Sec. & Exch. Comm'n v. Goldstone

• Decision Date: 26 January 2017
• Docket Number: No. CIV 12–0257 JB/GBW,CIV 12–0257 JB/GBW
• Citation: 233 F.Supp.3d 1169
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Larry A. GOLDSTONE; Clarence G. Simmons, III and Jane E. Starrett, Defendants.
• Court: U.S. District Court — District of New Mexico

233 F.Supp.3d 1169

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Larry A. GOLDSTONE; Clarence G. Simmons, III and Jane E. Starrett, Defendants.

No. CIV 12–0257 JB/GBW

United States District Court, D. New Mexico.

Signed January 26, 2017

Danielle Voorhees, Dugan Bliss, Gregory A. Kasper, Stephen C. McKenna, Ian S. Karpel, Securities & Exchange Commission, Denver, CO, Michael H. Hoses, US Attorney's Office District of New Mexico, Albuquerque, NM, for Plaintiff

Aaron Thompson, Daniel R. Crump, Jessica Kurzban, Wilmer Cutler Pickering Hale & Dorr LLP, Elena Kilberg, Jerry L. Marks, Paul M. Torres, Robert J. Liubicic, Alisa Schlesinger, Randall Lee, Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, CA, Andrew G. Schultz, Bruce D. Hall, Melanie B. Stambaugh, Rodey, Dickason, Sloan, Akin & Robb, William Spencer Reid, Keleher & McLeod, Albuquerque, NM, April N. Williams, Michael A. Lamson, Skye Lynn Perryman, Wilmer Cutler Pickering Hale & Dorr LLP, Washington, DC, Chris Johnstone, Heather S. Tewksbury, Wilmer Cutler Pickering Hale & Dorr LLP, Palo Alto, CA, Robert Badal, Santa Barbara, CA, Larry J. Montano, Holland & Hart, LLP, Santa Fe, NM, Thomas Arena, Milbank, Tweed, Hadley & McCloy LLP, Samuel J. Rubin, Freshfields Bruckhaus Deringer US LLP, George A. Salter, Peter J. Dennin, Hogan Lovells US LLP, New York, NY, for Defendants

MEMORANDUM OPINION AND ORDER

James O. Browning, UNITED STATES DISTRICT JUDGE

THIS MATTER comes before the Court on the Defendants' Renewed Motion for Judgment as a Matter of Law, filed July 27, 2016 (Doc. 594)("Renewed Motion for Judgment"). The Court held a hearing on December 1, 2016. The primary issues are: (i) whether specific factual findings the jury made that Defendant Larry A. Goldstone and Defendant Clarence G. Simmons III did not falsify books or records, and that Thornburg Mortgage did not fail to keep accurate books or records, require dismissal of Plaintiff Securities and Exchange Commission's claim that Goldstone and Simmons made false statements or omissions to Thornburg's accountant, KPMG, LLP; and (ii) whether the SEC presented legally sufficient evidence at trial for a reasonable jury to conclude that Goldstone committed securities fraud on February 28, 2008, either by making statements on the Consumer News and Business Channel ("CNBC") or in an email to Thornburg Mortgage's Investor Relations group. Because the jury's factual findings do not necessarily imply that Goldstone or Simmons did not make a misleading statement or omission to KPMG, the jury's verdict does not require dismissal of the SEC's rule 13b2–2(a) claim. Further, when viewed in the light most favorable to the SEC, the SEC presented evidence by which a reasonable jury could find that Goldstone knowingly or recklessly made a false or misleading statement on February 28, 2008, amounting to securities fraud. Accordingly, the Court grants in part and denies in part the Defendants' Renewed Motion for Judgment. The Court grants the Defendants' Renewed Motion for Judgment regarding Claims 2, 3, and 6. The Court denies the Defendants' Renewed Motion for Judgment regarding Claims 1 and 8.

FACTUAL BACKGROUND

The Court takes its facts from the Complaint, filed March 13, 2012 (Doc. 1). The Court presents the facts solely to provide context for the Renewed Motion for Judgment. It continues to adhere to the decisions on the facts that it reached in SEC v. Goldstone , No. CIV. 12-0257 JB/GBW, 2015 WL 5138242 (D.N.M. August 22, 2015) (Browning, J.)("Summary Judgment Opinion").

The Defendants are former officers of Thornburg Mortgage: Goldstone was the chief executive officer, Simmons was the chief financial officer, and Jane E. Starrett was the chief accounting officer. See Complaint ¶ 1, at 1. The SEC alleges that the Defendants were involved in fraudulent misrepresentations and omissions made in connection with the 2007 Form 10–K.¹

Complaint ¶¶ 1–3, at 1–2. The SEC asserts that the Defendants misled and withheld important financial information from Thornburg Mortgage's outside auditor, KPMG LLP, such as the impending collapse of a large European hedge fund that held mortgage-backed securities ("MBS") similar to the Thornburg Mortgage's adjustable rate mortgage ("ARM") securities.² See Complaint ¶¶ 76–79, at 22.

Thornburg Mortgage was a publicly traded single-family mortgage lender and real estate investment trust, founded in 1993, headquartered in Santa Fe, New Mexico, and was once the second-largest independent mortgage company in the United States of America after Countrywide Financial Corporation. See Complaint ¶ 2, at 1; id. ¶ 20, at 7. During the time relevant to the Complaint's allegations, Thornburg Mortgage's shares were traded on the New York Stock Exchange. See Complaint ¶ 20, at 7. Thornburg Mortgage's lending operations focused on "jumbo" and "super-jumbo"³ ARM securities; Thornburg Mortgage also purchased ARM securities that third parties originated. Complaint ¶ 21, at 7. Thornburg Mortgage used most of its earnings to pay dividends, and obtained financing for its mortgage and investment business through reverse repurchase agreements⁴ backed by ARM securities. See Complaint ¶ 3, at 2. Thornburg Mortgage's reverse repurchase agreements "typically consisted of a simultaneous sale of pledged securities to a lender at an agreed price in return for Thornburg Mortgage's agreement to repurchase the same securities at a future date (the maturity date) at a higher price." Complaint ¶ 22, at 7–8. The reverse repurchase agreements required Thornburg Mortgage to maintain a certain degree of liquidity and subjected Thornburg Mortgage to margin calls if the value of the ARM securities serving as collateral on the agreements fell below a specified level. See Complaint ¶ 22, at 8. A margin call would generally require Thornburg Mortgage to pay cash to reduce its loan amount or to pledge additional collateral to the lender, either on the same day that Thornburg Mortgage received the margin call or on the following day, unless the parties agreed otherwise. See Citigroup Global Markets, Inc. as Intermediating Agent for Citigroup Global Markets Limited and [Counterparty] Thornburg Mortgage, Inc., International Securities Lenders Association ISLA Global Master Securities Lending Agreement § 5.8, at 11, filed May 21, 2012 (Doc. 37–6)(brackets in original); Master Repurchase Agreement Between Greenwich Capital Markets, Inc., and Thornburg Mortgage, Inc. § 4(c) at 5, filed July 20, 2012 (Doc. 60–2); id. at § 11(a), at 7–8; Master Repurchase Agreement Between Credit Suisse First Boston Corporation and Thornburg Mortgage Asset Corporation § 4(c), at 4, filed July 20, 2012 (Doc. 60–3); id. at § 11(a), at 7; Complaint ¶ 23, at 8. Thornburg Mortgage's failure to timely meet a margin call would be an event of default and would allow a lender to declare Thornburg Mortgage in default, which would trigger cross-defaults on Thornburg Mortgage's other reverse repurchase agreements, and all lenders with whom Thornburg Mortgage had defaulted would then be allowed to seize and to sell the ARM securities collateralizing Thornburg Mortgage's loans. See Complaint ¶ 24, at 8. Receiving margin calls was part of Thornburg Mortgage's normal course of business, as the value of its ARM securities often fluctuated. See Complaint ¶ 25, at 8.

Citigroup Global Markets, Inc.'s margin call on February 21, 2008, was the largest of the three margin calls that Thornburg Mortgage could not immediately meet—$196 million. See Complaint ¶ 33, at 10. In response to Thornburg Mortgage's inability to meet the Citigroup Global margin call on February 21, 2008, Citigroup Global sent a letter to Goldstone and Simmons, stating that Thornburg Mortgage had breached the parties' reverse repurchase agreement and reserving Citigroup Global's right to declare Thornburg Mortgage in default. See Complaint ¶ 3, at 2; id. ¶ 34, at 10–11 (citing Letter from Stephen G. Malekian to Thornburg Mortgage, Inc., Re: The Global Master Securities Lending Agreement dated as of September 20, 2007 Between Citigroup Global Markets, Inc. as Intermediating Agent for Citigroup Global Markets Limited and Together with Citigroup Global Markets, Inc. and Thornburg Mortgage (dated Feb. 21, 2008), filed May 21, 2012 (Doc. 37–7)("Citigroup Global Letter")). Citigroup Global made clear that, although Citigroup Global was not exercising its rights under the reverse repurchase agreement, it was not waiving its right to declare Thornburg Mortgage in default or to amend the underlying reverse repurchase agreement. See Complaint ¶ 34, at 11. In an email from Goldstone to Simmons, Starrett, and others, dated February 21, 2008, Goldstone stated that he had negotiated a "payment plan with Citigroup Global in order to satisfy the call by the end of [the following] week[.]" Complaint ¶ 61, at 18 (alterations in original)(quoting Email from Clay Simmons to Nyira Gitana, Subject: FW: TMA Update at 2, sent February 21, 2008, at 9:30 a.m., filed May 21, 2012 (Doc. 37–10)). Thornburg Mortgage paid the Citigroup Global margin call over seven days and made the final payment of seventy-five million dollars on February 27, 2008. See Complaint ¶ 35, at 11.

In the last week of February 2008, Thornburg Mortgage had to sell the interest-only portions of its ARM loans ("I/O Strip Transactions") to generate sufficient cash to meet the margin calls it received in the second half of the month. See Complaint ¶ 36, at 11. The I/O Strip Transactions further depleted Thornburg Mortgage's liquidity to meet margin calls. See Complaint ¶ 36, at 11. In an email from Goldstone to Simmons and Starrett on February 22, 2008, Goldstone informed them of some of Thornburg Mortgage's plans to raise liquidity to meet margin calls: " 'Citi sold two of [Thornburg Mortgage's] IO securities ^{[5 ]} as well for a gain of approximately $25 million and net proceeds to Citi of $10 million.' " Complaint ¶ 67, at 19–20 (alteration in original)(quoting Email from Larry...