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U.S. Securities and Exchange Commission


Litigation Release No. 23553 / May 31, 2016

Securities and Exchange Commission v. First Mortgage Corporation, et al., Civil Action No. 2:16-cv-03772 (C.D. Cal., filed May 31, 2016)

The Securities and Exchange Commission today announced that a California-based mortgage company, and its six most senior executives, have agreed to pay $12.7 million to settle charges that they orchestrated a scheme to defraud investors in the sale of residential mortgage-backed securities guaranteed by the Government National Mortgage Association (Ginnie Mae RMBS). As alleged by the SEC, the defendants pulled current, performing loans out of Ginnie Mae RMBS by falsely claiming they were delinquent in order to sell them at a profit into newly-issued RMBS.

First Mortgage Corporation ("FMC") is a mortgage lender that issued Ginnie Mae RMBS backed by loans it originated. The SEC alleges that from March 2011 through March 2015, FMC caused its Ginnie Mae RMBS prospectuses to be false and misleading by improperly and deceptively using a Ginnie Mae rule that gave issuers the option to repurchase loans that were delinquent by three or more months. FMC, with the knowledge and approval of the company's senior-most management, purposely delayed depositing checks from borrowers who had been behind on their loans, falsely claiming to both investors and Ginnie Mae that such loans remained delinquent when in reality they were current. After repurchasing at prices applicable to delinquent loans, FMC was able to resell the loans into new Ginnie Mae RMBS pools at higher prices applicable to current loans for an immediate, nearly risk-free profit. Investors, meanwhile, were wrongly deprived of the interest payments on the repurchased loans.

The executives charged with fraud in the SEC's complaint filed in U.S. District Court for the Central District of California include:

  • Chairman and CEO Clement Ziroli Sr., who agreed to a $100,000 penalty.
  • Company president Clement Ziroli Jr., who agreed to pay 411,421.98 plus $27,203.92 in interest and a $200,000 penalty.
  • Chief financial officer Pac W. Dong, who agreed to pay a $100,000 penalty.
  • Senior vice president Ronald T. Vargas, who headed FMC's capital markets department, and agreed to pay a $60,000 penalty.
  • Senior vice president Scott Lehrer, who agreed to pay a $50,000 penalty.
  • Managing director of the servicing department Edward Joseph Sanders, who agreed to pay disgorgement of $51,576.51 plus $6,811.19 in interest. Sanders cooperated in the SEC's investigation, and no penalty is assessed against him.

In settling the charges without admitting or denying the allegations, each of the six executives agreed to be barred from serving as an officer or director of a public company for five years.

The SEC's complaint alleges that FMC, Ziroli Sr., Ziroli Jr., Dong, Vargas, Lehrer, and Sanders violated Sections 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5(a) and (c). The complaint also alleges that FMC violated Rule 10b-5(b). The settlements are subject to court approval.

The SEC's investigation was conducted by Allison Herren Lee and John B. Smith from the Complex Financial Instruments Unit in the Denver Regional Office. They were assisted by Dugan Bliss and Judy Bizu, and the case was supervised by Laura M. Metcalfe and Michael J. Osnato. The SEC appreciates the assistance of Ginnie Mae.



Modified: 06/01/2016