SEC Charges New Century Ex-Officers With Fraud

The Securities and Exchange Commission said Monday that it had charged three former top officers of the now defunct sub-prime mortgage lender New Century Corporation with securities fraud. The officers: New Century’s former CEO and co-founder, Brad A. Morrice ; the former CFO, Patti M. Dodge ; and the former controller, David N. Kenneally are accused of misleading investors as New Century’s subprime mortgage business was failing in 2006.

The S.E.C.  is seeking injunctions, and unspecified civil fines and restitution against the defendants.

New Century, which originated $357 million during its inaugural year in 1996, and just ten years later became the second largest residential subprime mortgage originator in the U.S., filed for bankruptcy protection in April 2007 after disclosing accounting errors.

The press release from the SEC:

Washington, D.C., Dec. 7, 2009 — The Securities and Exchange Commission today charged three former top officers of New Century Financial Corporation with securities fraud for misleading investors as New Century’s subprime mortgage business was collapsing in 2006. At the time of the fraud, New Century was one of the largest subprime lenders in the nation.

“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,” said Robert Khuzami, the SEC’s Director of Enforcement.

The SEC is devoting significant resources to identifying and holding accountable those who committed fraud in the subprime industry. Previous mortgage-related SEC enforcement actions include securities fraud charges against Countrywide Financial CEO Angelo Mozilo, and senior executives, including the CEO, of American Home Mortgage Investment Corp.

In the case of New Century, the SEC’s complaint names as defendants:

  • Former CEO and co-founder Brad A. Morrice of Laguna Beach, Calif.
  • Former CFO Patti M. Dodge of Irvine, Calif.
  • Former Controller David N. Kenneally of Rossmoor, Calif.

In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. Defendants, however, failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. Defendants knew this negative information from numerous internal reports they regularly received, including weekly reports that Morrice ominously entitled “Storm Watch.”

Read the whole complain here »

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