Three former executives from New Century -- one of the once largest, now defunct, subprime mortgage lenders -- were charged today with fraud. There have been surprisingly few orange jumpsuits for financial executives tied to the mortgage market's collapse. That won't change here, as the penalties the SEC seeks are merely civil. But at least one aspect of the case against New Century looks pretty solid.
Like any complaint, this one is not cut-and-dry. But this portion from the SEC's release looks particularly damning:
In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. Defendants, however, failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. Defendants knew this negative information from numerous internal reports they regularly received, including weekly reports that Morrice ominously entitled "Storm Watch."
(Brad A. Morrice is the former CEO and co-founder of New Century and one of the executives the suit is being brought against.)
Now listen: I don't know how this case will ultimately turn out. But if you have an internal weekly report circulating called "Storm Watch" while telling shareholders that there are clear skies ahead, then I'm not sure how much more obvious management's intentional misdirection could be. I know that if I were on a jury this evidence would speak pretty loudly.
Even though there are no criminal charges for this case, Matthew Padilla at the Orange County Register's Mortgage Insider blog notes:
In addition, the SEC is seeking a severe personal penalty against the three: a bar against ever again serving as officers or directors of a publicly traded company.
Of course, that's in addition to monetary damages. Barring these individuals as serving in these roles for any publicly traded company is a pretty serious consequence. It would almost certainly frustrate their future job opportunities and potential income. So any shareholders angry at these executives might at least feel some justice has been served if this penalty results.