Doral Financial Scandal: Sammy Levis Guilty of Wire Fraud
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.
Puerto Rican Government Bans 5 Books for High Schoolers
The Department of Education of the government of Puerto Rico recently eliminated five books from the eleventh grade curriculum of the public school system: Antología Personal, by José Luis González; El Entierro de Cortijo, by Edgardo Rodríguez Juliá; Mejor Te Lo Cuento: Antología Personal, by Juan Antonio Ramos; Reunión de Espejos: An Anthology of Essays edited by José Luis Vega (all Puerto Rican authors); and Aura, by Carlos Fuentes from Mexico. The public agency justified its action by saying that the books “contain unacceptable language and vocabulary, which is extremely coarse and vulgar.”
The governor of Puerto Rico, Luis Fortuño, supported the decision:
“I think I have been very clear, and that all of the mothers and fathers out there understand perfectly that the books that an 18-year-old can read should not be read by a 12-year-old.”
Numerous writers and artists in Puerto Rico publicly voiced their concerns and described the government’s action as censorship. The Federation of Teachers also condemned the decision and stated that it “reflects ignorance about the social reality that our students live in, and a backward-looking vision of modern literature as part of the academic curriculum.” After such public pressure, the Department of Education said they had only permanently eliminated one book, but were still evaluating the rest.
The Association of Journalists of Puerto Rico joined writers, professors and artists in an act of protest in front of the Department of Education in Hato Rey, where they read fragments of the books that were removed. Footage of a demonstration against the elimination of books in public school system was posted at YouTube:
Bloggers have also been commenting intensely.The writer Mayra Santos Febres says in Lugarmanigua [ES]:
Temo a la censura. Sobretodo le temo cuando se utiliza “la formación integral de nuestros niños y jóvenes” como excusa para privarlos del contacto con experiencias y sobretodo con libros que los ayuden a desarrollar herramientas para pensar. La reflexión tiene que hacerse en un contexto amplio, sin verjas ni “no pases”. Es imposible pensar: es decir, “sopesar ideas”, cuando estas ideas diferentes, divergentes son sacadas de en medio desde un principio. Cierto es que la educación debe tener en consideración la capacidad de jóvenes y niños para asimilar y digerir información. No vas a servirle churrasco a un bebé de cuatro meses que no tiene dientes. Pero los muchachos de undécimo grado que configuran el estudiantado de Escuelas Públicas de nuestro país, a su edad, ya tienen dientes. Tienen dientes, uñas y garras. Algunos ya tienen bebés de cuatro meses. Ya pueden comer churrasco.
[ENGLISH TRANSLATION]: I fear censorship, even more when the “integral formation of our children and youth” is used as an excuse to deprive them of contact and experience, and of books that might help them develop analytical tools. Reflection must be done in a broad context, without iron gates and “do not enter’s”. Its impossible to think, that is, to consider ideas, when different ideas are eliminated from the beginning. It is true that education must take into account the capacity of the young and the children to absorb and digest information. You are not going to give grilled meat to a four month-old baby who has no teeth. But at the age of the kids who are in the eleventh grade in the public schools of our country, they already have teeth. They have teeth, nails, and claws. Some of them even have four-month-old babies. They can eat grilled meat.
The legal scholar recently turned blogger Dora Nevares-Muñiz analyzed the controversy from a legal standpoint:
La censura de textos literarios de parte del Departamento de Educación es inconstitucional y viola derechos de los estudiantes… La censura, aparte de coartar el libre flujo de las ideas y la libertad de expresión atesorada en nuestra Constitución, constituye un acto de violencia de parte del Ejecutivo hacia unos estudiantes que tienen el derecho a recibir una educación que propenda al pleno desarrollo de su personalidad y al reconocimiento de los derechos y libertades fundamentales. El acto de censurar es de por sí un atentado a la libertad de pensamiento y expresión, típico de sociedades intolerantes y totalitarias. La censura no debe tener espacio en el sistema educativo. Una de las metas del sistema escolar debe ser que el estudiante internalice actitudes de tolerancia y respeto ante la diversidad y las personas que tienen ideas discrepantes. Este es uno de los primeros pasos para prevenir la violencia. Los libros censurados se leían en grado undécimo. Se trata de obras reconocidas en Puerto Rico y en el extranjero por su calidad literaria. Un estudiante de Escuela Superior debe tener desarrolladas las destrezas de pensamiento crítico y análisis lógico necesarias para analizar esos libros.
[ENGLISH TRANSLATION]: The Department of Education’s censorship of literary texts is unconstitutional and it infringes the rights of the students… Censorship not only restricts the free flow of ideas and the freedom of speech enshrined in our Constitution, but it also constitutes an act of violence perpetrated by the Executive branch against students who have the right to receive a complete education that leads them to the full development of their personalities and the recognition of their fundamental freedoms and rights. The act of censoring is an attempt against freedom of thought and expression, commonly seen in intolerant and totalitarian regimes. Censorship should have no place in the education system. One of the objectives of the school system should be that students internalize tolerance and respect towards diversity and people who have different opinions. This is one of the first steps in order to prevent violence. The censored books used to be read in eleventh grade. They are well known books in Puerto Rico and other countries due to their literary quality. A high school student should have the necessary critical analytic and logical reasoning skills to be able to analyze these books.
In his blog Lecturas urbanas [ES], Javier Valentín Feliciano remembered his experience in the public school system in Puerto Rico:
Cuando cursé mis doce años de estudios en la escuela pública nunca conocí a ninguna de estas autoras puertorriqueñas, tampoco conocí a escritores hispanoamericanos que estaban en todo su auge como Gabriel García Márquez, el propio Carlos Fuentes, Mario Vargas Llosa, Luisa Valenzuela, la lista es inmensa. Tuve que esperar muchísimos años para poderme reconocer como hispanoamericano con estos autores. En la escuela pública no los leí, nunca los asignaron. Quién sabe y nunca los hubiera descubierto.
[ENGLISH TRANSLATION]: I never read any of these Puerto Rican authors during my 12 years in the public school system. I never read Hispanic-American writers who were at their peak, such as Gabriel García Márquez, Carlos Fuentes [one of the censored authors], Mario Vargas Llosa, Luis Valenzuela; the list is immense. I had to wait many years to be able to recognize myself as Hispanic-American with these authors. I never read them in school; they were never assigned. Who knows if I would have never discovered them.
[thanks to glitter feet and global voices online via cc]
