By Mike Colpitts
Three top executives formerly with the second largest U.S. mortgage company charged by the SEC with hiding their company’s deteriorating financial condition from investors as the firm was failing will plead not guilty to federal charges, according to an attorney for one of the accused executives.
The SEC charged Thornburg Mortgage Inc. CEO Larry Goldstone, chief financial officer Clarence Simmons and accountant Jane Starrett with fraudulently overstating the company’s income at the height of the financial crisis. Behind the scenes, SEC prosecutors allege the firm was facing a severe liquidity crisis and was unable to make payments on margin calls it received from lenders in the weeks leading up to filing its annual report in 2008.
The company was considered the nation’s second-largest mortgage company behind Countrywide Lending before its collapse. In addition to its lending business that focused on jumbo and super-jumbo adjustable rate mortgages (ARMs), Thornburg purchased and held adjustable rate mortgage securities and securitized ARM loans, which have experienced the highest failure rates in terms of foreclosures during the housing crisis.
The trio’s plan back fired and the firm lost 90% of its value within just two weeks. The SEC alleges that the report filed was more than $400 million off as the mortgage company reported a record profit rather than an actual loss to investors.
In a February 2008 email obtained by federal prosecutors the accountant wrote, “We have purposefully not told [our auditor] about the margins calls.” The trio allegedly scrambled to satisfy outstanding margin calls and then timed the filing of the annual report to take place just hours after in order to precede additional margin calls from investors.
Federal prosecutors say that the executives’ plan to never disclose the delayed margin call payments fell through when they were unable to raise enough cash to quickly meet more demands for margin calls received after filing the annual report.
Thornburg was forced to disclose its problems in public 8-K filings with the SEC as the company began to fall apart. By the time the company filed an amended annual report its stock price had collapsed by more than 90%. The firm never recovered and filed bankruptcy in May 2009.
“The truest test of corporate executives’ commitment to full and accurate shareholder disclosure comes not during times of soaring profits and double-digit growth, but when companies are under financial stress and shareholders have the greatest need for accurate information,” said Robert Khuzami, director of the SEC’s division of enforcement. “These Thornburg executives flunked that test by issuing a series of misleading statements and half-truths to conceal Thornburg’s rapidly deteriorating situation.”