Angel Oak Capital fined for misleading investors

The Securities and Exchange Commission has fined Angel Oak Capital Advisors $1.75 million, and its portfolio manager, Ashish Negandhi $75,000 for deceiving investors about delinquencies in a fix-and-flip securitization.

“Angel Oak and Negandhi failed to disclose the firm’s improper use of funds while continuing to issue larger securitizations, which painted a misleading picture for investors,” said Osman Nawaz, chief of the SEC’s Division of Enforcement’s Complex Financial Instruments Unit, in a press release. “Firms must provide investors with full and accurate information regarding the performance of an investment, even after closing, to ensure the integrity of our markets.”

This settlement was proposed by Angel Oak and Negandhi and was accepted by the SEC, the cease-and-desist order said.

“While not admitting or denying the findings, Angel Oak Capital Advisors accepts the ruling set forth by the SEC relating to a 2018 securitization involving fix-and-flip mortgage loans,” a company spokesperson said. “The Angel Oak affiliate mortgage company has not originated these loans since 2019 and all senior noteholders in the securitization received full payment of principal and interest.”

Negandhi also did not admit or deny the findings, the SEC document said. Negandhi is still employed by Angel Oak, according to LinkedIn.

In March 2018, Angel Oak issued an unrated $90 million fix-and-flip securitization, which was a rare occurrence for these loans as only two deals were done that year.

However, shortly after the deal closed, delinquency rates increased sharply, triggering a provision that would accelerate Angel Oak’s obligation to return funds to certain investors.

In order to reduce delinquencies, Angel Oak allegedly undertook an undisclosed effort to divert funds held in escrow, known as loan in progress accounts, to make payments on those mortgages, the SEC filing said.

Without these payments, the early amortization clause would have been breached in November 2018.

When Angel Oak provided monthly loan performance data to investors, it “did not disclose to noteholders that it had used funds held in escrow in LIP accounts to mitigate loan delinquencies, or that, but for the use of such funds, an early amortization would have been triggered,” the filing said. Negandhi approved the use of the LIP funds for this purpose.

Angel Oak and Negandhi were reportedly concerned about reputation risk as the transaction was branded under Angel Oak Mortgage Trust, which was used for eight other non-qualified mortgage deals, the SEC document continued.

Besides agreeing to the cease-and-desist order and the fines, Angel Oak and Negandhi were censured for their actions.