Judge dismisses parts of IndyMac fraud case
In a setback for federal regulators, a federal judge threw out many of the fraud allegations against former IndyMac Bancorp Chief Executive Michael W. Perry in a case stemming from the collapse of the onetime Pasadena mortgage lender.
U.S. District Judge Manuel Real tossed five of seven public filings late Monday that had supported civil claims filed by the Securities and Exchange Commission. He also ruled that Perry could not be forced to repay allegedly ill-gotten gains.
Perry’s lead attorney, Jean Veta of Covington & Burling in Washington, said the SEC suit “should never have been filed” and that she would contest the remaining accusations at a non-jury trial scheduled for June 26 before Real.
The SEC’s lawyer, Donald W. Searles, said the agency intends to pursue the trial against Perry. The SEC also can try to bar Perry from serving as an officer and director of a public company and can seek to impose civil fines on him.
Searles said the agency had not yet decided whether to appeal Real’s rulings in the lawsuit.
As the mortgage implosion consumed subprime lenders, roiled Wall Street firms that had backed them and led to a deep recession, authorities looked for financial executives to blame.
In Southern California, federal prosecutors conducted criminal investigations into three purveyors of high-risk loans: IndyMac, Countrywide Financial Corp. in Calabasas and New Century Financial Corp. in Irvine. The investigations produced no indictments, however.
Instead, authorities pursued easier-to-prove civil lawsuits, producing settlements in several high-profile cases. Former Countrywide Chief Executive Angelo Mozilo and Bank of America Corp., which had purchased Countrywide, paid a combined $67.5 million to settle an SEC suit alleging flawed disclosures to investors and insider trading.
Before it failed in July 2008, IndyMac, a Countrywide spinoff, had become the nation’s largest issuer of so-called alt-A mortgages — risky home loans mostly based on borrowers’ simple statements of their income rather than on tax returns. As such, they were commonly called “liar loans.”
The SEC alleged that Perry allowed false or misleading statements to be made to investors about the company’s financial condition, including the omission of material information about the bank’s deteriorating condition as the real estate market crashed.
But Real ruled that in five instances, the company’s regulatory filings didn’t contain any false or misleading statements to investors and didn’t omit pertinent information.
The two remaining filings that the SEC is using to support its claims center on whether IndyMac adequately disclosed the financial threats it faced in both its first-quarter earnings report for 2008 and a slide-show presentation that accompanied it.
As defaults on the loans soared, a mid-2008 run on deposits at the company’s IndyMac Bank made the giant savings and loan the first in a series of collapses at major banks, which would later include Washington Mutual Inc. and Wachovia Corp.
The Federal Deposit Insurance Corp., which puts its losses on IndyMac at $13 billion, sold the remains of the bank to private investors who changed its name to OneWest Bank.
The SEC filed its securities fraud suit in February 2011 against Perry and two former IndyMac chief financial officers: S. Blair Abernathy, who paid $125,000 to settle the allegations without denying wrongdoing, and A. Scott Keys, who like Perry has denied the SEC allegations.
Keys’ lawyer, Gregory S. Bruch of Willkie Farr & Gallagher, said he believes the SEC will now drop its case against his client. Keys had taken a medical leave from IndyMac before May 12, 2008, when the allegedly misleading quarterly filings were made.
Keys, now the chief administrative officer for Kayne Anderson Capital Advisors, a Century City investment manager, feels vindicated “and saddened that we had to go through all of this,” Bruch said. “Nothing is more important to him than his business reputation.”
Searles said the SEC was reviewing whether to drop its case against Keys.
Of the executives the government has accused of civil wrongdoing in the aftermath of the financial crisis, Perry has been the most outspoken self-defender, maintaining a website, https://www.nottoobigtofail.org, that challenges the SEC and separate civil lawsuits brought by the FDIC and private investors.
In his ruling Monday, Real agreed with the defense argument that Perry could not be required to disgorge what the SEC described as ill-gotten gains since he had never sold any of his considerable stock holdings in IndyMac during the period at issue.
Perry had continued to purchase shares in the troubled thrift as late as Feb. 15, 2008, five months before the bank failed. Keys also was a buyer and not a seller of IndyMac shares.