New Century Financial, the largest U.S. subprime lender in bankruptcy, said on Thursday it probably inflated 2005 earnings because of accounting errors, a disclosure that might add fuel to federal criminal and regulatory examinations into the company.
The errors concerned losses on repurchased loans, and how New Century valued other mortgage-related assets, the company said in a U.S. Securities and Exchange Commission filing.
It said the errors "more likely than not" caused it to "materially" overstate 2005 pretax earnings, and that investors should not rely on its financial statements for that year.
The problems surfaced 3-1/2 months after New Century said it planned to restate results for the first nine months of 2006, citing increases in loan losses. They also come nearly three months after New Century said the SEC asked for talks on events preceding the announcement of the restatement, and that federal prosecutors in California were examining trading in its securities and accounting errors.
"What motivates prosecutors is the possibility of ongoing fraud over a long period of time," said Robert Mintz, a partner at McCarter & English in Newark, New Jersey, and a former federal prosecutor in that state. "If indeed (the 2005 errors are) new, it will likely ratchet up the investigation. It's an indication that potential wrongdoing was more widespread and more prolonged than originally thought."
Paul Kranhold, an outside spokesman for New Century, declined to elaborate on Thursday's filing or the Irvine, California-based company's dealings with the government. He said "we continue to work cooperatively with the SEC and the Justice Department."
SEC spokesman John Heine and Thom Mrozek, a spokesman for the U.S. Attorney in the Central District of California, declined to comment.
New Century said it does not expect to restate any results because it is liquidating.
New Century had been one of the largest U.S. providers of home loans to people with poor credit histories before filing for Chapter 11 bankruptcy protection on April 2. It shut down its lending unit and has sold most other major assets.
Dozens of subprime lenders have sold or quit their businesses or gone bankrupt in the last year as defaults soared. Many defaults were "early payment defaults" by borrowers who fell behind shortly after getting their loans.
"The previously announced restatement suggested to me that New Century had been pushing the accounting envelope as far as it could, certainly as it related to early payment defaults," said Matt Howlett, who at the time covered the company for Fox-Pitt Kelton in New York. "It seems like the scope of the review of accounting practices is expanding."
New Century has said at least 27 lawsuits have been filed against the company, its officers and its directors.