SEC fines mortgage company, bans executives for mortgage bond fraud

The California-based company was hit with more than $12 million in penalties for allegedly perpetrating a scam involving mortgage-backed securities

SEC fines mortgage company, bans executives for mortgage bond fraud
The Securities and Exchange Commission has hit a California mortgage company with a $12.7 million penalty and banned six senior executives in the wake of charges that they orchestrated a scheme to defraud investors in the sale of mortgage bonds guaranteed by Ginnie Mae.

First Mortgage Corporation (FMC) is a lender that issued Ginnie Mae-guaranteed residential mortgage-backed securities guaranteed by mortgages it issued. According to the SEC, between March of 2011 and March of 2015, FMC and its senior executives yanked current, performing loans out of Ginnie Mae mortgage bonds by falsely claiming they were delinquent – and then sold them at a profit into new mortgage-backed securities. The scheme defrauded investors out of $7.5 million, according to the SEC.

The SEC alleged that FMC purposely delayed depositing checks from borrowers who had been behind on their loans, then falsely claimed that the loans remained delinquent.

“This was done with the knowledge and approval of the company’s senior-most management,” the SEC stated in a release. After repurchasing at delinquent-loan prices, FMC was then able to sell the loans right back into new Ginnie Mae RMBS pools at current-loan prices.

“Investors, meanwhile, were wrongly deprived of the interest payments on the repurchased loans,” the SEC stated.

“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 FMC executives charged with fraud in the SEC’s complaint all agreed to be barred from serving as an officer or director for a public company for five years. They also agreed to the following penalties:
  • Chairman and CEO Clement Ziroli Sr. was assessed a $100,000 penalty
  • President Clement Ziroli Jr. agreed to pay $411,421.98, plus $27,203.92 in interest and a $200,000 penalty
  • CFO Pac W. Dong agreed to a $100,000 penalty
  • SVP Ronald T. Vargas, head of FMC’s capital markets department, was assessed a $60,000 penalty
  • SVP Scott Lehrer agreed to a $50,000 penalty
  • Edward Joseph Sanders, managing director of FMC’s servicing department, agreed to pay disgorgement of $51,576.51 and $6,811.19 in interest. Sanders cooperated in the SEC investigation.
The six executives settled the charges without admitting or denying the allegations, the SEC stated.

First Mortgage Corporation stopped originating loans a year ago, after more than 40 years in business, and began to wind down its operations, according to a Reuters report.