Three former executives at now-bankrupt lender New Century Financial Corp were charged with fraud by U.S. securities regulators on Monday, the latest government effort to pursue wrongdoing in the subprime mortgage market.
The U.S. Securities and Exchange Commission accused the three executives of trying to disguise New Century's rapidly deteriorating performance from investors while releasing weekly internal reports entitled Storm Watch.
The 2007 failure of New Century, one of the largest independent providers of home loans to people with poor credit, rippled across the U.S. mortgage lending industry.
It was a forerunner of failures to come as lenders booked losses on billions of dollars of mortgages and mortgage-linked securities at the heart of the global financial crisis.
The SEC is seeking civil penalties and disgorgement of funds from former New Century Chief Executive Brad Morrice, former Chief Financial Officer Patti Dodge, and former Controller David Kenneally.
The action follows civil fraud and insider trading charges filed in June by the SEC against prominent banker Angelo Mozilo of Countrywide Financial, who built the largest U.S. mortgage lender.
The SEC said New Century sought to assure investors that its business was not at risk and failed to disclose dramatic increases in early loan defaults, loan repurchases and pending loan repurchase requests.
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, SEC enforcement director Robert Khuzami said in a statement.
The agency charged that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that New Century had to repurchase.
The defendants' actions caused investors substantial losses, the SEC charged. After announcing in February 2007 that it would have to restate its 2006 financial statements, New Century's stock price fell 36 percent to about $19. The stock traded for less than $1 when New Century sought bankruptcy protection in April 2007.
A spokesman for a law firm representing Morrice said the allegations against him are flatly false and will be proved as such at trial. He said Morrice lost millions of dollars in New Century stock and was among the biggest victims of the company's collapse.
An attorney for Kenneally said he was a hardworking accountant who was still quite new at New Century and lost every penny he ever invested in the company he believed in.
Dodge's attorney said Dodge will contest the allegations of wrongdoing.
Rosalind Tyson, regional director of the SEC's Los Angeles office, said the SEC has made subprime cases a top priority because they deal with investor confidence and properly disclosing deteriorating business conditions.
Tyson declined to say how many subprime enforcement cases are pending. She said they require painstaking investigation because investigators must sift through piles of public disclosures and contrast them with internal documents that may reveal conflicting messages.
In another high-profile subprime case, the SEC last year filed civil fraud charges against two former Bear Stearns fund managers. It accused them of misleading investors about the financial condition of the bank's two biggest hedge funds, that were crammed with subprime securities, before they collapsed in mid-2007.
A jury acquitted the two fund managers of related criminal charges last month, but Khuzami has said the SEC intends to proceed with its civil case against them.
The New Century case is Securities and Exchange Commission v. Brad A. Morrice et al, United States District Court for the Central District of California, No. 09-01426.
(Reporting by Karey Wutkowski and Dan Margolies; Editing by Tim Dobbyn and Matthew Lewis)