The SEC charged the CEO and Chief Operating Officer ("COO") of a subprime auto loan funding and servicing company with conducting a fraudulent securitization scheme.
In a Complaint filed in the U.S. District Court for the Northern District of Illinois, the SEC stated that in an offering, the company sold to investors $100 million of interest-bearing notes that were backed by thousands of subprime auto loans. The SEC alleged that the CEO and COO directed the company to mislead investors with respect to (i) the company's loan servicing practices, and (ii) the quality of the loans backing the notes. The SEC claimed that in an effort to conceal the credit weaknesses in its portfolio of loans, the company applied "essentially fake borrower payments" to delinquent loans and unilaterally pushed back the payment due dates of loans to disguise how far behind borrowers were on payments.
According to the SEC, the CEO and COO (i) employed these deceptive practices to inappropriately withdraw funds from the securitization that belonged to investors and (ii) misled the securitization's underwriter and others involved in the preparation of the offering and the risk assessments of the notes. The SEC stated that the company's misleading practices also resulted in its provision of false monthly reports to investors. As a result, the SEC charged the CEO and COO with violations of Sections 10 ("Regulation of the Use of manipulative and deceptive devices") and 20 ("Liability of controlling persons and persons who aid and abet violations") of the Exchange Act; SEA Rule 10b-5 ("Manipulative and deceptive devices"); and Sections 15 ("Liability of controlling persons") and 17 ("Fraudulent interstate transactions") of the Securities Act.
The SEC is seeking (i) permanent injunctions, (ii) disgorgement with prejudgment interest, (iii) civil money penalties and (iv) officer and director bars on the CEO and COO.
Primary Sources
- SEC Press Release: SEC Charges Principals of Subprime Automobile Finance Company with Fraud
- SEC Complaint: James R. Collins and Robert F. DiMeo
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