Federal regulators have charged three executives of what was once the nation's second-largest mortgage company with civil accounting fraud.
The Securities and Exchange Commission said the executives conspired to conceal disastrous conditions at the now-defunct Thornburg Mortgage Inc. as the housing market collapsed and the financial crisis loomed.
The SEC said the three executives conspired to overstate Thornburg's income by more than $400 million in 2007. Thornburg faced "a severe liquidity crisis" in early 2008 and its lenders were demanding payments the company wasn't able to meet, the SEC said in a lawsuit filed Tuesday in federal court in Albuquerque, N.M.
The three are former Thornburg CEO Larry Goldstone, ex-Chief Financial Officer Clarence Simmons and ex-Chief Accounting Officer Jane Starrett. The SEC is seeking unspecified fines and restitution from them and wants them to be barred from serving as officers or directors of any public company.
Goldstone and Simmons disputed the SEC's charges and said they will contest them in court. The agency's suit "is based on unfounded claims, emails taken out of context and inaccurate interpretations of management's actions," they said in a statement. "The SEC's case singles out and punishes us for not having the clairvoyance to anticipate an unprecedented financial-system crisis."
Company auditor KPMG reviewed the circumstances around Thornburg's financial statements and stated that it found no problems with management's integrity or the company's internal controls, the statement from Goldstone and Simmons said. It added that the two had "communicated candidly and forthrightly with investors while they waged an 18-month battle to save the company."
Attorneys representing Starrett didn't immediately return a telephone call seeking comment.
Thornburg, which was based in Santa Fe, N.M, was the second-largest U.S. mortgage company after Countrywide Financial Corp. Its bankruptcy filing in May 2009, listing $36.5 billion in assets, was among the largest in U.S. history.
As about $300 million in margin calls from Thornburg's lenders piled up in early 2008, Goldstone, Simmons and Starrett conspired to keep shareholders and company auditors in the dark, the SEC said in its suit. The agency cited a Feb. 25, 2008 email from Starrett to Goldstone and Simmons saying, "We have purposefully not told (our auditor) about the margins calls."
Thornburg's stock had plunged by more than 90 percent by the time the company filed an amended annual report for 2007 on March 11, 2008, the SEC said.
The charges against the three executives were the SEC's latest enforcement action related to the financial crisis since it began a broad investigation in late 2008 into the actions of Wall Street banks and other financial firms.
In a major SEC case, Goldman Sachs & Co. agreed in July 2010 to pay $550 million to settle charges of misleading buyers of a complex mortgage investment. JPMorgan Chase & Co. resolved similar charges last June and paid $153.6 million. Citigroup Inc. agreed to pay $285 million to settle similar charges, though that settlement was struck down by a federal judge in November.
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