New Century Financial In The News

The SEC is finally bringing a case against the founder, CFO and Controller of New Century Financial, once one of the nation's largest originators of sub-prime mortgages. The case against the three officers involves fraud for, among other things, reporting to investors in 2006 that the loan portfolio was healthy and outperforming its peers, even when there was substantial internal data to the contrary. New Century filed for bankruptcy protection in 2007, and it once had a market value of more than $1 billion.

It is amazing that it has taken the SEC this long to bring an action in this high profile case. To be fair, part of the problem is that SEC core functions suffered under the dreadfully inept watch of the former Chair under a Republican administration. To do its job, the SEC needs leadership, a mandate, and resources, of which it had very little under the prior administration.

A special master for the bankruptcy court, Michael J. Missal, wrote a scathing 581 page report, which I have to admit that I read, excoriating the external auditor's complete breakdown in internal supervision and QC. It also faulted the auditor's failure to heed the signals of a coming meltdown that were evident from their own working papers. The firm vehemently denied the accusations, and their huffing and puffing rang hollow.

It is certainly good that some company officers will be held accountable for this fraud, but the light should also be shone on the board and its ineffectiveness, along with the passivity and inattention of the auditors. It's a real life, educational case for audit committees of financial services companies.

Countrywide Financial is another egregious case that had a direct impact on the current mortgage crisis, but it was acquired by Bank of America, and it may be old news given the euphoria about BofA paying back TARP funds.