NU Online News Service, March 2, 2:19 p.m. EST

A consulting firm is warning that financial firm risk managers face increasing peril from fraudulent claims on behalf of bankrupt companies.

The activity is detailed in a study "Risky Business: Financial Firms Face Wave of Fraudulent Transfer Claims," released by Navigant Consulting, Inc. (NCI), and the Economist Intelligence Unit (EIU).

According to the companies, there has been a "dramatic uptick in the number of fraudulent transfer claims driven by last year's financial crisis."

The firms' analysis provides perspectives on the preparedness levels of financial institutions in responding to claims by debtors, creditor committees and/or trustees who seek to recover money allegedly paid improperly to creditors.

There has been a rising tide of such claims, known as "fraudulent transfer" or "fraudulent conveyance" cases with more than half of respondents surveyed reporting they saw an increase in fraudulent transfer cases in the past year, while only two percent saw a decrease, according to Navigant.

In the wake of the increase in fraudulent transfer claims, the study found that many financial institutions are taking steps to manage their risks. The study also noted that:

oSixty percent of respondents said loan restructuring decisions are made either by the board of directors, chief executives, or senior management.

oMore than 80 percent of those surveyed said employers or clients have been either somewhat or very active in improving the internal processes to minimize fraudulent-transfer risks since the start of the recession.

oMore than 50 percent of internal and external legal counsel surveyed were optimistic about financial service firms' preparedness with fraudulent transfers.

oTwenty-six percent of respondents said financial firms will adopt new rules to seek expert counsel on solvency of applicants for loans.

"Stan Murphy, managing director at Navigant, said in a statement that the fraudulent transfer "risks for lending institutions can be very high and costly as more and more companies fail due to the economic downturn and creditors jostle for higher priority and security."

He added that, "To an increasing extent, lenders are being caught in the tide as courts find that they gained unfair advantages in their dealings with distressed borrowers."

Navigant reported that in one high-profile fraudulent transfer, Florida-based homebuilder Tousa Inc. and its subsidiaries were found by a bankruptcy court to have been insolvent both before and after engaging in a secured loan transaction.

Several lending institutions, said Navigant, made secured loans totaling approximately $500 million to the distressed borrower in large, part to settle unsecured claims held by unrelated lenders.

These secured loans were made prior to the time the debtor's parent entity declared bankruptcy. The case resulted in the transaction being unwound and the unsecured lenders had to return approximately $403 million in settlement payments that they had received.

In addition, the secured lenders' liens against the debtor's properties were voided. The judge ruled among others that the deal was a fraudulent transfer of the borrower's assets, because the assets were no longer available to be distributed following bankruptcy.

The Navigant-sponsored survey polled 154 respondents worldwide in law firms that provide services to financial services firms (71 percent) and executives who work in the legal departments of financial services firms (29 percent) around the globe.

More information on the study is online at www.navigantconsulting.com

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