SEC Charges Principals of Subprime Automobile Finance Company with Fraud

The Securities and Exchange Commission today announced fraud charges against two former executives of a subprime automobile finance company for misleading investors about the subprime automobile loans that backed its $100 million offering.

The SEC's complaint, filed in U.S. District Court for the Northern District of Illinois, alleges that James Collins and Robert DiMeo, the former principals of Honor Finance LLC, were responsible for false and misleading statements about, and engaged in deceptive conduct regarding, Honor's servicing practices in connection with the Honor Automobile Trust Securitization 2016-1 (HATS). The complaint alleges that Honor packaged together several thousand automobile loans Honor funded to serve as collateral for the HATS offering, which raised $100 million through the sale of interest-bearing notes to investors. According to the SEC's complaint, Collins and DiMeo took various steps designed to artificially inflate the value of the collateral underlying HATS. Specifically, the complaint alleges that Collins and DiMeo were responsible for, among other things, including loans in the deal that were not eligible to be included in the securitization vehicle, extending loan repayment dates without borrower knowledge, and forgiving payments due from delinquent borrowers. The complaint claims that, because of these improper practices, the servicing and performance information Honor provided to investors at the time of the offering and in later monthly reports was false.

"Investors in asset-backed securities are entitled to the same full and accurate disclosure as investors in other types of securities," said Osman Nawaz, Acting Chief of the SEC's Complex Financial Instruments Unit. "This case reflects our continued and resolute commitment to policing offerings in this space."

"We charge Collins and DiMeo with intentionally misleading investors, the underwriter, and ratings agencies in order to securitize loans that should not have been included in HATS and hide Honor's improper servicing practices," said Jennifer S. Leete, Associate Director of the SEC's Division of Enforcement. "In addition, because of their alleged misconduct, Honor continued to overstate the performance of the deal long after the securitization was issued."

The SEC's complaint charges the defendants with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks permanent injunctions, officer and director bars, disgorgement with prejudgment interest, and civil penalties.

The SEC's investigation was conducted by Jason Anthony and Amy Sumner, with assistance from Daniel Nigro. The investigation was supervised by Laura Metcalfe and Paul Pashkoff.  The litigation is being handled by David Nasse and Christopher Martin.