NEW YORK — The Securities and Exchange Commission filed a settled action against R&G Financial Corp. on Wednesday, alleging the company improperly inflated its net income by about $180 million over a three-year period.
Cheryl J. Scarboro, a SEC lawyer, said Wednesday the complaint is a settled injunctive action, with no monetary sanction against the Puerto Rican bank holding company. R&G Financial neither admitted or denied wrongdoing in settling the complaint.
In a lawsuit filed in U.S. District Court in Manhattan, the regulator alleged that R&G Financial improperly accounted for billions of dollars of mortgage-related transactions in 2002, in 2003 and in 2004.
"Those accounting irregularities enabled R&G Financial to report an apparent twelve quarter streak of 'record earnings,"' the lawsuit said. "Since the accounting and disclosure irregularities began to surface in early 2005, the market price of the company's common stock plummeted from approximately $40 to $10 per share, or 75%, thereby reducing equity market value by approximately $900 million."
In its complaint, the SEC said R&G Financial's board of directors made significant management changes, restated its results and "took other significant remedial action," including entering consent orders with the Federal Reserve's Board of Governors and the Federal Deposit Insurance Corp.
The SEC alleged R&G improperly accounted for the purported sale of nonconforming mortgage loans to other Puerto Rican financial institutions.
R&G improperly recognized a gain on sale on those transactions, instead of accounting for them for as secured borrowings, the SEC said.
"R&G Financial senior management knew, or was reckless in not knowing, that the company was improperly accounting for mortgage-related transactions as sales."
The company also significantly overvalued interest-only strips retained by R&G in its purported mortgage-loan sale transactions, the SEC said. R&G also managed its results through a series of mortgage-loan swaps with other Puerto Rican financial institutions, the regulator said.
R&G originated residential mortgage loans of $2 billion in 2002, $2.8 billion in 2003 and $2.3 billion in 2004, according to the lawsuit.
A company spokeswoman didn't return a phone call seeking comment Wednesday.
