Wednesday, March 14, 2007
The shake-out in the subprime lending market may well take down mortgage lender New Century Financial, which disclosed that its banks have cut off most of its access to credit, the lifeblood of any financial institution. While executives scramble to prevent a complete meltdown, with the company's shares having lost most of their value and now delisted from the New York Stock Exchange, they also have to deal with grand jury and SEC investigations that will likely target individuals at the company. According to New Century's 8-K filing on March 13 (here):
On February 28, 2007, the Company received a letter from the United States Attorney’s Office for the Central District of California (the "U.S. Attorney’s Office") indicating that it was conducting a criminal inquiry under the federal securities laws in connection with trading in the Company’s securities, as well as accounting errors regarding the Company’s allowance for repurchase losses. The Company has subsequently received a grand jury subpoena requesting production of certain documents. The Company intends to cooperate with the requests of the U.S. Attorney’s Office.
On March 12, 2007, the Company received a letter from the staff of the Pacific Regional Office of the Securities Exchange Commission stating that the staff was conducting a preliminary investigation involving the Company and requesting production of certain documents. The staff of the SEC had also previously requested a meeting with the Company to discuss the events leading up to the Company’s previous announcement of the need to restate certain of its historical financial statements. The Company intends to cooperate with the requests of the SEC.
If New Century ends up declaring bankruptcy, then the trustee is likely to undertake its own investigation while also providing information to government investigators, which would likely include a waiver of the attorney-client privilege and work product protection. It is not clear what trading is being looked at, but accounting issues are sure to involve senior management among those who will be questioned. (ph)