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Bet on Foreclosure Boom Turns Sour for Investors
Published: February 1, 2011

David J. Stern may be the best-known beneficiary of the foreclosure boom, having made millions in recent years from evictions processed by his law firm, the largest of its kind in Florida. But when he took part of his firm public early last year, he had plenty of help from a constellation of investors also looking to cash in on people losing their homes.

Early in 2010, the back-office processing operations of Mr. Stern’s law firm were converted into a publicly traded company called DJSP Enterprises. Mr. Stern pocketed nearly $60 million from that transaction, public filings show.

Behind that big-money deal was a curious cast of characters, including some with previous run-ins with regulators. Other parties included a small Wall Street investment bank headed by a former presidential candidate, the retired Gen. Wesley K. Clark, and a little-known private equity firm based in New York.

Even before the DJSP windfall, Mr. Stern enjoyed a lifestyle that featured grand mansions, flashy sports cars and a yacht called Misunderstood. But the days of easy money are over for Mr. Stern, his law firm and DJSP investors.

As the Florida attorney general’s office continues to investigate whether Mr. Stern’s law firm falsified documents in order to speed up foreclosures, the firm has lost its biggest clients, including Citibank and Fannie Mae. Many of DJSP’s executives have left the company, and it has laid off about 80 percent of its 1,200 employees.

Meanwhile, investors in DJSP are not doing any better. Shares of the company, which were worth $14 apiece last summer, trade now for about 50 cents on the Nasdaq exchange.

DJSP faces a lawsuit from investors who claim they were misled about its financial prospects, an accusation the company has denied. Separately, former employees of DJSP who performed back-office work related to Mr. Stern’s law firm have sued, contending that the company failed to follow federal regulations in laying them off; the company filed a motion to dismiss the claims.

In recent years, numerous big and small private equity firms across the country have taken large stakes in the back-office operations — the accounting, document processing and title-search departments — of law firms specializing in foreclosure, often called foreclosure mills. The private equity firms then make money by providing those services back to the law firm for a fee.

In a handful of cases, homeowners have sued law firms and the associated private equity firms, contending that they were involved in illegal fee-splitting arrangements. The firms deny the accusation. DJSP does not face such lawsuits, though it has noted in regulatory filings that a court could determine that its fee arrangements with Mr. Stern’s law firm were impermissible.

Mr. Stern, who stepped down as chairman and chief executive of DJSP but remains the company’s largest shareholder, did not respond to telephone calls seeking comment. He has not been accused of any wrongdoing, and his lawyer, Jeffrey Tew, has said repeatedly that Mr. Stern did nothing wrong.

The events that led to the creation of DJSP Enterprises started back in mid-2008. At that time, Mr. Stern told The American Lawyer magazine, he was approached by FlatWorld Capital, a small and little-known New York private equity firm, which was interested in a transaction with his law firm.

From an investor’s perspective, Mr. Stern’s firm in Plantation, Fla., appeared to be a sure bet: In 2009, it handled 70,000 foreclosures, or about 20 percent of such actions in the state, bringing in $260 million in revenue.

“They said it would give me an opportunity to restructure and reorganize,” Mr. Stern told the magazine, referring to the FlatWorld investors. “To take some chips off the table, yet continue to do what I do.”

It is not clear how FlatWorld Capital and Mr. Stern were introduced. The FlatWorld official who initiated the DJSP transaction was apparently a young New York investment banker named Jeffrey Valenty, public filings show.

Mr. Valenty, who at one point worked for CIBC World Markets, did not respond to repeated calls seeking comment.

FlatWorld, which does not appear to have made any earlier investments, needed investors with deep pockets to make a deal with Mr. Stern. That need would bring two other firms into the story — an investment banking firm, Rodman & Renshaw, that is headed by General Clark, and a publicly traded company with an odd name, the Chardan 2008 China Acquisition Corporation. 

According to filings with the Securities and Exchange Commission, an investment banker at Rodman & Renshaw, Ramnarain J. Jaigobind, introduced Mr. Valenty of FlatWorld to an acquaintance named Kerry Propper.

Mr. Propper, who is in his mid-30s, runs a boutique investment bank on Wall Street. Earlier, in August 2008, Mr. Jaigobind, while at a different investment bank, helped Mr. Propper raise $55 million for Chardan 2008.

Chardan 2008 was set up as a special-purpose acquisition company, known as a Spac. A Spac, sometimes referred to as a “blank check” company, raises money from investors in an initial public offering with the stated purpose of using those funds to acquire a company, often in a particular industry or a specific part of the world.

Mr. Propper had previously been involved in Spacs that had acquired Chinese companies, and Chardan 2008 was another such venture.

But in early 2009, S.E.C. filings show, Mr. Propper and Chardan 2008 changed direction after he was approached by Mr. Jaigobind about the possibility of investing in the back offices of Mr. Stern’s foreclosure operations.

Reached by phone at Rodman & Renshaw, Mr. Jaigobind referred a reporter to the bank’s general counsel, Gregory R. Dow. Mr. Dow declined to comment on the transaction, and he also said General Clark, the firm’s chairman, was unavailable for comment.

After nearly a year of negotiations, Chardan 2008 struck a deal in early 2010 to buy Mr. Stern’s foreclosure operations, giving it the name DJSP Enterprises. Mr. Propper told The New York Observer last summer that he did not have qualms about acquiring a law firm that specialized in foreclosures.

“It only processes them,” he told the newspaper.

Mr. Propper’s father, Dr. Richard D. Propper, acted as a “consultant” on the deal and, like his son, wound up with a significant stake in DJSP, public filings show.

Dr. Propper has a history of run-ins with regulators. In the mid-1990s, he settled with the S.E.C. over disclosure problems with investment partnerships he oversaw. And about five years ago, he and other individuals, including his son, were sued by federal officials in connection with their involvement with an equity fund that received money from the Small Business Administration.

Dr. Propper settled those charges late last year, agreeing to pay $1.5 million. He did not return phone calls seeking comment. Kerry Propper, who was also named in the S.B.A. lawsuit, paid a settlement totaling $36,000.

Like Mr. Stern, major holders in DJSP including Mr. Propper and Dr. Propper, who had received millions of shares at a penny each, were poised to make a fortune from the company. However, even though those shares were worth tens of millions of dollars last summer, they were restricted from selling them until earlier this year.

By then, Mr. Stern’s law firm was under fire, and the heady times were over. In an e-mail responding to questions, Kerry Propper said he had not profited from his investment.

“In fact, I bought additional shares and warrants in the open market at a much higher price,” Mr. Propper wrote. “As you could guess, this has not been a profitable investment for any of the insiders.”

Meanwhile, FlatWorld, the investment firm that helped the back-office operations of Mr. Stern’s law firm go public, has since gotten into the Spac business itself.

Recently, with the help of Rodman & Renshaw, it raised $22 million from investors, money that it plans to use to take over some kind of business somewhere in the world, according to its S.E.C. filing.

The filing indicates that FlatWorld did not have a specific investment target. Instead, the firm said it might use the funds to buy companies involved with activities like financial services, legal processing, health care or education that are located in parts of the world like India or China.