Tuesday, March 8, 2011
The SEC today announced that it filed a civil injunctive action against Robert A. DiGiorgio and his company, Radius Capital Corporation, charging them with securities fraud for making false and misleading statements relating to Radius’ issuance of mortgage-backed securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). According to the SEC’s Complaint, filed in the U.S. District Court for the Middle District of Florida, from December 2005 through October 2006, Radius and DiGiorgio offered and sold 15 Ginnie-Mae guaranteed mortgage-backed securities to investors totaling approximately $23.5 million. According to the Complaint, Radius and DiGiorgio represented to Ginnie Mae, and to investors in 15 separate prospectuses, that the residential loans underlying the securities were, or would be, insured by the Federal Housing Administration (“FHA”) as required to receive Ginnie-Mae’s guarantee.
The SEC alleges that Radius and DiGiorgio’s representations about the insurability of the underlying loans were false and misleading as the vast majority, more than 100 of the 154 underlying loans, were not, and could not, be FHA insured. According to the Complaint, Radius never even applied for FHA insurance for most of the uninsured loans and failed to submit the up-front mortgage insurance premiums it had collected from borrowers at closing to the FHA which were required for the loans to be insured. Even if Radius and DiGiorgio had applied for FHA insurance and properly submitted the mortgage insurance premiums, the uninsured loans could not have been insured because the borrowers failed to meet FHA’s debt-to-income, credit history, employment history, and other underwriting requirements.
The SEC alleges that many of the mortgages backing Radius’ securities quickly fell into default. In October 2006, Radius correspondingly defaulted on its pass-through payments to the investors holding the mortgage-backed securities. As a result, Ginnie Mae was required to pay investors the remaining principal balance on each uninsured loan that was in default, thereby incurring several million dollars in losses. In addition, investors holding the Radius securities lost interest income due to the unexpectedly high rate of prepayment of principal (by Ginnie Mae) as the Radius loans fell into default.
The SEC is seeking permanent injunctive relief against future violations, a conduct-based injunction preventing Radius and DiGiorgio from offering mortgage-backed securities, disgorgement of ill-gotten gains with prejudgment interest and civil penalties, jointly and severally, against Radius and DiGiorgio.