THE SEC SETTLES ITS NEW CENTURY SUB-PRIME CASE
New Century Financial was once the number three sub-prime lender. The Commission’s action against its three officers is one of the more significant market crisis cases brought by the SEC to date. On Friday, the agency settled with each defendant obtaining the relief sought in the complaint. SEC v. Morrice, Civil Action No. CV 09-01426 (C.D. Cal. Filed Dec. 7, 2009).
The New Century case was brought against Brad Morrice, former CEO and co-founder, Patti Dodge, former CFO and David Kenneally, former controller as discussed here. The complaint is similar to the one filed against the former executives of the number one sub-prime lender, Countrywide Financial (here). The claims center a disclosure fraud keyed to what defendants Morrice and Dodge failed to tell investors about the loan portfolio of the company.
New Century, which was a REIT, originated and purchased loans through two divisions. Although its lending centered on the sub-prime market, the company played down the risks in its filings. This trend continued even as the sub-prime market was unraveling and the company suffered a liquidity crisis which was not disclosed to investors.
As the liquidity crisis unfolded during the second and third quarters of 2006, accounting manipulations began. Ms. Dodge and Mr. Kenneally improperly made significant reductions to the reserves to inflate revenue. As the reserves were reduced, the demand for loan repurchases dramatically increased. This left the reserves for those repurchases significantly understated. Inflated revenues yielded an artificial share price.
To settle, Mr. Morrice consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5) as well as from aiding and abetting violations of Section 13(a). He also agreed to disgorge $464,364 plus prejudgments interest, to pay a civil penalty of $250,000 and to a five year officer-director bar.
Ms. Dodge settled with the SEC on similar terms. She consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(5) and from aiding and abetting violations of Section 13(a). In addition, she agreed to disgorge $379,808 plus prejudgment interest and to pay a civil penalty of $100,000. She also agreed to the entry of a five year officer-director bar.
Mr. Kenneally settled with the Commission by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b), 13(b)(5) and from aiding and abetting violations of Section 13(a). He also agreed to disgorge $126,676 along with prejudgment interest and to the entry of a five year officer-director bar. With these settlements the Commission concluded this action. See also Litig. Rel. 21609 (July 30, 2010).
Program: The Vanishing Line Between Civil And Criminal Securities Fraud: Sunday August 8, 2010, 10:30 a.m. at the ABA Annual Convention, San Francisco, CA. Co-chairs: Thomas O. Gorman and Frank C. Razzano. Panelists include: Hon. Cormac Carney, U.S. Dist. Court (C.D. CA), Greg Anders, Deputy Asst. AG, Criminal Division, DOJ; Michael Dicke, Associate Director – Enforcement, SEC, San Francisco; Ellen Podgor, Professor of Law, Stetson Univ. and Cheryl Evans, Special Counsel, National Chamber Law Reform Project.