Tuesday, April 3, 2007

New Century Bites the Dust

Subprime lender New Century Financial delayed the inevitable as long as possible, finally declaring bankruptcy after having its lines of credit cut off and soured loans returned to it by purchasers.  With the company in bankruptcy, a key issue now will be sorting out any possible responsibility if fraud is discovered in a federal criminal investigation of the company's financial statements and lending practices.  A story in the Orange County Register (here) reprints an e-mail sent on March 16 by former New Century vice chairman for finance and board member Edward Gotschall to friends: "I do want you to know that I've got great attorneys working with me, a significant Directors and Officers Liability Policy with the company and the knowledge that I haven't done anything wrong, something you wouldn't be able to figure out if you read the papers or listen to the news."  While a D&O policy might give some reassurance, these are not always as rock-solid as they may appear.  If there was fraud at the company at the time New Century purchased the policy, it may be voided for false statements made by the insured.  Moreover, D&O policies usually do not cover criminal or intentional misconduct.  With the company in bankruptcy, it is unlikely any current or former officers or directors will be able to recover much if anything under the corporate indemnification policy or their employment contracts, and the D&O well has a way of running dry if the investigation involves a number of individual targets.  With the trustee in bankruptcy now in charge of New Century, the attorney-client privilege is likely to be waived and prosecutors will have access to a wide range of corporate documents while they investigate the case. (ph)


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tough, having to face life like an everyday drug dealer

of course, it is necessary to point out to the defenders of this ship of fools that this bankruptcy could not have happened but for fraud since as a matter of law it would have been impossible for New Century to have made one bad loan, had it followed the applicable regulations and especially the four party (FRB, OCC, OTS, CU) treaty on appraisals.

Posted by: Moe Levine | Apr 3, 2007 12:28:27 PM

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