The Los Angeles Times has a good investigation of questionable stock sales at New Century Financial, which was one of the first big subprime shops to go bust last year.
The paper looked at the timing of stock trades by top executives and found quite a number of discrepancies:
* Cole adopted a trading plan on Sept. 15, 2006, and sold 25,000 shares under it the same day. Two other executives, Chief Financial Officer Patti M. Dodge and Executive Vice President Kevin Cloyd, sold stock within a week of setting up their plans in February 2005. Legal experts say making trades so quickly after a plan is adopted weakens the protection offered by a trading plan, because prosecutors or shareholder attorneys could argue that the plans were drafted to facilitate a quick dumping of shares.
* All six executives either enacted plans or made trades on the same dates as other executives, which legal experts say could raise questions about whether they were acting in concert on inside information.
* The trades do not appear to follow regular patterns. Over two years, for example, Morrice made only two sales under his trading plan — and both were in July 2005, allowing him to sell $6.4 million worth of stock before the price fell about 40% later that summer.
The LAT reports that a federal investigation into the stock trades, announced more than a year and a half ago,
This is good work, but it would have been great if the paper had analyzed what happened in the days and weeks after the stock sales, like the Journal did in its blockbuster options-backdating investigation a few years ago.
Still, it looks pretty bad for New Century:
“Under these trading plans, you would expect to see a pattern of sales,” said David Nolte, a forensic accountant with Fulcrum Inquiry in Los Angeles, which performs investigative audits for government agencies and law firms. “That’s not the situation with New Century. That’s why, if prosecutors wanted, they could draw a distinction between a plan that is legitimate and a plan that is a ruse.”
And check this number out—it shows just how bad New Century’s loans had gotten by 2004:
For example, the proportionof borrowers who had failed to make payments in the first three months of a loan reached 10% by November 2004 — up from 4.2% in March, according to an internal report filed in a federal lawsuit against New Century by the New York State Teachers’ Retirement System.