Two former executives of a major mortgage lender that collapsed near the start of the subprime lending crisis were charged Tuesday with accounting fraud and making false disclosures to hide their firm's worsening condition from investors.
Michael Strauss, 50, the former CEO of Melville, N.Y.-based American Home Mortgage Investment, and Stephen Hozie, 50, the former CFO of the now-bankrupt firm, fraudulently understated the company's first-quarter 2007 loan loss reserves by tens of millions of dollars, the Securities and Exchange Commission charged.
That action transformed what would have been the company's first-ever quarterly loss into a phony profit, the SEC alleged in a civil lawsuit.
The agency also accused Strauss and Hozie of misleading investors about the riskiness of the firm's mortgage portfolio, and charged both men and Robert Bernstein, 43, the firm's former controller, with misleading American Home's auditor.
"They wanted to create the impression they would be a survivor," said Robert Khuzami, director of the SEC's enforcement division. "So they chose to cross the line, despite the fact that they knew their company's holdings and business model were deteriorating rapidly."
Strauss agreed to settle the charges without admitting or denying wrongdoing. He will pay $2.45 million in disgorgement payments, prejudgment interest and penalties, the SEC said. His lawyer, Peter Bresnan, did not return a call seeking comment.
Attorneys for Hozie and Bernstein declined to comment. The case against both is continuing.
American Home sought bankruptcy court protection in August 2007 as mortgage defaults spiked and the firm's funding shrank. The collapse marked a dramatic fall for a firm that grew rapidly and originated $58.9 billion in mortgages in 2006.
The SEC charged that American Home grew via riskier loans that caused the firm to teeter as real estate markets stalled. Strauss and Hozie deliberately understated company reserves despite an internal analysis that showed the firm needed at least an additional $38 million, the SEC charged.
The company is now being liquidated.