Lender Processing Services Sued by Shareholders for Fraud

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foreclosure signLender Processing Services (LPS), which claims to be "the country's number one provider of ... default solutions" -- that is, foreclosure services for creditors -- is being sued by a pension fund shareholder for securities fraud. The suit, which is dated November 23 and seeks class action status, charges that LPS falsely inflated its stock price by making false and misleading statements in multiple places, including press releases, on analyst conference calls, and in SEC filings.

Specifically, the suit charges that LPS failed to disclose that its default services unit, which drives 41% of its revenue, has "falsif[ied] documents through the use of robosigners" and has "improper fee sharing arrangements with foreclosure attorneys and/or law firms."

The lawsuit points to three events that revealed the problems at the company, claiming they lowered the stock price to where it would have been had the problems been publicly known all along. The first was a Wall Street Journal story from April 3, 2010, which exposed the foreclosure document problems. The second was a disappointing earnings release on July 22; the third was a company statement put out on October 4 that discussed its business practices and, while admitting past problems, dismissed the issues as immaterial. The complaint was first publicized by stopforeclosurefraud.com.

As of publication time, neither the company nor the plaintiff's attorneys have responded to requests for comment.

LPS Dismisses and Is Silent on Risks Its Competitor Discloses

Although filing a complaint is a very long journey from winning a lawsuit, I'm not surprised the case has been filed. A story of mine on October 8 -- which is cited in the lawsuit -- took issue with the October 4th statement and comments the company made on an October 6 call with analysts because the statements seemed implausible at best and pretty far away from the public record.

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On the conference call, LPS executives discussed two lawsuits against the company that claim its default services unit's business model involves illegal attorney-fee sharing, and dismissed the suits' importance on the grounds that the company had "successfully defended" an earlier such suit. I pointed out that the plaintiffs voluntarily dismissed the case but not, according to the lead plaintiff attorney, because it was substantively weak; he couldn't explain further because of attorney-client privilege.

But that conference call isn't the only time LPS has refused to acknowledge its business model might be threatened. In its most recent quarterly and annual filings with the SEC, LPS does not disclose any risk relating to its get-paid-by-attorneys business model. Contrast that with Prommis Solutions, a company with a similar business and a target in one of the two fee-splitting suits LPS faces. Prommis Solutions explicitly warns in its SEC filing that "state or local bar associations, state or local prosecutors or other persons may challenge the services provided by us as constituting the unauthorized practice of law."

If the risk that LPS would be found to be illegally fee-splitting were so insubstantial that it didn't merit disclosure in its SEC filings, it's hard to understand why the local U.S. bankruptcy trustee has gotten involved in the fee-splitting lawsuit on the plaintiff's side, as the website Naked Capitalism reported on October 11. The first big event in the case, a hearing on LPS's motion for summary judgment, is scheduled for January 21, 2011.

Prommis Solutions also reports another risk factor that LPS doesn't, but which perhaps it should given the robosigning and related document issues at LPS: "Changes in or our failure to comply with the extensive legal requirements to which our business is subject may have an adverse effect upon our results of operations."

To win its case, the plaintiffs will have to show that the allegedly fraudulent statements and omissions not only inflated the stock price but that their revelation explains the stock's drop. Perhaps that won't be hard given the big tumble the shares took in response to the October 4th press release. But if the SEC filed its own suit, all it needs to show is that material fraudulent statements or omissions were made. Given the record so far, perhaps the SEC should be sending a Wells notice to LPS in the near future?
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