The subprime mortgage business is risky enough, even without throwing in allegations of fraud against a fugitive who was shot in the head last year in Norway by a disgruntled business associate.
Last week, the U.S. Court of Appeals for the 4th Circuit affirmed a $161 million jury verdict for the Federal Deposit Insurance Corp. in its suit over the implosion of First National Bank of Keystone, one of the costliest bank failures in U.S. history. The bank in West Virginia coal country collapsed in 1999, raking up colossal losses that cost the U.S. Bank Insurance Fund an estimated $750 million to $850 million.
Keystone had only done traditional local lending before bank officials were induced by Harald Bakkebo and several co-conspirators to invest hundreds of millions of dollars in a risky loan securitization enterprise involving the purchase of subprime mortgages, with the resale of the rights to most of the loans’ proceeds in special mortgage-backed securities, the 4th Circuit decision stated.
Bakkebo - a native of Norway who fled there in 1999 to avoid criminal prosecution in an unrelated insurance fraud scheme in Louisiana - was shot and killed last year in Norway. Bakkebo‘s attorney, Jeffrey Dorrell of Dorrell & Farris in Houston, had argued that the FDIC shouldn’t have been allowed to enter his insurance fraud indictment as evidence at the Keystone trial, but the 4th Circuit rejected that argument and other challenges made on appeal.
"As far as I'm able to determine, this is the first time in American jurisprudence that a court of appeals has approved the use of an indictment in an unrelated [civil] case," Dorrell says. "I think it's a dangerous precedent to set."
The FDIC may not see much of its money because it must proceed under Norwegian law to seize Bakkebo’s estate there from his two sons, and the estate "is not worth anywhere close to $161 million," Dorrell says. Approximately 20 other defendants in the Keystone case entered settlements or were subject to default judgments for much smaller amounts, Dorrell says. An FDIC spokesman told Legal Times the FDIC is pleased with the 4th Circuit ruling, but he wouldn‘t comment further on the case.