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Pity the flimflammed rich

This is one in which I have a hard time picking sides:

Ray Haarstick is an engineer and businessman who founded a company that makes software for private equity firms. He has zero fear of complex financial deals.

Yet the Waltham businessman said he felt duped after he bought a $1.4 million condo from insurance giant American International Group at Stowe Mountain Resort in Vermont and began receiving bills totaling $65,000 a year for condo services and fees.

“I’m a finance guy – people hire me to do extraordinary things with spreadsheets and databases,’’ Haarstick said. “I don’t make mistakes with my finances, but we were completely flimflammed on this.’’

Haarstick’s story is perhaps a metaphor for the recent financial crisis in which AIG played a key role: Smart, knowledgeable people were lured into investments they did not completely understand, and got burned. In the run-up to the crisis, AIG sold complex financial instruments that ensnared the global financial system, and almost brought it to the point of collapse.

In this case, the financial instruments were 500-plus page documents that committed owners to pay much higher fees than expected. Many of the homeowners are savvy and sophisticated buyers, including a former Citibank executive, a former senior vice president of the Duane Reade drugstore, and a powerful real estate investor.

On the one hand, you have AIG, a criminal enterprise that helped bring down the world economy. On the other hand you have “sophisticated” investors, among whom was a Citibank executive who may very well have been a co-conspirator with AIG.

The “financial instruments” at issue were, no doubt, impenetrable, much like the credit card contracts the rest of us have no choice but to accept, peddled by people like…why, here I go after that Citibank guy again.

When I started out as a lawyer I represented poor people in consumer cases. What I wouldn’t have given for the ability to defend a case based on the fact that my clients couldn’t understand the contract. Here’s what I would have heard, precisely what AIG is saying now:

Last week, AIG through lawyers for its subsidiary Chartis asked the court to dismiss the lawsuit calling the claims “flimsy.’’ Describing the plaintiffs as a group of highly educated buyers, AIG said in court documents that if the homeowners disagreed with the terms, they could have refused to sign the agreement or refused to close on the properties. They also could have sought to amend the terms and consulted lawyers.

“What they could not do,’’ AIG said, “is what they are doing now – agree to the document’s terms and then, because of buyer’s remorse, sue three years later claiming a ‘fraud’ on the basis that the document was hard to comprehend before they agreed to it.’’

Unless I could prove that a poor person’s contract broke some positive law (e.g., Truth in Lending, Home Solicitation Sales) I would get precisely nowhere by claiming that my client couldn’t understand the contract. That was pretty much a given, since they were written in such a way that only a lawyer could understand them, and even for us it was often an effort. And lets not even get into the fact that millions of middle class homeowners currently being foreclosed don’t get to argue that they didn’t understand that they were being flimflammed when they bought their homes. So long as the deal was all spelled out in impenetrable prose they have nothing to complain about.

So, this is bit of a test case. Do rich people who don’t understand contracts deserve more sympathy than poor people with the same problem? Are the rich different than you and me? I suppose they could argue that if they couldn’t understand the contract it was per se fraudulent, since only a deliberate and cleverly constructed fraud could get past their ultra-sophisticated understanding of high finance, while you can throw anything at the little people. This is a tricky one, to be sure, but don’t be surprised if some variant of that works for them.

Well, good luck to those rich folks. If my sympathy is with anyone, it’s with them. Some of them might actually be useful members of society. Whatever happens in this case, the story itself proves, once again, the proof of Woody Guthrie’s observation:

Yes, as through this world I’ve wandered
I’ve seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.

The men that use six-guns tend to get a lot less for their efforts, and usually serve a lot more time than their ink slinging competitors. In fact, when it comes to the guys with the fountain pens, the sheriff always seems to have other things to think about.

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