Almost three years after New Century Financial Corp. collapsed in the first phase of the mortgage meltdown, three former executives of the Irvine company were accused by regulators Monday of misleading investors as its subprime loan business came unglued.
New Century was the nation’s second-largest lender to borrowers with spotty credit before its demise in April 2007 signaled an unfolding crisis in the mortgage and housing markets that set off a deep global recession.
In a lawsuit filed in U.S. District Court in Los Angeles, the Securities and Exchange Commission accused Brad Morrice, a co-founder and former chief executive of New Century; Patti M. Dodge, its former chief financial officer; and David N. Kenneally, its ex-controller, of securities fraud. Through their attorneys, all three denied wrongdoing and said they would contest the suit.
The SEC complaint alleges that the executives failed to disclose dramatic increases in the rate of borrowers who were defaulting almost immediately on their loans. The defendants also didn’t disclose that investors who bought mortgages from New Century were increasingly demanding that the company buy back problem loans, the suit says.
Numerous internal reports contained such information, including weekly reports that Morrice titled “Storm Watch,” according to the complaint, which also accuses Dodge and Kenneally of fraudulently accounting for expenses related to bad loans the company had to buy back.
New Century shareholders were dealt a “double hit,” said Robert Khuzami, the SEC’s director of enforcement.
“The company’s mortgage assets and business performance became increasingly impaired,” Khuzami said, “and management manipulated its numbers and concealed its deteriorating performance.”
A statement issued by Morrice’s lawyers says the fraud allegations “are flatly false and will be proved false at trial.”
“Brad did all he could to save the company and to accurately report the company’s numerous challenges to its shareholders. While his efforts failed, there was no fraud,” the statement says, describing Morrice as “among the biggest victims” because he had purchased and held large amounts of New Century stock.
Morrice’s predecessor as CEO, Robert K. Cole, who also was a co-founder of New Century, isn’t a defendant in the SEC suit.
Dodge’s attorneys issued a statement saying “the evidence will show that Ms. Dodge fully and completely fulfilled all her fiduciary and corporate obligations to New Century and its shareholders.”
Kenneally’s lawyer, John D. Vandevelde of Los Angeles, said the SEC had mischaracterized his client as a “top officer” of New Century. Instead, the lawyer said, Kenneally was “a hard-working accountant who was still quite new at New Century and lost every penny he invested in the company he believed in” and who “always relied on the fully informed advice” of outside auditors.
The lawsuit comes 33 months after New Century disclosed in an SEC filing that federal investigators were conducting a criminal inquiry of accounting errors by the company and of trading in New Century stock.
The Times reported in November 2008 that a central element of the criminal inquiry was the sale of New Century stock in 2006 by four company executives, among them Dodge, Cole and the third co-founder, Edward F. Gotschall, who died early this year.
The sales totaled nearly $20 million, six times as much as the executives had sold in the preceding 12 months, an investigation by The Times found last year. Lawyers for the executives said last year that none of them sold stock based on nonpublic information and that the executives retained most of their shares when the company went under.
No charges have been filed in the criminal probe, and federal authorities couldn’t be reached Monday for comment. The SEC case filed Monday doesn’t allege insider trading.
In another high-profile case, the SEC has leveled accusations of insider trading as well as securities fraud at former Countrywide Financial Corp. Chief Executive Angelo Mozilo, who has denied wrongdoing.
The SEC declined to elaborate on Monday’s suit, which seeks to force the defendants to repay certain earnings, bar them from serving as officers or directors of public companies and impose unspecified fines.
Morrice, Cole and Gotschall had worked together at another Orange County subprime lender before starting New Century in 1995 to sell high-interest-rate loans to high-risk borrowers.
Because New Century worked mainly through independent loan brokers, it was less familiar to the public than were other California exotic mortgage specialists that helped trigger the financial meltdown, such as Ameriquest, Countrywide and IndyMac. Still, New Century eventually built an empire with offices in 35 states and more than 7,000 employees.
New Century’s share price peaked above $65 in late 2004 before gradually losing half its value in the next two years as the subprime industry began to crumble.
In the second half of 2006, the company raised $142.5 million by selling stock to new investors, the suit says. “These investments were wiped out as New Century’s fraud was revealed to the public” in 2007, the suit said.