David J. Stern, who became one of the country's best-known foreclosure lawyers before shutting his business under regulatory pressure, has been sued for fraud by the publicly traded company he helped create to take on his now-defunct law firm's back-office operations.
DJSP Enterprises Inc said Stern, a former chief executive, concealed that his law firm David J. Stern PA inflated revenue by systematically "cutting corners" in the foreclosure process.
It said this took place even though the firm knew that such clients as Citigroup Inc, Fannie Mae and Freddie Mac might flee.
DJSP said the shortcuts included letting workers sign foreclosure documents without reading them, known as "robo-signing," and submitting false or backdated documents to courts. It also said Stern awarded bonuses and "extravagant gifts" to workers who could churn out foreclosures quickly.
Stern had "specific intent to fraudulently induce DJSP" to assume the back-office operations, the company said. The demise last March of Stern's law firm "directly and necessarily resulted in the destruction of DJSP's business," it added.
DJSP in January 2010 took on the Stern operations in exchange for paying nearly $60 million in cash to Stern, whose lifestyle included luxury homes and a yacht.
The lawsuit filed in a Broward County, Florida, state court seeks damages. DJSP also sued Grant Thornton LLP, which it said conducted due diligence for the transaction, and McGladrey & Pullen LLP, which it said provided auditing services.
Both lawsuits were filed on Tuesday, and reproduced in a U.S. Securities and Exchange Commission filing on Wednesday.
Jeffrey Tew, Stern's lawyer, said: "David denies all of the allegations in this lawsuit, and we're going to defend it."
Grant Thornton spokesman Tim Blair said the company does not discuss its work for clients, and will defend itself if DJSP's lawsuit proceeds further. McGladrey spokesman Scott Franzen said that company does not discuss such litigation.
At its 2009 peak, Stern's firm handled 20 percent of Florida foreclosures and had a foreclosure caseload of 70,400, DJSP said. Stern resigned as chief executive of the Plantation, Florida-based company in November 2010.
On December 30, 2011, Florida Attorney General Pam Bondi said she would ask that state's Supreme Court to let her appeal a lower court decision that she could not subpoena records of Stern's law firm. She said she has six pending investigations into law firms for potential misconduct in foreclosure cases.
DJSP shares peaked at $13.65 in April 2010, but have traded below $1 since November of that year. They closed Wednesday up 5.1 cents at 12.1 cents on the Pink Sheets.
The cases are DJSP Enterprises Inc et al v. Stern et al, Broward County, Florida Circuit Court, No. CACE12000096; and DJSP Enterprises Inc v. McGladrey & Pullen LLP et al in the same court, No. CACE12000097.
(Reporting by Jonathan Stempel in New York, editing by Matthew Lewis, Gunna Dickson and Tim Dobbyn)