SEC eyes disclosure in subprime probes

By Rachelle Younglai

WASHINGTON (Reuters) - The Securities and Exchange Commission is investigating how banks, credit rating firms and lenders valued and disclosed complex mortgage-backed securities that ultimately led to the subprime crisis, a top agency enforcer said on Saturday.

"The big question is, who knew what when, and what did they disclose to the marketplace?" said Cheryl Scarboro, an associate director in the SEC's enforcement division in charge of the subprime working group.

The SEC has opened about three dozen investigations into firms and individuals involved in the subprime mortgage market. The investor protection agency has not named any names. But Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) are some of the firms in the financial services industry that have disclosed that government investigators are seeking information about their subprime activities.

Scarboro said the cases can be broken down into three main areas: the securitization process, the origination process and the retail area. Insider trading, which is one of the SEC's highest priorities, is also a key area.

"Our investigations into potential misconduct is clearly a priority at the division," Scarboro said at a Practising Law Institute conference in Washington.

Banks, due diligence firms and credit rating agencies are being examined for their role in the securitization process, or how mortgages were sold, repackaged and bundled into special financial products.

The SEC is looking at the valuations and accounting treatments of mortgage-backed securities. It is looking at whether the securities were valued correctly in the first place, what was the level of risk and if that was adequately disclosed to shareholders.

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