SEC v. Doral Financial Corporation, No. LR-19837, Southern District of New York (Sept. 19, 2006) — Press Release
raw: Doral Financial Corporation
Doral Financial Corporation, No. LR-19837 (S.D.N.Y. Sept. 19, 2006)
Doral Financial Corporation fraudulently overstated income by $921 million between 2000 and 2004 through improper accounting of mortgage sales with undisclosed recourse and inflated interest-only strips, falsely reporting 28 quarters of record earnings, which led to a $4 billion market value loss and a $25 million SEC penalty without admission of guilt.
Doral Financial Corporation was charged by the SEC with orchestrating a $921 million pre-tax income fraud between 2000 and 2004 by improperly recognizing gains on $3.9 billion in mortgage sales to FirstBank Puerto Rico, concealing oral recourse agreements, and inflating the value of retained interest-only strips. The company also engaged in $847 million in round-trip transactions to manage earnings, enabling it to falsely report 28 consecutive quarters of record earnings and facilitate over $1 billion in debt and equity offerings. Without admitting or denying the allegations, Doral consented to an injunction against violating federal securities laws and agreed to pay a $25 million civil penalty, while the SEC’s investigation remains ongoing.
Doral Financial Corporation, a Puerto Rican bank holding company listed on the NYSE, was charged by the SEC with a massive financial fraud involving the deliberate overstatement of pre-tax income by $921 million between 2000 and 2004. The fraud centered on two key schemes: improperly recognizing gains on $3.9 billion in mortgage loan sales to FirstBank Puerto Rico through undisclosed oral agreements that provided recourse beyond the written contracts, and significantly inflating the valuation of interest-only strips retained from these transactions. To further manipulate earnings, Doral engaged in approximately $847 million in contemporaneous purchase and sale transactions with other Puerto Rican financial institutions, creating the illusion of legitimate business activity. These accounting manipulations enabled the company to falsely report 28 consecutive quarters of record earnings and facilitate over $1 billion in debt and equity offerings. When the fraud began to surface in early 2005, Doral’s stock price collapsed from nearly $50 to under $10, erasing more than $4 billion in market value. Without admitting or denying the allegations, Doral consented to a court order enjoining it from violating key provisions of the Securities Act and Exchange Act and agreed to pay a $25 million civil penalty. The SEC’s investigation remains active, with ongoing cooperation from the DOJ, FBI, Federal Reserve, and FDIC.
Exhibits & Attached Documents (1)
Extracted insights
- $4.00B $4 billion ≥$1B
- $3.90B $3.9 billion ≥$1B
- $1.00B $1 billion ≥$1B
- $921.00M $921 million $100M–$1B
- $847.00M $847 million $100M–$1B
- $25.00M $25 Million $10M–$100M
- $25.00M $25 million $10M–$100M
- agency Securities and Exchange Commission
- organization Securities and Exchange Commission
- Securities and Exchange Commission filed financial fraud charges against Doral Financial Corporation
- Doral Financial Corporation settles financial fraud charges with SEC
- Doral Financial Corporation agrees to pay $25 million penalty
- Securities and Exchange Commission alleges Doral Financial overstated income by approximately $921 million
- Doral Financial Corporation overstated income by approximately $921 million
- Litigation Release No. 19837 dated September 19, 2006
- Case No. 06-CIV-07158 filed September 19, 2006
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 19837 / September 19, 2006 Securities and Exchange Commission v. Doral Financial Corporation, Case No. 06-CIV- 07158 (JES)(S.D.N.Y. filed September 19, 2006) Doral Financial Settles Financial Fraud Charges with SEC and Agrees to Pay $25 Million Penalty The Securities and Exchange Commission today filed financial fraud charges against Doral Financial Corporation, a NYSE-listed Puerto Rican bank holding company. The Commission alleges that Doral Financial overstated income by approximately $921 million or 100 percent on a pre-tax, cumulative basis between 2000 and 2004. The Commission further alleges that accounting irregularities enabled the company to report an apparent 28-quarter streak of "record earnings" and facilitated the placement of over $1 billion of debt and equity. Since Doral Financial's accounting and disclosure problems began to surface in early 2005, the market price of the company's common stock plummeted from almost $50 to under $10, thereby reducing equity market value by over $4 billion. According to the Commission's complaint, Doral Financial improperly accounted for the purported sale of non-conforming mortgage loans to other Puerto Rican financial institutions in two respects. First, Doral Financial improperly recognized gain on sales of approximately $3.9 billion in mortgages to FirstBank Puerto Rico, a wholly owned banking subsidiary of First BanCorp. These transactions were not true sales under generally accepted accounting standards because of oral agreements or understandings between Doral Financial's former treasurer and former director emeritus and FirstBank senior management providing recourse beyond the limited recourse established in the written contracts. Second, Doral Financial senior management significantly overvalued interest-only strips retained by the company in its mortgage loan sale transactions. The Commission further alleges that Doral Financial managed earnings through a series of contemporaneous purchase and sale transactions with other Puerto Rican financial institutions totaling approximately $847 million. The Commission's complaint, which was filed in the United States District Court for the Southern District of New York, charges Doral Financial with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 13a-1 and 13a-13. Without admitting or denying the Commission's allegations, Doral Financial has consented to the entry of a court order enjoining it from violating those antifraud, reporting, books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty. The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company. The Commission's investigation is continuing. SEC Complaint in this matter
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 19837 / September 19, 2006 Securities and Exchange Commission v. Doral Financial Corporation, Case No. 06-CIV- 07158 (JES)(S.D.N.Y. filed September 19, 2006) Doral Financial Settles Financial Fraud Charges with SEC and Agrees to Pay $25 Million Penalty The Securities and Exchange Commission today filed financial fraud charges against Doral Financial Corporation, a NYSE-listed Puerto Rican bank holding company. The Commission alleges that Doral Financial overstated income by approximately $921 million or 100 percent on a pre-tax, cumulative basis between 2000 and 2004. The Commission further alleges that accounting irregularities enabled the company to report an apparent 28-quarter streak of "record earnings" and facilitated the placement of over $1 billion of debt and equity. Since Doral Financial's accounting and disclosure problems began to surface in early 2005, the market price of the company's common stock plummeted from almost $50 to under $10, thereby reducing equity market value by over $4 billion. According to the Commission's complaint, Doral Financial improperly accounted for the purported sale of non-conforming mortgage loans to other Puerto Rican financial institutions in two respects. First, Doral Financial improperly recognized gain on sales of approximately $3.9 billion in mortgages to FirstBank Puerto Rico, a wholly owned banking subsidiary of First BanCorp. These transactions were not true sales under generally accepted accounting standards because of oral agreements or understandings between Doral Financial's former treasurer and former director emeritus and FirstBank senior management providing recourse beyond the limited recourse established in the written contracts. Second, Doral Financial senior management significantly overvalued interest-only strips retained by the company in its mortgage loan sale transactions. The Commission further alleges that Doral Financial managed earnings through a series of contemporaneous purchase and sale transactions with other Puerto Rican financial institutions totaling approximately $847 million. The Commission's complaint, which was filed in the United States District Court for the Southern District of New York, charges Doral Financial with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 13a-1 and 13a-13. Without admitting or denying the Commission's allegations, Doral Financial has consented to the entry of a court order enjoining it from violating those antifraud, reporting, books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty. The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company. The Commission's investigation is continuing. SEC Complaint in this matter