The Securities and Exchange Commission (SEC) on Wednesday charged three mortgage company executives with using bogus accounting to hide the company's financial condition in the midst of a major financial crisis that eventually led to the company filing for bankruptcy.
The SEC alleges that Santa Fe, N.M.-based Thornburg Mortgage Inc., Chief Executive Officer Larry Goldstone, Chief Financial Officer Clarence Simmons and Chief Accounting Officer Jane Starrett schemed to overstate the company's income by more than $400 million and falsely recorded a profit rather than an actual loss for the fourth quarter in its 2007 annual report.
The SEC's complaint charges Goldstone, Simmons and Starrett with violations of the anti-fraud, deceit of auditors, reporting, record-keeping and internal controls provisions of federal securities laws.
The SEC claims that behind the scenes, Thornburg was facing a severe liquidity crisis and was unable to make payments deadlines for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008. As Thornburg violated its lending agreements, company executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg's auditor, according to the SEC.
The SEC alleges that the executives' plan to never disclose the delayed margin call payments fell through when they were unable to raise cash quickly enough to meet more margin calls received soon after the annual report was filed. When Thornburg began to default on this new round of margin calls, it was forced to disclose its problems in 8-K filings with the SEC. By the time the company filed an amended annual report on March 11, its stock price had collapsed by more than 90 percent. Thornburg never fully recovered and filed for bankruptcy on May 1, 2009.
In a response in a letter to the SEC charges, Goldstone and Simmons claim that the SEC's actions are wholly without merit. They have refused to settle the matter with the SEC, as they do not believe that their actions or the factual record support the SEC's allegations. Instead, they will vigorously defend themselves in court, certain they will prevail. TMST was the nation's second largest independent mortgage originator and became a casualty of the 2008 financial crisis when it was forced to file for bankruptcy in May 2009 after its lenders refused to continue to extend credit because of their own financial difficulties.
"We are profoundly disappointed by the SEC's lawsuit, which is based on unfounded claims, emails taken out of context and inaccurate interpretations of management's actions surrounding the company's financial filings at the height of the financial crisis in February and March 2008," according to the correspondence. "The SEC's case singles out and punishes us for not having the clairvoyance to anticipate an unprecedented financial system crisis."
"It is worth noting that this same crisis was not foreseen by two Secretaries of the Treasury, two Chairmen of the Federal Reserve, the Chairman of the SEC, and the heads of major public and private financial institutions across the globe. Any fair and objective assessment of our actions during that time shows that the SEC's allegations against us have no merit," said the Goldstone and Simmons letter. "In its zealousness to find people to blame for the financial crisis, the SEC has brought a case based on hindsight that is not supported by the facts, unwinnable in court, and profoundly unfair."
Robert Khuzami, director of the SEC's Division of Enforcement said the true test of corporate executives' commitment to full and accurate shareholder disclosure comes when companies are under financial stress and shareholders have the greatest need for accurate information. "These Thornburg executives flunked that test by issuing a series of misleading statements and half-truths to conceal Thornburg's rapidly deteriorating situation," he said.