After disclosing accounting errors on Wednesday, February 7th, New Century Financial Corporation lost nearly half its market value, as its shares dropped from a little more than $29 on Wednesday to $16.61 two days later. The company announced that it would have to restate its financial results for the first three quarters of 2006. The results had not accounted for loans returned by New Century’s investors and for their depreciation, due to the higher risk they present.
Like many lenders, New Century sells its loans to banks, to be packed into mortgage-backed bonds. The investors can send the loans back if a borrower is delinquent on his/her payments. In 2006, the company failed to account for the increasing number of payment defaults and the depreciation of returned loans. It announced that a 20% decrease in loan production is expected in 2007, in contrast to its earlier predictions of flat growth.
Since New Century shocked its investors with the news of its bad financial situation, a number of law firms filed shareholder securities class action lawsuits on behalf of investors who purchased the company’s shares between April/May 2006 and February 2007. These complaints allege that the company issued misleading statements regarding its business activity and overstated its earnings. One of the law firms will be appointed by court to prosecute the securities fraud action on behalf of the shareholders.
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