Three Thornburg Mortgage Officers Charged with Securities Violations

by devteam March 16th, 2012 | Share

Three executives of ThornburgrnMortgage Company were charged today with securities violations for hiding thernfinancial condition of the company.  The Securitiesrnand Exchange Commission (SEC) alleged that even as Thornburg was violatingrnlending agreement by failing to make on-time payment the executives were hidingrnthe severity of its financial situation from investors and its own auditor.</p

Charged were Chief Executive OfficerrnLarry Goldstone, Chief Financial Officer Clarence Simmons, and Chief AccountingrnOfficer Jane Starret.  The SEC said thatrnthe three schemed to fraudulently overstate the companies income by more thanrn$400 million and falsely record a profit rather than an actual loss for thernfourth quarter in its 2007 annual report. rnAt the same time the company was unable to make on-time payments forrnsubstantial margin calls in had received from its lenders.  The complaint cites an email from Starret tornthe other two stating “We have purposefully not told [our auditor] about thernmargins calls.  The three then “scrambledrnto satisfy all outstanding margin calls and then timed the filing of the annualrnreport to occur just hours later in order to precede additional margin callsrnand avoid full disclosure.”  </p

The plan to never disclose therndelayed payments fell through when they were unable to raise cash quicklyrnenough to meet the next calls and Thornburg had to disclose its problems in 8-Krnfiling with the SEC.  By the time therncompany filed an amended annual report its stock price had collapsed by morernthan 90 percent.  The company neverrnrecovered and filed for bankruptcy on May 1, 2009. </p

Donald Hoerl, Director of the SEC’srnDenver Regional Office, said, “Thornburg’s executives schemed to drop arndisingenuous annual report into the public realm at the most opportune momentrnpossible while knowing it was merely the calm before the next storm.”</p

At one time the Santa Fe, New Mexicorncompany was considered the nation’s second largest independent mortgage companyrnafter Countrywide.  The company’s lendingrnbusiness focused on jumbo and super-jumbo adjustable rate mortgages and it bothrnpurchased and securitized ARM loans.  Thernmargin calls were part of its lending agreements if the value of the ARM securitiesrnit used as collateral for borrowing fell below designated thresholds.  The company was then required to pay cash tornreduce the loan amounts or pledge additional collateral.  </p

In the weeks before the annualrnreport in question was filed the company received more than $300 million inrnmargin calls and was late meeting those from at least three lenders.  It received legal notices from one lenderrnwarning of default.  ‘Unwilling torndisclose these events and the extent of the liquidity crisis, Thornburgrnexecutives improperly determined that more than $400 million in market valuernlosses related to its ARM securities were temporary and therefore did not needrnto be recognized in the company’s income statement.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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