SEC Charges Three Subprime Lenders with Fraud

Three former mortgage executives were charged with fraud on Monday for activitiesrngrowing out of their roles at the defunct New Century Mortgage

The charges were brought by the U.S. Securities and Exchange Commissionrn(SEC) which accused the three of covering up the rapidly declining financialrncondition of their firm before it filed for bankruptcy in April, 2007.

The three are Brad Morrice, former Chief Executive; Patti Dodge thernformer CFO and former Controller David Kenneally.  The SEC is seeking to permanently enjoin therndefendants from future violations of the federal securities laws, disgorgementrnof funds with prejudgment interest and to bar them from acting as an officer orrndirector.  The suit, filed in federalrncourt in the Central District of California also seeks unspecified civilrnpenalties.  

New Century was one of the largest of the independent providers in thernsubprime lending market, lending to persons with poor credit or high debtrnratios.

The government accused the officers of attempting to keep investors inrnthe dark about the financial condition of New Century, assuring investors thatrnthe business was performing well while failing to disclose a growing incidencernof loan defaults, mandatory loan repurchases and requests for repurchases.   

The SEC also charges that Dodge and Kenneally fraudulently accountedrnfor some of the expenses associated with repurchasing bad loans.   Kenneally, with Dodge's knowledge, allegedlyrnchanged New Century's accounting method for loan repurchases.  These changes violated generally acceptedrnaccounting standards and led to what the SEC said were materially overstatementsrnof the company's financial prospects.  

The executives are also charged with causing substantial investorrnlosses.  The company announced inrnFebruary 2007 that it had to restate its 2006 financial statements at which pointrnits stock plunged 36 percent to the high teens. rnIt was trading at less than $1 when the company finally filed forrnbankruptcy.

Today's indictments come less than a month after U.S. Attorney GeneralrnEric Holder announced the creation of a new interagency fraud unit that willrnoversee investigations into the mortgage meltdown.  The SEC is a participant in that fraudrnunit.  At the time of that announcementrnHolder made it clear that investigations of subprime mortgage irregularitiesrnwere already underway and that prosecutions would be forthcoming.  

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