SEC v. Doral Financial Corporation, Southern District of New York (Sept. 19, 2006) — Complaint

~e~er (PB 9168) H, Bresnan  
Cheryl J. Scarboro  
Reid A.Muoio (RM 2274)  
.JasonM. Anthony  
Attorneys 
for Plaintiff  
Securities and Exchange Commission  
100 F Street, N.E.  
washington, D.C. 20549-6030  
(tel) 202/551-4597 (Bresnan)  
UN~TED STATES DISTRICT COURT FOR THE  
SOUTHERN DISTRICT OF NEW YORK  
____--__Y---_------b 
X 
1 
SECURITIES AND EXCHANGE COMMISSXON,  
Plaintiff, 
)  
v.  ) 
1 COMPLAINT 
DORAL FINANCIAL CORPORATION,  1 
Defendant. 
Plaintiff Securities and Exchange Commission (the  
"SEC") alleges as follows:  
NATURE OF THE ACTION  
1. 
The SEC brings this financial fraud action against 
Doral Financial Corporation, a NYSE-listed Puerto Rican bank 
holding company. Dora1 Financial overstated income by 
approximately $921 million or 100 percent on a pre-tax, 
cumulative basis between 2000 and 2004. Accounting 
irxegularities 
enabled the company to report an apparent 28-
quarter streak of "record earningsr' 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 or 80%,  
thereby reducing equity market value by over $4 billion.  
2. By  engaging in  such conduct, Doral Financial 
violated, and unless enjoined will continue to  violate, 
Section 17(a) of  the Securities Act of  1933 ("Securities 
Act") [15 U.S.C. 
5 77q(a)] and 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. 
§§ 240.1033-5, 240.1233-20, 240.13a-1 
and 240.13a-131, promulgated thereunder. 
3. Since learning of  the accounting problems, Doral  
Financial's Board of  Directors brought in a new management  
team, 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 System and the Federal Deposit Insurance  
Corporation.  
JURISDICTION  
4. This Court has jurisdiction over this action 
pursuant to Sections 20 (b) and 22 (a) of the Securities Act 
<,[I5 U.S.C. 
§§ 77t(b) and 77v(a)] and Sections 21(e) and 27 
of the Exchange Act [15 U.S.C. 
55 78u (e) and 78aal . Doral 
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. Doral Financial Corporation ("Doral Financial" or 
the "company") is a financial holding company with mortgage 
banking operations in Puerto Rico and New York City. 
. 
6. Doral Financial was the leading residential  
mortgage lender in Puerto Rico during the relevant period.  
The volume of  loans originated and purchased by  Doral  
Financial during 2004 and 2003 was approximately $7.8  
billion and $6.5 billion, respectively. Doral Financial  
reported consolidated assets of $17.8 billion and  
consolidated stockholdersf equity of  $1.3 billion as  of  
December 31, 2004, in its restated financials.  
7. Doral Financialf s common stock is registered with  
the Commission pursuant to Section 12(b) of the Exchange Act  
and listed on  the NYSE. There were 107,921,799 shares  
outstanding as of March 9, 2005.  
8. Doral Financial's stock price steadily increased  
from approximately $10 per share in early 2000 to almost $50  
in  early 2005 (with two 3  for 2  splits). In  2002 U.S.  
Banker ranked Doral Financial "The Best" out of  the 100  
largest banking companies in  the United States. Dora1  
Financial's chief executive officer made Forbesf Top 10 list  
of "Best Performing Bosses" in 2003 and 2004.  

SUBSTANTIVE ALLEGATIONS  
DORAL FINANCIAL'S MORTGAGE LOAN SALE TRANSACTIONS  
9. Doral Financial has traditionally emphasized the  
origination of 
15 to 30 year first mortgage loans secured by  
single family residences. Conventional loans that do not  
meet the underwriting requirements for sale or  exchange  
under standard Federal Home Loan Mortgage Corporation  
('FHLMC") or Federal National Mortgage Association ('FNMA")  
programs are referred to  as  "non-conforming" loans. The  
principal deviations that do not permit non-conforming loans  
to qualify for such programs are more flexible requirements  
for income verification or credit history, and loan amounts  
in  excess of  those permitted by  FNMA or  FHLMC. Dora1  
Financial uses its own credit system to evaluate these loans  
and generally requires lower loan-to-value ratios and higher  
borrower equity.  
10. Doral Financial customarily sold or  securitized  
most of the residential mortgage loans that it originated  
and purchased through various channels. Non-conforming  
loans were generally sold in  bulk to  local financial  
institutions in negotiated transactions. When Doral sold a  
pool of loans to an investor it agreed to pay the purchaser  
a  specified pass-through rate for the entire pool being  
purchased. Amounts received on  the mortgages above the  
pass-through rate were retained by Doral Financial as  
servicing rights and, if  applicable, interest-only strips  

("10s"). The pass-through rate paid to the investors may  
have been a  fixed rate or  more often a  variable rate  
generally based on  a  spread over the three-month London  
Interbank Offered Rate ("Libor"). The servicing fee rate 
retained by Doral Financial was fixed and contractually 
specified. 
11. The purported present value of  the future cash  
flows retained by  Doral Financial in  excess of  the pass  
through rate payable to investors and the servicing fee rate  
retained by  Doral Financial was recorded on the companyf s  
financial statements as  10s. The fair values assigned to  
the 10s reduced the carrying amount of the loans sold. The  
gain realized on the sale of the loans was determined by the  
difference of the sales price for the loan over the carrying  
amount. Net gains from mortgage loan sales and fees were  
Doral Financial's principal source of  income during the  
relevant period, as  originally reported. The majority of  
those profits was attributable to the 10s.  
12. Doral Financial retained 10s with recorded fair  
values of $509 million in 2004, $281 million in 2003, $197.9  
million in 2002, $141.4 million in 2001 and $72.7 million in  
2000, as  originally reported. These valuations resulted  
from the accounting and disclosure irregularities described  
below. As of December 31, 2004, 2003, 2002, 2001 and 2000,  
the carrying value of 10s reflected-in the balance sheet was  
$878.7 million, $578.1 million, $359.2 million, $236.5  

million and $158.0 million, respectively, as originally 
reported. Those values were significantly overstated for 
the reasons described below. 
DORAL FINANCIAL OVERVALUED ITS 10s 
13. To value its 10s for financial reporting purposes,  
Doral Financial obtained two valuations from third parties,  
compared them to  the valuation produced by  its internal  
model, and recorded the 10s in its consolidated financial  
statements at  the lowest of  the three valuations. There  
were at  least four problems with the way this apparently  
reasonable accounting policy was applied in practice.  
14. First, Doral Financial's internal model used the  
s.0-called "spot rate" methodology to compute the value of  
its 10s and gain on sale. The spot rate was the contractual  
or the actual 90-day Libor rate at the end of each reporting  
period. Doral Financial assumed for accounting purposes  
that interest rates remained fixed for the life of  the  
underlying mortgages at  the spot rate. Doral Financial's  
independent accountants, PricewaterouseCoopers LLP ("PwC"),  
were aware that the company's internal model used this  
methodology. However, this assumption was inconsistent with  
market practice, which would have assumed an  expected  
interest rate spread based on implied forward Libor rates  
('forward curve"). Incorporating the forward curve into  
Doral. Financial's internal model would have reduced the  

value of  its 10s and gains recognized on  sales of  the  
underlying mortgages.  
15. Second, Doral Financial's former treasurer and the  
former director emeritus improperly influenced the third-  
party valuation work to obtain results that were higher or  
similar to the valuations resulting from the internal model.  
This influence included providing inaccurate information to  
at  least one of  these third parties about the 10s orally  
over the phone. Had they not been misled, this third party  
might have assigned a value to Doral Financialf s 10s that  
was substantially lower than the value resulting from the  
internal model.  
16. Third, in connection with the company's efforts to  
enhance its interest rate risk management practices, Doral  
Financial senior management, including the former chief  
executive officer ("CEO") and the former chief financial  
officer ("CEO"), was informed by  late 2004 that the market  
would value the 10s using the forward curve and that the  
company's spot rate methodology significantly overstated the  
value of the portfolio. This information was not  
appropriately communicated to the company's governing bodies  
or independent accountants, PwC, prior to the release of the  
financial results for the year ended December 31, 2004.  
17. Fourth, the former CEO and the former director  
emeritus used questionable assumptions and flawed data to  
calculate a $97.5 million impairment charge to the 10s for  

the fourth quarter -of 2004, as  a  result of  which the  
impairment was significantly understated. The $97.5 million  
impairment charge was announced publicly in  an  earnings  
press release at  the close of  the market on  January 18,  
2005. Doral Financial's closing stock price plummeted $5.80  
or 12% the next day, from $49.45 to $43.05, and continued to  
fall.  
18. Doral Financial disclosed publicly its use of the  
spot rate methodology for the first time in its Form 10-K  
for 2004 which was filed after the close of the market on  
March 15, 2005. Dora1 Financialf s  closing stock price  
plummeted after the filing of  the Form 10-K for 2004,  
falling $6.64 or 17% to $31.65 on March 16, $4.19 or 14% to  
$26.31 on March 17, and $4.89 or 
19% to $21.50 on March 18,  
2005. These disclosures also triggered a  series of  
downgrades by  analysts and rating agencies in  March and  
April 2005. On April 14, 2005, an analyst at Merrill Lynch  
downgraded Doral Financial to "sell" from "neutral" because  
of  the possibility of  a  restatement. Dora1 Financial's  
closing stock price dropped $2.24 or  12% to $17 -07 on this  
news.  
19. The morning of  April 19, 2005, Doral Financial  
announced publicly that it  had determined to  correct the  
methodology used to value its 10s to incorporate the forward  
curve and that doing so would decrease the value of its I0  
portfolio by  $400 to  $600 million. Dora1 Financial's  

closing stock price dropped $0.70 or 4.6% to $16.15 on that  
day. According to Doral Financial's Form 10-K/A, income was  
overstated by  approximately $283.1 million on  a  pre-tax,  
cumulative basis during the relevant period because of 
I0  
valuation issues.  
DORAL FINANCIAL IMPROPERLY RECOGNIZED GAIN ON SALE  
FROM ITS TRANSACTIONS WITH FIRSTBANK  
20. The largest buyer of Doral Financial's non-
conforming mortgages during the relevant period was 
FirstBank Puerto Rico ("FirstBank") 
. FirstBank is a wholly- 
owned banking subsidiary of  First BanCorp., a NYSE-listed 
financial services company. Dora1 Financial improperly 
recognized gain on  sales of  approximately $3.9 billion in 
mortgages to FirstBank between 2000 and 2004. 
21. These transactions were not true sales under  
generally accepted accounting principles ("GAAP") 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. As a result,  
the company improperly recognized gain on  sale from these  
transactions. The oral recourse agreements or  
understandings with FirstBank were not captured by  Doral  
Financial's financial reporting process or  appropriately  
communicated to the audit committee, PwC or  the company's  
internal and external counsel.  

22. After the close of the market on October 25, 2005,  
Doral Financial announced publicly that it was investigating  
the true sale issue. On October 26, 2005, Doral Financial's  
closing stock price dropped $2.25 or  20% on  this news.  
Ratings agencies downgraded Doral Financial's senior debt on  
October 27  and 28, 2005. On  December 15, 2005, Dora1  
Financial announced its intention to restate its financials  
to  account for the transactions with FirstBank as  loans  
payable secured by mortgage loans and to reverse the gains  
previously recognized.  
23. As  reflected in  Doral Financial's Form 10-K/A,  
income was overstated by  approximately $595.5 million on a  
pre-tax, cumulative basis during the relevant period because  
of the FirstBank true sale issue and certain contemporaneous  
purchase and sale transactions discussed below.  
CONTEMPORANEOUS PURCHASE AND SALE TRANSACTIONS  
24. Doral Financial managed earnings through a series  
of contemporaneous purchase and sale transactions with other  
Puerto Rican financial institutions totaling approximately  
$846.9 million. These involved the generally  
contemporaneous purchase and sale of mortgage loans from and  
to local financial institutions where the amounts purchased  
and sold, and other terms of the transactions, were similar.  
Doral Financial entered into approximately $200.1 million  
worth of  these transactions during the fourth quarter of  
2004 with one Puerto Rican financial institution and  

approximately $646.8 million worth during 2000 and 2001 with  
other local financial institutions.  
25. On  December 15, 2005, Doral Financial announced  
that it had determined to reverse the gains recognized on  
these transactions because there was insufficient  
contemporaneous documentation to substantiate their business  
purpose. For some periods, the gains on  sale originally  
recorded in connection with such transactions had a material  
impact on the companyfs consolidated financial statements.  
DORAL FINANCIALfS RESTATEMENT  
26. Doral Financial completed the restatement process  
in February 2006. According Doral Financial's Form 10-K/A,  
income was overstated by  approximately $921 million on  a  
pre-tax, cumulative basis during the relevant period. Doral  
Financial attributed approximately $595.5 million of  that  
amount to  the FirstBank true sale and contemporaneous  
purchase and sale issues and $283.1 million to I0 valuation  
issues (the balance of  approximately $42 million was  
attributed to four other accounting adjustments).  
27. Doral Financialf s  net income (in thousand) and  
diluted earnings per common share (in dollars) for fiscal  
year 2000 through 2004 were restated as follows:  
Net
-
Income Diluted EPS-
Fiscal Original Restated Change Original Restated Change  
year  

28. As  a  result of  t'hese accounting irregularities,  
the financial statements Doral Financial incorporated into  
its periodic filings and offering documents, together with  
the associated earnings press releases and other materials  
disseminated to the investing public, were materially false  
and misleading from at least early 2000 through early 2005.  
RELEVANT BENEFIT AND INJURY  
29. Doral Financial's accounting and disclosure 
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. 
30. On  the equity side, Doral Financial raised $345  
million through a  Private Investment in  Public Equity  
("PIPE") in  late 2003 and early 2004. Dora1 Financial  
obtained millions of dollars more in this PIPE than it would  
have had its true financial condition been known to  the  
market. On the debt side, Doral Financial further benefited  
from the irregularities by  paying millions of dollars less  
in interest on certain bond offerings.  
31. Since the accounting and disclosure problems began  
to  surface in  early 2005, the market price of  Doral  
Financial's common stock plummeted from almost $50 to under  

$10 or 80%, thereby reducing equity market value by over $4 
billion. 
FIRST CLAIM FOR RELIEF  
(Violations of Section 17(a)  
of the Securities Act)  
32. Plaintiff SEC hereby incorporates ¶¶ 1 through 31 
with the same force and effect as if set out here. 
33. In  the manner described in ¶¶ 1  through 32, 
defendants Dora1 Financial, in  the offer or  sale of 
securities, by the use of means or instruments of interstate 
commerce or  by  the mails, directly or  indirectly (a) 
employed devices, schemes or  artifices to  defraud; (b) 
obtained money or property by means of 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 purchasers of  securities, in  violation of 
Section 17 (a) of the Exchange Act [15 
U.S .C. § 77q (a) ] . 
SECOND CLAIM FOR RELIEF  
(Violations of Section 10 (b) and  
Rule lob-5 of the Exchange Act)  
34. Plaintiff SEC hereby incorporates ¶¶ 1 through 33 
with the same force and effect as if set out here. 

35. In  the manner described in ¶¶ 1 through 34, 
defendant Doral 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 
artifices 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. 
THIRD CLAIM FOR RELIEF 
(Violations of the Reporting Provisions  
of the Exchange Act)  
36. Plaintiff SEC hereby incorporates ¶¶ 1 through 35 
with the same force and effect as if set out here. 
37. 
In the manner described in ¶¶ 1  through 36, 
defendant Doral Financial violated Sections 13(a) of  the 
Exchange Act [15 U.S.C. 
§ 78m(a)] and Rules 12b-20, 13a-1 
and 13a-13 promulgated there under [17 C.F.R. 
§§ 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. 

FOURTH CLAIM FOR RELIEF  
(Violations of the Books and Records and Internal  
Control  
Provisions of the Exchange Act)  
38. Plaintiff SEC hereby incorporates ¶¶ 1 through 37 
with the same force and effect as if set out here. 
39. In  the manner described in 
¶¶ 1  through 38, 
defendant Doral 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. 
§§ 78m(b) (2) (A) and 78m(b) (2) (B)]. 
PRAYER FOR RELIEF  
WHEREFORE, the SEC respectfully requests that this  
Court enter a judgment:  
(i) permanently enjoining defendant Doral 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 Section 17 (a) of the Securities Act [15 U.S.C. 
§ 
77q (a) ] and 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, 240.1233-20, 
240.13a-1 and 240.13a-131, promulgated thereunder; 

(ii) ordering defendant Dora1 Financial to disgorge all 
ill-gotten gains from the conduct alleged herein, with 
prejudgment interest; 
(iii) ordering defendant Dora1 Financial to pay civil 
money penalties pursuant to Section 20(d) of the securities 
AC~ [15 U.S.C. $ 77t(d)J and Section 21(d) (3) of the 
Exchange Act [15 U.S.C. 9 78u(d) (3)l; and 
(iv) granting such other relief as this Court may deem 
just and appropriate. 
Dated: September, /z, 2006 
Peter H. Bresnan (PB 9168) 
Cheryl J. Scarboro 
Reid A. Muoio (RM 2274) 
Jason M, Anthony 
Attorneys for Plaintiff 
Securities and Exchange 
Commission 
100 F Street, N.E. 
Washington, D.C. 20549-6030 
(tell 202/551-4597 (Bresnan) 

~ e ~ e r  (PB 9168) H, Bresnan  
Cheryl J. Scarboro  
Reid A. Muoio (RM 2274)  
.Jason M. Anthony  

Attorneys for Plaintiff  
Securities and Exchange Commission  
100 F Street, N.E.  
washington, D.C. 20549-6030  
(tel) 202/551-4597 (Bresnan)  

U N ~ T E D  STATES DISTRICT COURT FOR THE  
SOUTHERN DISTRICT OF NEW YORK  
_ _ _ _ - - _ _ Y - - - _ - - - - - - b  

X 

1 
SECURITIES AND EXCHANGE COMMISSXON,  

Plaintiff, )  
v.  ) 

1 COMPLAINT 
DORAL FINANCIAL CORPORATION,  1 

Defendant .  

Plaintiff Securities and Exchange Commission (the  

"SEC") alleges as follows :  

NATURE OF THE ACTION  

1. The SEC b r i n g s  t h i s  financial fraud action aga ins t  

Doral Financial Corporation, a NYSE-listed Puerto Rican bank 

holding company. Dora1 Financial overstated income by 

approximately $921 million o r  100  percent on a pre-tax, 

cumulative basis between 2000 and 2004. Accounting 

irxegularities e n a b l e d  the company t o  report an apparent 28-

quarter streak of "record earningsr '  and facilitated t h e  

placement of over $1 billion of debt and equity. Since 

Doral Financial's accounting and disclosure problems began 

to surface i n  early 2005, the market price of the company's 



common stock plummeted from almost $50 to under $10 or 80%,  

thereby reducing equity market value by over $4 billion.  

2. By engaging in such conduct, Doral Financial 

violated, and unless enjoined will continue to violate, 

Section 17(a) of the Securities Act of 1933 ("Securities 

Act") [15 U.S.C. 5 77q(a)] and 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. §§ 240.1033-5, 240.1233-20, 240.13a-1 

and 240.13a-131, promulgated thereunder. 

3. Since learning of the accounting problems, Doral  

Financial's Board of Directors brought in a new management  

team, 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 System and the Federal Deposit Insurance  

Corporation.  

JURISDICTION  

4. This Court has jurisdiction over this action 

pursuant to Sections 20 (b) and 22 (a) of the Securities Act 

<,[I5 U.S.C. §§ 77t(b) and 77v(a)] and Sections 21(e) and 27 

of the Exchange Act [15 U.S.C. 55 78u (e) and 78aal . Doral 

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. Doral Financial Corporation ("Doral Financial" or 

the "company") is a financial holding company with mortgage 

banking operations in Puerto Rico and New York City. . 

6. Doral Financial was the leading residential  

mortgage lender in Puerto Rico during the relevant period.  

The volume of loans originated and purchased by Doral  

Financial during 2004 and 2003 was approximately $7.8  

billion and $6.5 billion, respectively. Doral Financial  

reported consolidated assets of $17.8 billion and  

consolidated stockholdersf equity of $1.3 billion as of  

December 31, 2004, in its restated financials.  

7. Doral Financialf s common stock is registered with  

the Commission pursuant to Section 12(b) of the Exchange Act  

and listed on the NYSE. There were 107,921,799 shares  

outstanding as of March 9, 2005.  

8. Doral Financial's stock price steadily increased  

from approximately $10 per share in early 2000 to almost $50  

in early 2005 (with two 3 for 2 splits). In 2002 U.S.  

Banker ranked Doral Financial "The Best" out of the 100  

largest banking companies in the United States. Dora1  

Financial's chief executive officer made Forbesf Top 10 list  

of "Best Performing Bosses" in 2003 and 2004.  



SUBSTANTIVE ALLEGATIONS  

DORAL FINANCIAL'S MORTGAGE LOAN SALE TRANSACTIONS  

9. Doral Financial has traditionally emphasized the  

origination of 15 to 30 year first mortgage loans secured by  

single family residences. Conventional loans that do not  

meet the underwriting requirements for sale or exchange  

under standard Federal Home Loan Mortgage Corporation  

('FHLMC") or Federal National Mortgage Association ('FNMA")  

programs are referred to as "non-conforming" loans. The  

principal deviations that do not permit non-conforming loans  

to qualify for such programs are more flexible requirements  

for income verification or credit history, and loan amounts  

in excess of those permitted by FNMA or FHLMC. Dora1  

Financial uses its own credit system to evaluate these loans  

and generally requires lower loan-to-value ratios and higher  

borrower equity.  

10. Doral Financial customarily sold or securitized  

most of the residential mortgage loans that it originated  

and purchased through various channels. Non-conforming  

loans were generally sold in bulk to local financial  

institutions in negotiated transactions. When Doral sold a  

pool of loans to an investor it agreed to pay the purchaser  

a specified pass-through rate for the entire pool being  

purchased. Amounts received on the mortgages above the  

pass-through rate were retained by Doral Financial as  

servicing rights and, if applicable, interest-only strips  



("10s"). The pass-through rate paid to the investors may  

have been a fixed rate or more often a variable rate  

generally based on a spread over the three-month London  

Interbank Offered Rate ("Libor"). The servicing fee rate 

retained by Doral Financial was fixed and contractually 

specified. 

11. The purported present value of the future cash  

flows retained by Doral Financial in excess of the pass  

through rate payable to investors and the servicing fee rate  

retained by Doral Financial was recorded on the companyf s  

financial statements as 10s. The fair values assigned to  

the 10s reduced the carrying amount of the loans sold. The  

gain realized on the sale of the loans was determined by the  

difference of the sales price for the loan over the carrying  

amount. Net gains from mortgage loan sales and fees were  

Doral Financial's principal source of income during the  

relevant period, as originally reported. The majority of  

those profits was attributable to the 10s.  

12. Doral Financial retained 10s with recorded fair  

values of $509 million in 2004, $281 million in 2003, $197.9  

million in 2002, $141.4 million in 2001 and $72.7 million in  

2000, as originally reported. These valuations resulted  

from the accounting and disclosure irregularities described  

below. As of December 31, 2004, 2003, 2002, 2001 and 2000,  

the carrying value of 10s reflected-in the balance sheet was  

$878.7 million, $578.1 million, $359.2 million, $236.5  



million and $158.0 million, respectively, as originally 

reported. Those values were significantly overstated for 

the reasons described below. 

DORAL FINANCIAL OVERVALUED I T S  10s 

13. To value its 10s for financial reporting purposes,  

Doral Financial obtained two valuations from third parties,  

compared them to the valuation produced by its internal  

model, and recorded the 10s in its consolidated financial  

statements at the lowest of the three valuations. There  

were at least four problems with the way this apparently  

reasonable accounting policy was applied in practice.  

14. First, Doral Financial's internal model used the  

s.0-called "spot rate" methodology to compute the value of  

its 10s and gain on sale. The spot rate was the contractual  

or the actual 90-day Libor rate at the end of each reporting  

period. Doral Financial assumed for accounting purposes  

that interest rates remained fixed for the life of the  

underlying mortgages at the spot rate. Doral Financial's  

independent accountants, PricewaterouseCoopers LLP ("PwC"),  

were aware that the company's internal model used this  

methodology. However, this assumption was inconsistent with  

market practice, which would have assumed an expected  

interest rate spread based on implied forward Libor rates  

('forward curve"). Incorporating the forward curve into  

Doral. Financial's internal model would have reduced the  



value of its 10s and gains recognized on sales of the  

underlying mortgages.  

15. Second, Doral Financial's former treasurer and the  

former director emeritus improperly influenced the third-  

party valuation work to obtain results that were higher or  

similar to the valuations resulting from the internal model.  

This influence included providing inaccurate information to  

at least one of these third parties about the 10s orally  

over the phone. Had they not been misled, this third party  

might have assigned a value to Doral Financialf s 10s that  

was substantially lower than the value resulting from the  

internal model.  

16. Third, in connection with the company's efforts to  

enhance its interest rate risk management practices, Doral  

Financial senior management, including the former chief  

executive officer ("CEO") and the former chief financial  

officer ("CEO"), was informed by late 2004 that the market  

would value the 10s using the forward curve and that the  

company's spot rate methodology significantly overstated the  

value of the portfolio. This information was not  

appropriately communicated to the company's governing bodies  

or independent accountants, PwC, prior to the release of the  

financial results for the year ended December 31, 2004.  

17. Fourth, the former CEO and the former director  

emeritus used questionable assumptions and flawed data to  

calculate a $97.5 million impairment charge to the 10s for  



the fourth quarter -of 2004, as a result of which the  

impairment was significantly understated. The $97.5 million  

impairment charge was announced publicly in an earnings  

press release at the close of the market on January 18,  

2005. Doral Financial's closing stock price plummeted $5.80  

or 12% the next day, from $49.45 to $43.05, and continued to  

fall.  

18. Doral Financial disclosed publicly its use of the  

spot rate methodology for the first time in its Form 10-K  

for 2004 which was filed after the close of the market on  

March 15, 2005. Dora1 Financialf s closing stock price  

plummeted after the filing of the Form 10-K for 2004,  

falling $6.64 or 17% to $31.65 on March 16, $4.19 or 14% to  

$26.31 on March 17, and $4.89 or 19% to $21.50 on March 18,  

2005. These disclosures also triggered a series of  

downgrades by analysts and rating agencies in March and  

April 2005. On April 14, 2005, an analyst at Merrill Lynch  

downgraded Doral Financial to "sell" from "neutral" because  

of the possibility of a restatement. Dora1 Financial's  

closing stock price dropped $2.24 or 12% to $17 -07 on this  

news.  

19. The morning of April 19, 2005, Doral Financial  

announced publicly that it had determined to correct the  

methodology used to value its 10s to incorporate the forward  

curve and that doing so would decrease the value of its I0  

portfolio by $400 to $600 million. Dora1 Financial's  



closing stock price dropped $0.70 or 4.6% to $16.15 on that  

day. According to Doral Financial's Form 10-K/A, income was  

overstated by approximately $283.1 million on a pre-tax,  

cumulative basis during the relevant period because of I0  

valuation issues.  

DORAL FINANCIAL IMPROPERLY RECOGNIZED GAIN ON SALE  
FROM ITS TRANSACTIONS WITH FIRSTBANK  

20. The largest buyer of Doral Financial's non-

conforming mortgages during the relevant period was 

FirstBank Puerto Rico ("FirstBank") . FirstBank is a wholly- 

owned banking subsidiary of First BanCorp., a NYSE-listed 

financial services company. Dora1 Financial improperly 

recognized gain on sales of approximately $3.9 billion in 

mortgages to FirstBank between 2000 and 2004. 

21. These transactions were not true sales under  

generally accepted accounting principles ("GAAP") 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. As a result,  

the company improperly recognized gain on sale from these  

transactions. The oral recourse agreements or  

understandings with FirstBank were not captured by Doral  

Financial's financial reporting process or appropriately  

communicated to the audit committee, PwC or the company's  

internal and external counsel.  



22. After the close of the market on October 25, 2005,  

Doral Financial announced publicly that it was investigating  

the true sale issue. On October 26, 2005, Doral Financial's  

closing stock price dropped $2.25 or 20% on this news.  

Ratings agencies downgraded Doral Financial's senior debt on  

October 27 and 28, 2005. On December 15, 2005, Dora1  

Financial announced its intention to restate its financials  

to account for the transactions with FirstBank as loans  

payable secured by mortgage loans and to reverse the gains  

previously recognized.  

23. As reflected in Doral Financial's Form 10-K/A,  

income was overstated by approximately $595.5 million on a  

pre-tax, cumulative basis during the relevant period because  

of the FirstBank true sale issue and certain contemporaneous  

purchase and sale transactions discussed below.  

CONTEMPORANEOUS PURCHASE AND SALE TRANSACTIONS  

24. Doral Financial managed earnings through a series  

of contemporaneous purchase and sale transactions with other  

Puerto Rican financial institutions totaling approximately  

$846.9 million. These involved the generally  

contemporaneous purchase and sale of mortgage loans from and  

to local financial institutions where the amounts purchased  

and sold, and other terms of the transactions, were similar.  

Doral Financial entered into approximately $200.1 million  

worth of these transactions during the fourth quarter of  

2004 with one Puerto Rican financial institution and  



approximately $646.8 million worth during 2000 and 2001 with  

other local financial institutions.  

25. On December 15, 2005, Doral Financial announced  

that it had determined to reverse the gains recognized on  

these transactions because there was insufficient  

contemporaneous documentation to substantiate their business  

purpose. For some periods, the gains on sale originally  

recorded in connection with such transactions had a material  

impact on the companyfs consolidated financial statements.  

DORAL FINANCIALfS RESTATEMENT  

26. Doral Financial completed the restatement process  

in February 2006. According Doral Financial's Form 10-K/A,  

income was overstated by approximately $921 million on a  

pre-tax, cumulative basis during the relevant period. Doral  

Financial attributed approximately $595.5 million of that  

amount to the FirstBank true sale and contemporaneous  

purchase and sale issues and $283.1 million to I0 valuation  

issues (the balance of approximately $42 million was  

attributed to four other accounting adjustments).  

27. Doral Financialf s net income (in thousand) and  

diluted earnings per common share (in dollars) for fiscal  

year 2000 through 2004 were restated as follows:  

N e t- I n c o m e  D i l u t e d  EPS-

Fiscal Original Restated Change Original Restated Change  
year  



28. As a result of t'hese accounting irregularities,  

the financial statements Doral Financial incorporated into  

its periodic filings and offering documents, together with  

the associated earnings press releases and other materials  

disseminated to the investing public, were materially false  

and misleading from at least early 2000 through early 2005.  

RELEVANT BENEFIT AND INJURY  

29. Doral Financial's accounting and disclosure 

irregularities enabled the company to report an apparent 2 8 -

quarter streak of "record earnings" and facilitated the 

placement of over $1 billion of debt and equity. 

30. On the equity side, Doral Financial raised $345  

million through a Private Investment in Public Equity  

("PIPE") in late 2003 and early 2004. Dora1 Financial  

obtained millions of dollars more in this PIPE than it would  

have had its true financial condition been known to the  

market. On the debt side, Doral Financial further benefited  

from the irregularities by paying millions of dollars less  

in interest on certain bond offerings.  

31. Since the accounting and disclosure problems began  

to surface in early 2005, the market price of Doral  

Financial's common stock plummeted from almost $50 to under  



$10 or 80%, thereby reducing equity market value by over $4 

billion. 
FIRST CLAIM FOR RELIEF  

(Violations of Section 17(a)  
of the Securities Act)  

32. Plaintiff SEC hereby incorporates ¶ ¶  1 through 31 

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

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

defendants Dora1 Financial, in the offer or sale of 

securities, by the use of means or instruments of interstate 

commerce or by the mails, directly or indirectly (a) 

employed devices, schemes or artifices to defraud; (b) 

obtained money or property by means of 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 purchasers of securities, in violation of 

Section 17 (a) of the Exchange Act [15 U.S .C. § 77q (a) ] . 

SECOND CLAIM FOR RELIEF  

(Violations of Section 10 (b) and  
Rule lob-5 of the Exchange Act)  

34. Plaintiff SEC hereby incorporates ¶ ¶  1 through 33 

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



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

defendant Doral 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 

artifices 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. 

THIRD CLAIM FOR RELIEF 

(Violations of the Reporting Provisions  
of the Exchange Act)  

36. Plaintiff SEC hereby incorporates ¶ ¶  1 through 35 

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

37. In the manner described in ¶ ¶  1 through 36, 

defendant Doral Financial violated Sections 13(a) of the 

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

and 13a-13 promulgated there under [17 C.F.R. §§ 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. 



FOURTH CLAIM FOR RELIEF  

(Violations of the Books and Records and Internal  
Control  

Provisions of the Exchange Act)  

38. Plaintiff SEC hereby incorporates ¶ ¶  1 through 37 

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

39. In the manner described in ¶ ¶  1 through 38, 

defendant Doral 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. §§ 78m(b) (2) (A) and 78m(b) (2) (B)]. 

PRAYER FOR RELIEF  

WHEREFORE, the SEC respectfully requests that this  

Court enter a judgment:  

(i) permanently enjoining defendant Doral 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 Section 17 (a) of the Securities Act [15 U.S.C. § 

77q (a) ] and 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, 240.1233-20, 

240.13a-1 and 240.13a-131, promulgated thereunder; 



(ii) ordering defendant Dora1 Financial to disgorge all 

ill-gotten gains from the conduct alleged herein, with 

prejudgment interest; 

(iii) ordering defendant Dora1 Financial to pay civil 

money penalties pursuant to Section 20(d) of the securities 

A C ~  [15 U.S.C. $ 77t(d)J and Section 21(d) (3) of the 

Exchange Act [15 U.S.C. 9 7 8 u ( d )  ( 3 ) l ;  and 

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

just and appropriate. 

Dated: September, /z, 2006 

Peter H. Bresnan (PB 9168) 
Chery l  J. Scarboro 
Reid A. Muoio (RM 2274) 
Jason M, Anthony 

Attorneys for Plaintiff 
Securities and Exchange 

Commission 
100 F Street, N.E. 
Washington, D.C. 20549-6030 
(tell 202/551-4597 (Bresnan)