This is a Securities and Exchange Commission enforcement action for fraudulent misrepresentations and omissions about a mortgage company’s financial condition, margin call activity, and liquidity by the mortgage company’s executives.
The company, which obtained financing through “repo” agreements that subjected it to margin calls if the value of certain of its securities fell below certain thresholds, received more than $300 million in margin calls that severely drained its liquidity. It was late in meeting the margin calls from at least three lenders and had received a reservation of rights letter from one of these lenders confirming that it was in violation of its lending agreement and could be declared in default at any time.
The extent of the company’s liquidity crisis and exposure to default and cross-default notices would have (1) undermined the company’s imminent plans to raise additional cash and thereby alleviate its liquidity crisis and (2) led the company’s outside auditor to question its conclusion that over $400 million in market value losses associated with its adjustable-rate-mortgage (ARM) securities were temporary and therefore did not need to be recognized in the company’s income statement. In an effort to avoid these consequences, the executives allegedly failed to disclose to the company auditor and the investing public that it had violated its lending agreements, received a reservation of rights letter, and was required to sell certain portions of its securitized ARM loans to meet margin calls, the government alleges. Misrepresentations were made through the company’s annual report, financial statements and in statements to the auditor, according to the complaint. A number of experts that specialize in crisis management and securities were sought to opine on this issue.
