Risk Management

Subprime ERISA Practices Lead to Lawsuit

Complaint alleges that Fremont General engaged in unsafe lending practices, and that executives authorized the purchase of company stock for its pe...
Stephen Taub and Dave CookApril 27, 2007

Subprime lender Fremont General is being sued by its employees under the Employee Retirement Income Security Act.

The ERISA lawsuit, filed in U.S. District Court for the Southern District of California, reportedly claims that board members authorized the purchase of Fremont stock for company pension funds even as they were selling their own shares. The suit seeks to recover unspecified losses in the “millions of dollars.”

According to Bloomberg, the complaint alleges that executives sold $16.5 million of their own shares from January 1, 2003, to April 24, 2007, while causing the company’s retirement plan to buy between $150 million and $210 million in Fremont stock. Chairman James A. McIntyre sold $11 million of company stock last August, and four other directors sold $5.5 million worth earlier this year, reported the Associated Press. McIntyre and eight other directors are named as defendants, the company’s public-relations agency has reportedly stated

“They knew or should’ve known that company stock was an imprudent investment because of Fremont Investment & Loan’s unsound underwriting, risk management, and lending practices,” the lawsuit said, according to Bloomberg. Fremont General does business primarily through that wholly owned banking unit, according to the company’s Website. This year the company’s share price has fallen about 50 percent.

According to the AP, the complaint alleges that Fremont engaged in unsafe lending practices beginning in 2003, but the strategy backfired when a large number of subprime borrowers began to default. Last month the company consented to a cease-and-desist order from the Federal Deposit Insurance Corp. and announced it would exit the market for subprime residential lending.

Earlier this month, Grant Thornton resigned as the auditor for Fremont and for another subprime lender, Accredited Home Lenders. Fremont has since retained Squar, Milner, Peterson, Miranda & Williamson in that role.

A representative of Fremont’s public-relations firm, Abernathy MacGregor, said it does not comment on pending litigation.

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