Former Doral Executive Convicted For Securities Fraud Scheme That Caused $4 Billion Decline in Shareholder Value

LawFuel.com – Law Newswire Service –
PREET BHARARA, the United States Attorney for the
Southern District of New York, announced today that MARIO S.
LEVIS, a/k/a “Sammy Levis,” was found guilty on securities and
wire fraud charges after a five-week jury trial before United
States District Judge THOMAS P. GRIESA for his role in a scheme
to defraud investors and potential investors in the stock of
Puerto Rico-based Doral Financial Corporation (“Doral”) that took
place while he was the Treasurer and Senior Executive Vice
President of Doral. The scheme, occurring between 2001 and 2005,
involved misrepresentations that LEVIS made regarding certain
core assets of Doral. An aggregate decline in shareholder value
of approximately $4 billion followed the unraveling of the
scheme.
According to the Superseding Indictment and the
evidence at trial:
Doral, with mortgage banking operations in Puerto Rico
and New York City, was a leading residential mortgage lender in
Puerto Rico. Between 2001 and 2005, LEVIS corrupted the process
by which Doral determined the publicly reported value of certain
non-cash assets carried on Doral’s financial books called
“interest-only strips” (“IOs”). Doral represented to the public,
in its annual financial statements, that the aggregate value of
its IOs, and company earnings associated with those IOs, were
increasing substantially year after year. By the beginning of
2005, Doral publicly announced a streak of 28 quarters of “record
earnings” based in significant part on the stated value of its
IOs.
During the same time, Doral’s stock price steadily
increased from approximately $10 per share in early 2000 to
almost $50 at the end of 2004. Also during this time frame,
LEVIS and other members of his family were substantial holders of
Doral securities. Between 2001 and 2004, the value of LEVIS’s
stock in Doral tripled to over $60 million.

In its public filings with the United States Securities
and Exchange Commission (“SEC”), Doral represented that the value
of its IOs was based, in part, on two “outside” and “independent”
expert valuations provided to Doral on a quarterly basis.
According to Doral’s filings with the SEC and representations by
LEVIS to investors, these outside independent valuators were
performing the valuation using their own economic and portfolio
assumptions.
In truth and in fact, however, LEVIS thoroughly
corrupted those valuations. For example, the valuation provided
by a Morgan Stanley trader in fact involved the trader merely
recopying numbers provided by LEVIS without any other work
whatsoever, and then subsequent attempts by LEVIS to conceal that
fact from Doral’s auditors and lawyers. The other valuation from
Popular Securities (“Popular”) actually involved LEVIS dictating
key assumptions for Popular to use in performing its valuation
analysis. In both cases, LEVIS failed to inform the valuators
that Doral was treating their valuations as independent or citing
their work in Doral’s SEC filings.
In March 2005, when an executive at Popular directly
asked LEVIS whether Popular’s valuation was being used as an
independent valuation, LEVIS denied that Popular was one of the
independent valuations. Later, when investors pressed LEVIS to
identify the sources of the independent valuations described in
Doral’s SEC filings, he falsely told investors that he could not
identify the sources due to confidentiality agreements.
LEVIS also materially misrepresented to the investing
public — in direct communications with investors, investor
representatives, and market analysts — certain specific
characteristics of the Doral IO portfolio. Specifically, among
other things, LEVIS falsely claimed provision in Doral’s loansale
agreements called “caps,” which would purportedly function
to prevent substantial write-downs of the IOs if interest rates
continued to rise.
Beginning in mid-January 2005, when Doral announced an
approximate $97.5 million write-down of the stated value of its
IOs attributed to rising interest rates, and LEVIS’ scheme
concerning the IO valuations began to unravel, the market price
of Doral’s common stock began to drop steadily from its high of
almost $50 per share. By the time LEVIS resigned from Doral in
late August 2005, the price of Doral’s shares had fallen more
than 70 percent to approximately $14.13 per share. In total, the
company’s shareholders had suffered an aggregate decline in
shareholder value of approximately $4 billion.
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* * *
LEVIS was found guilty of one count of securities fraud
(Count One) and two counts of wire fraud (Counts Three and Five).
The jury found LEVIS not guilty of one count of wire fraud (Count
Four), and the Court dismissed an additional count of wire fraud
(Count Two). LEVIS faces a maximum sentence of 20 years in
prison on the securities fraud count and a fine of the greatest
of $5 million or twice the gross gain or loss from the offense.
For each of the wire fraud counts on which he was found guilty,
LEVIS faces a maximum sentence of 20 years in prison and a fine
of the greatest of $250,000 or twice the gross gain or loss from
the offense.
LEVIS, 46, of San Juan, Puerto Rico, is scheduled to be
sentenced by Judge GRIESA on September 14, 2010.
U.S. Attorney PREET BHARARA stated: “Senior executives
of publicly traded companies have to tell the investing public
the truth, even when it hurts. It’s that simple. Today, a
Manhattan jury found that Mario Levis of Doral intentionally
flouted this bedrock principle, causing a colossal $4 billion
loss to his company’s shareholders. Our Office, working more
closely than ever with the FBI and the SEC, will continue to
pursue corrupt professionals in the financial services industry
whose greed-driven misconduct hurts honest investors and
threatens our markets.”
Mr. BHARARA praised the work of the Federal Bureau of
Investigation and thanked the SEC for its assistance in the case.
This case was brought in coordination with President
BARACK OBAMA’s Financial Fraud Enforcement Task Force, on which
Mr. BHARARA serves as a Co-Chair of the Securities and
Commodities Fraud Working Group. President OBAMA established the
interagency Financial Fraud Enforcement Task Force to wage an
aggressive, coordinated, and proactive effort to investigate and
prosecute financial crimes. The task force includes
representatives from a broad range of federal agencies,
regulatory authorities, inspectors general, and state and local
law enforcement who, working together, bring to bear a powerful
array of criminal and civil enforcement resources. The task
force is working to improve efforts across the federal executive
branch, and with state and local partners, to investigate and
prosecute significant financial crimes, ensure just and effective
punishment for those who perpetrate financial crimes, combat
discrimination in the lending and financial markets, and recover
proceeds for victims of financial crimes.

The case is being prosecuted by the Securities and
Commodities Fraud Task Force of the United States Attorney’s
Office. Assistant United States Attorneys WILLIAM J. STELLMACH
and DANIEL A. BRAUN and Special Assistant United States Attorney
JASON M. ANTHONY, are in charge of the prosecution.
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