U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21327 / December 7, 2009

Accounting and Auditing Enforcement Release No. 3079 / December 7, 2009

SECURITIES AND EXCHANGE COMMISSION v. BRAD A. MORRICE et al., Civil Action No. SACV09-01426 JVS (C.D. Cal.)

SEC CHARGES FORMER OFFICERS OF SUBPRIME LENDER NEW CENTURY WITH FRAUD

The Securities and Exchange Commission today charged three former top officers of New Century Financial Corporation with securities fraud for misleading investors as New Century's subprime mortgage business was collapsing in 2006. At the time of the fraud, New Century was one of the largest subprime lenders in the nation.

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.
     
  • 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. 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."

The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase. In the face of dramatically increasing loan repurchases and a huge, undisclosed backlog of repurchase demands, Kenneally, with Dodge's knowledge, made changes to New Century's accounting for loan repurchases in both the second and third quarters of 2006. 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 further alleges that the defendants' fraud caused investors substantial losses. From early 2006 to early 2007, New Century's stock price ranged from $30.00 to $50.00; and in the second half of 2006, the company 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, New Century's stock price fell 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, charges the defendants with violations of the antifraud provisions in Section 17(a) of the Securities Act (Morrice and Dodge only) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; the record-keeping provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder (Dodge and Kenneally only); the internal control provisions of Section 13(b)(5) of the Exchange Act; the false statements to auditors provisions of Exchange Act Rule 13b2-2; the officer certification provisions of Rule 13a-14 of the Exchange Act (Morrice and Dodge only); the failure to reimburse provisions of Section 304 of the Sarbanes-Oxley Act of 2002 (Morrice and Dodge only); and aiding and abetting New Century's violations of the reporting provisions in Sections 13(a) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder. The Commission seeks permanent injunctions against future violations, disgorgement with prejudgment interest, officer and director bars, and civil penalties.