The US Securities and Exchange Commission on Monday charged three former top executives of New Century Financial Corporation – the bankrupt subprime lender – with securities fraud.
The SEC said the defendants — former chief executive and co-founder Brad Morrice, former CFO Patti Dodge and former controller David Kenneally — misled investors as New Century’s subprime mortgage business was collapsing in 2006.
“New Century shareholders took a double-hit: the company’s mortgage assets and business performance became increasingly impaired, and management manipulated its numbers and concealed its deteriorating performance,” said Robert Khuzami, the SEC’s Director of Enforcement.
The allegations come several months after the SEC accused Angelo Mozilo, Countrywide’s former CEO, of wide-ranging securities fraud and of insider trading.
Moreover, according to the regulator’s statement on the charges:
The SEC is devoting significant resources to identifying and holding accountable those who committed fraud in the subprime industry. Previous mortgage-related SEC enforcement actions include securities fraud charges against Countrywide Financial CEO Angelo Mozilo, and senior executives, including the CEO, of American Home Mortgage Investment Corp.
Here’s some more detail on the allegations laid out by the SEC in its civil complaint, filed in federal court in the Central District of California (emphasis ours):
the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. Defendants, however, failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. Defendants knew this negative information from numerous internal reports they regularly received, including weekly reports that Morrice ominously entitled “Storm Watch.”
The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase. In the face of dramatically increasing loan repurchases and a huge, undisclosed backlog of repurchase demands, Kenneally, with Dodge’s knowledge, made changes to New Century’s accounting for loan repurchases in both the second and third quarters of 2006. These undisclosed accounting changes violated generally accepted accounting principles and resulted in New Century’s improperly avoiding substantial repurchase expenses and materially overstating its financial results.
The complaint further alleges that the defendants’ fraud caused investors substantial losses. From early 2006 to early 2007, New Century’s stock price ranged from $30.00 to $50.00; and in the second half of 2006, the company raised $142.5 million by selling stock to new investors. After New Century announced in February 2007 that it would have to restate its 2006 financial statements, New Century’s stock price fell 36% to around $19.00. New Century’s stock price continued to fall, and traded at less than $1 when the company filed for bankruptcy in April 2007.
None of the defendants could be reached for comment at pixel time.
Related links:
Subprime probes and that niggling fear on Wall Street – FT Alphaville
Thanks for the tip – SELL New Century – FT Alphaville
New Century liquidators sue KPMG for $1bn – FT
Einhorn steps down from New Century’s board – DealBook