THE SEC’S LATEST MAKRET CRISIS CASES – THREE INDYMAC OFFICERS
The Commission’s newest market crisis cases center on the collapse of IndyMac and its federally-chartered thrift, IndyMac bank. Three of the bank’s former officers were named as defendants in two actions: Michael W. Perry, the former Chief Executive Officer and Chairman of the board of IndyMac Bancorp, Inc.; A. Scott Keys, the former Executive Vice President and Chief Financial Officer of IndyMac and S. Blair Abernathy, the former Executive Vice President and Chief Financial Officer of IndyMac Bancorp, Inc. SEC v. Perry, Civil Action No. CV 11-01309 (C.D. Cal. Filed Feb. 11, 2011); SEC v. Abernathy, Civil Action No. CV 11-01308 (C.D. Cal. Filed Feb. 11, 2011). Mr. Abernathy settled with the Commission. The action as to Messrs. Perry and Keys is in litigation. See also Lit. Rel. No. 21853 (Feb. 11, 2011).
Both cases center on claims that the defendants failed to properly disclose the deteriorating financial condition of the bank as the market crisis evolved. According to the Commission’s complaint against defendants Perry and Keys, IndyMac’s 2007 Annual report was false and misleading because it failed to accurately disclose the true financial condition of the company. Likewise, 2008 stock sales were made without telling investors about the true financial condition of the company. Although IndyMac acknowledged in a February 2008 Form 8-K which that the year had been a “terrible” year, the press release assured investors that the company had a “game plan” for 2008 that gave it a “realistic shot” at a profit. In any event the release noted, the bank had more than sufficient capital to continue through a turn around in the markets. Investors were also told that the bank’s capital ration was at 10.57% at the end of 2007 which is above the 10% level defined by regulators as “well capitalized.” Accordingly, the bank did not intend to raise capital.
About one week after the press release a significant one-day rise in interest rates caused the bank’s forecast capital ratio to be right at, or slightly under, the 10% well capitalized level. Accordingly Defendant Perry sent Mr. Keys and others an e-mail stating that the bank should raise up to $50 million by selling stock through a standing arrangement the company maintained. Those sales began in February 2008 after approval from the board using an S-3 signed by Messrs. Perry and Keys. The prospectus contained boiler plate language regarding the use of the proceeds. Investors were not specifically told the funds would be used to bolster the bank’s capital position or that. contrary to the earlier press release, “IndyMac’s capital and liquidity levels were rapidly deteriorating . . “ according to the complaint.
Subsequently, IndyMac filed its 2007 Form 10-K, signed by Mesrs. Perry and Keys. It was also false and misleading according to the complaint. This stems in part from the fact that the filing largely repeated the representations from the earlier press release about the financial condition of the company. It also states that if the bank’s capital rations declined that it “may” be required to seek additional regulatory capital through stock sales. According to the Commission the representations that its capital position is “strong” and the statement that it “may” be required to sell stock to bolster that position are false and misleading. Likewise, IndyMac’s Form S-3, which incorporates by reference these representations, is false and misleading.
A prospectus filed in April 2008 to sell an additional 10 million shares was also false and misleading. Again this stems in large part from the fact that it uses the same boiler plate description regarding the use of the offering proceeds as the earlier S-3. In addition, from late April through early May the company continued to sell stock. At the time of those sales Mr. Perry knowingly, or recklessly, failed to disclose that earlier in April the rating agencies had downgraded the mortgage backed securities of the company and that this “jeopardized IndyMac Bank’s ‘well-capitalized’ status. . . “
A Form 10-Q and 8-K filed on May 12, 2008 are also false and misleading according to the complaint. The filing states that the capital ratio is 10.25%. During an earnings call regarding the quarter, Mr. Berry stated that IndyMac had contributed $88 million to the bank to ensure that it remained well capitalized. These statements were false and misleading according to the compliant. The former failed to note that the 10.25% calculation was based on a waiver of by OTS on how certain assets were valued without which the ratio would have been 9.86% or below “well capitalized.” The latter failed to note that part of the contribution had been backdated into the first quarter. The filing did however at least “partially disclose the deteriorating financial condition of the company. Following those disclosures the share price dropped 11%.
The complaint against Messrs. Perry and Scott alleges intentional misconduct. It is based on alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and aiding and abetting violations of Section 13(a).
The complaint against Mr. Abernathy is substantially similar. However it is based on Securities Act Sections 17(a)(2) and (3). This complaint focuses on alleged false and misleading statements made in connection with the stock sales regarding the quality securities loans. Specifically, the offering documents contained boiler plate statements regarding the quality of those loans. Mr. Abernathy was “involved” which what is called the Conduct Division until it was shut down in August 2007. This division sampled loan quality based on a number of key factors. It developed facts demonstrating that 12% to 18% of IndyMac loans contained misrepresentations in the originating documents. Mr. Abernathy “negligently failed to take reasonable or responsible steps that the . . [offering] documents which has been prepared by inside and outside counsel, included accurate disclosures concerning the loans . . “ As CFO after April 25, 2008, he also was responsible for filing made after that date which contained the misrepresentation noted in the companion case.
To resolve the case with the Commission Mr. Abernathy consented to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. He also agreed to pay an civil penalty of $100,000 and $25,000 in disgorgement along with prejudgment interest. Mr. Abernathy also consented to the entry of an administrative order barring him from practicing before the Commission as an accountant with a right to apply for reinstatement after two years.