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New Century Execs Settle Accounting Fraud Allegations

Allegations of false and misleading financial statements have been settled by three of New Century Financial Corp.’s former senior executives. One of the defendants allegedly hid a flood of pending repurchases.

The settlement offers were announced today by the Securities and Exchange Commission.

In 2007, New Century collapsed and filed for bankruptcy. At the time, the company’s chief executive officer, Brad A. Morrice, blamed “sudden and significant challenges facing our industry” and noted that he would have preferred a different outcome.

Today Morrice is joining former chief financial officer Patti M. Dodge and former controller David N. Kenneally in a settlement with the SEC. A fourth potential defendant, former CFO Edward Gotschall, died early last year.

In a December 2009 announcement, the SEC accused the trio of misleading investors as the former Irvine, Calif.-based firm was collapsing. They allegedly conveyed that New Century was not at risk and was performing better than its peers.

But the defendants allegedly hid dramatic increases in loan defaults and repurchases from investors.

Today’s announcement indicated that Morrice, Dodge and Kenneally agreed to the settlements on July 29, though none admitted or denied allegations outlined in the SEC’s complaint. The settlements are subject court approval in a global settlement tied to another case.

According to the SEC’s lawsuit, second- and third-quarter 2006 filings contained false and misleading statements about its subprime business. Morrice and Dodge allegedly participated in the disclosure process, and even though they knew about certain negative portfolio trends — they didn’t take adequate steps to ensure proper disclosure.

Kenneally is accused of changing estimates for loan repurchase obligations and ignoring the backlog of repurchase requests — leading to an understatement of repurchase reserves. Kenneally’s actions were allegedly contrary to Generally Accepted Accounting Principles and led to a material overstatement of financial results.

Morrice agreed to a permanent injunction prohibiting him from violating antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. He also agreed to a $250,000 civil penalty, $464,354 in disgorgement and $76,991 in prejudgment interest.

Dodge agreed to a similar injunction as well as a $100,000 civil penalty, $379,808 in disgorgement and $70,192 in prejudgment interest.

Kenneally, which also agreed to an injunction, agreed to disgorge $126,676, pay $23,324 in prejudgment interest and pay a $32,500 civil penalty.

All three defendants are barred from serving as an officer or director of a public company for five years.

Disgorgement, prejudgment interest and penalties will be handed over to impacted investors pursuant to final judgments.

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).

In re New Century.
Case No. 07-931-DDP (C.D. Cal.).

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