A federal judge rejected requests to toss out a shareholder lawsuit accusing former New Century Financial Corp. executives and underwriters of violating securities laws by making misstatements about the Irvine, Calif., company's financial situation.
Judge Dean Pregerson of the U.S. District Court for the Central District of California in Los Angeles denied the requests last week by Robert Cole, New Century's former chairman and chief executive; Brad Morrice, its former president; eight investment banks, including Bear Stearns Cos. and Deutsche Bank AG; and KPMG LLP, New Century's auditor.
Investors led by the New York State Teachers' Retirement System accused Mr. Cole and Mr. Morrice of fraudulently concealing the now-bankrupt subprime mortgage lender's deteriorating condition as it was issuing progressively riskier loans while claiming to adhere to strict underwriting standards.
"Plaintiffs have sufficiently alleged facts giving rise to a strong inference that the officer defendants were at least deliberately reckless in making misrepresentations as to loan quality, internal controls, and various financial statements," Judge Pregerson wrote.
The suit accuses KPMG of securities fraud and says the underwriters are liable for providing misleading registration statements for some of New Century's preferred stock.
Neither Dan Ginsburg, a KPMG spokesman, nor Manuel Abascal, an attorney for Mr. Cole, would discuss the ruling. John Spiegel, an attorney for Mr. Morrice, and John Durrant, an attorney for the underwriters, did not return calls seeking comment.
New Century, at one point the second-biggest U.S. subprime lender, filed for bankruptcy protection in April of last year.