Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, December 7, 2009

SEC Charges Former New Century Financial Officers with Securities Fraud

The SEC 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. The SEC’s complaint names as defendants: former CEO and co-founder Brad A. Morrice, former CFO Patti M. Dodge, and former Controller David N. Kenneally.  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.”

The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase. In the face of dramatically increasing loan repurchases and a huge, undisclosed backlog of repurchase demands, Kenneally, with Dodge’s knowledge, made changes to New Century’s accounting for loan repurchases in both the second and third quarters of 2006. These undisclosed accounting changes violated generally accepted accounting principles and resulted in New Century’s improperly avoiding substantial repurchase expenses and materially overstating its financial results.

The complaint, filed in federal court in the Central District of California, seeks permanent injunctions against future violations, disgorgement with prejudgment interest, officer and director bars, and civil penalties.

http://lawprofessors.typepad.com/securities/2009/12/sec-charges-former-new-century-financial-officers-with-securities-fraud.html

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