Whistleblower was fired

Ailing lender's lawyer says she was let go after making accusations

May 17, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

Federal regulators are investigating allegations that Fieldstone Investment Corp., a Columbia subprime mortgage lender that has been hard hit by rising defaults, fired its general counsel in January for accusing senior management of illegal activity.

Cynthia L. Harkness filed the whistleblower complaint under the Sarbanes-Oxley Act, which is intended to protect employees who report fraudulent activity that can mislead investors in public companies.

Harkness, who had been with Fieldstone for three years, alleges that she was fired for reporting purported violations of securities and other laws at the company.

Fieldstone disclosed the existence of the complaint in a filing with the Securities and Exchange Commission. The company said that it plans to "vigorously defend" itself and that the complaint is "without merit."

"All I can say is we are investigating," Leni Uddyback-Fortson, a spokeswoman for the Occupational Safety and Health Administration, said yesterday.

Harkness couldn't be reached for comment. She lodged her complaint in March with OSHA, which is part of the Labor Department and has a whistleblower program. She's seeking reinstatement, lost wages and other damages.

Subprime lenders across the country are facing financial - and legal - difficulties as a growing number of borrowers, who often have poor credit histories, have defaulted on loans that come with high costs or adjustable interest rates. New Century Financial Corp., once one of the largest lenders to high-risk borrowers, sank into bankruptcy last month.

Fieldstone sells mortgages on single-family homes at dozens of branch offices across the country, as well as through independent brokers.

The company doesn't have a retail branch in Maryland but does originate some loans through wholesale channels here.

Roughly half of the loans that Fieldstone extended under its own underwriting guidelines in recent months were "liar loans," where little or no effort is made to confirm an applicant's income, according to a recent financial statement. And half of the loans were on properties in California, where home prices have been declining after a period of huge gains.

The company lost $69 million in the first quarter, after a loss of $68 million last year. As of the end of March, the company had $416 million in loans that were more than three months past due, or where collection was otherwise in doubt.

Fieldstone also is facing a class action lawsuit seeking to block the company's proposed sale to Credit-Based Asset Servicing and Securitization LLC, a New York firm known as C-BASS that collects mortgage payments and buys troubled loans.

The lawsuit, filed in Howard County Circuit Court, alleges that Fieldstone founder and CEO Michael J. Sonnenfeld and other directors "betrayed the interests of the company's public shareholders."

Thomas S. Brennan, who replaced Harkness as Fieldstone's general counsel, declined to comment beyond what the company disclosed in regulatory filings.

Mark D. Gately, an attorney who represents Fieldstone in the class action, noted that the plaintiffs have not filed an amended complaint to reflect the latest details of the takeover deal, so there's no pending request for an injunction or any other court action.

Fieldstone stockholders are scheduled to meet Tuesday to vote on the deal with C-BASS. Wall Street analysts said the buyout averted a possible bankruptcy at Fieldstone, an outcome that could have meant shareholders receive pennies per share, if anything.

"These guys are a highly leveraged company; they just didn't have the cash to get by, and their lenders were battening down the hatches," said Matthew Howlett, an analyst at Fox-Pitt Kelton. "If they didn't find a partner, they most likely didn't have the cash to survive."

Fieldstone and C-BASS executives renegotiated their deal several times as the subprime industry tanked along with Fieldstone's stock price. The shares have plunged more than 60 percent in the last year, to $3.85 at the close of trading yesterday. C-BASS has offered to pay $4 a share in cash, down from $7.25 it originally considered paying.

Fieldstone is facing a liquidity crunch after a number of Wall Street firms, which extend short-term lines of credit to finance its mortgage business, have put out margin calls on the loans. That typically means a request for additional collateral or cash. Such margin calls contributed to the downfall of New Century.

C-BASS has agreed to buy some Fieldstone assets at favorable prices now to keep it afloat until the deal is done. If that money runs out, it's unclear whether the company could continue on its own.

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