The bankruptcy trustee for American Business Financial Services Inc. has reached a $100 million settlement with investment banks that helped the Philadelphia mortgage lender package loans into securities.
However, the settlement, which requires approval by Bankruptcy Court in Wilmington, would provide no immediate relief for investors because of additional litigation, the trustee, George L. Miller of the Philadelphia accounting firm Miller, Coffey, Tate L.L.P., said yesterday.
"I'm trying to get the money to the people," said Miller, who previously secured settlements of $16.7 million from directors and officers of American Business Financial and $20 million from the law firm Blank Rome L.L.P., which represented the company.
American Business Financial collapsed in 2005, owing $600 million to investors who bought unsecured notes.
The company raised money for its operations by selling above-market-rate notes to investors, including many retirees looking for high income. The 26,000 claims that were filed totaled more than $1 billion, including interest accrued since the bankruptcy, Miller said.
Founded in 1988 to make loans to borrowers with impaired credit, American Business Financial moved from Bala Cynwyd to Center City in 2003 with the help of city and state aid and faltered almost immediately.
In the end, the company used money from new investors to pay off the notes of previous investors in a classic Ponzi scheme, according to court documents.
According to Steven M. Coren, an attorney for Miller, this week's settlement of a lawsuit that Miller filed three years ago in Philadelphia's Court of Common Pleas calls for $55 million from JPMorgan Chase & Co., including Bear Stearns Cos. Inc., which JP Morgan bought last year; $37.5 million from Credit Suisse; and $7.5 million from Morgan Stanley.
Those banks securitized $3.6 billion in subprime loans for American Business Financial. The lawsuit alleged that they had helped the company book more than $500 million in fictitious gains and more than $500 million in fictitious assets.
Spokesmen for Credit Suisse and JPMorgan declined to comment. Morgan Stanley did not respond to a request for comment.
The settlement was reported in yesterday's Legal Intelligencer.
Two big legal battles remain before investors receive any money from the company's estate, Miller said.
One involves Greenwich Capital Financial Products Inc., which provided $500 million of debtor-in-possession financing to American Business Financial after the bankruptcy filing. That lawsuit, involving claims by Miller and counterclaims by Greenwich, has frozen all payments to investors, Miller said.
The second is an arbitration case against the lender's accounting firm, BDO Seidman L.L.P. Miller is seeking $962 million from that firm, he said.