Monthly Archives: November 2011

M. Perry’s Responses to SEC’s First Set of Interrogatories

You can access my formal response to the SEC’s first set of interrogatories by going to the SEC tab and scrolling down to the November 22, 2011, document entitled: “M. Perry’s Responses to SEC’s First Set of Interrogatories”. There are some portions of this document and one entire exhibit that had to be redacted (“blacked out”), because the information is “attorney-client privileged” (being claimed by the FDIC and the bankruptcy trustee of the holding company). This so-called privileged information is subject to a court-ordered, confidentiality provision that basically says I can use these materials (primarily legal advice and opinions of Indymac’s outside counsel regarding various matters) in my legal defense, but I cannot disclose them publicly without the FDIC and the bankruptcy trustee’s consent. Clearly, I would have preferred to do so, as my goal is the full disclosure of all of the facts, and these facts only serve to strengthen my case and weaken the SEC’s allegations against me.

Please take the time to read my detailed response to these SEC questions. I think my response speaks for itself and continues to show that the SEC’s allegations (against me and one of Indymac’s CFOs) are without merit.

With that said, I would like to make a few key points:

  1. Compare and contrast my responses to the SEC’s questions (November 22, 2011), with the SEC’s responses to my questions (October 31, 2011). While we raised legal objections (for my protection), we answered their questions in significant detail with facts and documents. The SEC provided almost nothing but legalese in their responses and certainly provided no important evidence to support their allegations. This, to me, speaks volumes about the lack of merit of their complaint.
  2. Several of the documents cited in my interrogatory response directly refute the SEC’s allegations in their complaint and/or show that we prudently sought legal advice about disclosure matters and capital raising through the DSPP, thus seriously weakening the SEC’s claims against me.
  3. In my response, we cite information from two analysts in my defense. The reason that we specifically highlighted these two analysts is that the SEC sought out and received very weak “declarations” from each of them regarding the SEC’s allegations. Each of these “declarations” is only two pages long, and they are remarkable for what they fail to say — even after the SEC, a federal regulator with oversight and enforcement authority over these securities analysts seeks them out and presumably “asks” them if they are willing to submit these declarations. We have not had an opportunity to conduct discovery and depose these two analysts as yet (as we found out about these declarations on October 31, 2011), but we wanted to show the SEC that much of what these analysts had publicly written about Indymac, at the time, contradicts or disproves the SEC’s own allegations and even the written declarations they made. Once we obtain the analysts’ contemporary documents and take their depositions, I plan to discuss these declarations in further detail on the blog. Suffice it to say, for now, that both of these analysts had “Sell” ratings on Indymac, during the entire time in question (and both disclosed in their reports that their firms had “Sell” recommendations on a very small percentage of firms they covered). Thus, the entire mix of our disclosures clearly was sufficient to enable these analysts to make the “right call” on Indymac. Moreover, the KBW analyst’s reports clearly were designed to support those speculators “short selling” our stock. Just take a look at the “risk factors” in his report. These “risk factors” weren’t negative characteristics about Indymac. To the contrary, the KBW analyst stated: “Risks to our price target include a sharp improvement in market conditions in the MBS market, as well as a firming of housing prices, particularly in California.” Because the analyst had a “Sell” rating for Indymac, he regarded as “risks” those things that would be positive to Indymac.
  4. The SEC does not have a single, major institutional shareholder of Indymac who will support their allegations. Instead the SEC was only able to obtain two very weak, “two-page” analyst declarations, both from analysts who were recommending — as a result of our publicly disclosed information and the general, well-known market conditions — to “Sell” Indymac! That is a huge flaw/weakness in the SEC’s case. In the interest of full disclosure, I should add that the SEC hints in their interrogatory response to me that they may have one or more of the DSPP “investors” willing to take their side, but who those “investors” are and what they actually will say remains to be seen. Remember, as I said on the SEC tab in my full statement, these DSPP “investors” were generally arbitrage players who were shorting Indymac’s stock in a roughly equal amount to what they were buying to earn the “DSPP discount” without taking on any material market risk. I doubt these arbitrage players were doing anything more than skimming our public filings, and I suspect most were not even doing that.
  5. There has been a lot of discussion regarding the $18 million intercompany receivable booked at the bank as of March 31, 2008 and approved by the OTS. There is extensive discussion of this issue in my response to the SEC’s interrogatories that I suggest you read. In short, this receivable was approved by the OTS; signed off by E&Y, outside counsel, and our board; and booked in accordance with Generally Accepted Accounting Principles (GAAP).

Here are a few other key excerpts from my interrogatory responses: (Please note: I personally “verified under penalty of perjury that my interrogatory responses are true and correct to the best of my knowledge, information, and belief.”)

  • “….the advice provided by Indymac’s counsel regarding Indymac’s disclosure obligations, as well as certifications provided by other Indymac employees during the disclosure process, will prevent the Commission from meeting its burden of proving that Mr. Perry acted with scienter.”
  • “Mr. Perry’s actions were at all times consistent with the input and advice provided by legal counsel and other professional advisors.”
  • “These professionals were kept apprised on an ongoing basis of Indymac’s financial condition, including its risk-based capital ratio forecasts, liquidity, capital-raising efforts, and discussions with the Bank’s primary federal regulator, the Office of Thrift Supervision (“OTS”), and Mr. Perry relied on their opinions and judgment regarding the content of Indymac’s disclosures.”
  • “…the auditors never advised Indymac or Mr. Perry to revise the statements alleged by the Commission’s complaint to be false or misleading, or to include any of the additional information  that the Commission claims should have been disclosed. Nor did Ernst &Young identify any material audit differences. To the contrary, Ernst & Young issued an unqualified opinion on the 2007 10-K….and an unqualified review opinion on the Q1 2008 10-Q.”
  • “Mr. Perry relied on the opinions and certifications provided to him by Indymac officers, directors, and employees regarding the disclosures contained in Indymac filings. This included reliance on formal certifications….”
  • “None of the Disclosure Committee members (24 top managers at Indymac) advised Mr. Perry that Indymac should revise the statements alleged by the Commission to be false and misleading, or to include any of the additional details that the Commission now claims should have been disclosed.”
  • “Mr. Perry also relied on the opinions and approvals provided by members of the Audit Committee of the Board of Directors.”
  • “As all these facts and others demonstrate, the Indymac disclosures challenged in the Commission’s Complaint were the product of a rigorous, good-faith effort by dozens of Indymac officers and directors, including Mr. Perry, along with their outside professional advisors, aimed at providing Indymac investors with timely, accurate, and comprehensive disclosures on all material issues. None (of them)….ever advised Mr. Perry that Indymac should revise the statements alleged by the Commission to be false and misleading, or to include any of the additional details that the Commission now claims should have been disclosed.”
  • “The alleged false and misleading disclosures and omissions cited in the SEC’s complaint are immaterial because they add nothing of significance to the total mix of publicly available information.”
  • “The SEC alleges that the May 2 DSPP prospectus “failed to disclose that the DSPP offering’s specific purpose was to raise capital to protect Indymac Bank’s capital ratio”. Yet, in an 8-K filed by Indymac one day earlier, on May 1, 2008, a filing incorporated by reference into the May 2 DSPP prospectus….Mr. Perry specifically disclosed the extent of Indymac’s reliance on the DSPP “to sustain sufficient capital levels to keep Indymac Bank safe and sound through this crisis period.” Mr. Perry stated that “we continue raising capital every day through the Direct Stock Purchase Plan (DSPP). Since recommencing the DSPP on February 26, we have raised $84 million in new capital through today, including $45 million in the first month of Q208 alone.” Note: This is but one specific example of the lack of merit of the SEC’s disclosure allegations against me.

In sum, the SEC’s alleged case against me was weak when it was filed. As the litigation progresses and my legal team is able to engage in additional discovery, the flaws in the SEC’s case will become even more apparent.

SEC’s Responses to M. Perry’s First Set of Interrogatories

Federal Judge Rakoff: “Doesn’t the SEC have an interest in what the truth is?”

Matthew T. Martens, a senior lawyer at the SEC said that the government believed that the public knew the truth about Citi’s conduct because the government’s lawsuit laid out its claims against the bank.

Last time I checked, correct me if I am wrong, anyone can make an allegation,” said Judge Rakoff. “The mere fact that you say it’s so doesn’t make it so unless its proved.”

The New York Times, 11/09/11

Attached you will find the SEC’s response to my first set of interrogatories (I also plan to post my responses to the SEC’s interrogatories when they are filed). You can access that document by going to the SEC tab and scrolling down to the October 31, 2011 document entitled: “SEC’s Responses to M. Perry’s First Set of Interrogatories”.

I am not going to discuss these interrogatories in detail, but the SEC’s responses make clear that their case is exceedingly weak. In the vast majority of their responses, the SEC claims that it cannot fully answer the interrogatories because the litigation discovery process is not over. Is it really appropriate at this stage for the SEC to refuse to answer an interrogatory fully by saying, “we need to do further discovery”? The SEC has had access to all discoverable materials for over three years and has spent thousands of hours on this case and interviewed scores of witnesses under oath, including myself.

I also would like to discuss scienter and the improbability of the SEC’s allegations.

In this type of civil securities case, the SEC has to establish that the disclosures that they allege were omitted or misleading were BOTH material and made with scienter (I don’t plan to discuss materiality yet, but I am confident that they won’t be able to prove their disclosure allegations were material either and I plan to discuss the lack of materiality at the appropriate point).

The U.S. Supreme Court has defined scienter as follows:

“A mental state embracing intent to deceive, manipulate, or defraud.”

And according to information I have read, the 9th Circuit requires the plaintiffs to allege (and later prove) “deliberate recklessness” and “recklessness so severe that it strongly suggests actual intent”. Furthermore, the 9th Circuit has ruled that “Scienter could never be shown by motive and opportunity alone, and most other courts now hold that “motive and opportunity” alone cannot give rise to a strong inference of scienter. LYLE ROBERTS ET AL., WILSON SONSINI GOODRICH & ROSATI, P.C., RECENT ISSUES IN THE PLEADING OF SCIENTER IN SECURITIES FRAUD CLAIMS 5 (2005),

Clearly, scienter is a very high burden for the SEC to prove.

I believe this is why the SEC announced in late September of this year that it was making a major shift away from scienter-based charges in their civil litigation, to the “easier to prove” negligence-based charges.

Let’s review the SEC’s case briefly (see the SEC tab for more details): The SEC has alleged that CFO #1 and myself “knowingly or recklessly” made material omissions or misleading disclosures during a roughly 90-day period beginning sometime in February 2008 and ending on May 12, 2008. In addition, when CFO #1 had to take an emergency, medical leave of absence in late April 2008 and was replaced by CFO #2, the SEC alleges that CFO #2 almost immediately began to omit and mislead investors in Indymac’s public disclosures, but he did so “negligently” rather than “knowingly or recklessly” (according to the settlement they reached with him). While I can’t speak for him, I believe that CFO #2 settled this matter because the SEC used its awesome government power to intimidate him. In addition to not admitting or denying any of the SEC’s negligence allegations, he was able to settle for about $100,000 and is allowed (if he chooses) to be an officer or director of a public company. Yet, despite the fact that he did not admit to the allegations, his employment as a top manager at OneWest Bank was terminated shortly before the civil settlement was made public. He didn’t do a thing wrong, yet he was forced into this civil settlement because of the time (years), cost (millions), and emotional toll it would have taken on him and his family to defend himself against this matter.

Think about it. CFO #2 stepped in when CFO #1 had an emergency medical issue and performed in an outstanding manner and disclosed everything properly. And for his significant efforts in helping Indymac in a crisis, the SEC comes after him, forces him into a public settlement with a fine and then that SEC enforcement action causes him to lose his job. It is not right that the SEC has that kind of power to intimidate honest Americans and that employers like OneWest, by their actions, essentially support this practice.

All of the SEC’s allegations against me are common with either CFO #1 or CFO #2 and yet importantly in the SEC’s answer to Interrogatory No. 25, the SEC says there was no collusion between any of us. Think about that for a minute. How in the world out of all of the hundreds (if not thousands) of disclosures we made during the period in question, could I and two different CFOs decide to omit or mislead on exactly the same disclosures without colluding? And it is not just one disclosure, it’s numerous items: by my count, at least nine different types of disclosures. It’s extremely unlikely that I and even one CFO would have randomly picked the same (one) disclosure item on which to purportedly omit or mislead investors, let alone nine or more. So unless the SEC has some evidence of collusion (and I can tell you they can’t even prove their underlying misrepresentation allegation, let alone collusion), it is not logically (statistically) possible that we randomly picked the exact same disclosures to purportedly intentionally omit or mislead investors.

I guess the SEC could say, “Well, they didn’t do it intentionally, but they were reckless”. That’s ridiculous. A long-time CEO and CFO (#1) who were both highly respected would all of a sudden decide to become reckless? And CFO #2 who had a distinguished record with the company somehow became negligent from nearly the first day he started and for just a few weeks thereafter? That makes no sense. If that’s true, there would be a lot of evidence to support that allegation. Generally, if you are reckless, you are reckless. It would happen all the time — not just in a 90-day period of time. There is no evidence whatsoever to support “recklessness.” None.

To this point, in these interrogatories, we asked them “do you have any evidence or testimony from anyone who ever told Mr. Perry that he should have disclosed these omitted facts or that told him that these allegedly misleading disclosures were misleading”? Read their answer. I can tell you that, once you cut through all the legalese, their answer is “No, they don’t”. We had an extensive SOX certification process where literally scores of managers provided formal, written certifications regarding disclosures for their areas to the CFO and me. Our Audit Committee, including its Chairman, carefully read our SEC disclosures and generally provided some edits. We had outside counsel and independent auditors review our public disclosures. We even had our banking regulators reading and reviewing our public disclosures. And we had a fabulous internal management team who prepared our public disclosures. All of them, thanks to my transparent communication, were aware of exactly the same issues I was. None of them thought we had omitted or misled on anything material, and none of them ever raised any of the alleged omissions or purported misleading statements with me or anyone else.

And what’s the motive? None of us sold any stock (I hadn’t sold a share since 2005), and in fact I bought several million dollars of stock during the 90 day period of time in question.

The SEC “bragged” last week that they had filed 735 enforcement actions in the 12 months ending September 30, 2011 (the most filed in a single year), and SEC Chairwoman Schapiro highlighted that many of the cases were “related to the financial crisis and its aftermath”.

The SEC has formidable power, that’s true. But the SEC should be more responsible in wielding that power, particularly in a case like this where the disclosures were in full accordance with the law. As Judge Rakoff has said, just because the SEC makes an allegation does not make it true.