SEC charges former CEO, CFO with fraudulent bond scheme

Dive Brief:

The Securities and Exchange Commission (SEC) has charged the former executives of Live Well, a reverse mortgage lender, with fraudulently increasing the company's borrowing capacity and generating millions of dollars in revenue by inflating the value of reverse-mortgage backed bonds the company held or intended to buy as collateral.
Under the charge, former CEO Michael Hild led an effort to convince the third-party pricing service that lenders relied on in their underwriting of loans to the company to stop publishing independent valuations of the company’s bonds. The company's former CFO, Eric Rohr, was charged with aiding and abetting the fraud.
By substituting its own valuations of the bonds, the company was able to inflate their value as collateral and secure loans larger than the bonds could support. The company used the higher loan proceeds to expand its portfolio by buying more bonds and subsequently inflating their values as well.

Dive Insight:

Starting in late 2015, the value of the company’s bond portfolio grew from $71 million to $570 million over an 18-month period.

The enlarged bond portfolio generated more than $100 million in revenue from cash remittances and Hild, as CEO, received more than $24 million in compensation.

“Rohr was aware of all aspects of the scheme, including the submission of inappropriately inflated quotes to the Pricing Service,” the SEC said. “Rohr, nevertheless, carried out the scheme with Hild. Rohr communicated Hild’s instructions to submit inflated quotes to the Pricing Service to other Live Well employees on multiple occasions, and he also certified false and misleading financial statements of Live Well that he supplied or caused others to supply to the repo counterparties in connection with the lenders’ assessment of Live Well’s creditworthiness.”

The company’s former portfolio manager, Darren Stumberger, was also charged.

The executives will be on the hook for repayment of the money illegally obtained and additional financial penalties if the charges are upheld.