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Ocwen Financial Corp. and its chief executive were ordered to pay three Los Angeles mortgage brokers $9.1 million after an arbitration panel found that the West Palm Beach, Fla., financial services company tried to defraud them of their minority interest in a subsidiary. A three-member panel under the auspices of the American Arbitration Association ruled that Ocwen engaged in fraudulent inducement and breached its duty of good faith. “A majority of the panel concludes [Ocwen's] breaches of fiduciary duty … were part of a calculated effort to eliminate claimants’ minority interest,” wrote the panel, which last week denied a request by Ocwen to reduce the judgment amount. Paul Holman, James Cook and Robert Fickas, who owned Los Angeles-based Admiral Home Loan, agreed to sell their company to Ocwen in 1997. Under the terms of the agreement, they received $6.75 million and a 20 percent interest in a newly created subsidiary of Ocwen called Ocwen Financial Services. The parent company owned the other 80 percent. Holman was named president of the subsidiary. Fickas was named executive vice president and Cook was to be general counsel. Six months after selling their company to Ocwen, the three learned that company chairman and chief executive William Erbey, who was also chairman of the subsidiary, intended to make a capital call requiring subsidiary shareholders to invest $62 million in the company. That meant Holman, Cook and Fickas had to write a check for $12.4 million. In essence, after receiving just $6.75 million for their company, Holman, Cook and Fickas were expected to invest more than $12 million in Ocwen Financial Services. They learned about the capital call the night before the first board meeting in November 1997, according to David Bianchi, a partner Stewart Tilghman Fox & Bianchi in Miami, who represented the three men. “These three were not wealthy men, at least not wealthy enough to write a check for $12.4 million,” Bianchi said. Because they could not come up with the money, their 20 percent share in the company was reduced to less than 1 percent. Bianchi said Erbey was able to carry out the capital call because Holman was the sole board member from Admiral Home Loan on the four-person board. The vote, Bianchi said, was 3-1 approving the capital call. The arbitration panel, which comprised South Florida attorneys, ruled that Ocwen had failed to keep the minority shareholders apprised of day-to-day business activities and required them to make a hefty investment that Ocwen and Erbey knew could not be paid and would kill the minority shareholders’ stake in the subsidiary. Erbey declined comment for this story. Sidney Stubbs, a partner at Jones Foster Johnston & Stubbs in West Palm Beach who represented Ocwen, declined comment other than to explain that the judgment itself was $6 million and the award only escalated to $9.1 due to interest. He also said that the three minority investors originally sought $75 million, a sum that far exceeded the amount that was ultimately awarded. According to the arbitrators’ opinion, it was also discovered that Erbey had signed 16 unanimous consent resolutions of the board of Ocwen Financial Services without consulting the Admiral owners. “He essentially ignored the minority shareholders,” Bianchi said. The three minority investors were also represented by William Hearon, a solo practitioner in Miami. According to Hearon, Ocwen Financial Corp. closed the Ocwen Financial Services subsidiary in 1999. Ocwen Financial Corp. (NYSE: OCN), a registered savings and loan and financial services company, lost more than $8 million on revenues of $49 million in its most recent quarter, ended March 30. The three minority investors originally sued Ocwen in U.S. District Court in Los Angeles in December 1997. But the court ruled that the terms of the purchase agreement with Ocwen required the dispute to be arbitrated. In 1999, the investors again sought to present their case before a jury by suing Ocwen in Palm Beach Circuit Court. But the state’s 4th District Court of Appeal also ordered the case to arbitration. The arbitration was held in February at the Embassy Suites in Boca Raton, Fla.. The panel issued its ruling in April and last week it denied a motion for reconsideration. Under arbitration rules, according to Bianchi, the decision cannot be appealed. The arbitrators on the panel were: Stanley A. Beiley, a partner with Sacher Zelman Van Sant Paul Beiley Hartman Terzo Rolnick & Waldman in Miami; Joseph M. Matthews, a partner with Colson Hicks Eidson in Coral Gables; and Jerald S. Beer, a partner with Boose Casey Ciklin Lubitz Martens McBane & O’Connell in West Palm Beach. Beer concurred in the finding of liability but dissented on grounds that the damage award should have been smaller. A dissent has no bearing on the ruling. He said he would have awarded just $1.75 million plus interest. Litigation in the matter, however, is not over. Bianchi said the Los Angeles mortgage brokers plan to file for attorney fees that are in excess of $3 million.

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