As mortgages went bad, executives cashed out
While Irvine subprime lender New Century was failing, key executives continually changed their stock trading plans and often sold within days of colleagues' trades, a Times investigation shows.
The subprime lending industry was starting to buckle under the weight of bad loans in November 2006, when executives at Irvine-based New Century Financial Corp. held a conference call to release their latest earnings.
Loan volume was down and defaults were up, the earnings report showed, and in recent weeks at least five stock analysts had downgraded the company's shares. Moreover, four executives had sold nearly $20 million in stock in the last four months, six times as much as they had sold over the previous 12 months.
That led one analyst to ask whether there was anything investors should know.
"It's just part of their personal financial diversification plan," Chief Executive Brad Morrice said in response to the question during the Nov. 2 earnings call.
Those executive stock sales, however, have emerged as a central element in the Justice Department's criminal investigation of New Century, according to a person familiar with the inquiry who was not authorized to speak publicly.
No charges have been filed, and attorneys for the company's former top executives say that none of the executives sold stock based on information that had not been disclosed to the public and that the executives retained most of their shares when the company went under.
"Their stock sales were modest -- and entirely appropriate -- steps to diversify their assets," said John Spiegel, a Los Angeles attorney who represents five former New Century executives. "Any suggestion to the contrary simply flies in the face of the facts."
Justice Department officials declined to comment on their investigation of New Century, which collapsed into bankruptcy in early 2007 after a short-lived reign as the nation's biggest subprime lender.
The Times conducted its own review of the executive stock trades, analyzing Securities and Exchange Commission filings detailing 277 stock purchases and sales between 2003 and 2007 by six top executives.
Among other things, The Times looked at the executives' use of trading plans to sell stock, mostly after exercising options to buy at a low price and then sell at a much higher price. Federal regulators sanctioned use of such plans in 2000 as a way for executives to engage in regular sales of stock without being accused of making trades based on inside information.
To be an effective shield, however, the plans must be designed and executed carefully, securities experts say.
