SEC Settles Fraud Charges With Mortgage Company and Executives

Investing

Published: June 1, 2016 11:40 am

Last Updated: January 13, 2020 7:20 am

The U.S. Securities and Exchange Commission (SEC) recently announced that a California-based mortgage company and six of its senior executives have agreed to pay $12.7 million to settle charges regarding a scheme to defraud investors in the sale of residential mortgage-backed securities (RMBS) guaranteed by the Government National Mortgage Association (Ginnie Mae).

First Mortgage Corporation (FMC) is a mortgage lender that issued Ginnie Mae RMBS backed by loans it originated. The SEC alleged that from March 2011 to March 2015, FMC and its senior-most executives pulled current, performing loans out of Ginnie Mae RMBS by falsely claiming they were delinquent in order to sell them at a profit into newly issued RMBS.

The company caused its Ginnie Mae RMBS prospectuses to be false and misleading by improperly and deceptively using a Ginnie Mae rule that gave issuers the option to repurchase loans that were delinquent by three or more months.

According to the complaint, FMC purposely delayed depositing checks from borrowers who had been behind on their loans, falsely claiming to both investors and Ginnie Mae that such loans remained delinquent when in reality they were current. This was done with the knowledge and approval of the company’s senior-most management. After repurchasing at prices applicable to delinquent loans, FMC was able to resell the loans into new Ginnie Mae RMBS pools at higher prices applicable to current loans for an immediate, nearly risk-free profit. Investors, meanwhile, were wrongly deprived of the interest payments on the repurchased loans.

Andrew Ceresney, director of the SEC’s Division of Enforcement, commented:

FMC and its senior executives abused their privileged access to Ginnie Mae’s securitization program by allowing greed to corrupt their business practices. It is critical that we hold senior management fully accountable for this kind of misconduct, which we were able to accomplish here quickly due to the cooperation of company insiders.

The executives charged with fraud in the SEC’s complaint agreed to the following settlements:

Chairman and CEO Clement Ziroli Sr. agreed to a $100,000 penalty.

Company president Clement Ziroli Jr. agreed to pay 411,421.98 plus $27,203.92 in interest and a $200,000 penalty.

Chief financial officer Pac W. Dong agreed to pay a $100,000 penalty.

Senior vice president Ronald T. Vargas, who headed FMC’s capital markets department, agreed to pay a $60,000 penalty.

Senior vice president Scott Lehrer agreed to pay a $50,000 penalty.

Managing director of the servicing department Edward Joseph Sanders agreed to pay disgorgement of $51,576.51 plus $6,811.19 in interest. Sanders cooperated in the SEC’s investigation.

In settling the charges without admitting or denying the allegations, each of the six executives agreed to be barred from serving as an officer or director of a public company for five years.