Three former mortgage executives were charged with fraud on Monday for activities
growing out of their roles at the defunct New Century Mortgage
The charges were brought by the U.S. Securities and Exchange Commission
(SEC) which accused the three of covering up the rapidly declining financial
condition of their firm before it filed for bankruptcy in April, 2007.
The three are Brad Morrice, former Chief Executive; Patti Dodge the
former CFO and former Controller David Kenneally. The SEC is seeking to permanently enjoin the
defendants from future violations of the federal securities laws, disgorgement
of funds with prejudgment interest and to bar them from acting as an officer or
director. The suit, filed in federal
court in the Central District of California also seeks unspecified civil
penalties.
New Century was one of the largest of the independent providers in the
subprime lending market, lending to persons with poor credit or high debt
ratios.
The government accused the officers of attempting to keep investors in
the dark about the financial condition of New Century, assuring investors that
the business was performing well while failing to disclose a growing incidence
of loan defaults, mandatory loan repurchases and requests for repurchases.
The SEC also charges that Dodge and Kenneally fraudulently accounted
for some of the expenses associated with repurchasing bad loans. Kenneally, with Dodge's knowledge, allegedly
changed New Century's accounting method for loan repurchases. These changes violated generally accepted
accounting standards and led to what the SEC said were materially overstatements
of the company's financial prospects.
The executives are also charged with causing substantial investor
losses. The company announced in
February 2007 that it had to restate its 2006 financial statements at which point
its stock plunged 36 percent to the high teens.
It was trading at less than $1 when the company finally filed for
bankruptcy.
Today's indictments come less than a month after U.S. Attorney General
Eric Holder announced the creation of a new interagency fraud unit that will
oversee investigations into the mortgage meltdown. The SEC is a participant in that fraud
unit. At the time of that announcement
Holder made it clear that investigations of subprime mortgage irregularities
were already underway and that prosecutions would be forthcoming.