Risk Management

Ex-Treasurer of Mortgage Banker Indicted for Fraud

Alleged scheme at Puerto Rico-based Doral Financial involved misreporting the value of "interest-only strips."
Stephen TaubMarch 6, 2008

A former finance executive of Puerto Rico-based mortgage banker Doral Financial Corp. was indicted for his role in an alleged scheme to defraud investors and potential investors in his company’s stock.

Mario Levis, who also used the name Sammy Levis, formerly Doral’s treasurer and senior executive vice president, was charged with one count of securities fraud and three counts of wire fraud.

According to the acting U.S. attorney for the Southern District of New York, and the Federal Bureau of Investigation, Levis participated in a scheme from 2001 to 2005 that involved the fraudulent manipulation of the publicly reported value of certain core assets of Doral in order to artificially inflate the market price of Doral’s common stock. When the scheme was unraveled, the stock lost about $4 billion.

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If convicted, he faces a maximum penalty of 20 years on the securities fraud count and 20 years on each of the wire fraud counts. Levis also faces a maximum fine of $5 million or twice the gross gain or loss from the offense on the securities charge and a maximum fine of $250,000 or twice the gross gain or loss on each of the wire fraud charges.

According to the indictment, between 2001 and 2005 Levis “corrupted the process” by which Doral determined the publicly reported value of certain noncash assets carried on Doral’s financial books — so-called “interest-only strips.” Doral represented to in its annual financial statements that the aggregate value of its IO’s, and the earnings associated with them, was increasing substantially year after year.

By the beginning of 2005, Doral publicly announced a streak of 28 quarters of “record earnings” based in significant part on the stated value of its IO’s, according to the U.S. attorney. During the same time, Doral’s stock price steadily increased fivefold from early 2000 to the end of 2004.

At the height of Doral’s stock price appreciation, Levis’ family beneficially owned about 9.2 million shares, or 8.2 percent, of Doral stock, for a maximum value of $450 million.

Beginning in mid-January 2005, when Doral announced a $97.5 million write-down of the stated value of its IO’s attributed to rising interest rates, and Levis’ scheme concerning the IO valuations began to unravel, the market price dropped more than 70 percent, or a total value of $4 billion.

According to the indictment, Levis materially misrepresented to the investing public the financial condition and performance of Doral, and the value of the IO’s and the earnings associated with them; the valuation process relating to them; and certain specific characteristics of how they were kept in portfolio of Doral.