Mario S. Levis, aka “Sammy Levis,” was found guilty on securities and wire fraud charges after a five-week jury trial before U.S. District Judge Thomas P. Griesa for his role in a scheme to defraud investors and potential investors in the stock of Puerto Rico-based Doral Financial Corporation (Doral) that took place while he was the Treasurer and Senior Executive Vice President of Doral, Preet Bharara, the U.S. Attorney for the Southern District of New York, announced today. The scheme, occurring between 2001 and 2005, involved misrepresentations that Levis made regarding certain core assets of Doral. An aggregate decline in shareholder value of approximately $4 billion followed the unraveling of the scheme.
According to the superseding indictment and the evidence at trial:
Doral, with mortgage banking operations in Puerto Rico and New York City, was a leading residential mortgage lender in Puerto Rico. Between 2001 and 2005, Levis corrupted the process by which Doral determined the publicly reported value of certain non-cash assets carried on Doral's financial books called “interest-only strips” (IOs). Doral represented to the public, in its annual financial statements, that the aggregate value of its IOs, and company earnings associated with those IOs, were 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 IOs.
During the same time, Doral's stock price steadily increased from approximately $10 per share in early 2000 to almost $50 at the end of 2004. Also during this time frame, Levis and other members of his family were substantial holders of Doral securities. Between 2001 and 2004, the value of Levis's stock in Doral tripled to over $60 million.
In its public filings with the U.S. Securities and Exchange Commission (SEC), Doral represented that the value of its IOs was based, in part, on two “outside” and “independent” expert valuations provided to Doral on a quarterly basis. According to Doral's filings with the SEC and representations by Levis to investors, these outside independent valuators were performing the valuation using their own economic and portfolio assumptions.
In fact, however, Levis thoroughly corrupted those valuations. For example, the valuation provided by a Morgan Stanley trader in fact involved the trader merely recopying numbers provided by Levis without any other work whatsoever, and then subsequent attempts by Levis to conceal that fact from Doral's auditors and lawyers. The other valuation from Popular Securities (Popular) actually involved Levis dictating key assumptions for Popular to use in performing its valuation analysis. In both cases, Levis failed to inform the valuators that Doral was treating their valuations as independent or citing their work in Doral's SEC filings.
In March 2005, when an executive at Popular directly asked Levis whether Popular's valuation was being used as an independent valuation, Levis denied that Popular was one of the independent valuations. Later, when investors pressed Levis to identify the sources of the independent valuations described in Doral's SEC filings, he falsely told investors that he could not identify the sources due to confidentiality agreements.
Levis also materially misrepresented to the investing public — in direct communications with investors, investor representatives, and market analysts — certain specific characteristics of the Doral IO portfolio. Specifically, among other things, Levis falsely claimed provision in Doral's loan-sale agreements called “caps,” which would purportedly function to prevent substantial write-downs of the IOs if interest rates continued to rise.
Beginning in mid-January 2005, when Doral announced an approximate $97.5 million write-down of the stated value of its IOs attributed to rising interest rates, and Levis' scheme concerning the IO valuations began to unravel, the market price of Doral's common stock began to drop steadily from its high of almost $50 per share. By the time Levis resigned from Doral in late August 2005, the price of Doral's shares had fallen more than 70 percent to approximately $14.13 per share. In total, the company's shareholders had suffered an aggregate decline in shareholder value of approximately $4 billion.
Levis was found guilty of one count of securities fraud (Count One) and two counts of wire fraud (Counts Three and Five). The jury found Levis not guilty of one count of wire fraud (Count Four), and the Court dismissed an additional count of wire fraud (Count Two). Levis faces a maximum sentence of 20 years in prison on the securities fraud count and a fine of the greatest of $5 million or twice the gross gain or loss from the offense. For each of the wire fraud counts on which he was found guilty, Levis faces a maximum sentence of 20 years in prison and a fine of the greatest of $250,000 or twice the gross gain or loss from the offense.
Levis, 46, of San Juan, P.R., is scheduled to be sentenced by Judge Griesa on Sept. 14, 2010.
U.S. Attorney Preet Bharara stated: “Senior executives of publicly traded companies have to tell the investing public the truth, even when it hurts. It's that simple. Today, a Manhattan jury found that Mario Levis of Doral intentionally flouted this bedrock principle, causing a colossal $4 billion loss to his company's shareholders. Our office, working more closely than ever with the FBI and the SEC, will continue to pursue corrupt professionals in the financial services industry whose greed-driven misconduct hurts honest investors and threatens our markets.”
U.S. Attorney Bharara praised the work of the FBI and thanked the SEC for its assistance in the case.
This case was brought in coordination with President Barack Obama's Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
The case is being prosecuted by the Securities and Commodities Fraud Task Force of the U.S. Attorney's Office. Assistant U.S. Attorneys William J. Stellmach and Daniel A. Braun and Special Assistant U.S. Attorney Jason M. Anthony, are in charge of the prosecution.