Kathy Patrick has been a beauty queen, a Harvard law student and a singer with a Christian rock band. Lately she also is the secret weapon for big bond investors seeking to recover billions of dollars on faulty mortgage-backed securities.
This summer, Patrick, a Houston lawyer with a 33-person firm called Gibbs & Bruns, extracted an agreement from Bank of America Corp. to pay $8.5 billion to investors who bought flawed mortgage bonds issued before the housing market collapsed. On Friday, she announced her next target: J.P. Morgan Chase & Co.
Acting on behalf of 20 bondholders, many of whom also were involved in the Bank of America deal, Patrick last week sent a letter to five big banks asking them to open investigations into $95 billion in mortgages issued by J.P. Morgan and its affiliates. The banks serve as trustees on the bond deals.
Patrick declined to identify her clients, but they include giant asset managers BlackRock Inc. and Pacific Investment Management Co., or Pimco, according to a person familiar with the matter. BlackRock declined to comment and Pimco didn't return calls seeking comment.
"We will honor our obligation to repurchase any loan that should be repurchased under the terms of those agreements," a spokeswoman for J.P. Morgan said. Representatives of J.P. Morgan and Bank of America declined to comment.
It isn't clear yet whether Patrick's efforts will bear fruit. The proposed Bank of America settlement remains tied up in court, and Patrick may face other challenges in her effort to recover funds from J.P. Morgan, in part because of differences in the structures of the bond deals and the company's relationship to entities involved in the securitization process.
At Gibbs & Bruns, Patrick, 51 years old, has built a network of investment-company clients and a reputation as a tough litigator with a talent for marshaling diverse groups of investors to work for common goals. Those who underestimated her often did so at their own peril.
At her first meeting with Bank of America, representatives of the bank "spent 90 minutes taking Kathy's deposition," recalls Scott Humphries, a Gibbs & Bruns partner. They wanted to know, "did this little lady from Texas know anything about mortgage securities."
The daughter of a U.S. Army lieutenant colonel, Patrick got her first taste of the legal system when still in college. In 1980, she successfully sued to block the Miss USA pageant from stripping her title as Miss New Mexico in a dispute over residency requirements.
Patrick joined Gibbs & Bruns in 1986 after clerking for a federal judge, initially representing broker-dealers in arbitration cases. In her spare time, Patrick teaches adult-education classes at her church and helps lead morning services as the lead singer for a rock 'n' roll band that sings Christian praise music. On a pro bono basis, she has represented the city of Houston in environmental disputes and Planned Parenthood against antiabortion activists.
Patrick got her first big break in 1992 when Merrill Lynch Asset Management hired the firm to represent it and other bond investors in a dispute over failed revenue bonds underwritten by Drexel Burnham Lambert to finance construction of six maximum-security prisons.
Steven Rofsky, then a vice president with Merrill Lynch Asset Management, recalls briefing Patrick for about an hour on the case and then, within 24 hours, receiving a 25-page memo outlining the litigation strategy. "It was a road map to what several years later was an overwhelming victory in a federal court trial," Rofsky recalls. In 1994, a Texas jury awarded the investors about $80 million.
Later, when Rofsky was a managing director at bond insurer Ambac Financial Group Inc., he hired Patrick to represent a group of investors seeking to recover losses on $1.6 billion on bonds issued by National Century Financial Enterprises Inc., an issuer of securities backed by health-care receivables. The investors have thus far recovered more than $600 million, Patrick says.
"She has that combination of Texas practical, no-nonsense relatability, combined with intellect and command of the material," says Scott Wyler, general counsel of III Offshore Advisors, an adviser to a fund that also invested in the failed deal.
In court, Patrick displays a folksy demeanor and, at times, a sharp tongue. During a hearing in state court over the Bank of America settlement, she dismissed controversy over the agreement as a "kerfuffle."
Patrick's firm, which typically operates on a contingency basis, stands to earn an $85 million paycheck if the Bank of America settlement is approved.
The Bank of America agreement would be the largest such settlement by a financial-services firm to date. But it has drawn opposition from critics such as New York Attorney General Eric Schneiderman, who called the proposed deal "unfair and inadequate" because it involves bonds with an unpaid principal balance of $221 billion.
Patrick says the deal includes not only cash payments, but also changes in mortgage-servicing practices. "When ultimately people understand the facts of this settlement, and how it favors loan modifications, the settlement will be approved," she says.
This story first appeared on WSJ.com.