The Securities and Exchange Commission (SEC) charged three of New Century Financial Corp.'s top officials with securities fraud for misleading investors as the mortgage firm's subprime mortgage business was collapsing in 2006. At the time of the fraud, it was one of the largest subprime lenders in the nation.

"New Century shareholders took a double-hit: the company's mortgage assets and business performance became increasingly impaired, and management manipulated its numbers and concealed its deteriorating performance," said Robert Khuzami, the SEC's director of enforcement.

According to a release from the SEC, it is devoting considerable resources to identifying and holding accountable those who committed fraud in the subprime industry. Previous mortgage-related SEC enforcement actions include securities fraud charges against Countrywide Financial CEO Angelo Mozilo, and other  senior executives from other firms such as the CEO of American Home Mortgage Investment Corp.

The release said that in New Century's case, the SEC's complaint names as defendants: former CEO and co-founder Brad A. Morrice of Laguna Beach, Calif.; former CFO Patti M. Dodge of Irvine, Calif.; and former Controller David N. Kenneally of Rossmoor, Calif.

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.

However, The defendants in the case failed to disclose important negative information, such as dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests.

The defendants knew this negative information from numerous internal reports they regularly received, such as weekly reports that Morrice ominously entitled Storm Watch.

The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase.With the dramatically increasing loan repurchases as well as a huge, undisclosed backlog of repurchase demands, Kenneally, with Dodge's knowledge, made changes to New Century's accounting for loan repurchases over the 2Q06 and 3Q06. These undisclosed accounting changes violated generally accepted accounting principles and resulted in New Century's improperly avoiding substantial repurchase expenses and materially overstating its financial results.


The complaint also alleges that the defendants' fraud caused investors considerable losses. From early 2006 to early 2007, the mortgage firm's stock price ranged from $30.00 to $50.00; and in 2H06, it raised $142.5 million by selling stock to new investors. After New Century announced in February 2007 that it would have restate its 2006 financial statements, its stock price plummeted 36% to around $19.00. New Century's stock price continued to fall, and traded at less than $1 when the company filed for bankruptcy in April 2007.

The complaint, filed in federal court in the Central District of California, is seeking a final judgment permanently enjoining defendants from future violations of the federal securities laws, disgorgement with prejudgment interest, officer and director bars, and civil penalties.

The SEC also seeks from Morrice and Dodge reimbursement of bonuses and incentive or equity-based compensation pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.

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