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U.S. Securities and Exchange Commission


Litigation Release No. 20455 / February 13, 2008

Securities and Exchange Commission v. R&G Financial Corporation, 08 CV 1471 (Marrero, J.) (S.D.N.Y. filed February 13, 2008)

R&G Financial Settles Financial Fraud Charges With SEC

The Securities and Exchange Commission today filed financial fraud charges against R&G Financial Corporation, a bank holding company with mortgage banking operations in Puerto Rico. The Commission alleges that R&G Financial overstated income by approximately $180 million or 80 percent on a cumulative basis by improperly accounting for billions of dollars worth of mortgage-related transactions in 2002, 2003 and 2004. The Commission further alleges that those accounting irregularities enabled R&G financial to report an apparent twelve quarter streak of "record earnings." Since the accounting and disclosure problems began to surface in early 2005, the market price of the company's common stock plummeted from approximately $40 to $10 per share or 75%, thereby reducing equity market value by approximately $900 million.

According to the Commission's complaint, R&G Financial improperly accounted for the purported sale of non-conforming mortgage loans to other Puerto Rican financial institutions in two respects. First, R&G Financial improperly recognized gain on sales of mortgages. These transactions were not true sales under generally accepted accounting principles because of full recourse provisions in the written contracts. Second, R&G Financial significantly overvalued interest-only strips retained by the company in its purported mortgage loan sale transactions. The Commission further alleges that R&G Financial managed earnings through a series of mortgage loan swap transactions with other Puerto Rican financial institutions.

The Commission's complaint, which was filed in the United States District Court for the Southern District of New York, charges R&G Financial with violating Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13. Without admitting or denying the Commission's allegations, R&G Financial has consented to the entry of a court order enjoining it from violating those antifraud, reporting, books and records and internal control provisions of the federal securities laws.

The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company.

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The Commission's investigation is continuing.

SEC Complaint in this matter



Modified: 02/13/2008