A federal judge has certified a securities fraud class action against Sallie Mae, the top student loan provider in the United States.
Lead plaintiff SLM Ventures accused SLM Corp., Sallie Mae's corporate name, of telling investors it used strict underwriting standards for its loans, while weakening those standards by approving risky loans to students at for-profit schools.The suit was filed in the Southern District Court of New York (a copy of the pdf filing is here).
What's the primary reason why the plaintiff filed suit? Sallie Mae offers federally guaranteed loans and private education loans ("PELs"). The company claimed it was adhering to, as the Courthouse News Services said above, to underwriting standards for its loans, all of its loans. In 2006, Sallie Mae's management team expanded the PEL program. As a result, the portfolio doubled, and it increased from $7 billion in PELs to over $15 billion.
The plaintiff accuses "Sallie Mae actually [of] relax[ing] its underwriting standards." In so doing, they "loaned billions of dollars to borrowers with low credit scores and other high risk borrowers who
attended part-time, correspondence, or for-profit schools [my emphasis]."
In order to hide the number of PEL loans that had were delinquent or in default, Sallie Mae moved as many of them into forbearance, which is a violation of regulations.
Albert Lord, who was a the Chairman at the time, also comes into play. In 2007, he tried to sell the company off to private equity investors. If he had succeeded, he would have received $225 million, the total amount of his stock options in the company. The deal, however, fell through.
Lord's was extremely defensive during a 2007 investors call (read the full transcript here). When discussing the expansion of PEL, he was tight-lipped and refused to answer specific questions about it. At one point he said, rather oddly, " Most of the advice I get takes the direction of playing poker and how to play poker."
But he quickly added this contradictory claim, "I think it’s important that you understand that I’m not playing poker. The board is not playing poker. We are trying to do what we’ve always done and that’s create value by running the company well."
Whatever that means . . .
The call worsened, and Lord kept delivering bad jokes. (A word of advice to Lord: if you do quit your day job as a loan predator, don't go into stand-up comedy).
He continued with a line of dumb jokey comments."I don’t play chess. I play golf -- poorly. I don’t play the piano, but we have a piano and if you put CDs in it, it plays itself," he said.
That didn't go off well, as Lord said a few minutes later, "You guys are pretty serious today, I can see."
Again, and as the Courthouse News Service reported, he would not discuss the creditworthiness of PEL.
David Jackson, who is a contributor to Seeking Alpha, described the Q&A session as the "most remarkable" he ever experienced (see Jackson's transcription here).
This is when Lord gets nasty. Jason Miller asks Lord several questions, and Lord essentially lets him know that it's too much. They move to the next caller who is Bill Cavalier. Cavalier begins to ask questions about securitization. Lord refuses to respond, and insists that Cavalier direct those questions to Steve McGarry (McGarry was promoted to senior vice president, investor relations in 2008).
Cavalier sounds surprised by Lord's reaction, and says, "But you’re the CEO. You’re the guy who just took over the company."
Lord replies, "Yeah, that’s exactly right. I’m the CEO. You should give Steve a call. Next question."
Apparently, that means CEOs aren't responsible for understanding the innerworkings of their companies, especially when it relates to securitizations and banking. That's obviously expecting far too much!
When the call is wrapped up, and there are no more questions, Lord says to McGarry, "How good is this? Steve, let’s go. There’s no -- no questions. Let’s get the fuck out of here [my emphasis].
Lord, like usual, was keepin' it classy. Stay tuned for updates on this case of SLM vs. SLM.