Chapter 1: Bob becomes a real estate investor It is November 2007 and the economy of...

Chapter 1: Bob becomes a real estate investor

It is November 2007 and the economy of Bob is a recent art school graduate working as an actor on a new Tyler Perry movie. Bob got a wonderful 6 month contract with a 3 month advance on pay.

After Bob’s second day of work he was getting gas and a new Ferrari pulled up in the next stall. Bob was amazed and started a conversation. It turns out the owner of a Ferrari was a real estate investor. The driver of the Ferrari tells Bob amazing stories of flipping homes, buying houses with no money down and no credit check and never losing money on deals-because real estate always goes up!

Bob is inspired, packs his bags, and leaves Atlanta to go to Miami to begin his career in real estate investing the next day. Shortly after arriving in Miami Bob sets up an LLC and is able to secure pre-approval for a commercial real estate loan using his job as an actor as income.

Once Bob gets the loan he finds a real estate agent and signs a power of attorney to purchase a property on Bob’s behalf. In the power of attorney Bob says, “in exchange for $1,000 real estate agent agrees to buy the most speculative high return investment she can”. Bob feeling accomplished went to the Ferrari dealership and awaited his payday.

Chapter 2: Bob runs into business problems

A month later Bob scrolls through missed calls from Tyler Perry’s studio to see a missed call from the agent. When Bob calls the agent back she says she purchased a property! Bob and the agent meet and it turns out the property is a junkyard-literally. With some industrial office space attached.

Bob was furious but the agent let him know the investment was in a rapidly developing area by the water and in 10 years it could be an incredible investment. Bob, having no money, knew he couldn’t maintain this property for 10 years and threatened to sue the realtor if she couldn’t unwind the deal. The realtor, insulted, stormed off and Bob never heard from her again.

When Bob tried to sell the property to pay back the loan he discovered two other loans the agent took out against the property. One was secured against the property, and he other was secured against the proceeds of the landfill. Bob couldn’t find any registered documents with the state or county for either loan. Bob was eventually forced to file bankruptcy on behalf of the LLC. The creditors are starting to pursue Bob’s personal assets for the losses they incurred.

Chapter 3: Bob looks for a job

It’s April 2008 and Bob, not giving up on his goal of being a real estate tycoon. Bob has an interview at a boutique eight person investment firm in Atlanta but they turned him away because they said they wanted “an Asian so they could win more business with the rich Asians in the community”. Bob was disappointed but kept looking.

Bob is able to secure a role at Lehman Brothers as President of Risk, where he is responsible for determining whether the company’s investment portfolio is too risky.

Bob loves his job. He just checks out what the ratings agencies (Moody’s, Fitch, etc) say about the assets, mostly mortgage-backed securities (MBS), in his portfolio and just copies and pastes the reports findings, labels the research as his, and sends it to shareholders. Bob also gets internal reports about the quality of the MBS but they have a lot of numbers. Numbers stress Bob out.

Chapter 4: Bob navigates the financial crisis

In September 2008 a junior employee at Lehman, who isn’t afraid of numbers, discovers the MBS are worth negative billions of dollars, effectively bankrupting the firm. Millions who invested in Lehman lost their life savings. The FBI and the SEC are also investigating to both Lehman and Bob to see if either committed any wrong doing.

Bob, always looking to get ahead, signs a tell all deal book deal to describe the corruption at Lehman Brothers. Bob exaggerated in his book but it became a New York Times bestseller. The CEO of Lehman Brothers is so upset by the book we becomes physically ill. Hmm the CEO’s family sends a cease and desist letter demanding Bob recall the book and his claims.

Question 1: You are a brand new lawyer who just passed the bar and Bob walks into your office asking for advice. Please identify and analyze all of the issues where (1) Bob is liable to someone else or (2) where someone else is liable to Bob.

Question 2: Bob has hard a really hard time. Is there anything Bob could have done to have acted in a more ethical manner?

Homework Answers

Answer #1

Question 1:

Bob is liable to receive his payments aginst the agent who did not explicitly mention about selling rights.

Now all shareholders can also hold Bob liable for sending misleadingaand false information . Also creditors of LLC can hold him liable for his money. The makers of Tyler Perry Movie can hold Bob liabke for breaking his contract and demand his 3month advance pay.

Question 2:

Bob could have identified all risks for signing off loans on property and buying the property with proper checks and controls . Also he could have communicated internal team at Lehmann Brothers about information before sending out to be more fair and transparent and could have checked and verified all numbers to justify them.

Even at his film job career he should have completed his contractual obligation else it is unethical and can be legally charged.

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