Kaufman & Broad Trader Racks Up $11.7-Million Loss : Real estate: Despite the unauthorized transactions, firm expects to report record earnings for third quarter and the year.
Home-building giant Kaufman & Broad Home Corp. disclosed Tuesday that an alleged rogue mortgage trader carried out unauthorized transactions that left the company with $11.7 million in losses.
The Los Angeles-based firm, while refusing to identify the mortgage trader, said he was fired during the last week after two years with the company’s mortgage subsidiary. It said it believes nearly all of the unauthorized trades occurred within the last three months.
The trading, while embarrassing for Kaufman & Broad, did not inflict severe financial damage on the company, analysts said. In fact, the company said Tuesday that despite the losses, it expects to report record earnings for the third quarter and the year. It also remains on track to construct more houses than any other U.S. home builder in 1999.
On the New York Stock Exchange, Kaufman & Broad shares were off slightly in moderate trading, closing down 38 cents at $20.44.
Argus Research analyst James N. Kelleher said he still regards Kaufman & Broad
as a well-run company with a bright outlook, even though Tuesday’s news was “a public relations blow.”
Kaufman & Broad spokeswoman Mary M. McAboy said the dismissed trader was responsible for arranging futures contracts on mortgages earmarked for sale to investors in the secondary mortgage market.
Ordinarily, it takes the company 30 to 60 days from originating a mortgage with one of its home buyers until arranging the sale of the loan to an investor in the secondary market. To protect the company against the risk of interest rate swings until it sells off the mortgages, Kaufman & Broad’s policy is to cover its financial position with futures contracts.
But McAboy said the unauthorized speculative trading was outside the bounds of that activity, bearing “little or no relation to our mortgage loan originations.” She said the trader’s motive was unclear, inasmuch as his compensation was not tied to profits on speculative trading.
The mortgage subsidiary, Kaufman & Broad Mortgage Co., is a key part of the parent company’s business. It provided 15% of Kaufman & Broad’s pretax earnings last year, and for consumers it provides the convenience of buying a home and obtaining a mortgage from the same company.
But Kelleher said Kaufman & Broad probably would be better off hiring a financial services company to handle its futures contracts portion of the business. “It’s very sensible to be in the mortgage business, but they don’t need to be in every aspect of financial services, and they certainly don’t need to be in the futures business,” he said.
However, McAboy said the company plans to continue in the business and has tightened its financial controls to head off any future trading abuses. She said the company detected the unauthorized trades during a routine internal audit.
The dismissed trader reported directly to Mark Crivelli, president of the mortgage subsidiary. Crivelli will handle the trader’s duties until a replacement is hired.
McAboy declined to say whether criminal or regulatory authorities are looking into the case or whether the company will take legal action against the dismissed trader.
Although Wall Street occasionally is rocked by disclosures of unauthorized trading that cost securities firms millions, such activity hasn’t appeared to be a problem in the mortgage industry.
“In 20 years of following the industry, it’s the first instance I’m aware of this ever happening,” said John Stanley, an analyst with Warburg Dillon Read in New York.
Stanley added that for Kaufman and Broad, “it’s not a big loss. It appears to be a contained, one-time item. Otherwise, the company appears to be doing terrifically well.”
Kaufman & Broad is due to report its third-quarter results in three weeks. During the first half of its fiscal year, it reported net income of $44.8 million on revenue of $1.6 billion. That was up, partly due to acquisitions, from net income of $25.3 million on revenue of $963.7 million in the first half of the previous fiscal year.
The 32-year-old company builds homes in seven Southwestern states, from California to Texas, as well as in France. Its chairman and chief executive, Bruce Karatz, is one of Los Angeles’ best-known corporate leaders.
