Thornburg Mortgage is under investigation by the U.S. Securities and Exchange Commission and is being reviewed by the New York Stock Exchange, according to a regulatory filing posted by the troubled company on Monday.
"It is significant, and it is something for the company to worry about, but it doesn't necessarily mean there was any violation of the law," said Erik Gerding, a business law professor at the University of New Mexico.
In the filing, Thornburg said it received a letter from the New York Stock Exchange, dated March 6, that said the agency is reviewing stock transactions made before a Jan. 9 disclosure by Thornburg that "the impact of recent market events in the mortgage industry" was affecting its book value.
That means the New York Stock Exchange is looking into potential insider trading, Gerding said.
The New York Stock Exchange has computer programs that can determine whether unusual trading patterns have taken place during the period before a company makes a major announcement, he said. The NYSE will then investigate whether someone with insider information traded on that information before the announcement was made.
But, Gerding added, "It's really hard to say if anyone at Thornburg Mortgage has done anything wrong based on the fact that the New York Stock Exchange is looking into it."
Thornburg also said in Monday's filing that it received notice from the SEC on April 4 that the agency is conducting an investigation relating to Thornburg's recent restatement of its 2007 fiscal year financial statements; valuations of and disclosures concerning the accounting treatment for Thornburg's mortgage-backed securities addressed in the restatement; and margin calls— in which lenders demand their money back— that the company received or was threatened with relating to reverse repurchase agreements and related disclosures.
"The SEC's notice states that it has not determined that any violations of the securities laws have occurred," the filing said.
Thornburg spokeswoman Suzanne O'Leary Lopez declined to comment. Representatives of the SEC and NYSE also did not comment on Tuesday.
In March, Thornburg said it would restate past earnings to incorporate a $427.8 million writedown on mortgage-backed securities it held in a portfolio as of Dec. 31. Companies like Thornburg have been forced to reduce the value of their holdings as the mortgage crisis causes the secondary market to dry up for debt backed by mortgages.
Essentially, the SEC wants to see whether Thornburg's restated financials or margin calls are indicative of financial fraud in 2007 or before, Gerding said, as well as whether Thornburg adequately disclosed to investors its financial situation before and during the credit crunch.
Every time a company files a restatement, the SEC's "ears perk up," Gerding noted. Investigations can take anywhere from a couple of months to years, he said.
Thornburg said in the filing that it is cooperating with both agencies "on a voluntary basis."
The SEC has a tendency to look favorably on companies that cooperate with investigations, Gerding said. He did note, however, that any information revealed or unearthed during the investigation could potentially be used down the road by lawsuit plaintiffs. Thornburg is the defendant in a few class-action lawsuits alleging that the company failed to disclose financial woes and that shares traded at artificially inflated prices as a result.
As recently as March, $610 million in unmet margin calls had Thornburg teetering on bankruptcy. But the company announced in mid-March that an agreement had been reached with five companies that had made loans to Thornburg, whereby the lenders would stop margin calls if Thornburg raised $948 million.
Thornburg said in late March that it had successfully raised $1.35 billion in new capital— albeit at great cost to the company, observers noted— through the sale of debts, warrants to purchase Thornburg stock at a penny a share and stakes in some of its mortgage assets.
The plan would leave existing shareholders with a 5.5 percent stake in the company. A shareholder vote on whether to authorize the increase in stock will take place June 12.
