The former head of American Home Mortgage Investment Corp. has agreed to pay nearly $2.5 million to settle federal civil charges of accounting fraud and concealing the company’s deteriorating finances as the subprime mortgage crisis hit in 2007.
The Securities and Exchange Commission announced the settlement Tuesday with former American Home Chairman and Chief Executive Michael Strauss, the company’s founder.
Charges against the company’s former chief financial officer, Stephen Hozie, also accused of accounting fraud and misleading investors, are pending. The SEC also alleged that Strauss, Hozie and former controller Robert Bernstein misled American Home’s auditor about the adequacy of the company’s reserves against losses on mortgages.
Carl Loewenson, Jr., an attorney representing Hozie, declined to comment Tuesday, as did Bernstein’s attorney, Frank Wohl. Strauss’s lawyer, Peter Bresnan, didn’t return calls seeking comment.
The executives were major players in the national mortgage meltdown, an SEC official said. American Home filed for bankruptcy protection in August 2007 and is currently in the process of liquidating. It fell from being one of the nation’s 10 biggest mortgage lenders to insolvency in about a week, as its lenders demanded more collateral for their loans.
Like scores of other mortgage companies, Melville, N.Y.-based American Home was left with no capital to operate as the market for securities tied to high-risk subprime home loans dried up after a spike in homeowner defaults. The collapse in the mortgage-backed bonds in 2007 helped set off the global economic crisis.
Strauss, 50, who lives in Southampton, N.Y., neither admitted or denied wrongdoing in his settlement with the SEC, though he did agree to refrain from future violations of securities laws. He agreed to pay about $2.2 million in restitution and interest, and a $250,000 civil fine. Strauss also will be barred for five years from serving as an officer or director of any public company.
In a civil lawsuit filed in federal court in Manhattan, the SEC alleged that Strauss and Hozie, fraudulently understated American Home’s reserves against losses on home loans by tens of millions of dollars for the first quarter of 2007. They knew the company needed at least another $38 million in reserves and made the loss into a “fictional profit.” The two executives also deceived investors about the company’s financial condition and the riskiness of the home loans it made, according to the agency.
“These senior executives did not just occupy a front row seat to the mortgage meltdown — they were part of the show,” SEC Enforcement Director Robert Khuzami said in a statement. “As the housing market imploded, these executives kept secret that the company’s holdings were collapsing like a house of cards.”
The SEC has said it is investigating about two dozen cases related to possible mortgage fraud, in addition to its efforts with the Justice Department and other federal agencies.
“The investigation into mortgage-related fraud is a high priority,” Khuzami said Tuesday in a telephone interview. “We intend to aggressively pursue” those cases.
The Senate voted Tuesday to hire hundreds more FBI agents and federal prosecutors to investigate the roughly 5,000 allegations of mortgage fraud that come in every month. The $530 million provided in the legislation would enable hiring of an additional 160 special FBI agents and more than 200 support staff over two years; it also includes $40 million to boost the SEC’s enforcement staff.
Strauss and Hozie failed to disclose to investors that American Home was forced to sell the bulk of its multibillion-dollar holdings of mortgage-linked securities in April 2007 to meet pressing needs for cash flow, the SEC alleged in its suit. Most of the company’s home loans in 2006 were made without verifying the borrower’s income, the agency said.
The SEC is seeking unspecified civil fines and restitution from Hozie, 50, a resident of Columbia, S.C., and Bernstein, 43, who lives in West Islip, N.Y. The agency also wants to bar Hozie from being an officer or director of any public company.
