The Securities and Exchange Commission today announced that a California-based mortgage company and six senior executives agreed to pay $12.7 million to settle charges that they orchestrated a scheme to defraud investors in the sale of residential mortgage-backed securities 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 alleges 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. FMC 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 SEC’s complaint filed in U.S. District Court for the Central District of California, 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.
“FMC and its senior executives abused their privileged access to Ginnie Mae’s securitization program by allowing greed to corrupt their business practices,” said Andrew Ceresney, Director of the SEC's Division of Enforcement. “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.
The SEC’s complaint alleges that FMC, Ziroli Sr., Ziroli Jr., Dong, Vargas, Lehrer, and Sanders violated Sections 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5(a) and (c). The complaint also alleges that FMC violated Rule 10b-5(b). The settlements are subject to court approval.
The SEC’s investigation was conducted by Allison Herren Lee and John B. Smith from the Complex Financial Instruments Unit in the Denver Regional Office. They were assisted by Dugan Bliss and Judy Bizu, and the case was supervised by Laura M. Metcalfe and Michael J. Osnato. The SEC appreciates the assistance of Ginnie Mae.
SEC Press Release
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