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SEC-RPT-Panel

 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 63818 / February 2, 2011 
 
ACCOUNTING AND AUDITING ENFORCEMENT 
Release No. 3237 / February 2, 2011 
 
ADMINISTRATIVE PROCEEDING 
File No.  3-14216 
 
 
In the Matter of 
 
Deerfield Capital Corp. and 
Danielle Valkner, CPA,   
 
Respondents. 
 
 
 
 
ORDER INSTITUTING CEASE-AND-
DESIST PROCEEDINGS PURSUANT TO 
SECTION 21C OF THE SECURITIES 
EXCHANGE ACT OF 1934, MAKING 
FINDINGS, AND IMPOSING REMEDIAL 
SANCTIONS AND A CEASE-AND-DESIST 
ORDER  
  
 
I. 
 
 The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities 
Exchange Act of 1934 (“Exchange Act”), against Deerfield Capital Corp. (“Deerfield Capital”) 
and Danielle Valkner (collectively “Respondents”).   
 
II. 
 
 In anticipation of the institution of these proceedings, Respondents have submitted Offers 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the findings 
herein, except as to the Commission’s jurisdiction over them and the subject matter of these 
proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease-
and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making 
Findings,  and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth 
below.   
 
 
 
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III. 
 
 On the basis of this Order and Res pondent’s Offer, the Commission finds1 that:  
 
Summary 
 
1. Deerfield Capital Corp. (“Deerfield Cap ital”) violated the books and records and 
internal control provisions of the Exchange Act in connection with three transactions involving 
securities issued by a Real Estate Mortgage Investment Conduit (“REMIC”)—an investment 
vehicle used for the pooling of mortgage loans and the issuance of mortgage-backed securities.  In 
each of the transactions, one of which occurred in December 2005 and two in March 2006, 
Deerfield Capital improperly recognized a gain from the purported sales of the REMIC while 
simultaneously purporting to purchase a “new” security (or “re-REMIC”) representing nearly the 
same rights to nearly the same stream of payments.  Deerfield Capital’s recognition of a gain on 
the sale of the REMIC was contrary to Generally Accepted Accounting Principles (“GAAP”).   
 
 2. For the December 2005 transaction, Deerfield Capital recognized $3.9 million of 
gain on the sale of the REMIC, which constituted 15 percent of Deerfield Capital’s reported net 
income for the fourth quarter of 2005 and 6 percent of its net income for the year ended December 
31, 2005.  For the March 2006 transactions, Deerfield Capital recognized gains of $3.6 million, 
which constituted 14 percent of its net income for the quarter ended March 31, 2006 and 4 percent 
of its net income for the year ended December 31, 2006. 
 
3. The misstatement related to the Dece mber 2005 transaction caused an excess 
payment of $977,000 in performance fees to Deerfield Capital Management LLC (“Deerfield 
Management”), which by virtue of its provision of investment management and administrative 
services to Deerfield Capital, made the decision to account for the December 2005 transaction as a 
sale.  
 
Respondents 
 
4. Deerfield Capital Corp. is a Maryland corporation with its principal place of 
business located in Rosemont, Illinois.  At all relevant times, Deerfield Capital traded on the New 
York Stock Exchange (“NYSE”) and was a specialty finance company that invested in real-estate 
securities and various other asset classes and elected to be taxed as a real estate investment trust 
(“REIT”), which meant that it was required to distribute to investors at least 90 percent of its 
taxable income.  The company’s stated objective was to provide attractive returns to its investors 
through a combination of dividends and capital appreciation.  At all times relevant to this Order, 
Deerfield Capital was externally managed by Deerfield Management .  As an externally-managed 
                                                 
1 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not binding 
on any other person or entity in this or any other proceeding.   
 
 
 
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company, Deerfield Capital had its own CEO and CFO, but it had no employees and relied on 
Deerfield Management to conduct its business and operations.  On December 21, 2007, Deerfield 
Management became a wholly-owned subsidiary of Deerfield Capital.  On October 1, 2008, 
Deerfield Capital terminated its REIT status retroactive to January 1, 2008.  Deerfield Capital is 
now a Nasdaq-listed company.   
 
5. Danielle Valkner (“Valkner”), age 41, is a CPA and was the CFO of Deerfield 
Management during the relevant time period.  During the relevant time period, Valkner worked 
closely with Deerfield Capital’s CFO and the staff responsible for Deerfield Capital’s accounting.  
Valkner did not sign any of Deerfield Capital’s public filings, but signed management 
representation letters in connection with the 2005 and 2006 audits and quarterly reviews of 
Deerfield Capital by its outside auditor.   
 
Background 
 
6. The three REMIC securities at issue in this matter were “digital” interest-only 
(“IO”) securities, which paid an annualized return of 8.375 percent when the one-month LIBOR 
exceeded 4.0 percent, but nothing when LIBOR was at or below 4.0 percent.  During 2005, as the 
one-month LIBOR rose, these digital IOs increased in value.   
 
 7. Due to differences in tax accounting for the original issue discount on the digital 
IO, Deerfield Capital’s reported taxable income was greater than its reported GAAP income.  
Deerfield Capital’s REIT status required it to distribute substantially all of its taxable income to its 
shareholders, and the difference in taxable income and GAAP income would have led to Deerfield 
Capital showing negative retained earnings on its GAAP balance sheet.  Deerfield Capital’s board 
was concerned about the tax/GAAP disparity and the possibility of shareholder confusion, as 
shareholders might have interpreted dividend payments in excess of GAAP earnings as a 
premature return of capital.   In October 2005, Deerfield Capital’s board of directors requested that 
Deerfield Management attempt to resolve the difference between Deerfield Capital’s GAAP and 
taxable income, and Deerfield Management then began exploring the possible sale of the digital 
IOs.  Thus, in late 2005, Deerfield Management personnel explored the option of selling one of the 
digital IOs in order to eliminate a difference between the income reported for tax purposes and the 
income reported for GAAP purposes and to capture the gain on the increasing value of the digital 
IO.  
 
 8. The trader responsible for Deerfield Ca pital’s mortgage-backed securities portfolio 
did not want to sell the digital IO because he felt that the security provided an effective hedge 
against increased funding costs of Deerfield Capital’s portfolio.  The trader wanted either to retain 
the digital IO or to acquire an identical or similar security to provide that hedge.  In order to 
accommodate the divergent goals of realizing a gain with respect to the digital IO, preserving its 
perceived hedge value, and more closely aligning Deerfield Capital’s GAAP and tax income, 
Deerfield Capital explored a number of options during the last quarter of 2005.   
 
 
 
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9. The efforts to consummate a transaction or series of transactions, which had begun 
in October, intensified as the year end approached.  During December, Deerfield Management 
personnel continued their attempts to sell the digital IO but were unable to obtain what they felt 
was a fair price.   
 
10. Finally, on December 28, a sales person for a third-party broker-dealer proposed the 
following transaction:  
 
• The third-party broker-dealer would purchase the digital IO by the end of 2005, 
with settlement on January 24, 2006. 
• The third-party broker-dealer would re-securitize the digital IO cash flows by 
combining the cash flows with those from an unrelated stream of principal-only 
(“PO”) payments representing approximately 10 percent of the total value of the 
“new” security.   
• Deerfield Capital would purchase the “new” security for settlement on January 30, 
2006.  
• The price of the digital IO component would be the same in both the sale and 
purchase transactions.  Deerfield Capital and the third-party broker-dealer agreed 
upon a price halfway between the bid and ask price of the security on the date of the 
transaction.  Since the third-party broker-dealer’s “purchase” and “sale” of the IO 
component would be at the same price, the third-party broker-dealer’s salesman 
told Deerfield Management’s trader that he was “indifferent” to the pricing of the 
security.  
 
11. On December 29, the par ties agreed to the transaction described above.  In its 
financial statements for the year ended December 31, 2005, Deerfield Capital recognized a gain of 
$3.9 million as a result of the transaction. 
 
Application of GAAP 
 
12. These transactions do not qualify  for sale treatment under SFAS 140, Accounting 
for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the 
applicable generally accepted accounting principle.  Under SFAS 140(9)(a)-(c), a transaction may 
be accounted for as a sale, and a gain or loss recognized, only if all of certain conditions are met.  
Otherwise, the sale must be treated as a financing, upon which a gain or loss cannot be recognized.   
13. Deerfield Capital’s three REMIC transactions in late 2005 and early 2006 did not 
meet the requirements of SFAS 140(9)(b) and therefore should not have been treated as sales under 
GAAP.  SFAS 140(9)(b) requires that the transferee have the right to pledge or exchange the 
transferred assets it received and that no conditions both constrain the transferee from taking 
advantage of its right to pledge or exchange and provide more than a trivial benefit to the 
transferor. Deerfield Capital agreed to purchase a re-REMIC security that included the same cash 
flows represented by the IOs sold through a forward purchase contract concurrent with the third-
 
 
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party broker-dealer’s purchase, effectively constraining the third-party broker-dealer from pledging 
or exchanging the assets.  Further, the IOs Deerfield Capital purportedly sold represented all 
payments from the underlying REMIC trust, constraining the third-party broker-dealer’s ability to 
obtain a similar security.  SFAS 140(32) states that, “A free standing forward purchase-sale 
contract between the transferor and the transferee on transferred assets not readily obtainable in the 
marketplace would benefit the transferor and is likely to constrain a transferee in much the same 
manner” as a free standing call option.    
 
14. In addition, neither Deer field Capital nor Deerfield Management performed a 
sufficient analysis or obtained the legal advice necessary to determine if the transactions satisfied 
SFAS 140(9)(a), which requires that the assets be “presumptively beyond the reach of the 
transferor and its creditors.”  The third-party broker-dealer had a contractual obligation to deliver a 
security for which 90 percent of the price represented the same stream of payments from the same 
pool of specifically identified assets.   Deerfield Capital and Deerfield Management did not fully 
analyze the available evidence or obtain a legal opinion and therefore did not have reasonable 
assurance that the transactions would be deemed a true sale at law.   
 
Deerfield Capital’s Accounting for the Transactions 
 
15. In late December 2005, Valkner played a significant role in the operations of 
Deerfield Capital.  Although others participated in the structuring of the December 2005 
transaction, Deerfield Capital’s management relied primarily upon Valkner, the CFO of Deerfield 
Management, to determine whether the transaction qualified for sales treatment under GAAP.  
Valkner was aware of the difficulties that Deerfield Capital faced in executing a transaction that 
met all the previously stated objectives.  Additionally, Deerfield Management’s head of trading 
told Valkner in a December 21 email that “an outright sale” of the IO security was “very 
challenging as no one wanted to provide a firm bid at a reasonable level in an acceptable time 
frame.   
 
16. In a series of December  29 communications between Valkner and other members 
of Deerfield Management personnel, including the mortgage trader who had negotiated the 
transaction, and after consultation with other Deerfield Capital accounting personnel, Valkner 
stated she believed that the December 29 transaction qualified for sale treatment.   Deerfield 
Capital had not previously engaged in a transaction similar to the December 29 transaction, and 
Valkner did not correctly analyze the application of SFAS 140.  When analyzing the transaction, 
Valkner did not ask the trader how the terms of the sale of the digital IO and the purchase of the re-
REMIC were negotiated; never reviewed the Bloomberg message reflecting the terms of the 
transaction; and did not determine whether the digital IO represented an entire tranche of a pool of 
collateral, thereby making it unique. 
  
17. Deerfield Capital’s accounti ng staff failed to document its analysis of the complex 
accounting issues raised by the transaction.  Although Deerfield Capital’s outside auditors had 
been consulted concerning previous efforts to conduct a transaction concerning the IO, Deerfield 
 
 
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Capital did not consult its outside auditor in connection with the December 2005 transaction and 
did not bring the transaction to the auditor’s attention in connection with the audit of Deerfield 
Capital’s accounts for the year ended December 31, 2005.   
 
18. Valkner did not review the transaction after December 29.  Although she did not 
sign the filings containing Deerfield Capital’s financial statements, she signed management 
representation letters addressed to Deerfield Capital’s outside auditors, in which she stated to the 
best of her knowledge, that Deerfield Capital’s financial statements were presented in accordance 
with GAAP, for the audit of the year ended December 31, 2005, the year ended December 31, 
2006 and the quarter ended March 31, 2006.   
 
19. At the close of the quarter ended Ma rch 31, 2006, Deerfield Capital sold two 
additional digital IO securities in similar transactions.  Deerfield Capital’s new CFO did not 
undertake any independent review of the transactions, purportedly relying instead upon the work 
done by Valkner and others to ensure compliance with GAAP in connection with the December 29 
transaction.  Deerfield Capital did not inform its outside auditor of the transaction.  In connection 
with the March 2006 transactions, Deerfield Capital recognized $3.6 million in gains on the sales. 
 
Impact on Deerfield Capital’s Financial Statements 
 
20. In connection with the December 2005 transactions, Deerfield Capital recognized a 
gain on sale of $3.9 million and recorded a related expense of $977,000 for an incentive fee paid to 
Deerfield Management.  In connection with the March 2006 transactions, Deerfield Capital 
recognized a gain on sale of $3.6 million and recorded an incentive fee expense of $915 thousand; 
however, Deerfield Management did not ultimately collect that fee at the time of its year-end 
calculation, due to losses arising from the impairment of the re-REMICs later in 2006. 
 
21. In its audited Statement of  Operations included in its Form 10-K for the year ended 
December 31, 2005, Deerfield Capital represented that it had realized a net gain of $5.372 million 
on the sale of available-for-sale securities, which was a component of $5.435 million in other 
income and gain.  Deerfield Capital failed to disclose that $3.9 million of that gain represented the 
“sale” of the IO security and there was an agreement to purchase a newly created re-REMIC 
security that included the cash flows of the IO sold combined with cash flows from a PO security. 
Similarly, in the Form 10-Q for the three months ended March 31, 2006, Deerfield Capital 
represented that it had realized a gain of $2.092 million on the sale of available-for-sale securities.  
Again, Deerfield Capital failed to disclose that $3.6 million of that gain related to the sale of the 
digital IOs and that there was an agreement to purchase a newly created re-REMIC security that 
included the cash flows of those IOs.   
   
22. Correcting the improper acc ounting requires that the gain on sale be excluded from, 
and that the incentive fee be added back to, the income statement. As a result of the accounting 
errors, Deerfield Capital overstated its net income for the fourth quarter of 2005 by $2.9 million, or 
15 percent, and for the first quarter of 2006 by $2.7 million, or 14 percent.  As a result of the 
 
 
 7
errors, Deerfield Capital also overstated its net income for the year ended December 31, 2005 by 6 
percent.   
 
Violations 
 
23. As a result of the conduct described a bove, Deerfield Capital violated Section 
13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and Valkner was a 
cause of Deerfield’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, and 13a-
1 thereunder, which require every issuer of a security registered pursuant to Section 12 of the 
Exchange Act to file with the Commission information, documents, and annual and quarterly 
reports as the Commission may require, and mandate that periodic reports contain such further 
material information as may be necessary to make the required statements not misleading.  
Deerfield Capital violated those provisions by filing quarterly and annual reports that misstated 
its net income and gain on sale of available-for-sale securities and by failing to disclose that it 
was obligated to reacquire certain assets for which it had recognized revenue on a purported sale 
that should have been accounted for as a financing.   
 
 24. As a result of the conduct described above, Deerfield Capital violated Section 
13(b)(2)(A) of the Exchange Act, and Valkner was a cause of Deerfield Capital’s violations of 
Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep 
books, records, and accounts which, in reasonable detail, accurately and fairly reflect their 
transactions and dispositions of their assets.  Because Deerfield Capital incorrectly recorded the 
transactions described above as sales, rather than financings, its books, records and accounts did 
not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. 
 
 25. Lastly, as a result of the conduct de scribed above, Deerfield Capital violated 
Section 13(b)(2)(B) of the Exchange Act, which requires all reporting companies to devise and 
maintain a system of internal accounting controls sufficient to provide reasonable assurances that 
transactions are recorded as necessary to permit preparation of financial statements in accordance 
with generally accepted accounting principles.  Deerfield Capital failed to implement internal 
accounting controls relating to its transactions in sales and purchases of re-securitizations sufficient 
to provide reasonable assurances that these accounts were accurately stated in accordance with 
generally accepted accounting principles.       
 
 
IV. 
 
 In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
agreed to in Respondents’ Offers. 
 
 Accordingly, it is hereby ORDERED that: 
 
 
 
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 A. Pursuant to Section 21C of the Exchange Act, Respondent Deerfield Capital cease 
and desist from committing or causing any violations and any future violations of Sections 13(a), 
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.   
 
 B. Pursuant to Section 21C of the Exchange Act, Respondent Valkner cease and desist 
from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the 
Exchange Act and Rules 12b-20 and 13a-1 thereunder.   
 
C. Respondent Deerfield Capital shall, within 15 days of the entry of this Order, pay 
disgorgement of $977,000 and prejudgment interest of $300,070.36 to the United States Treasury.  
If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 
600.  Payment shall be: (A) made by wire transfer, United States postal money order, certified 
check, bank cashier's check or bank money order; (B) made payable to the Securities and 
Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, 
Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, 
Alexandria, VA 22312; and (D) submitted under cover letter that identifies Respondent Deerfield 
Capital as a Respondent in these proceedings, the file number of these proceedings, a copy of 
which cover letter and money order or check shall be sent to Gerald Hodgkins, Associate Director, 
Division of Enforcement, Securities and Exchange Commission, 100 F St., N.E., Washington, DC 
20549-6010.   
 
 By the Commission. 
 
 
       E l i z a b e t h  M .  M u r p h y  
       S e c r e t a r y  
 
 
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Service List 
 
 Rule 141 of the Commission's Ru les of Practice provides that the Secretary, or another duly 
authorized officer of the Commission, shall serve a copy of the Order Instituting Cease-and-Desist 
Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, 
Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), on the Respondents and 
their legal agents. 
 
 The attached Order has been sent to the following parties and other persons entitled to 
notice: 
 
Honorable Brenda P. Murray    
Chief Administrative Law Judge   
Securities and Exchange Commission  
100 F Street, N.E. 
Washington, DC 20549-2557  
 
Douglas McAllister, Esq. 
Enforcement Division     
Securities and Exchange Commission   
100 F Street, N.E. 
Washington, DC 20549-6561     
     
Ms. Danielle Valkner    
c/o Kevin J. McCall, Esq. 
Jenner & Block LLP  
353 N. Clark Street 
Chicago, IL 60654-3456 
 
Kevin J. McCall, Esq. 
Jenner & Block LLP  
353 N. Clark Street 
Chicago, IL 60654-3456 
(Counsel for Danielle Valkner) 
 
Deerfield Capital Corp. 
c/o William R. Baker III 
Latham & Watkins LLP 
555 Eleventh Street, N.W. 
Suite 1000 
Washington, DC 20004 
 
 
 
 
 10
 
 
 
William R. Baker III 
Latham & Watkins LLP 
555 Eleventh Street, N.W. 
Suite 1000 
Washington, DC 20004 
(Counsel for Deerfield Capital Corp.) 
 