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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.