro Mayorkas, a former U.S. attorney in the Central District. The question on defense lawyers’ minds beyond New Century is whether large-scale investigations will surface elsewhere in California. So far, they haven’t. Defense lawyers chalk much of that up to the slow pace with which the government responds to any scandal du jour. When federal prosecutors do wade into the subprime mess, though, white-collar lawyers wonder whether they will merely ramp up simple fraud cases against brokers, or if more complicated investigations against subprime lenders and investment banks are in the offing. “I think there’s a general feeling that the DOJ and some other regulators have been taking their time trying to analyze the landscape pretty carefully, deciding how they’re going about it, and that they’re getting close,” said Walter Brown Jr., a former federal prosecutor and partner at Orrick, Herrington & Sutcliffe. The feds could be prodded by activity from state attorneys general. Washington Mutual on Thursday acknowledged an SEC inquiry into its appraisal practices, which follows a suit by New York AG Andrew Cuomo against appraiser First American Corp. Cuomo’s suit, filed in November, claims First American caved to pressure from Washington Mutual to use preferred appraisers who inflated the value of homes. “The rumors are that before too long, subpoenas are going to start flying,” Brown said. “To who, or how many, are anyone’s guess.” GOING AFTER LITTLE FISH Simple mortgage fraud is nothing new for federal prosecutors. Just last month, the Northern District U.S. attorney’s office indicted Edward Batayeh, former CFO of San Ramon-based CHL Mortgage Group, for bilking four financial institutions out of $13 million. The government has tagged Batayeh as a fugitive, and he does not have an attorney listed on the docket. In such prosecutions, the lender is usually the victim — not the target. And the defense work fans out to a diffuse set of smaller-shop lawyers. Late last year, for instance, the founder of Modesto-based DreamLife Financial, Anthony Daniloo, pleaded guilty to dozens of mortgage fraud counts and was sentenced to 108 months in prison. Walnut Creek solo Deborah Levine represented Daniloo. Such instances of simple fraud multiplied during the housing boom, due to the lax mortgage standards in place by lenders. Thus defense lawyers say the feds could respond to the crisis by simply upping their prosecutions of this type of fraud. In the Northern District, at least, that uptick hasn’t happened yet, says Christopher Cannon, a defense lawyer at Sugarman & Cannon who has defended mortgage brokers in the past. “I haven’t seen any reports of a grand jury investigating any mortgage brokers in the Northern District,” Cannon said. Still, those prosecutions are a far cry from the kind of complicated investigations that target financial institutions — and spawn big-firm legal fees. ORANGE COUNTY IS GROUND ZERO The subprime meltdown does hold out the possibility for such prosecutions — even beyond the type of reaction seen with New Century’s restatement. Since subprime retail lenders like New Century mostly packaged and sold off their loans to Wall Street investors, both defense lawyers and prosecutors say the level of disclosure accompanying those sales could pose problems. If a lender was aware that a large volume of its subprime loans were based on fraudulent documentation, it could face a mail or wire fraud prosecution if it knowingly hid the truth from the investment banks, Brown said. Should these types of prosecutions surface, it would be a bonanza for Los Angeles white-collar practitioners. Five of the top-10 subprime lenders are headquartered in Orange County, according to The Orange County Register. Speaking generally, Proskauer partner Bert Deixler said prosecutors could try to flip lower-level brokers against lenders if they see evidence of what they believe to be corporate criminal conduct. According to lawyers involved in New Century, Deixler represents former CEO Brad Morrice, but Deixler declined to comment on the investigation. Brown points out that investigative tactic might be more difficult in the subprime industry, because the sales forces are compartmentalized from the divisions that actually sell off the mortgages to Wall Street. Beyond the California lenders, the government could pursue securities fraud cases against the Wall Street banks that securitized the mortgages and sold them to investors. Such prosecutions would be based on knowingly failing to fully disclose the risks embedded in the mortgages, defense lawyers say, and would most likely come out of the Southern District of New York.

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