Einhorn Quits New Century Board

The subprime lender has been hit hard of late.
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New Century Financial's

(NEW) - Get Report

troubles keep worsening.

David Einhorn of the New York-based hedge fund Greenlight Capital resigned from the real estate investment trust's board of directors late Wednesday, according to a filing.

Greenlight is one of New Century's largest shareholders, owning 6.3% of the lender's outstanding common stock. The firm has been a shareholder of New Century since 2002.

Einhorn's nomination to the board last year was the culmination of a battle between the two firms. He first attempted to get on New Century's board in 2005, but was rejected. Greenlight retaliated by attempting to nominate three directors onto New Century's board.

Last March, New Century finally agreed to increase the size of its board to 11 members and give Einhorn a seat. Along with the agreement, New Century also waived the rules for Greenlight in regards to how much the company could own of the lender. New Century permitted Greenlight to own as much as 19.6% of the company, though Greenlight's stake never got that high.

Pleased with the outcome, Einhorn praised the lender at the time.

"New Century is a unique and valuable franchise," he said in a statement at the time. "I look forward to sharing my perspective as the board oversees effective allocation of the company's capital to the most attractive risk-adjusted opportunities, and to working with the other board members to enhance per-share value for all stockholders."

But New Century, which originates loans to consumers with the poorest credit histories and then sells the loans for securitization, has been mired with problems of late. Shares of several subprime companies, including New Century, have plummeted in recent weeks as delinquencies and defaults have picked up. Investors have been worrying that some lenders might go under if their banks cut off funding.

The company has seen its shares drop more than 80% over the past month after revealing it would have to restate earnings for the first three quarters of 2006 to correct errors in how it accounted for loan repurchase losses, among other things.

Last week, the REIT said that the U.S. attorney's office for the Central District of California was conducting a criminal inquiry in connection with the trading of the firm's securities and the accounting errors. New Century is also involved in class-action lawsuits.

New Century expects to record a loss for the fourth quarter. It is seeking waivers to the covenants with 11 of its 16 financing companies that require it to report at least $1 of net income for any rolling two-quarter period. So far six have granted New Century waivers.

Greenlight Capital has also been in the news lately for its bets against Washington, D.C.-based business development company

Allied Capital

(ALD)

. Einhorn has accused Allied of accounting fraud and demanded the removal of its management.

Allied said last month in a response to a subpoena that it had discovered that "an agent of the company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005."

But for New Century, Einhorn's aggressive shareholder activist tactics might prove best on the sidelines for now, one observer says.

"The fate of New Century is really up to the fate of the warehouse providers at this point that have lines out to them," says Matthew Howlett, an analyst at Fox-Pitt Kelton. "I just think it's better right now that he is not there. I don't know what service he could provide at this point."

According to Howlett, Einhorn was concerned that New Century was not managing its capital efficiently enough and was pushing for more share buybacks. Fox-Pitt has suspended his coverage of New Century.

A spokeswoman for Greenlight Capital would not comment further on the issue. New Century did not immediately return a call requesting comment.

Shares were up 15 cents, or 2.9%, to $5.31 on Thursday.