Since Baltimore City Hall contended in a federal lawsuit last year that a group of international banks conspired to keep a key interest rate benchmark low, more municipalities and private companies have started to investigate potential losses because of the alleged scheme.
Baltimore bankruptcy attorney Joel I. Sher is looking into whether banks' manipulation of Libor, the London interbank offered rate, caused a jumbo mortgage lender, Thornburg Mortgage Inc., to lose money though interest-rate swaps tied to the rate.
Suits over Libor would add to a collection of multibillion-dollar cases against some of the world's largest banks that he is overseeing.
Sher, 59, is the bankruptcy trustee for Thornburg and is leading the lawsuits against financial institutions, alleging that they drove the mortgage company into the red with unscrupulous investment techniques.
A graduate of Baltimore's Northwestern High School who earned an undergraduate degree in 1974 from the University of Maryland, College Park, Sher attended Villanova Law School and became interested in bankruptcy law. Today he is chairman of the downtown law firm Shapiro Sher Guinot & Sandler.
As a Chapter 11 bankruptcy trustee, Sher has reorganized a security firm with more than 1,100 employees and annual revenue of more than $55 million. He has served as counsel to several Chapter 7 trustees overseeing the bankruptcies of national retail chains, including Just for Feet Inc. and Merry-Go-Round Enterprises Inc. He also has counseled creditors' committees.
But Thornburg — now known as TMST Inc. — has become the "biggest and probably most important case" of his three-decade career, Sher said.
Why was the Thornburg case filed in Maryland bankruptcy court?
Maryland is the No. 1 state for the incorporation of [real estate investment trusts]. It was filed here for a variety of reasons, but Thornburg itself was incorporated in Maryland and its principal place of business was Santa Fe, N.M.
What happened was, after the [bankruptcy] case was filed, there were allegations made in a whistle-blower letter. An anonymous letter was sent to creditors complaining about certain misconduct of the senior management. The bankruptcy court here found that there was cause to appoint custody [of the company to an outside party] because of those allegations. Then I got appointed.
Thornburg was probably the nation's largest jumbo mortgage originator and did mortgage securitizations. At its heyday, it probably securitized over $30 billion in mortgages and had about $50 billion in what's known as "repo" transactions and other derivatives. Thornburg was a victim of the whole economic upheaval in the mortgage markets.
[The case] was filed here in May of 2009, and at the time it was the seventh-largest case ever in the United States. I was appointed trustee in November of 2009.
How did you become aware of the alleged misconduct by the banks?
When I got appointed, through investigation of transactions and interviews, we uncovered these causes of action. Plus, creditors brought conduct to my attention that merited investigation.
We filed about six or seven significant pieces of litigation. First was an action against the former officers and directors and the outside law firm, which was settled. That's finished. Currently pending are cases against Goldman Sachs, Barclays, Royal Bank of Canada, Bank of America, JPMorgan, Credit Suisse, UBS, Citibank, Royal Bank of Scotland.
What's the status of Thornburg?
It's been wound up, all tangible assets have been liquidated and now we're just involved in litigation. It's a very small, skeletal staff left in Santa Fe. I went and wound it down. When I first took over the case, I was probably out there three out of four weeks during 2010; now [it's] maybe once a month, once every six weeks. A lot of Southwest [Airlines] miles. A lot of peanuts. Over the years, I've had occasions to run businesses. But nothing ever on this scale.
What are the basics of the cases against the banks that came out of the bankruptcy?
In the cases against Goldman, Barclays and Royal Bank of Canada, the allegations are that they took advantage of certain disruptions in the market to declare events of default and liquidate mortgage-backed securities that we believe significantly depressed values, thereby depriving the company [of] the value of what it owned.
The company engaged in what's known as repo transactions — reverse purchase transactions — so that Barclays and RBC in the summer of 2007, we believe, liquidated the mortgage-backed securities at a shockingly low level. Goldman did the same in 2008. We're seeking damages in the $50 [million] to $100 million range each.
In the largest action, which is against five banks, total damages we're seeking [are] about $2 billion. It's a much more complicated series of allegations.
In 2008, those banks induced [Thornburg] to raise a billion dollars in new capital, which it did. And then they essentially took the billion dollars and liquidated out their positions.
As a result of what happened, the company had to wind down in spring of 2009. These actions all happened from 2007 through the first quarter of 2009.
Are other cases similar to the Thornburg cases being litigated?
There are other cases pending but nothing of this magnitude. There are a lot of cases going on that came out of the mortgage meltdown.
The big case, the $2 billion case, really is going to be a case of first impression. There are some issues there that haven't seen the light of day. That's why we think it's really important to get it right; to make sure that there's an accurate record of what happened.
This case will have precedential value going down the line. This case, I think, has a great deal of significance for a lot of investors.