Washington, D.C., Sept. 19, 2006 – LAWFUEL – US Law & Legal – The Securities and Exchange Commission today filed financial fraud charges against Doral Financial Corporation, alleging that the NYSE-listed Puerto Rican bank holding company overstated income by 100 percent on a pre-tax, cumulative basis between 2000 and 2004. The Commission further alleges that by overstating its income by $921 million over the period, the company reported an apparent 28-quarter streak of “record earnings” that facilitated the placement of over $1 billion of debt and equity. Since Doral Financial’s accounting and disclosure problems began to surface in early 2005, the market price of the company’s common stock plummeted from almost $50 to under $10, reducing the company’s market value by over $4 billion.
Without admitting or denying the Commission’s allegations, Doral Financial has 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. The settlement reflects the significant cooperation provided by Doral in the Commission’s investigation.
Linda Chatman Thomsen, Director of the Division of Enforcement, said, “The accounting fraud at Doral is particularly troubling because it occurred after the reforms of the Sarbanes-Oxley Act of 2002. Today’s settlement reflects our continuing commitment to protect shareholders against financial fraud.”
Peter H. Bresnan, a Deputy Director in the Division of Enforcement, stated, “The scheme engaged in by Doral senior management involved improper valuation of corporate assets, sales lacking economic substance and round-trip transactions. Today’s action should emphasize that these types of accounting tricks will not be tolerated.”
According to the Commission’s complaint, Doral Financial improperly accounted for the purported sale of non-conforming mortgage loans to other Puerto Rican financial institutions in three respects. First, Doral Financial improperly recognized gain on sales of approximately $3.9 billion in mortgages to a large Puerto Rican financial institution. These transactions were not true sales under generally accepted accounting standards because of oral agreements or understandings between Doral Financial’s former treasurer, its former director emeritus and the counterparty’s senior management providing recourse beyond the limited recourse established in the written contracts. Second, Doral Financial senior management significantly overvalued interest-only strips retained by the company in its mortgage loan sale transactions. Finally, the Commission further alleges that Doral Financial managed earnings through a series of contemporaneous purchase and sale transactions with other Puerto Rican financial institutions totaling approximately $847 million.
The Commission’s complaint, which was filed in the United States District Court for the Southern District of New York, charges Doral Financial with violating Section 17(a) of the Securities Act of 1933 and 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 United States 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.