The bankruptcy trustee winding down Thornburg Mortgage has agreed to settle for $6.5 million a lawsuit against the company's former executives and its outside legal firm that alleged they engaged in a conspiracy to secretly use the failed mortgage company's employees and assets to launch a new company.

Joel I. Sher, the bankruptcy trustee handling the lender's mortgage liquidation, sued former Thornburg Chief Executive Larry A. Goldstone and former Chief Financial Officer Clarence G. Simmons III and their company SAF Financial Inc. He also sued lawyer Karen A. Dempsey and her firm, Orrick Herrington & Sutcliffe, for allegedly helping the two cover up their actions.

"The agreement reached among the parties is comprised of a global resolution of all claims asserted by and between the parties," Sher said in papers filed Monday in U.S. Bankruptcy Court in Baltimore seeking court approval of the settlement.

In addition to the lump sum payment to the trustee of $6.5 million, "Orrick shall withdraw its final fee application with prejudice and shall return to the bankruptcy estate, all post-petition fees it has already received as well as any retainer it held as of the petition date," said Sher.

Defendants Goldstone and Simmons, as well as former Thornburg insiders — Deborah J. Burns, a vice president of structured finance; and Amy Pell, director of investor relations; and Garrett Thornburg had previously denied they acted improperly and sought to have the case dismissed.

Sher, an attorney at Baltimore law firm Shapiro Sher Guinot & Sandler, filed suit against the former insiders in March 2010. He's been running what's left of Thornburg, now called TMST Inc., more than two years.

He took charge of Thornburg, once the nation's second-largest independent mortgage company, a couple of months after a whistleblower wrote a letter to a lawyer in the case alleging Goldstone and Simmons were misusing the lender's employees and assets to launch a new company.

He had been seeking $12 million from the defendants for damages from their alleged breach of their duty of loyalty to Thornburg. He was also seeking $10 million against Dempsey and Orrick on an allegation of legal malpractice.

Sher claimed the defendants, fearing bankruptcy was imminent, amended a management agreement that transferred millions of dollars to an affiliate company. They used the cash to fund the new venture and "then lied to the board about the reason for the amendment," according to the lawsuit.

Thornburg, a real estate investment trust that specialized in making jumbo mortgage loans, was founded in 1993. While it avoided many of the excesses of the subprime-mortgage market during the real-estate bubble, Thornburg eventually succumbed to Chapter 11 as the value of the mortgage-backed securities the company packaged and sold to investors plummeted in the worsening housing crisis.

The company tried to hang on, selling $21.9 billion in mortgage assets in 2007. But as prices for mortgage-backed securities continued to fall in 2008, Thornburg, with Goldstone and Simmons leading the effort, looked to buy a thrift to save the company's failing lending business. Ownership of a thrift would have give Thornburg access to customer deposits — a cheaper funding source than credit from investment banks, which Thornburg had traditionally relied on to fund its lending business.

Sher is also suing some of the biggest players on Wall Street's mortgage-finance assembly line — including affiliates of JPMorgan Chase & Co., Citigroup Inc. and Credit Suisse Group AG — for scheming to strip Thornburg's assets until it collapsed into bankruptcy.

Thornburg, based in Santa Fe, N.M., filed for Chapter 11 protection in May 2009, listing assets of $24.4 billion and debts of $24.7 billion. The bulk of those assets — some $19.7 billion — were held in securitization trusts.

Sher is winding down the company and seeking to recover assets for the benefit of creditors.

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