Mortgage Fraud Charges Target Execs
NEW YORK ( TheStreet) -- The Securities and Exchange Commission hcharged top executives at now-defunct Thornburg Mortgage with fraudulently hiding the mortgage lenders problems as the financial crisis put the company on the brink in 2008.
Once the nation's second largest independent mortgage company after now Bank of America (BAC) -owned Countrywide Financial, Thornburg Mortgage is alleged by the SEC to have misstated its income by over $400 million, falsely recording a fourth quarter profit in its 2007 annual report. The SEC complaint says that the company, which offered and repackaged "jumbo" mortgages - loans larger than $417,000 - failed to disclose more than $300 in margin calls to its auditors as it tried to survive a liquidity crisis.
|The SEC charges Thornburg Mortgage with fraud.|
In its complaint, the SEC charged former Thornburg Chief Executive Larry Goldstone, CFO Clarence Simmons and CAO Jane Starrett with fradulently conspiring mask a series of margin calls that draining the firms cash as it reported its 2007 annual report on Feb. 28, 2008. After not disclosing those liquidity impacts, Thornburg was able to raise $1.35 billion in a bankruptcy-averting measure in April 2008.
Thornburg began to fall behind on a new round of margin calls shortly thereafter, forcing a March disclosure of its liquidity problems. Nevertheless, after a string of multi-billion dollar losses, Thornburg filed for bankruptcy in May 2009.
The SEC alleges that Goldstone, Simmons, and Starrett schemed to deceive Thornburg's auditor and investors into believing the company had met its fourth quarter margin calls. However, behind the scenes, the firm was late in meeting calls from at least three of its lenders and possibly already in default, according to the SEC. The firm was able to meet all of its outstanding margin calls just hours before the filing of its annual report, where the liquidity issues were not disclosed.
For the SEC, Wednesday's charge may be its biggest criminal complaint related to the underwriting and securitization of mortgages, after withdrawing a criminal prosecution of Countrywide Financial Chief Executive Angelo Mozillo in a $67.5 million settlement in 2010. Last year, Lee B. Farkas, the former head of mortgage lender Taylor, Bean & Whitaker was sentenced to 30-years in prison on fraud charges first brought by the SEC in 2010.
After being criticized for not prosecuting bankers and mortgage brokers for activities leading to the financial crisis, the SEC now says it has filed crisis-related enforcement actions against 98 individuals and entities.
After Thornburg filed for bankruptcy late in 2009, the firm's bankruptcy trustee Joes Sher said that the company's top executives paid themselves bonuses and stole company money as they hatched a scheme to launch a new firm in the days and months ahead of the lender's demise.