SEC Charges Three Former Mortgage Executives

The ""Securities and Exchange Commission"":http://sec.gov/ (SEC) charged three former senior executives of Thornburg Mortgage on Tuesday for hiding the company's true financial state in an annual report. The plan backfired and caused a 90 percent value loss for the company in two weeks.

[IMAGE]

The SEC alleges Thornburg's chief executive officer Larry Goldstone, chief financial officer Clarence Simmons, and chief accounting officer Jane Starrett overstated the company's income by more than $400 million and falsely recorded a profit for the 2007 fourth quarter at the start of the financial crises.

Thornburg was facing liquidity issues and was unable to make payments on time 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.

According to the SEC's complaint, Thornburg was violating lending agreements by failing to make on-time payments while executives were trying to cover up the severity of their liquidity crisis to investors and Thornburg's auditor.

[COLUMN_BREAK]

For example, in an e-mail from Starrett to Goldstone and Simmons, she said, ""We have purposefully not told [our auditor] about the margins calls.""

Goldstone, Simmons, and Starrett scrambled to make the final payment on Thornburg's margin calls approximately 12 hours before filing the annual report. As Goldstone had earlier stated to Simmons and Starrett in an e-mail, ""We don't want to disclose our current circumstance until it is resolved."" The intention was ""to keep the current situation quiet while we deal with it.""

When Thornburg began to fall behind on the new 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 fell by more than 90 percent. The company, which was once considered the second-largest independent mortgage company next to Countrywide, filed for bankruptcy on May 1, 2009.

Thornburg's lending business focused on jumbo and super-jumbo ARMSs; the company also purchased and held ARM securities and securitized ARM loans. In order to finance its mortgage business and investment activities, the company relied on constant access to financing, which included borrowing money from various lenders.

The SEC's complaint charges the three former executives with violations of antifraud, deceit of auditors, reporting, record keeping, and internal controls provisions of the federal securities laws. The complaint seeks officer and director bars, disgorgement, and financial penalties.