On Monday of this week, the U.S. Securities and Exchange Commission charged David Kenneally, 2662 Oak Knoll drive, Rossmoor, along with two other former executives, with Securities fraud. The charges resulted from the 2007 collapse of subprime lender New Century Financial.

Kenneally served New Century as its controller And was responsible for the company’s accounting operations and financial reporting. He was charged along with Former CEO and co-founder Brad A. Morrice of Laguna Beach, and Former CFO Patti M. Dodge of Irvine. In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was
performing better than its peers.

The SEC statement wrote “Defendants, however, failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. Defendants knew this negative information from numerous internal reports they regularly received, including weekly reports that Morrice ominously entitled "Storm Watch.”

The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase. In the face of dramatically increasing loan repurchases and a huge, undisclosed backlog of repurchase demands, Kenneally, with Dodge's knowledge, made changes to New Century's accounting for loan repurchases in both the second and third quarters of 2006. These undisclosed accounting changes violated generally accepted accounting principles and resulted in New Century's improperly avoiding substantial repurchase expenses and materially overstating its financial results.

The complaint further alleges that the defendants' fraud caused investors substantial losses. From early 2006 to early 2007, New Century's stock price ranged from $30.00 to $50.00; and in the second half of 2006, the company raised $142.5 million by selling stock to new investors. After New Century announced in February 2007 that it would have to restate its 2006 financial statements, New Century's stock price fell 36% to around $19.00. New Century's stock price continued to fall, and traded at less than $1 when the company filed for bankruptcy in April 2007.

We contacted Kenneally’s attorney, John Vandevelde, a partner in the Los Angeles law firm, Crowell & Moring. According to their web site, Mr. Vandevelde’s “practice is primarily white collar criminal defense in federal and state court.” While he would not answer questions, he provided the following statement:
“We are extremely disappointed that the SEC has chosen to file a civil suit against Mr. Kenneally, never a so-called "top officer" as the SEC says in its press release, but a hard-working accountant who was still quite new at New Century and lost every penny he ever invested in the company he believed in. He was never the Chief Financial Officer or the Chief Accounting Officer, never signed any financial statements, and always relied on the fully-informed advice of the outside auditors in the accounting treatment that the SEC now says, with the benefit of years of review, was technically incorrect. We have not yet reviewed the lawsuit, but Mr. Kenneally will defend any allegation that he engaged in anything approaching securities fraud”

We also located an online biography of Kenneally which we could not verify. In discussing his promotion to senior vice president, this source Cited a July 2005 company news release, which wrote “Mr. Kenneally will continue to manage the accounting and treasury departments, and will have added responsibility for financial reporting.”

According to this source, Kenneally joined New Century Financial in 2003. Prior to that, he served in a variety of senior accounting positions in several financial services companies. This source reported that he is a Certified Public Accountant, but his name was not listed in the online license search of the California Board of Accountancy. This online biography also reported he holds a Bachelor of Arts in Business Economics, Accounting emphasis, from the University of California at Santa Barbara.