SEC accuses 3 ex-New Century executives of fraud over subprime mortgage collapse

SEC accuses 3 ex-New Century execs of fraud

WASHINGTON — Federal regulators on Monday accused three former top executives of collapsed mortgage lender New Century Financial Corp. of fraud, saying they misled investors and inflated profits as the company’s subprime loan business was failing in 2006.

In a case stemming from the mortgage market meltdown, the Securities and Exchange Commission filed a lawsuit seeking injunctions, and unspecified civil fines and restitution against New Century’s former CEO and co-founder Brad Morrice, former chief financial officer Patti Dodge and former controller David Kenneally.

The SEC also wants the three barred from serving as officers or directors of any public company and reimbursement of their bonuses or stock option awards.

Irvine, Calif.-based New Century had been the No. 2 U.S. maker of subprime mortgage loans, extended to borrowers with inferior credit records and the spark that ignited the home-loan bust. The company filed for bankruptcy protection in April 2007 after disclosing accounting errors. It was dissolved in August 2008.

Lawyers for Morrice and Dodge said they intend to contest the agency’s charges.

“We believe the evidence will show that Ms. Dodge fully and completely fulfilled all her fiduciary and corporate obligations to New Century and its shareholders,” Dodge’s attorney, Terry Bird, said in a statement. “She looks forward to responding to these allegations and clearing her good name.”

The allegations against Morrice “are flatly false and will be proved false at trial,” said Josh Epstein, a spokesman for the Proskauer Rose law firm, which is representing Morrice. “Brad did all he could to save the company and to accurately report the company’s numerous challenges to its shareholders. While his efforts failed, there was no fraud.”

Kenneally’s attorney didn’t respond to calls seeking comment Monday.

Once a Wall Street darling, New Century had a market value of more than $1 billion at its zenith. It collapsed after a spike in defaults on subprime mortgages prompted its lenders to pull funding and demand that it buy back bad loans.

About 70 percent of the loans made by New Century featured low initial “teaser” interest rates designed to increase after a period of time.

In its suit filed in federal court in Los Angeles, the SEC alleged that New Century’s disclosures to investors falsely sought to assure them that its business wasn’t at risk and was performing better than competitors — omitting significant negative information such as a dramatic increase in defaults on home loans. The three executives were aware of the negative information from numerous internal reports they received, including weekly reports that Morrice dubbed “Storm Watch,” according to the SEC.

The SEC said the executives’ misconduct inflicted major losses on New Century investors. Its stock traded at $30 to $50 from early 2006 through early 2007, but after the restatement of accounts was announced in February 2007, the shares plunged to around $19, the agency said. The stock was below $1 a share at the time of the bankruptcy filing two months later.

“New Century shareholders took a double hit,” SEC Enforcement Director Robert Khuzami said in a statement. “The company’s mortgage assets and business performance became increasingly impaired, and management manipulated its numbers and concealed its deteriorating performance.”

In a March 2008 report, a court examiner in California found that New Century used improper accounting practices while making risky loans, creating “a ticking time bomb” that led to its rapid demise.

The examiner’s report found that 40 percent of the company’s loans were so-called stated-income loans that don’t require borrowers to verify their income. The company’s predominant criteria for making loans was whether it could resell them on the secondary market, New Century directors and senior managers told investigators.

The SEC said it is “devoting significant resources to identifying and holding accountable those who committed fraud in the subprime industry.”

In June, the agency brought civil fraud charges against Countrywide Financial Corp. CEO Angelo Mozilo and two other former executives of what had been the biggest U.S. mortgage lender. Mozilo, the most high-profile individual to face charges from the government in the aftermath of the financial crisis, has denied any wrongdoing.

The former head of American Home Mortgage Investment Corp., Michael Strauss, agreed in April to pay nearly $2.5 million to settle SEC charges of accounting fraud and concealing the company’s deteriorating finances as the mortgage crisis hit in 2007.

The SEC has said it is investigating about two dozen cases related to possible mortgage fraud, in addition to its efforts with the Justice Department and other federal agencies.