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SEC Sues Former Jumbo Executives for Fraud

The Securities and Exchange Commission (SEC) Tuesday sued the former top executives of now defunct 'super' Jumbo lender Thornburg Mortgage

The SEC accused the trio of hiding the firm's deteriorating financial condition and overstating income by $400 million.

The SEC charges that former CEO Larry Goldstone, chief financial officer Clarence Simmons, and chief accounting officer Jane Starrett falsely recorded a profit rather than an actual loss for the fourth quarter in the firm's 2007 annual report. 

“Behind the scenes, Thornburg was facing a severe liquidity crisis and was unable to make on-time payments for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008,” the agency charged. “The plan backfired and the company lost 90 percent of its value in two weeks.”

Its warehouse lenders included Credit Suisse, JPMorgan Chase, Greenwich Capital, and Royal Bank of Scotland, among others.

The Santa Fe-based Thornburg Mortgage – once one of the largest jumbo and “super” jumbo lenders in the U.S. – filed for bankruptcy protection in 2009, listing debts of more than $1 billion. At the time it was a publicly traded REIT.

According to the SEC's complaint filed in federal court in New Mexico, even though Thornburg was violating lending agreements by failing to make on-time payments, the executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg's auditor. 

In a February 25, 2008 email from Starrett to Goldstone and Simmons, she said, “We have purposefully not told [our auditor] about the margin calls.” 

The SEC said Goldstone, Simmons, and Starrett scrambled to satisfy all outstanding margin calls and then timed the filing of the annual report to occur just hours later in order to precede additional margin calls and avoid full disclosure. 

As Goldstone had earlier stated to Simmons and Starrett in an email, “We don't want to disclose our current circumstance until it is resolved.”  The intention was “to keep the current situation quiet while we deal with it.” 

At press time the defendants had not issue any statements concerning the charges.

Last month the bankruptcy trustee for Thornburg Mortgage agreed to settle for $6.5 million a lawsuit against the company's former executives and legal counsel – including Goldstone and Simmons – over allegations they engaged in a conspiracy to secretly use the failed Jumbo lender's employees and assets to launch a new company.

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