SEC v. R&G FINANCIAL CORPORATION, Southern District of New York (Feb. 13, 2008) — Complaint

Cheryl J. Scarboro 

Reid 
A. Muoio (RM 2274) 

Attorneys for Plaintiff 

Securities and Exchange Commission 

100 
F Street, N.E. 

Washington, D.C. 20549-6030 

(tel) 202/551-4403 (Scarboro) 

UNITED STATES DISTRICT COURT FOR THE 
SOUTHERN DISTRICT OF NEW YORK 
.................... 
X 
) 
SECURITIES AND EXCHANGE COMMISSION, 

Plaintiff, 

COMPLAINT 

R&G FINANCIAL CORPORATION, 

Defendant. 

) 
-------------------
-X 
Plaintiff Securities and Exchange Commissi 

"SEC") alleges as follows: 

NATURE OF THE ACTION 

1. The SEC brings this financial fraud a 
R&G Financial Corporation, a  bank holding company with 
mortgage banking operations in  the Commonwealth of  Puerto 
Rico. R&G Financial inflated net income by  approximately 
$180 million or  80% on  a  cumulative basis by  improperly 
accounting for billions of dollars worth of mortgage-related 
transactions in  2002, 2003 and 2004. Those accounting 
irregularities enabled R&G Financial to report an apparent 
twelve quarter streak of  "record earnings.
" Since the 
accounting and disclosure irregularities began to surface in 

early 2005, the market price of the company's common stock 

plummeted from approximately $40 to  $10 per share or  758, 

thereby reducing equity market value by  approximately $900 

million. 

2. By engaging in such conduct, R&G Financial 

violated Sections 10 (b), 13 (a), 13 (b) (2) 
(A) and 13 (b) (2) (B) 

of the Securities Exchange Act of 1934 ("Exchange Act") [15 

U.S.C. §§ 78j (b) , 78m(a), 78m(b) (2) (A) and 78m(b) (2) (B)] and 
Rules lob-5, 12b-20, 13a-1 and 13a-13 [17 C.F.R. 
§§ 240.10b-
5, 240.12b-20, 240.13a-1 and 240.13a-131, promulgated 
thereunder. 
3. Since then R&G Financial's board of directors made 

significant management changes, restated the company's 

financials and took other significant remedial action. The 

latter includes entering into consent orders with the Board 

of Governors of the Federal Reserve and the Federal Deposit 

Insurance Corporation. 

JURISDICTION 

4. This Court has jurisdiction over this action 

pursuant to Sections 21(e) and 27 of the Exchange Act [I5 

U.S.C. §§ 78u(e) and 78aal. R&G Financial has, directly or 
indirectly, made use of  the means or  instrumentalities of 
interstate commerce and/or of the mails in connection with 
the transactions described in this Complaint. 

DEFENDANT 

5. R&G Financial Corporation ("R&G Financial" or the 

"company") is a bank holding company with mortgage banking 

operations in Puerto Rico. 

6. R&G Financial was the second largest mortgage loan 

originator for single-family residences in Puerto Rico 

during the relevant period. The volume of  residential 

mortgages loans originated by  R&G Financial during 2004, 

2003 and 2002 was $2.3 billion, $2.8 billion and $2.0 

billion, respectively. 

7. R&G Financial's Class 
B common stock was 

registered with the Commission pursuant to Section 12 (b) of 

the Exchange Act during the relevant period and was listed 

on  the NYSE from July 2002 until February 2007. The 

company's Class 
B common stock now trades on the pink sheets 

at around $1 per share. There were approximately 30 million 

shares of  Class 
B common stock outstanding during the 

relevant period. 

8. R&G Financial's longtime independent auditor is 
PricewaterhouseCoopers LLP ("PwC") 
. 
SUBSTANTIVE ALLEGATIONS 

RCG FINANCIAL'S MORTGAGE LOAN SALE TRANSACTIONS 

9. R&G Financial was engaged in  the business of 

originating first and second mortgage loans on single-family 

residential properties secured by real estate. The majority 


of these mortgages were "nonconforming, " meaning, they did 
not satisfy loan origination guidelines of the Federal Home 

Loan Mortgage Corporation ("Freddie Mac") and Federal 

National Mortgage Association 
("Fannie Mae"). 

10. R&G Financial purported to sell pools of 

nonconforming loans in  privately negotiated transactions, 

principally to  other Puerto Rican financial institutions. 

R&G Financial generally agreed to  pay the contra-party a 

specified pass-through interest rate for the entire pool of 

loans. Any amounts received on  the mortgages above the 

pass-through rates were retained by  R&G Financial. The 

pass-through rate paid to the contra-party was generally a 

variable rate based upon a  spread over the three-month 

London Interbank Offered Rate ("Libor"). 

11. The purported present value of  the future cash 

flow retained by  R&G Financial was recognized on  the 

company's financial statements as interest-only strips 

(\\I0su). The fair values assigned to the 10s were 
recognized as gain on sale by R&G Financial. For 2004, 2003 
and 2002, 
R&G Financial recognized $144.6 million, $96.3 
million and $43.5 million, respectively, of  gain on  sale 
from the mortgage-related transactions. Most of those gains 
were associated with the 10s. 

R&G FINANCIAL'S IMPROPER GAINS ON SALE 

12. R&G Financial accounted for mortgage-related 
transactions as  sales. The provisions in  the written 
agreements obligated R&G Financial to  guarantee timely 
payment of  principal and interest for the life of  the 
mortgages. These full recourse provisions were incompatible 
with a  "true sale" accounting treatment and thus no  gain 
should have been recognized under Statement of  Financial 
Accounting Standards No. 140 ("SFAS 140") 
, "Accounting for 
Transfers and Servicing of Financial Assets and 
Extinguishments of Liabilities." 
13. As  a  result, R&G Financial improperly recognized 

gain on  sale from these mortgage-related transactions and 

should have instead accounted for them as secured 

borrowings. As alleged below, R&G Financial senior 

management knew, or was reckless in not knowing, that the 

company was improperly accounting for mortgage-related 

transactions as sales. 

14. During the 2003 audit, R&G Financial's former CEO 

sought to  obtain a  legal opinion from outside counsel to 

support true sale accounting treatment of certain mortgage- 

related transactions under SFAS 140. After legal research 

and analysis, this first outside legal counsel informed the 

former CFO that he could not provide the requested opinion 

because he did not believe that the transactions qualified 

as true sales at law. This attorney also told the former 


CFO that he  believed there would be  a  significant adverse 

impact on  the company's financial statements should the 

transactions be re-characterized as secured borrowings. 

15. Outside counsel subsequently informed R&G 

Financial's former CEO in a brief conversation that he  had 

been asked to provide a true sale opinion but could not and 

that he was concerned that the company had a problem. This 

outside legal counsel's concerns were never addressed 

because the former CFO was able to obtain true sale opinions 

from a  second outside law firm after the filing of  the 

company's 2004 Form 10-K under circumstances alleged below. 

16. After the filing of  the 2003 Form 10-K, R&G 
Financial retained a  second outside law firm to  provide 
opinions supporting true sale treatment of  the 
mortgage- 
related transactions. The second outside law firm provided 
certain true sale opinions to  the company prior to  the 
satisfaction of  certain conditions it  had determined were 
necessary 
-and advised the former CFO. were required -in 
connection with the delivery of  those opinions, e-g., 
execution of amendments to various transaction documents. A 
lawyer at the second law firm did this as an accommodation 
to the company. R&G Financial provided 
PwC copies of these 
opinions in connection with the 2004 audit. 
17. On  October 21, 2005, one of 
R&G Financial's 
contra-parties, First BanCorp, announced that it might have 
to  restate previously issued financial statements because 

certain mortgage-related transactions did not qualify as 

true sales. On  October 25, 2005, R&G Financial's main 

competitor announced publicly that it  too was investigating 

true sale accounting issues. R&G Financial' s  stock price 

was negatively affected by these disclosures, dropping 

approximately $2 per share from $11.50 to $9.45 that week. 

R&G Financial's stock price was largely unaffected when it 

announced on November 4, 2005 its own investigation of true 

sale accounting issues. 

R&G FINANCIAL OVERVALUED ITS 10s 

18. R&G Financial should have recognized no  gain on 

sale and instead accounted for these transactions as secured 

borrowings; however, even if  gain recognition was not an 

error, the company knowingly overstated gains and the value 

of  its 10s. This occurred because, without disclosing to 

the investing public, R&G Financial used the so-called "spot 

rate" methodology without a reasonable basis to compute the 

value of its 10s and gain on sale. 

19. The spot rate was the 90-day Libor rate at the end 
of each rating period. 
R&G Financial assumed for accounting 
purposes that interest rates remained fixed for the life of 
the underlying mortgages at the spot rate. This assumption 
was inconsistent with a  reasonable determination of  fair 
value. The fair value of a security of this nature would 
have assumed an  expected interest rate spread based on 
implied forward 
Libor rates ("forward curve")
. 

Incorporating the forward curve into R&G Financial's 

valuation methodology would have reduced the value of  its 

10s and gains recognized on  the purported sales of  the 

underlying mortgages. 

20. 
R&G Financial senior management knew, or  was 

reckless in not knowing, that use of the spot rate to value 

the company's 10s was improper. R&G Financial's former 

Chief Financial Officer ("CFO") became aware in  Summer of 

2003 that an I0 valuation based on the spot rate produced a 

value almost twice that as one based on the forward curve. 

In  addition, as  the result of  communications with an 

external financial consulting firm, by late 2004 R&G 

Financial's former CFO had reason to believe that the use of 

the spot rate to  value the 
10s did not result in  a 

reasonable fair value determination. 

21. 
R&G Financial's stock price traded downwards from 

$35 in mid-March to $25 in mid-April 2005 as the market grew 

increasingly concerned over its valuation methodology. R&G 

Financial announced after the close of the market on April 

25, 2005, that it was revising its valuation methodology and 

that doing so would reduce the value of its 
10s by  $90-to- 

$150 million. R&G Financial's stock price plummeted on this 

news falling $8.14. or 35% to close at  $15.04 on April 26, 

2005. 


RCG FINANCIAL'S SWAP TRANSACTIONS 

23. 
R&G Financial managed earnings through a series of 

swap transactions with another Puerto Rican financial 

institution. These involved generally contemporaneous 

purchases and sales of mortgage loans to and from the other 

financial institution where the amounts purchased and sold, 

and other terms of the transactions, were nearly identical. 

24. 
R&G Financial entered into approximately $200 
million worth of  these transactions during the fourth 
quarter of  2004 for which it improperly recognized gain on 
sale of  $24 million. 
R&G Financial's 2004 Form 10-K 
included a  general description of  the transaction and 
indicated that it was part of the company's risk management 
activities. This disclosure was misleading since the 
company's principal purpose was to  recognize gain on  sale 
and book substantial income at year-end. 
RCG FINANCIAL'S RESTATEMENT 

25. R&G Financial completed the restatement process in 

November 2007. During the restatement process, the company 

retained new outside law firms to  review the mortgage-

related transactions. These new law firms were unable to 

provide true sale opinions with respect to certain 

transactions in which the company provided the contra-party 

full recourse because these provisions were incompatible 


with the requirements for sale accounting under SFAS 140. 

These transactions were re-characterized as secured 

borrowings. 

26. R&G Financial re-characterized the swap 

transaction with Dora1 Financial because there was 

insufficient contemporaneous documentation of the company's 

purported business purpose. 

27. According to R&G Financial's 2004 Form 10-K/A, net 

income was overstated by $184 million or 80% on a cumulative 

basis during the relevant period. Net income (in thousand) 

and diluted earnings per share (in dollars) for fiscal years 

2002 through 2004 were restated as follows: 

Net Income Diluted 
-
EPS
-
Original Restated Change Original Restated Change 

28. As  a  result of  these accounting irregularities, 

the financial statements R&G Financial incorporated into its 

earnings releases and periodic filings were materially false 

and misleading from at  least January 2002 through March 

2005. 


FIRST CLAIM FOR RELIEF 
(Violations 
of Section 10(b) and 
Rule lob-5 of the Exchange Act) 
29. Plaintiff SEC hereby incorporates ¶¶ 1 through 28 
with the same force and effect as if set out here. 
30. In  the manner described in 
¶¶ 1  through 29, 
defendant R&G Financial, in connection with the purchase or 
sale of securities, by the use of means or instrumentalities 
of interstate commerce or of the mails, directly or 
indirectly (a) employed devices, schemes or  art if ices to 
defraud; (b) made untrue statements of  material facts or 
omissions of material facts necessary in order to make the 
statements made, in  the light of  the circumstances under 
which they were made, not misleading; or  (c) engaged in 
transactions, practices or courses of business which 
operated or would operate as a fraud or deceit upon persons, 
in violation of Section 10 
(b) of the Exchange Act [15 U.S.C 
§ 78j (b) ] and Rule lob-5 [17 C.F.R. § 240.10b-51 promulgated 
thereunder. 
SECOND CLAIM FOR RELIEF 
(Violations 
of the Reporting Provisions 
of the Exchange Act) 
31. Plaintiff SEC hereby incorporates ¶¶ 1 through 30 
with the same force and effect as if set out here. 

32. In  the manner described in ¶¶ 1  through 31, 
defendant R&G Financial violated Sections 13(a) of  the 
Exchange Act [15 U.S.C. 
5 78m(a)] and Rules 12b-20, 13a-1 
and 13a-13 promulgated there under [17 C.F.R. 
55 240.12b-20, 
240.13a-11, by filing reports with the SEC that inaccurately 
reflected the company's financial performance and provided 
other untrue and inaccurate information to the public. 
THIRD CLAIM FOR RELIEF 
(Violations 
of the Books and Records and Internal 
Control Provisions of the Exchange Act) 
33. Plaintiff SEC hereby incorporates ¶¶ 1 through 32 
with the same force and effect as if set out here. 
34. In  the manner described in 
¶¶ 1  through 33, 
defendant R&G Financial failed to  make and keep accurate 
books and records and to  devise and maintain an adequate 
system of  internal accounting controls in  violation of 
Section 13(b) (2) (A) and 13(b) (2) (B) of the Exchange Act [15 
U.S.C. 55 78m(b)(2)(A) and 78m(b) (2)(B)1 . 
PRAYER FOR RELIEF 
WHEREFORE, the SEC respectfully requests that this 

Court enter 
a judgment: 

(i) permanently enjoining defendant R&G Financial, and 

its officers, agents, servants, employees, attorneys, and 

those in active concert or participation with it who receive 

actual notice by personal service or otherwise, from 


violating Sections 10 (b) , 13 (a), 13 (b) (2) (A) and 13 (b) (2) (B) 
of the Exchange Act [15 
U.S.C. § 78j(b), 78m(a), 
78m(b) (2) (A) and 78m(b) (2) (B) 
] and Rules lob-5, 12b-20, 13a- 
1 and 13a-13 [17 C.F.R. 
§§ 240.10b-5, 240.12b-20, 240.13a-1 
and 240.13a-131, promulgated thereunder; and 
(ii) granting such other relief as this Court may deem 

just and appropriate. 

Dated: February 12, 2008 

Cheryl 
J. Scarboro 

Reid A. Muoio (RM 2274) 

Attorneys for Plaintiff 

Securities and Exchange 

Commission 

100 F Street, N.E. 

Washington, D.C. 20549-6030 

(tel) 202/551-4403 (Scarboro) 

Cheryl J. Scarboro 

Reid A. Muoio (RM 2274) 


Attorneys for Plaintiff 

Securities and Exchange Commission 

100 F Street, N.E. 

Washington, D.C. 20549-6030 

(tel) 202/551-4403 (Scarboro) 


UNITED STATES DISTRICT COURT FOR THE 
SOUTHERN DISTRICT OF NEW YORK 
. . . . . . . . . . . . . . . . . . . .  X 

) 
SECURITIES AND EXCHANGE COMMISSION, 


Plaintiff, 


COMPLAINT 

R&G FINANCIAL CORPORATION, 


Defendant. 

) 

- - - - - - - - - - - - - - - - - - - - X 

Plaintiff Securities and Exchange Commissi 


"SEC") alleges as follows: 


NATURE OF THE ACTION 


1. The SEC brings this financial fraud a 

R&G Financial Corporation, a bank holding company with 

mortgage banking operations in the Commonwealth of Puerto 

Rico. R&G Financial inflated net income by approximately 

$180 million or 80% on a cumulative basis by improperly 

accounting for billions of dollars worth of mortgage-related 

transactions in 2002, 2003 and 2004. Those accounting 

irregularities enabled R&G Financial to report an apparent 

twelve quarter streak of "record earnings." Since the 

accounting and disclosure irregularities began to surface in 



early 2005, the market price of the company's common stock 


plummeted from approximately $40 to $10 per share or 758, 


thereby reducing equity market value by approximately $900 


million. 


2. By engaging in such conduct, R&G Financial 


violated Sections 10 (b), 13 (a), 13 (b) (2) (A) and 13 (b) (2) (B) 


of the Securities Exchange Act of 1934 ("Exchange Act") [15 


U.S.C. §§ 78j (b) , 78m(a), 78m(b) (2) (A) and 78m(b) (2) (B)] and 

Rules lob-5, 12b-20, 13a-1 and 13a-13 [17 C.F.R. §§ 240.10b-

5, 240.12b-20, 240.13a-1 and 240.13a-131, promulgated 

thereunder. 

3. Since then R&G Financial's board of directors made 


significant management changes, restated the company's 


financials and took other significant remedial action. The 


latter includes entering into consent orders with the Board 


of Governors of the Federal Reserve and the Federal Deposit 


Insurance Corporation. 


JURISDICTION 


4. This Court has jurisdiction over this action 


pursuant to Sections 21(e) and 27 of the Exchange Act [I5 


U.S.C. §§ 78u(e) and 78aal. R&G Financial has, directly or 

indirectly, made use of the means or instrumentalities of 

interstate commerce and/or of the mails in connection with 

the transactions described in this Complaint. 



DEFENDANT 


5. R&G Financial Corporation ("R&G Financial" or the 


"company") is a bank holding company with mortgage banking 


operations in Puerto Rico. 


6. R&G Financial was the second largest mortgage loan 


originator for single-family residences in Puerto Rico 


during the relevant period. The volume of residential 


mortgages loans originated by R&G Financial during 2004, 


2003 and 2002 was $2.3 billion, $2.8 billion and $2.0 


billion, respectively. 


7. R&G Financial's Class B common stock was 


registered with the Commission pursuant to Section 12 (b) of 


the Exchange Act during the relevant period and was listed 


on the NYSE from July 2002 until February 2007. The 


company's Class B common stock now trades on the pink sheets 


at around $1 per share. There were approximately 30 million 


shares of Class B common stock outstanding during the 


relevant period. 


8. R&G Financial's longtime independent auditor is 

PricewaterhouseCoopers LLP ("PwC") . 

SUBSTANTIVE ALLEGATIONS 


RCG FINANCIAL'S MORTGAGE LOAN SALE TRANSACTIONS 


9. R&G Financial was engaged in the business of 


originating first and second mortgage loans on single-family 


residential properties secured by real estate. The majority 




of these mortgages were "nonconforming, " meaning, they did 

not satisfy loan origination guidelines of the Federal Home 


Loan Mortgage Corporation ("Freddie Mac") and Federal 


National Mortgage Association ("Fannie Mae"). 


10. R&G Financial purported to sell pools of 


nonconforming loans in privately negotiated transactions, 


principally to other Puerto Rican financial institutions. 


R&G Financial generally agreed to pay the contra-party a 


specified pass-through interest rate for the entire pool of 


loans. Any amounts received on the mortgages above the 


pass-through rates were retained by R&G Financial. The 


pass-through rate paid to the contra-party was generally a 


variable rate based upon a spread over the three-month 


London Interbank Offered Rate ("Libor"). 


11. The purported present value of the future cash 


flow retained by R&G Financial was recognized on the 


company's financial statements as interest-only strips 


(\\I0su). The fair values assigned to the 10s were 

recognized as gain on sale by R&G Financial. For 2004, 2003 

and 2002, R&G Financial recognized $144.6 million, $96.3 

million and $43.5 million, respectively, of gain on sale 

from the mortgage-related transactions. Most of those gains 

were associated with the 10s. 



R&G FINANCIAL'S IMPROPER GAINS ON SALE 


12. R&G Financial accounted for mortgage-related 

transactions as sales. The provisions in the written 

agreements obligated R&G Financial to guarantee timely 

payment of principal and interest for the life of the 

mortgages. These full recourse provisions were incompatible 

with a "true sale" accounting treatment and thus no gain 

should have been recognized under Statement of Financial 

Accounting Standards No. 140 ("SFAS 140") , "Accounting for 

Transfers and Servicing of Financial Assets and 

Extinguishments of Liabilities." 

13. As a result, R&G Financial improperly recognized 


gain on sale from these mortgage-related transactions and 


should have instead accounted for them as secured 


borrowings. As alleged below, R&G Financial senior 


management knew, or was reckless in not knowing, that the 


company was improperly accounting for mortgage-related 


transactions as sales. 


14. During the 2003 audit, R&G Financial's former CEO 


sought to obtain a legal opinion from outside counsel to 


support true sale accounting treatment of certain mortgage- 


related transactions under SFAS 140. After legal research 


and analysis, this first outside legal counsel informed the 


former CFO that he could not provide the requested opinion 


because he did not believe that the transactions qualified 


as true sales at law. This attorney also told the former 




CFO that he believed there would be a significant adverse 


impact on the company's financial statements should the 


transactions be re-characterized as secured borrowings. 


15. Outside counsel subsequently informed R&G 


Financial's former CEO in a brief conversation that he had 


been asked to provide a true sale opinion but could not and 


that he was concerned that the company had a problem. This 


outside legal counsel's concerns were never addressed 


because the former CFO was able to obtain true sale opinions 


from a second outside law firm after the filing of the 


company's 2004 Form 10-K under circumstances alleged below. 


16. After the filing of the 2003 Form 10-K, R&G 

Financial retained a second outside law firm to provide 

opinions supporting true sale treatment of the mortgage- 

related transactions. The second outside law firm provided 

certain true sale opinions to the company prior to the 

satisfaction of certain conditions it had determined were 

necessary - and advised the former CFO. were required - in 

connection with the delivery of those opinions, e-g., 

execution of amendments to various transaction documents. A 

lawyer at the second law firm did this as an accommodation 

to the company. R&G Financial provided PwC copies of these 

opinions in connection with the 2004 audit. 

17. On October 21, 2005, one of R & G  Financial's 

contra-parties, First BanCorp, announced that it might have 

to restate previously issued financial statements because 



certain mortgage-related transactions did not qualify as 


true sales. On October 25, 2005, R&G Financial's main 


competitor announced publicly that it too was investigating 


true sale accounting issues. R&G Financial' s stock price 


was negatively affected by these disclosures, dropping 


approximately $2 per share from $11.50 to $9.45 that week. 


R&G Financial's stock price was largely unaffected when it 


announced on November 4, 2005 its own investigation of true 


sale accounting issues. 


R&G FINANCIAL OVERVALUED ITS 10s 


18. R&G Financial should have recognized no gain on 


sale and instead accounted for these transactions as secured 


borrowings; however, even if gain recognition was not an 


error, the company knowingly overstated gains and the value 


of its 10s. This occurred because, without disclosing to 


the investing public, R&G Financial used the so-called "spot 


rate" methodology without a reasonable basis to compute the 


value of its 10s and gain on sale. 


19. The spot rate was the 90-day Libor rate at the end 

of each rating period. R&G Financial assumed for accounting 

purposes that interest rates remained fixed for the life of 

the underlying mortgages at the spot rate. This assumption 

was inconsistent with a reasonable determination of fair 

value. The fair value of a security of this nature would 

have assumed an expected interest rate spread based on 

implied forward Libor rates ("forward curve") . 



Incorporating the forward curve into R&G Financial's 


valuation methodology would have reduced the value of its 


10s and gains recognized on the purported sales of the 


underlying mortgages. 


20. R&G Financial senior management knew, or was 


reckless in not knowing, that use of the spot rate to value 


the company's 10s was improper. R&G Financial's former 


Chief Financial Officer ("CFO") became aware in Summer of 


2003 that an I0 valuation based on the spot rate produced a 


value almost twice that as one based on the forward curve. 


In addition, as the result of communications with an 


external financial consulting firm, by late 2004 R&G 


Financial's former CFO had reason to believe that the use of 


the spot rate to value the 10s did not result in a 


reasonable fair value determination. 


21. R&G Financial's stock price traded downwards from 


$35 in mid-March to $25 in mid-April 2005 as the market grew 


increasingly concerned over its valuation methodology. R&G 


Financial announced after the close of the market on April 


25, 2005, that it was revising its valuation methodology and 


that doing so would reduce the value of its 10s by $90-to- 


$150 million. R&G Financial's stock price plummeted on this 


news falling $8.14. or 35% to close at $15.04 on April 26, 


2005. 




RCG FINANCIAL'S SWAP TRANSACTIONS 


23. R&G Financial managed earnings through a series of 


swap transactions with another Puerto Rican financial 


institution. These involved generally contemporaneous 


purchases and sales of mortgage loans to and from the other 


financial institution where the amounts purchased and sold, 


and other terms of the transactions, were nearly identical. 


24. R&G Financial entered into approximately $200 

million worth of these transactions during the fourth 

quarter of 2004 for which it improperly recognized gain on 

sale of $24 million. R&G Financial's 2004 Form 10-K 

included a general description of the transaction and 

indicated that it was part of the company's risk management 

activities. This disclosure was misleading since the 

company's principal purpose was to recognize gain on sale 

and book substantial income at year-end. 

RCG FINANCIAL'S RESTATEMENT 


25. R&G Financial completed the restatement process in 


November 2007. During the restatement process, the company 


retained new outside law firms to review the mortgage-


related transactions. These new law firms were unable to 


provide true sale opinions with respect to certain 


transactions in which the company provided the contra-party 


full recourse because these provisions were incompatible 




with the requirements for sale accounting under SFAS 140. 


These transactions were re-characterized as secured 


borrowings. 


26. R&G Financial re-characterized the swap 


transaction with Dora1 Financial because there was 


insufficient contemporaneous documentation of the company's 


purported business purpose. 


27. According to R&G Financial's 2004 Form 10-K/A, net 


income was overstated by $184 million or 80% on a cumulative 


basis during the relevant period. Net income (in thousand) 


and diluted earnings per share (in dollars) for fiscal years 


2002 through 2004 were restated as follows: 


Net Income Diluted -EPS-

Original Restated Change Original Restated Change 


28. As a result of these accounting irregularities, 


the financial statements R&G Financial incorporated into its 


earnings releases and periodic filings were materially false 


and misleading from at least January 2002 through March 


2005. 




FIRST CLAIM FOR RELIEF 

( V i o l a t i o n s  of S e c t i o n  10 (b) and 
R u l e  lob-5 of the E x c h a n g e  A c t )  

29. Plaintiff SEC hereby incorporates ¶ ¶  1 through 28 

with the same force and effect as if set out here. 

30. In the manner described in ¶ ¶  1 through 29, 

defendant R&G Financial, in connection with the purchase or 

sale of securities, by the use of means or instrumentalities 

of interstate commerce or of the mails, directly or 

indirectly (a) employed devices, schemes or art if ices to 

defraud; (b) made untrue statements of material facts or 

omissions of material facts necessary in order to make the 

statements made, in the light of the circumstances under 

which they were made, not misleading; or (c) engaged in 

transactions, practices or courses of business which 

operated or would operate as a fraud or deceit upon persons, 

in violation of Section 10 (b) of the Exchange Act [15 U.S.C 

§ 78j (b) ] and Rule lob-5 [17 C.F.R. § 240.10b-51 promulgated 

thereunder. 

SECOND CLAIM FOR RELIEF 

( V i o l a t i o n s  of the R e p o r t i n g  P r o v i s i o n s  
of the E x c h a n g e  A c t )  

31. Plaintiff SEC hereby incorporates ¶ ¶  1 through 30 

with the same force and effect as if set out here. 



32. In the manner described in ¶ ¶  1 through 31, 

defendant R&G Financial violated Sections 13(a) of the 

Exchange Act [15 U.S.C. 5 78m(a)] and Rules 12b-20, 13a-1 

and 13a-13 promulgated there under [17 C.F.R. 55  240.12b-20, 

240.13a-11, by filing reports with the SEC that inaccurately 

reflected the company's financial performance and provided 

other untrue and inaccurate information to the public. 

THIRD CLAIM FOR RELIEF 

( V i o l a t i o n s  of the B o o k s  and R e c o r d s  and Internal 
C o n t r o l  P r o v i s i o n s  of the E x c h a n g e  A c t )  

33. Plaintiff SEC hereby incorporates ¶ ¶  1 through 32 

with the same force and effect as if set out here. 

34. In the manner described in ¶ ¶  1 through 33, 

defendant R&G Financial failed to make and keep accurate 

books and records and to devise and maintain an adequate 

system of internal accounting controls in violation of 

Section 13(b) (2) (A) and 13(b) (2) (B) of the Exchange Act [15 

U.S.C. 55 78m(b)(2)(A) and 78m(b) (2)(B)1 . 

PRAYER FOR RELIEF 

WHEREFORE, the SEC respectfully requests that this 


Court enter a judgment: 


(i) permanently enjoining defendant R&G Financial, and 


its officers, agents, servants, employees, attorneys, and 


those in active concert or participation with it who receive 


actual notice by personal service or otherwise, from 




violating Sections 10 (b) , 13 (a), 13 (b) (2) (A) and 13 (b) (2) (B) 

of the Exchange Act [15 U.S.C. § 78j(b), 78m(a), 

78m(b) (2) (A) and 78m(b) (2) (B) ] and Rules lob-5, 12b-20, 13a- 

1 and 13a-13 [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1 

and 240.13a-131, promulgated thereunder; and 

(ii) granting such other relief as this Court may deem 


just and appropriate. 


Dated: February 12, 2008 


Cheryl J. Scarboro 

Reid A. Muoio (RM 2274) 


Attorneys for Plaintiff 

Securities and Exchange 


Commission 

100 F Street, N.E. 

Washington, D.C. 20549-6030 

(tel) 202/551-4403 (Scarboro)