Mortgage lender's accounting, executives are scrutinized

LOS ANGELES — Federal investigators looking into New Century Financial will be examining whether admitted accounting errors by the mortgage lender specializing in high-risk loans were the result of sloppy bookkeeping or fraud, legal experts said Thursday.

Among the areas that will be probed: whether executives began dumping their shares last year because they knew the company was headed for trouble.

"The key issue on both insider trading and securities or accounting fraud is going to be knowledge and intent," said attorney Michael Levy, who has represented Enron, among other companies targeted by criminal probes, and also was an assistant U.S. attorney in Washington, D.C.

"The question is: Did individuals at the company know that the accounting was improper and nevertheless failed to correct it or trade based on that information?" he said.

The Securities and Exchange Commission (SEC) and the U.S. Justice Department are looking into the actions taken by New Century and its officers since the company disclosed last month that it failed to accurately tally losses from loan repurchases and that it would have to restate financial results for the first three quarters of 2006.

After the revelation, the company has been left on the brink of bankruptcy, as creditors have cut off funding or taken steps to do so, many demanding the company, the nation's second-largest subprime lender, buy back billions in mortgage loans.

The company's stock has tumbled 96.8 percent since a 52-week high of $51.97 last May. It was suspended from the New York Stock Exchange this week.

In addition, New Century faces at least nine shareholder lawsuits that claim its top executives and directors misled investors while conveniently selling shares before the stock took a nose dive.

Attorney Jan Handzlik, a former assistant U.S. attorney in Los Angeles who has prosecuted fraud cases and now represents clients facing securities-fraud investigations, said it's likely to be several months before investigators get a full picture of what happened at New Century and can determine whether any laws were broken.

"The symptoms that we're now seeing are very similar to what we've seen in other major securities cases, but whether or not the causes are the same is something that still needs to be determined," Handzlik said.

Officials with the U.S. Attorney's Office for the Central District of California, who are handling the criminal inquiry into the trading of New Century shares and the accounting errors, declined to comment, citing the investigation.

Calls and e-mails to the SEC's Pacific Regional Office were not returned.

New Century, once the second-biggest lender of home loans for buyers with less-than-perfect credit, built a billion-dollar business by selling risky loans to buyers and then selling them to investment banks, using the proceeds to continue funding new loans for homebuyers.

That worked during the housing boom years, but rising defaults coupled with the market's downturn last year prompted New Century's creditors to demand the company buy back the bad loans, the so-called loan repurchases.

It's likely investigators have requested documents related to its financial transactions, as well as memos and e-mails.

"The question of whether or not the company and its officers acted willfully is something that might be reflected in the e-mails," Handzlik said.

Memos, e-mails and ultimately interviews of officials at the company are often used to determine if information was hidden from lawyers, auditors or others.

If investigators determine that the failure of the company's accounting procedures was not intentional, it could simply receive a fine as part of an SEC enforcement action, Handzlik said.

"In such a proceeding, the company might simply promise that its systems are adequate and that it never do this sort of thing again," Handzlik said.

"The more substantial question is whether or not the company was aware of the lapse in controls and yet continued to sell mortgage pools," he said.