Securities Law Prof Blog

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

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Tuesday, March 13, 2012

SEC Charges Execs at Former Mortgage Company with Concealing Financial Collapse

The SEC charged Thornburg Mortgage Inc. chief executive officer Larry Goldstone, chief financial officer Clarence Simmons, and chief accounting officer Jane Starrett (whom the agency describes as the senior-most executives at formerly one of the nation’s largest mortgage companies) with hiding the company’s deteriorating financial condition at the onset of the financial crisis. According to the SEC, they schemed to fraudulently overstate the company’s income by more than $400 million and falsely record a profit rather than an actual loss for the fourth quarter in its 2007 annual report. Behind the scenes, Thornburg was facing a severe liquidity crisis and was unable to make on-time payments for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008.

According to the SEC’s complaint filed in federal court in New Mexico, even though Thornburg was violating lending agreements by failing to make on-time payments, the executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg’s auditor. For example, in a February 25 e-mail from Starrett to Goldstone and Simmons, she said, “We have purposefully not told [our auditor] about the margins calls.” Goldstone, Simmons, and Starrett scrambled to satisfy all outstanding margin calls and then timed the filing of the annual report to occur just hours later in order to precede additional margin calls and avoid full disclosure. As Goldstone had earlier stated to Simmons and Starrett in an e-mail, “We don’t want to disclose our current circumstance until it is resolved.” The intention was “to keep the current situation quiet while we deal with it.”

The SEC alleges that the executives’ plan to never disclose the delayed margin call payments fell through when they were unable to raise cash quickly enough to meet more margin calls received soon after filing the annual report. When Thornburg began to default on this new round of margin calls, it was forced to disclose its problems in 8-K filings with the SEC. By the time the company filed an amended annual report on March 11, its stock price had collapsed by more than 90 percent. Thornburg never fully recovered and filed for bankruptcy on May 1, 2009.

The SEC’s complaint charges Goldstone, Simmons, and Starrett with violations of the antifraud, deceit of auditors, reporting, record keeping, and internal controls provisions of the federal securities laws. The complaint seeks officer and director bars, disgorgement, and financial penalties.

http://lawprofessors.typepad.com/securities/2012/03/sec-charges-execs-at-former-mortgage-company-with-concealing-financial-collapse-.html

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