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SEC Suing Subprime Execs

Former New Century executives accused of fraud

Dec. 7, 2009

By staff

Three former executives of failed New Century Financial Corp. face a lawsuit by the Securities and Exchange Commission. The trio is accused of defrauding investors.

Brad A. Morrice, co-founder and former chief executive officer; Patti M. Dodge, former chief financial officer; and David N. Kenneally, former controller are named as defendants in a lawsuit that was filed today in U.S. District Court for the Central District of California by the SEC.

The agency hopes to collect illegally earned income, impose civil penalties and prevent the three from serving as officers or directors of a publicly traded company. Reimbursement of bonuses and other compensation is sought from Morrice and Dodge.

A fourth potential defendant, former CFO Edward Gotschall, died earlier this year.

The three defendants are accused of misleading investors as the former Irvine, Calif.-based firm faced collapse. The company allegedly conveyed to investors that the company was not at risk and was performing better than its peers.

Dramatic increases in loan defaults and repurchases, however, were hidden from investors, the SEC claims. The concerns about the problems were allegedly outlined in weekly reports from Morrice entitled "Storm Watch."

Dodge and Kenneally are accused of fraudulently accounting for expenses during 2006 tied to bad loans that New Century was required to repurchase.

"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 news release stated.

New Century's stock price, which traded as high as $50, collapsed by April 2007 when the company filed bankruptcy.

"New Century shareholders took a double-hit," SEC Director of Enforcement Robert Khuzami said in the statement. "The company's mortgage assets and business performance became increasingly impaired, and management manipulated its numbers and concealed its deteriorating performance."

The agency highlighted its securities fraud charges against Countrywide Financial Corp.'s former CEO Angelo Mozilo and former American Home Mortgage Investment Corp.CEO Michael Strauss.

Securities and Exchange Commission, Plaintiff, vs. Brad A. Morrice, Patti M. Dodge, and David N. Kenneally, Defendants.
Case No. SACV09-01426 JVS, Dec. 7, 2009 (U.S. District Court for the Central District of California).

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