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It has come to light that Angel Oak Capital Advisors (“Angel Oak”) has been lying to their investors, according to the SEC. This revelation has sent shockwaves through the investment community and has called into question the integrity of the firm. Angel Oak has been accused of inflating the value of assets under management, as well as misrepresenting the performance of their portfolios. These allegations are serious and if proven true, could have devastating consequences for the firm.

In March 2018, Angel Oak Capital Advisors, LLC raised $90 million from investors through the first-ever securitization of a pool of "fix and flip" loans. Shortly after the closing of the offering, Angel Oak observed an unexpected increase in the rate of late mortgage payments, or delinquencies, in the underlying pool of "fix and flip" mortgages.

The rising delinquency rate, which continued through 2019, threatened to breach an early amortization trigger in the securitization designed to protect noteholders against losses by requiring early repayment of the investment.

Given the rising delinquency rates, Angel Oak became increasingly concerned about the adverse harm to the firm that would result from an early amortization, particularly so soon after the securitization's closing in March 2018.

Among other things, Angel Oak discussed the negative impact of an early amortization on the firm's ability to conduct future securitizations as well as on investors' perception of the quality of the underwriting criteria used by Angel Oak affiliates to originate mortgage loans. Angel Oak also discussed the adverse financial impact of an early amortization on Angel Oak-managed private funds, which owned the junior tranche of the securitization notes.

To avoid paying back investors early, Angel Oak took undisclosed measures to reduce mortgage delinquency rates. They did this by using funds that were supposed to go towards expenses related to renovating the properties and instead made payments on delinquent mortgages. This went against what was stated in the securitization's offering materials and resulted in lower delinquency rates.

By doing this, Angel Oak was able to prevent an early amortization from taking place. Had Angel Oak not engaged in these illicit practices, the early amortization trigger would have been breached in November 2018, thereby requiring early repayment of the investment principal to senior tranche noteholders.

Throughout the period of the securitization, Angel Oak disseminated performance information data to noteholders, through monthly reports prepared by the securitization’s trustee, which disclosed, among other things, the delinquency rates on the mortgages in the securitization pools as well as the securitization’s compliance with the early amortization trigger.

Angel Oak, however, did not disclose to noteholders that it had used funds held in escrow in Loans in Progress (LIP) accounts to mitigate loan delinquencies, or that, but for the use of such funds, an early amortization would have been triggered. As a result, Angel Oak’s statements that were incorporated in the monthly trustee reports regarding delinquency rates and its compliance with the early amortization trigger were materially false and misleading.

If these allegations are true, they suggest that Angel Oak was not being truthful with its investors about the performance of its securities offering. This could potentially result in serious financial losses for those who invested in the offering.

Ashish Negandhi, a senior portfolio manager at Angel Oak, was well aware of the potential damage to the company's financial health and reputation that could result from breaching an early amortization trigger on a securitization. With delinquency rates on the rise, there was a real risk of this happening.

To prevent this from happening, Negandhi approved the use of LIP account funds to bring specific delinquent mortgage loans up to date. Unfortunately, he failed to ensure accurate information about the delinquency rates or the securitization's compliance with the early amortization trigger was disclosed to noteholders. As a result, Angel Oak ultimately suffered significant financial and reputational harm.

As a result of Angel Oak’s actions, the SEC alleges that Angel Oak and Negandhi willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. In addition, the SEC alleges that Angel Oak willfully violated and Negandhi caused Angel Oak's violation of Section 206(2) of the Advisers Act.

These violations occurred when Angel Oak and Negandhi made false and misleading statements to potential investors regarding the firm's character and quality of investments. By making these false and misleading statements, Angel Oak and Negandhi defrauded investors of millions of dollars. The SEC is seeking disgorgement of ill-gotten gains and civil penalties against Angel Oak and Negandhi.

Sources say that limited partner investors may be pulling their funds. As it stands as of the time of this writing, the firm's reputation has been tarnished, and it will take a long time for them to regain the trust of the investment community. Only time will tell if Angel Oak will be able to weather this storm.