It’s been a stunning turn for Robert Cole, Brad Morrice and Edward Gotschall, the once highflying founders of Irvine’s New Century Financial Corp.
The surge in subprime mortgages earlier this decade helped vault the trio of industry veterans to the top of their business, making them among the wealthier executives in Orange County.
In the past four years, the three cashed out stock worth more than $80 million, according to filings with the Securities and Exchange Commission.
That’s on top of salaries, bonuses and stock options for each founder that ran into seven figures annually for each in recent years.
The compensation was a payoff for their work building New Century into one of the nation’s top subprime lenders.
The trio started the company in 1995 and weathered another subprime storm in 1997 that looks mild compared to today’s meltdown.
Now observers see a lengthy dose of legal issues for the founders, along with other past and present New Century executives, after the rapid collapse of the country’s second-largest subprime lender.
Analysts and legal experts predict a bankruptcy reorganization or liquidation of the company, which has lost close to 95% of its value in the past six weeks or so.
“I’m very surprised” New Century hasn’t filed for bankruptcy protection yet, said Marc Winthrop, founder of Newport Beach-based Winthrop Couchot Professional Corp., a law firm that specializes in bankruptcy proceedings. “Like others in the industry, we’ve all been expecting a filing.”
Hired Adviser
Last week, New Century was reported to have hired an adviser, New York-based Lazard Ltd., known for its work on corporate restructuring and bankruptcy cases.
The company’s founders first worked together at Santa Ana’s Plaza Home Mortgage Corp., which spawned Irvine-based Option One Mortgage Corp., now a unit of H & R; Block Inc. that the tax preparer is trying to sell.
Cole and Gotschall stepped down from their executive posts in recent years, remaining as directors. Morrice became chief executive last June.
Morrice and New Century’s directors have been putting in long hours at the company’s Irvine Center Towers headquarters in recent weeks, working to salvage the company, according to reports.
Last week, the company got a small breather when Britain’s Barclays PLC said it won’t press New Century to buy back $900 million in loans that have gone bad.
The company still faces nearly $8 billion in loans it may have to buy back.
But the long-term viability of New Century isn’t the only crisis facing the founders right now.
The SEC and the Justice Department are investigating New Century’s executives for stock trades and accounting errors. A lengthy list of shareholder lawsuits have been filed against the company and its executive team, alleging they misled investors prior to the stock drop, even while they were selling shares.
“A key focus is the SEC investigation, and the possible criminal investigations,” Winthrop said. “That has to be of great concern to them.”
New Century’s executives have avoided making public statements since the company’s stock began its freefall last month.
The company was absent from last week’s Senate Banking Committee hearing on the subprime sector. Company executives declined to testify.
Public Offering
New Century’s founders took the company public in 1997, just before subprime lending took a downturn as the Russian debt crisis spooked investors from risky investments.
As a result, the founders didn’t begin to see the bulk of their fortunes until early this decade when the housing market took off.
New Century insiders have sold off nearly $100 million worth of stock since 2003. Much of those 2.4 million shares sold were from the founders. The company counts about 56 million shares outstanding.
Gotschall, New Cen-tury’s former vice chairman of finance and chief financial officer, sold nearly $40 million of stock since 2003, pocketing about $32 million in profits, according to reports on financial Web site TheStreet.com.
Former chief executive Cole sold another $30 million of shares during that time, profiting nearly as much.
Morrice sold $18 million, with profits of about $13 million.
Like other shareholders, the founders have seen their remaining New Century holdings devastated in the stock’s meltdown.
Together, they still own about 3.7 million shares of New Century stock, according to filings made last month.
Those shares had a market value of nearly $200 million (not including the cost of exercising options) at the peak of New Century’s stock price. They still were close to $130 million just a few months ago.
Last week, they had a market value of about $5 million.
Sales in Question
Securities lawyers say the SEC and Justice Department are likely to look at trades leading up to a Feb. 7 announcement from the company that started the stock’s decline. The investigations could take several months to compile documents and internal filings from the company.
Of the three executives, Morrice sold the bulk of his shares well before the company’s downturn, with his last million-dollar transaction last summer. Gotschall made about $19 million from stock sales from late summer to November.
As far as recent sales, Morrice sold nearly 6,000 shares on Feb. 2. Those shares were sold at $30.25, for a total of $178,414, according to SEC records. Morrice made another 4,000-plus share sale in January, as did Cole and Gotschall.
