AOL Time-Warner Merger A Crock From Day One?

Bloomberg has an interesting story: the SEC is suing some former AOL execs for allegedly overstating Internet advertising revenue by more than $1 billion between 2000 and 2002:

In mid-2000, before AOL completed its $124 billion takeover of Time Warner, the Internet service provider began overstating revenue by paying more for goods and services in exchange for customers' ad purchases, the SEC said. The company agreed to pay $300 million in 2005 to settle a related regulatory probe.

Interestingly, the whistleblower, called as a witness in a number of cases, is also being pursued by the SEC. Now that seems plain silly. You'd think that the SEC would want to encourage people to come forward, and it sounds as though someone needed to at the company. Now what are people going to do in other companies? Help hide anything because they don't want to be held accountable?

Legal Snag in Credit Mess

Gretchen Morgenson has been doing a good job for the New York Times of following some of the more interesting threads in the credit meltdown. She has a story about a legal snag on the mortgage front - a federal judge in Ohio has dismissed 14 foreclosure cases brought by mortgage investors because they didn't prove that they had title to the properties they wanted to seize:

But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.

Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.

I hadn't realized that the structures put additional squeeze on the borrowers, but if it works against one, then it's going to work against the other. The cases were brought by Deutsche Bank National Trust Company - amusingly enough, Deutsche Bank is one of the firms that is being least affected by the meltdown. When asked for proof of assignment of the mortgages, the bank's lawyers could only dig up letters of intent to transfer, and not the actual documents that would have shown ownership. As the judge wrote (and paper reported):

The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.

One source said he had heard of cases where a loan was in more than one pool, and there is apparently no repository showing who has what. Here's another snippet from the story:

And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership.

No proof of ownership would mean no standing to sue - and although I'm not a lawyer, I think this problem is going to run very deep. It's not just about foreclosures. You have huge pools of securities that are based on owning these loans, only if you can't prove that you own the loans, are you now in the middle of securities fraud?