LandAmerica Saw the End, Still Took Client Money

Saturday, September 12, 2009 , , , , , 1 Comments

Perhaps I should correct that headline. LandAmerica saw the end, still took client money say LandAm clients. Is that better? Ooooh, LFG, I think we saw what you did there?

In the latest round of LandAm goodness, Richmond Times-Dispatch shares another tale from a LandAm client who lost his children's college fund to the scam. Scam? Is that the word? Just wait:

Last Nov. 24, two days before LandAmerica Financial Group went bankrupt, the company refused to release funds it was holding for retired Army Col. Tracy Ralphs of Suffolk.

He was about to close on a land purchase for a new home when he got an e-mail from a LandAmerica executive saying the company no longer was in business.

Ralphs had put $81,666 of proceeds from selling land -- his life savings -- into a LandAmerica account on Oct. 15, just two days before that same LandAmerica official sent an e-mail to the company's chief lawyer warning that the company was about to run out of money to pay customers like him.

And, though LandAmerica wouldn't release Ralphs' funds when promised, the company had on Nov. 12 paid a $200,000 bill from the law firm it consulted about bankruptcy -- the equivalent of five 40-hour weeks of one of the firm's top $995-an-hour lawyers, according to bankruptcy court filings.

"Now, they're talking about paying me 20 cents on the dollar," Ralphs said. He said that is what lawyers involved in the case advised him.

Like others who deposited money with LandAmerica, he believes the company took his money even when its executives knew it couldn't repay it.

In a sworn affidavit, Ralphs said the LandAmerica official who took his deposit told him on the day the Glen Allen firm filed for bankruptcy that one senior LandAmerica official knew as early as June that "this whole thing was going to blow up."

If you have been paying attention thus far, you know that I wouldn't give LandAmerica more than 3 lines of precious Jr Deputy Accountant real estate were it not for "the Richmond Fed connection"... the what?

Those studying for the Regulation section of the CPA exam know them as "unsecured creditors," the poor saps at the bottom of the bankruptcy food chain who will be lucky to scrape the bottom of the barrel for whatever scraps remain after LandAm's secured creditors are paid off. Not to mention the IRS, who will want to get a piece as well to cover the "relief" they are looking at giving to LandAm's 1031 victims.

The 400 people had been told their "1031 exchange" deposits with LandAmerica were held in trust for them -- the same thing, in fact, that LandAmerica's chief counsel and Executive Vice President Michelle H. Gluck told two large banks on Oct. 7, about a week before Ralphs deposited his money with LandAmerica.

LandAmerica, in turn, invested the money in a variety of ways including auction-rate securities, a high-interest-rate note then considered a safe investment. But the market for auction-rate securities froze in February 2008, making the funds inaccessible.

In the Oct. 7 letter, Gluck, now a senior vice president and general counsel of the Richmond Federal Reserve, pushed the banks to make good on their promises that the $290.5 million in auction-rate securities could always be redeemed. Gluck asked the banks to pay up because LandAmerica was using the securities to back its own promises to customers such as Ralphs.

The best the banks had offered was Citicorp Inc.'s proposal to lend LandAmerica $25 million on the security of $138.5 million of auction-rate securities.

"Your personnel are well-aware of the nature of the 1031 exchange business . . . and with that knowledge directed the company towards [auction-rate securities] as safe, highly liquid investments," Gluck wrote, adding that the banks' refusal to redeem the securities left the bank in a financial crisis.

"This situation needs to be resolved this week," she said.

LandAmerica had at that point been trying for weeks to arrange a merger or to sell its title-insurance companies, which accounted for 85 percent to 90 percent of its revenue, to address its financial crisis.

And within weeks, LandAm was dead. A few months later, Gluck found herself a sweet gig at the Richmond Fed and I have been watching ever since wondering "WTF is going on?!"

Any chance LandAm 1031 victims have at recouping their losses will likely be lost to the millions of dollars in legal fees LandAm bankruptcy lawyers are cleaning up on, fees which Gluck herself signed off on. Someone tell me why the DoJ isn't crawling all over this screaming "fraud!"?!

In essence, Gluck's cute little note shows that LandAm had simply hoped no one would notice they were pooling client 1031 funds into ARSs and when the bottom dropped out and the auction rate securities locked up in February of 2008, the ruse had been exposed. I'm not a judge so it isn't for me to analyze, perhaps LandAm's behavior was not criminal, only stupidly irresponsible, but in the age of financial innovation perhaps we should consider levying a fine against absolute, blatant stupidity.

And why again did Richmond want her? That's the part that I still can't figure out. As one commenter on the Times-Dispatch article points out:

What gets me is that one of the main players in LA’s scheme was Michelle Gluck, but further down the article says she is “now a senior vice president and general counsel of the Richmond Federal Reserve.“ Are you kidding me?

It looks like to me what she did is a felony. I thought felons were barred from holding a position with the Federal Reserve.

I agree with “dc” that these people should be charged with stealing and go to prison for this.

There are thousands of “clean” folks out there who are in need of a job and now a thief is in charge of OUR money.

Ruh oh, Richmond might have some 'splainin to do. I have said this before but I will happily say it again and again until it makes sense; this goes against the Richmond mantra I've come to know and love (yeah, whatever, Fedbashers have feelings too, mmkay?), and the more I read about the last days of LandAm, the stranger it feels to consider what they could have possibly been thinking.

I've heard whisperings that Gluck may have left out some significant details during the hiring process but those are unsubstantiated wild speculation and far be it from me to postulate on events I was not present for nor have much of an understanding of. I don't know, maybe it never came up in her interview. "Sooo, have you ever run a ponzi scheme with client money?" Even if she wasn't necessarily forthcoming before signing on, surely there had to be some due diligence into her claims, perhaps even an investigation into LandAm's final days?

Apparently not.

This is why you don't hire monkeys to look after bananas. Or so I've heard.

Hit JDA's LandAmerica tag for the story thus far if you need to catch up. It goes without saying that I still won't let this one go.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


even more interesting is the evolution of Gluck-think between the times she:
1. wrote those letters ("the company holds these funds in escrow as fiduciaries" sheet funds), and
2. the time in late November when she applied at the court for Chapter 11 debtor-in-possession status, and
3.vigorous litigation throughout 2009 when she authorized millions of dollars to her attorneys to argue the exact opposite.

Had she told the court about those letters, that her customers' funds were escrows for which she was a fiduciary, those customers would have been paid off in full before her bankruptcy lawyers would have been paid a dime. Perhaps that is the reason those letters were sealed up until recently.

But there is likely a dark side to her hiring at the Fed. By saying two or three different things to different audiences, and impoverishing large numbers of people, she is the clear frontrunner to succeed Greenspan as the King of FedSpeak.

LandAmerica victims may also be starting a "Gluck's Bodycount" meter soon.