Bank Holding Company to Pay $8.5 Million Civil Penalty
Washington D.C., Aug. 7, 2007 – LAWFUEL – The Legal Newswire – The Securities and Exchange Commission today filed financial fraud charges against First BanCorp, alleging that former senior management of the NYSE-listed, Puerto Rico-based bank holding company concealed the true nature of more than $4 billion worth of transactions involving “non-conforming” residential mortgages. Non-conforming mortgages have income verification and credit history standards that are generally more flexible than those required for sale or exchange under Fannie Mae and Freddie Mac programs and can constitute “subprime” mortgages.
Without admitting or denying the Commission’s charges, First BanCorp consented to being permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and paying an $8.5 million civil penalty.
Linda Chatman Thomsen, Director of the Division of Enforcement, said, “Today’s action against First BanCorp demonstrates that when misconduct in the mortgage industry impacts our securities markets and harms investors, the SEC will be there to take action. Investors deserve accurate disclosure and responsible accounting in all sectors of the marketplace.”
Cheryl J. Scarboro, an Associate Director in the Division of Enforcement, stated, “The SEC’s Division of Enforcement has focused significant resources on disclosure and accounting issues relating to the mortgage industry, and we encourage market participants who believe they have securities-related issues in this area to contact us as soon as possible.”
The Commission’s complaint charges First BanCorp with aiding and abetting violations of the federal securities laws by Doral Financial Corporation, another NYSE-listed, Puerto Rico-based bank holding company. Doral Financial previously consented to the entry of a court order enjoining it from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty [LR-19837, Sept. 19, 2006].
According to today’s complaint, First BanCorp, which purportedly purchased the non-conforming mortgages from Doral Financial, profited from the transactions by earning more than $100 million in net interest income. Doral Financial, which purportedly sold the mortgages to First BanCorp, improperly recognized income on the transactions. According to the Commission, the mortgage-related transactions were not true sales under generally accepted accounting principles because senior management of Doral Financial agreed orally and in emails to extend the recourse provision from the 24-month period included in the written agreements to full recourse for the duration of the mortgages.
The Commission’s complaint filed in the U.S. District Court for the Southern District of New York charges First BanCorp with aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20 13a-1 and 13a-13.
The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Company.
The Commission’s investigation is continuing.