U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21014 / April 28, 2009
Accounting and Auditing Enforcement Release No. 2967 / April 28, 2009
Securities and Exchange Commission v. Michael Strauss, Stephen Hozie and Robert Bernstein, Civil Action No. 09-CV-4150 (RB) (S.D.N.Y. April 28, 2009)
On April 28, 2009, the Securities and Exchange Commission filed a civil action in the United States District Court for the Southern District of New York against former senior officers at American Home Mortgage Investment Corp., Michael Strauss, Stephen Hozie and Robert Bernstein. The Commission alleges that Strauss and Hozie engaged in accounting fraud and made false and misleading disclosures that were designed to conceal from investors that American Home Mortgage's financial condition and prospects had significantly worsened in the first four months of 2007.
The complaint alleges that Strauss and Hozie fraudulently understated American Home Mortgage's first quarter 2007 loan loss reserves by tens of millions of dollars, converting the company's loss into a fictional profit. In fact, as Strauss and Hozie knew, the company's own analysis showed that American Home Mortgage needed significant additional reserves. The analysis also showed that the company's losses on its delinquent second liens were mounting quickly and that American Home Mortgage would lose at least 72% of the value of these loans after the properties went through foreclosure. Strauss and Hozie knowingly failed to reserve adequately for the expected losses caused by these delinquent loans.
According to the SEC's complaint, Strauss and Hozie made misleading disclosures concerning, among other things, the riskiness of the mortgages the company originated and held and the company's liquidity. Strauss and Hozie also failed to disclose the fact that, during the month of April 2007, American Home Mortgage was forced to sell the majority of its multi-billion dollar mortgage-backed securities portfolio to meet pressing liquidity demands. The complaint further alleges that Strauss, Hozie and Bernstein misled American Home Mortgage's auditor about the adequacy of the reserves.
The complaint alleges that Strauss and Hozie violated the antifraud provisions of the federal securities laws, specifically 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. The complaint further charges (i) Strauss and Hozie with aiding and abetting American Home Mortgage's violations of Section 10(b) and Rules 10b-5 and 13a-11 of the Exchange Act; (ii) Strauss, Hozie and Bernstein with aiding and abetting American Home Mortgage's violations of the reporting, books and records, and internal control provisions under Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; and (iii) Strauss, Hozie and Bernstein with direct violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder. Finally, the complaint charges Strauss and Hozie with violations of the officer certification provisions under Rule 13a-14 of the Exchange Act. The Commission's complaint seeks permanent injunctions against future violations, disgorgement of ill-gotten gains plus prejudgment interest and the imposition of civil penalties. The complaint also seeks officer and director bars against Strauss and Hozie.
Strauss has agreed to settle the SEC's charges without admitting or denying the allegations. He will be permanently enjoined from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws and will pay approximately $2.2 million in disgorgement and prejudgment interest and a $250,000 penalty. Strauss will also be barred from serving as an officer or director of a public company for five years. The litigation is ongoing with respect to the other defendants.