SEC charges former New Century Financial executives with fraud

The Securities and Exchange Commission on Monday filed civil charges against former top executives at what was once one of the nation’s largest subprime mortgage lenders, the government’s latest attempt to punish executives who played a role in fostering the financial crisis.

Nearly three years after New Century Financial collapsed, the company’s co-founder and former chief executive Brad Morrice, former chief financial officer Patti Dodge and former controller David Kenneally face charges that they conspired to mislead investors as the business was imploding in 2006. Spokesmen for the defendants said they plan to contest the charges.

New Century was one of the nation’s largest subprime lenders, making home loans to borrowers with checkered credit histories or other financial limitations. The company’s bankruptcy filing in April 2007 was among the events that foreshadowed and helped trigger last year’s financial crisis.

The SEC’s complaint seeks financial penalties from Morrice, Dodge and Kenneally and asks that they each be barred from serving as an officer or director of a publicly traded company. The complaint also seeks to reclaim bonuses and other compensation paid to Morrice and Dodge.

“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 government has pursued an array of civil and criminal cases against mortgage lenders and executives who worked on the front lines of the housing bubble in the middle of this decade. Many of the loans that were given to borrowers who could not pay were turned into securities held by banks around the world. When the borrowers defaulted, those securities lost value, causing deep losses for banks.

The SEC’s civil cases have focused not on improprieties with mortgage lending, but rather on whether mortgage lenders misled investors about how risky their businesses were. Earlier this year, the SEC filed charges against Angelo Mozilo, the former chief executive of Countrywide Financial, the nation’s largest subprime lender, accusing him of concealing from shareholders the firm’s worsening condition. A federal judge recently refused to throw out the case, which is expected to take many months to prepare ahead of a trial.

The Justice Department, meanwhile, has unveiled a number of criminal cases around the country against mortgage professionals accused of misleading borrowers.

In the New Century case, filed in federal court in the Central District of California, the SEC alleges that the lender tried to reassure investors that its business was not at all risky, even as the industry was showing signs of weakness. The SEC alleges that the company failed to tell investors about dramatic increases in early loan defaults and other signs that the business was deteriorating.

Morrice wrote a weekly internal report titled “Storm Watch” that brought these troublesome signs to the attention of other New Century executives, the SEC alleges.

The SEC also alleges that Dodge and Kenneally manipulated accounting to mislead investors about the company’s exposure to the subprime loan market.

A spokesman for Morrice said that the SEC’s allegations are “flatly false” and that Morrice did all he could to save the company.

A lawyer for Dodge said the former chief financial officer “completely fulfilled all her fiduciary and corporate obligations to New Century and its shareholders.”

A lawyer for Kenneally said the former controller was not a high-ranking official, didn’t sign off on financial statements and always relied on outside auditors to endorse accounting decisions.


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