SEC Charges Former Mortgage Lending Executives With Securities Fraud
The Securities and Exchange Commission today charged three former senior executives at IndyMac Bancorp with securities fraud for misleading investors about the mortgage lender's deteriorating financial condition.
The SEC alleges that former CEO Michael W. Perry and former CFOs A. Scott Keys and S. Blair Abernathy participated in the filing of false and misleading disclosures about the financial stability of IndyMac and its main subsidiary, IndyMac Bank F.S.B. The three executives regularly received internal reports about IndyMac's deteriorating capital and liquidity positions in 2007 and 2008, but failed to ensure adequate disclosure of that information to investors as IndyMac sold millions of dollars in new stock.
IndyMac Bank was a federally-chartered thrift institution regulated by the Office of Thrift Supervision (OTS) and headquartered in Pasadena, Calif. The OTS closed the bank on July 11, 2008, and placed it under Federal Deposit Insurance Corporation (FDIC) receivership. IndyMac filed for bankruptcy protection later that month.
"These corporate executives made false and misleading disclosures about IndyMac at a time when the company's financial condition was rapidly deteriorating. Truthful and accurate disclosure to investors is particularly critical during a time of crisis, and the federal securities laws do not become optional when the news is negative," said Lorin L. Reisner, Deputy Director of the SEC's Division of Enforcement.
According to the SEC's complaints filed in U.S. District Court for the Central District of California, Perry and Keys defrauded new and existing IndyMac shareholders by making false and misleading statements about IndyMac's financial condition in its 2007 annual report and in offering materials for the company's sale of $100 million in new stock to investors. In early February 2008, IndyMac projected that it would return to profitability and continue to pay preferred dividends in 2008 without having to raise new capital. In late February 2008, Perry and Keys knew that contrary to the rosy projections released just two weeks earlier, IndyMac had begun raising new capital to protect IndyMac's capital and liquidity positions. Specifically, Perry and Keys regularly received information that IndyMac's financial condition was rapidly deteriorating and authorized new stock sales as a result. Yet they fraudulently failed to fully disclose IndyMac's precarious financial condition in the 2007 annual report and the offering documents for the new stock sales.
The SEC further alleges that Perry knew that rating downgrades in April 2008 on bonds held by IndyMac Bank had exacerbated its capital and liquidity positions to the extent that IndyMac had no choice but to suspend future preferred dividend payments by no later than May 2, 2008. This material information was not disclosed in IndyMac's ongoing stock offerings. Perry also failed to disclose in various SEC filings or a May 2008 earnings conference call that IndyMac would not have been "well-capitalized" at the end of its first quarter without departing from its traditional method for risk-weighting subprime assets and backdating an $18 million capital contribution.
According to the SEC's complaint, Abernathy replaced Keys as IndyMac's CFO in April 2008. He similarly made false and misleading statements in the offering documents used in selling new IndyMac stock to investors despite regularly receiving internal reports about IndyMac's deteriorating capital and liquidity positions.
The SEC also alleges that in summer 2007 while serving as IndyMac's executive vice president in charge of specialty lending, Abernathy made false and misleading statements about the quality of the loans in six IndyMac offerings of residential mortgage-backed securities (RMBS) totaling $2.5 billion. Abernathy received internal reports each month revealing that 12 to 18 percent of IndyMac's loans contained misrepresentations regarding important loan and borrower characteristics. However, the RMBS offering documents stated that nothing had come to IndyMac's attention that any loan included in the offering contained a misrepresentation. The SEC alleges that Abernathy failed to ensure that the quality of IndyMac's loans was accurately disclosed and failed to disclose that information had come to IndyMac's attention about loans containing misrepresentations.
Abernathy agreed to settle the SEC's charges without admitting or denying the allegations. He consented to the entry of an order that permanently restrains and enjoins him from violating Section 17(a)(2) and 17(a)(3) of the Securities Act and requires him to pay a $100,000 penalty, $25,000 in disgorgement, and prejudgment interest of $1,592.26. Abernathy also consented to the issuance of an administrative order pursuant to Rule 102(e) of the SEC's Rules of Practice, suspending him from appearing or practicing before the SEC as an accountant. He has the right to apply for reinstatement after two years.
The SEC's complaint charges Perry and Keys with knowingly violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b 5 thereunder, and aiding and abetting IndyMac's violations of its periodic reporting requirements under Section 13(a) of the Exchange Act and Rules 12b 20 and 13a 1 thereunder. Perry also is charged with aiding and abetting IndyMac's reporting violations under Exchange Act Rules 13a 11 and 13a 13. The SEC's complaint against Perry and Keys seeks permanent injunctive relief, an officer and director bar, disgorgement of ill-gotten gains with prejudgment interest, and a financial penalty.
The SEC acknowledges the assistance of the FDIC in this investigation.
For more information about this enforcement action, contact:
John M. McCoy III
Donald W. Searles
SEC Issues Notice of Proposed Plan of Distribution and Opportunity for Comment in the Matter of Hennessee Group LLC and Charles J. Gradante
The Securities and Exchange Commission announced today that it has given notice, pursuant to Rule 1103 of the Securities and Exchange Commission's Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. § 201.1103, that the Division of Enforcement has filed a proposed plan for the distribution of monies (Distribution Plan) in the matter of Hennessee Group LLC (Hennessee Group) and Charles J. Gradante.
The Distribution Plan provides for distribution of the disgorgement, prejudgment interest and civil penalty totaling $514,644.15 paid by Hennessee Group, plus any accumulated interest, less any federal, state, or local taxes on the interest and tax administrator fees. The proposed plan provides for distribution of the monies to eligible customers of Hennessee Group who invested in the Bayou Funds.
A copy of the Distribution Plan may be obtained by submitting a written request to Osman A. Handoo, Senior Counsel, United States Securities and Exchange Commission, 100 F Street, N.E., Washington DC 20549-5041. Interested parties may also print a copy of the proposed Distribution Plan from the Commission's public website, http://www.sec.gov. Any person or entity wishing to comment on the Distribution Plan must do so in writing by submitting their comments within thirty days of the date of the Notice (i) to the Office of the Secretary, United States Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549-1090; or (ii) via the Commission's Internet comment form (www.sec.gov/litigation/admin.shtml); or (iii) by sending an e-mail to email@example.com. Comments submitted by letter, by e-mail, or by the Commission's website should include the Administrative Proceeding File Number (Admin. Proc. File No. 3-13454) in the subject line. Comments received will be made available to the public. Persons should submit only information that they wish to make publicly available. (Rel. 34-63890; File No. 3-13454)
Securities and Exchange Commission Revokes Registration of Securities of China Digital Media Corporation for Failure to Comply with the Antifraud Provisions
On Feb. 11, 2011, the Commission instituted a settled proceeding pursuant to Section 12(j) of the Securities Exchange Act of 1934 (Exchange Act) revoking the registration of each class of registered securities of China Digital Media Corporation (China Digital) for its failure to comply with the antifraud provisions of the Securities Exchange Act of 1934.
Without admitting or denying the findings of the order, except as to jurisdiction, which it admitted, China Digital consented to the entry of an Order Instituting Proceedings, Making Findings, and Revoking Registration of Securities Pursuant to Section 12(j) of the Exchange Act finding that it had failed to comply with Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder and revoking the registration of each class of China Digital's securities pursuant to Section 12(j) of the Exchange Act.
Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:
No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .
In a related matter, on Feb. 1, 2011, the Commission filed a civil action in the United States District Court for the Eastern District of Michigan against China Digital for violations of the antifraud, registration and reporting provisions of the federal securities laws. China Digital agreed to settle all of the charges and pay disgorgement of $200,000. See Lit. Rel. 21833. (Rel. 34-63888; File No. 3-14250)
Securities and Exchange Commission Orders Hearing on Registration Suspension or Revocation Against Two Public Companies for Failure to Make Required Periodic Filings
On Feb. 11, 2011, the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registrations of each class of the securities of Score One, Inc. and Global Peopleline Telecom, Inc. for failure to make required periodic filings with the Commission.
In this Order, the Division of Enforcement (Division) alleges that these issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the Administrative Law Judge will hear evidence from the Division and the Respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The Administrative Law Judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these Respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-63889; File No. 3-14251)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change (SR-CBOE-2011-013), filed by the Chicago Board Options Exchange to amend its fees schedule and circular regarding Trading Permit Holder Application and Other Related Fees has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63876)
A proposed rule change filed by NASDAQ OMX PHLX(SR-Phlx-2011-12) relating to fees for Complex Orders has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63880)
A proposed rule change filed by The Depository Trust Company (SR-DTC-2011-02) regarding a pilot test for publishing corporate actions pursuant to the International Standard Organization 20022 format has become effective pursuant to Section 19(b)(3)(A)(iii) of the Securities Exchange Act of 1934 and Rule 19b-4(f)(4) thereunder. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63886)
Approval of Proposed Rule Change
The Commission approved a proposed rule change (SR-NYSEArca-2010-120) submitted by NYSE Arca under Rule 19b-4 of the Securities Exchange Act of 1934 relating to the listing and trading of shares of the SPDR Nuveen S&P High Yield Municipal Bond ETF. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63881)
Disapproval of Proposed Rule Change
The Commission disapproved a proposed rule change (SR-FINRA-2010-055) submitted by the Financial Industry Regulatory Authority pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to amend FINRA Rule 6140 (Other Trading Practices). Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63885)
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