Bankruptcy

Examiner, but No Ouster, for New Century

Bankruptcy judge will leave current management in place but approves a closer look into accounting practices at the subprime lender.
Stephen TaubMay 16, 2007

A bankruptcy judge has declined to replace top executives at New Century Financial with a trustee but has approved the appointment of an examiner to investigate accounting practices at the subprime lender, according to published accounts.

Last month, U.S. Trustee Kelly Beaudin Stapleton asked U.S. Bankruptcy Court Judge Kevin J. Carey to fire the management of New Century for failing to “ensure accurate financial accounting and to institute adequate internal controls,” according to a Reuters report at the time. Under bankruptcy law, the wire service noted, a trustee could be appointed to take their place “for cause including fraud, dishonesty, incompetence, or gross mismanagement,” before or after a bankruptcy case begins.

As a fallback, Stapleton sought appointment of an examiner, whose “report on those irregularities…will enable the court and parties in interest to evaluate the genesis of those irregularities and to identify the persons against whom the estate might have claims or rights of action,” he wrote, according to the Associated Press at the time.

Judge Carey declined to appoint a trustee, Reuters reported on Wednesday; the judge maintained that New Century was managing its sale of assets well, a lawyer for a creditors’ committee reportedly asserted. However, the judge will permit the U.S. Trustee to appoint an examiner to look into the company’s accounting.

In a statement, New Century pledged to cooperate with the examiner.

Though an examiner generally has fewer powers than a trustee, he or she can investigate possible misconduct when it is in the creditors’ interest or when the debtor owes more than $5 million.

Last week, we reported that New Century owes the U.S. government at least $400 million in taxes.

In March, New Century disclosed that it is the target of investigations by the Securities and Exchange Commission and the U.S. Attorney’s Office for the Central District of California. The company was delisted by the New York Stock Exchange shortly thereafter.