According to the commission, such use of funds kept in the LIP (loan in progress) account was in violation of the rules as the funds were intended for repayment of expenses related to renovation of mortgaged properties.
As a result, Angel Oak was able to artificially lower delinquency rates on the underlying loan pool, preventing it from triggering early amortizations, the company said. It also allowed the company to avoid early repayment of its investments to senior tranche noteholders later that year, in November 2018.
Not only did Angel Oak fail to disclose to bondholders that it was using funds held in escrow in the LIP account to mitigate loan delinquencies that continued into 2019, but it also issued “materially false and misleading information” in reports about delinquency rates, the commission explained.
The Commission found that the firm's 52-year-old senior portfolio manager, Ashish Negundi, was aware of the situation and, concerned about the adverse financial and reputational impact it would have on Angel Oak, authorized the use of LIP account funds to mitigate the impact of the loan delinquencies.
Negandhi's actions allegedly led to a failure to disclose to noteholders the true nature of the LIP funds, and Negandhi and Angel Oak also failed to report the improper use of LIP funds to the boards of directors of private placement funds for which Angel Oak acted as investment advisor.