SEC charges former IndyMac senior executives with securities fraud

By Caroline Salls

Pittsburgh, Feb. 11 - Three former IndyMac Bancorp senior executives have been changed with securities fraud by the Securities and Exchange Commission for misleading investors about the mortgage lender's deteriorating financial condition, according to a news release.

The SEC alleges that former chief executive officer Michael W. Perry and former chief financial officers A. Scott Keys and S. Blair Abernathy participated in the filing of false and misleading disclosures about the financial stability of IndyMac and its main subsidiary, IndyMac Bank FSB.

The agency said the three executives regularly received internal reports about IndyMac's deteriorating capital and liquidity positions in 2007 and 2008, but failed to make sure that information was disclosed to investors as IndyMac sold millions of dollars of new stock.

"These corporate executives made false and misleading disclosures about IndyMac at a time when the company's financial condition was rapidly deteriorating," SEC Division of Enforcement deputy director Lorin L. Reisner said in the release.

"Truthful and accurate disclosure to investors is particularly critical during a time of crisis, and the federal securities laws do not become optional when the news is negative."

False financial statements

According to the SEC's complaints filed in U.S. District Court for the Central District of California, Perry and Keys defrauded new and existing IndyMac shareholders by making false and misleading statements about IndyMac's financial condition in its 2007 annual report and in offering materials for the company's sale of $100 million of new stock to investors.

In early February 2008, IndyMac projected that it would return to profitability and continue to pay preferred dividends in 2008 without having to raise new capital, the release said.

In late February 2008, the SEC alleged that Perry and Keys knew that, contrary to the rosy projections released just two weeks earlier, IndyMac had begun raising new capital to protect IndyMac's capital and liquidity positions.

Specifically, the SEC said Perry and Keys regularly received information that IndyMac's financial condition was rapidly deteriorating and authorized new stock sales as a result. Yet, the agency claims they fraudulently failed to fully disclose IndyMac's precarious financial condition in the 2007 annual report and the offering documents for the new stock sales.

Downgrade knowledge

The SEC also alleged that Perry knew that rating downgrades in April 2008 on bonds held by IndyMac Bank had exacerbated its capital and liquidity positions to the extent that IndyMac had no choice but to suspend future preferred dividend payments by no later than May 2, 2008.

Again, the SEC said this information was not disclosed in IndyMac's ongoing stock offerings.

The agency said Perry also failed to disclose in various SEC filings or a May 2008 earnings conference call that IndyMac would not have been "well-capitalized" at the end of its first quarter without departing from its traditional method for risk-weighting subprime assets and backdating an $18 million capital contribution.

According to the SEC's complaint, Abernathy replaced Keys as IndyMac's CFO in April 2008, and he made similar false and misleading statements in the offering documents used in selling new IndyMac stock to investors despite regularly receiving internal reports about IndyMac's deteriorating capital and liquidity positions.

The SEC also alleged that Abernathy made false and misleading statements about the quality of loans in six IndyMac offerings of residential mortgage-backed securities (RMBS) totaling $2.5 billion in the summer of 2007 as IndyMac's executive vice president in charge of specialty lending.

The SEC said Abernathy received internal reports each month revealing that 12% to 18% of IndyMac's loans contained misrepresentations regarding important loan and borrower characteristics.

However, the RMBS offering documents stated that nothing had come to IndyMac's attention that any loan included in the offering contained a misrepresentation.

CFO Abernathy settles

Abernathy has agreed to settle the SEC's charges without admitting or denying the allegations.

Specifically, he consented to the entry of an order that permanently enjoins him from violating securities laws and requires him to pay a $100,000 penalty, $25,000 in disgorgement and $1,592.26 in prejudgment interest.

Abernathy also agreed to the issuance of an administrative order pursuant suspending him from appearing or practicing before the SEC as an accountant. He has the right to apply for reinstatement after two years.

Fraud charges

The SEC's complaint charges Perry and Keys with knowingly violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b 5, as well as aiding and abetting IndyMac's violations of its periodic reporting requirements.

Perry also is charged with aiding and abetting IndyMac's reporting violations.

The SEC's complaint against Perry and Keys seeks permanent injunctions, an officer and director bar, disgorgement of ill-gotten gains with prejudgment interest and a financial penalty.

IndyMac, a Pasadena, Calif., bank holding company, filed for bankruptcy on July 31, 2008 in the U.S. Bankruptcy Court for the Central District of California. The Chapter 7 case number is 08-21752.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.