Three executives of Thornburg
Mortgage Company were charged today with securities violations for hiding the
financial condition of the company. The Securities
and Exchange Commission (SEC) alleged that even as Thornburg was violating
lending agreement by failing to make on-time payment the executives were hiding
the severity of its financial situation from investors and its own auditor.
Charged were Chief Executive Officer
Larry Goldstone, Chief Financial Officer Clarence Simmons, and Chief Accounting
Officer Jane Starret. The SEC said that
the three schemed to fraudulently overstate the companies income by more than
$400 million and falsely record a profit rather than an actual loss for the
fourth quarter in its 2007 annual report.
At the same time the company was unable to make on-time payments for
substantial margin calls in had received from its lenders. The complaint cites an email from Starret to
the other two stating "We have purposefully not told [our auditor] about the
margins calls. The three then "scrambled
to satisfy all outstanding margin calls and then timed the filing of the annual
report to occur just hours later in order to precede additional margin calls
and avoid full disclosure."
The plan to never disclose the
delayed payments fell through when they were unable to raise cash quickly
enough to meet the next calls and Thornburg had to disclose its problems in 8-K
filing with the SEC. By the time the
company filed an amended annual report its stock price had collapsed by more
than 90 percent. The company never
recovered and filed for bankruptcy on May 1, 2009.
Donald Hoerl, Director of the SEC's
Denver Regional Office, said, "Thornburg's executives schemed to drop a
disingenuous annual report into the public realm at the most opportune moment
possible while knowing it was merely the calm before the next storm."
At one time the Santa Fe, New Mexico
company was considered the nation's second largest independent mortgage company
after Countrywide. The company's lending
business focused on jumbo and super-jumbo adjustable rate mortgages and it both
purchased and securitized ARM loans. The
margin calls were part of its lending agreements if the value of the ARM securities
it used as collateral for borrowing fell below designated thresholds. The company was then required to pay cash to
reduce the loan amounts or pledge additional collateral.
In the weeks before the annual
report in question was filed the company received more than $300 million in
margin calls and was late meeting those from at least three lenders. It received legal notices from one lender
warning of default. 'Unwilling to
disclose these events and the extent of the liquidity crisis, Thornburg
executives improperly determined that more than $400 million in market value
losses related to its ARM securities were temporary and therefore did not need
to be recognized in the company's income statement."