A $5+ million judgment has been entered against investment bank Lehman Brothers, Inc. and subsidiary Lehman Commercial Paper, Inc. in a class action filed on behalf of all persons who acquired mortgage loans from First Alliance Corporation from May 1, 1996, through March 31, 2000, that were used underwritten by Lehman Commercial Paper. Specifically, the class action covers loans that were used as collateral for First Alliance's warehouse credit line with Lehman Commercial Paper, Inc. or were securitized in transactions underwritten by Lehman Brothers Inc. The action alleges that Lehman Brothers knowingly assisted in fraudulent activities by providing financial backing to aggressive home equity lender First Alliance, despite warnings about its questionable business practices. The money will not be distributed until all possible appeals have been exhausted.

The verdict only came after strenuous jury deliberation that went from May 12 to June 16, 2003. The action was filed by representatives for more than 7,500 homeowners who got high-cost home equity loans from First Alliance. In March 2000, the company ceased operations and filed for bankruptcy after its lending practices were described in an article in The New York Times, in collaboration with the ABC News program "20/20."

In the trial, jurors were asked whether First Alliance had defrauded homeowners, whether Lehman Brothers knew of that fraudulent behavior when it provided financing to the lender, and whether Lehman Brothers "substantially assisted" First Alliance in perpetrating the fraud. In each case, the jurors answered yes. Lehman Brothers underwrote $400 million in mortgage-backed securities for First Alliance and provided it with a $150 million line of credit.

The jury awarded the homeowners $50.9 million in damages, holding Lehman Brothers responsible for 10 percent of that amount. First Alliance, its founder, Brian Chisick, and other company executives and directors were held responsible for 85 percent of the damage award. The remaining 5 percent was assessed against MBIA Inc., which insured some of the mortgage-backed securities.

Lehman Brothers continued to provide financing for First Alliance even after the lender's business practices had been cited in numerous consumer lawsuits, including one filed by AARP, and in regulatory actions by attorneys general in various states. Those cases--like this one--accused the company of preying on homeowners, many of them senior citizens, by using a high-pressure sales pitch that concealed the high fees, or points, that the company charged for its home-equity loans.

Few conventional lenders charge origination fees of more than 2 points on a loan--that is, 2 percent of the total amount borrowed. Many state regulators consider fees of more than 8 points to be indefensible. First Alliance charged up to 25 points on its loans, substantially increasing the monthly payments and putting some homeowners at risk of foreclosure.

During the recent trial, attorneys for the homeowners quoted extensively from internal Lehman documents from the mid-1990's that described First Alliance's business practices in scathing terms. One Lehman executive, Eric Hibbert, visited the company and later described it in a memorandum as "the used car salesperson" of the subprime credit market. "It is a requirement to leave your ethics at the door," Mr. Hibbert wrote in one of his evaluations of the company.

In March 2002, First Alliance agreed to pay up to $60 million to settle accusations by the Federal Trade Commission that it had defrauded roughly 18,000 people by concealing its extremely high fees and escalating interest rates. At the time, the settlement was by far the largest the federal agency had ever obtained in a predatory lending case. That settlement also called for Mr. Chisick and his wife, the founders of First Alliance and its largest shareholders, to personally contribute $20 million to a compensation fund for defrauded homeowners.

First Alliance, prior to filing for bankruptcy in March 2000, was a subprime mortgage lender operating in 18 states while servicing nearly $900 million in loans. Generally, customers of the company were borrowers who had difficulty obtaining loans from other sources due to poor credit ratings or insufficient credit histories. Many of these customers were homeowners who secured loans with their first mortgages. The class alleges that First Alliance, using "sales tracks" to misrepresent loans, engaged in fraudulent and predatory lending practices.