by Brian Mahany
Once upon a time, Thornburg Mortgage was one of the largest real estate lenders in the nation. Like our perennial “favorite” Allied Home Mortgage, Thornburg had more than its fair share of problems. While HUD ultimately caused Allied to collapse, Thornburg met a similar fate after a $36 billion bankruptcy filing. Four years later, the feds are charging three former executives with civil accounting fraud.
The SEC says that Thornburg’s former CEO, CFO and chief accountant all conspired to hide the company’s true financial picture from auditors, the public and regulators. If the allegations are true, the trio should be facing prison in criminal court.
While we laud the SEC for its vigilance in exposing corruption and fraud, the agency has no tools to criminally prosecute offenders. Forcing corporate execs to disgorge their ill-gotten gains is an important first step but seeing them in orange jumpsuits doing the “perp walk” would be more gratifying. Too often, the overworked SEC simply settles the cases with no admission of any wrongdoing. Pay a fine and admit nothing.
In Thornburg’s case, the SEC says the officers hid a $300 million margin call. That ultimately caused the company to become insolvent and resulted in bankruptcy. Much of the case is based on an alleged email in which the chief accountant tells CEO Larry Goldstone “We have purposefully not told (our auditor) about the margins calls.”
According to published reports, the executives say the email was taken “out of context.”
What amazes us is that Thornburg’s auditor, KPMG, did not find the $300 million problem. Instead, they gave the company a clean bill of health. Allegedly, they found no problem with management’s integrity or the company’s internal controls.
A company goes through a multi-billion bankruptcy and closes its doors sending hundreds of people to unemployment lines yet no one is responsible or saw the impending collapse? We don’t buy that. Unfortunately, it is a story we see repeated often. Enron anyone?
There are several lessons in this story. First, financial statements are not worth the paper on which they are printed. We have seen many high profile cases in which a company gets a clean bill of health only to fold weeks later. If you are making a large investment or trusting your wealth with someone, don’t rely solely on audited financials.
The second lesson is that the government is only as effective as the tools it is given. To date, we give the government a “D” grade for prevention and only a “C” for its after-the-fact response to the 2008 economy collapse. Part of the problem is lack of tools (the SEC can only sue people, not put them in jail). Another part of the problem is a lack of will.
Big banks and Wall Street investment houses have simply become too big to fail and too big to jail. Taking a criminal case against a major bank requires thousands and thousands of hours of work. Those cases can be won but to date we have seen far too few criminal prosecutions.
Although the federal government’s response to our economic collapse is at best fair, the one bright spot has been the proliferation of federal false claims act cases – whistleblower law suits. The False Claims Act was enacted back in the Civil War days as a way of empowering citizens to recover money on behalf of the government and taxpayers. Today it has become a powerful tool that allows massive recoveries against mortgage companies that defraud HUD and Fannie Mae, doctors that cheat Medicare and contractors that rip off the military.
We don’t know what will happen to the former Thornburg executives but we know that billions of dollars were lost, that money will never be recovered and that no one has faced criminal charges for their roles in the collapse. Right now, we can only hope the SEC will take whatever crumbs are left.
If you are a present or former employee or auditor and have inside information about fraud that causes a loss to taxpayers, you may qualify under the False Claims Act as a whistleblower. Under state and federal laws, whistelblowers are entitled to a portion of whatever the government collects. While we believe most whistleblowers come forward out of a sense of civic duty and desire to do the right thing, receiving a big check from the government certainly doesn’t hurt.
For more information, contact attorney Brian Mahany at or by telephone at (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence. Our whistleblowers attorneys represent people across the United States. We currently represent the whistleblower in the largest false claims case anywhere in the U.S. against a lender or bank; HUD’s $2.4 billion case against Allied Home Mortgage.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. Services available in many jurisdictions.
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