UPDATE 2-SEC charges Thornburg mortgage execs with fraud

* SEC sues ex-CEO, ex-CFO, ex-accounting chief

* SEC says execs inflated income, hid liquidity problems

* Thornburg filed for bankruptcy protection in 2009

* Lawyers for defendants not immediately available (Recasts, adds background, details from lawsuit, defense response, case citations, bylines)

By Aruna Viswanatha and Jonathan Stempel

WASHINGTON, D.C., March 13 (Reuters) - Three former executives at now-bankrupt Thornburg Mortgage Inc have been charged with fraud by the U.S. Securities and Exchange Commission, accused of hiding the fast-deteriorating financial condition of the large home lender.

The SEC said on Tuesday that former Chief Executive Larry Goldstone, former Chief Financial Officer Clarence Simmons and former Chief Accounting Officer Jane Starrett schemed to fraudulently overstate Thornburg's income by more than $400 million in its 2007 annual report.

According to the SEC, this occurred even as Thornburg, based in Santa Fe, New Mexico, was facing a liquidity crisis and substantial margin calls from its lenders in the weeks before it filed its 2007 annual report on Feb. 28, 2008.

The complaint filed in a federal court in New Mexico quotes a Feb. 25, 2008 email from Starrett to Goldstone and Simmons saying: "We have purposely not told [the auditors] about the margin calls so that we don't escalate an issue which we believe will be put to rest" by the time they issue their opinion.

SEC enforcement chief Robert Khuzami said in a statement on Tuesday: "The truest test of corporate executives' commitment to full and accurate shareholder disclosure comes not during times of soaring profits and double-digit growth, but when companies are under financial stress and shareholders have the greatest need for accurate information."

"Thornburg executives flunked that test by issuing a series of misleading statements and half-truths to conceal Thornburg's rapidly deteriorating situation," he said.

Goldstone and Simmons said in a statement that the lawsuit was without merit.

"We are profoundly disappointed by the SEC's lawsuit, which is based on unfounded claims, emails taken out of context and inaccurate interpretations of management's actions," they said.

A lawyer for Starrett did not immediately respond to a request for comment.

Thornburg revealed in its annual report on Feb. 28, 2008 that it had incurred more than $300 million of margin calls in the prior two weeks after the value of some of its securities declined.

"From an earnings perspective, we will have a very strong year, and the dividend should be safe," Goldstone said that day in an interview with Reuters. "The issue we disclosed today is not a credit performance issue, but a securities price issue. It's a lot more about market psychology and confidence than anything else ."

Now known as TMST Inc, Thornburg once specialized in making "jumbo" home loans larger than $417,000 to borrowers with good credit.

It collapsed after the margin calls and as the value of mortgages it held plunged, and filed for Chapter 11 protection on May 1, 2009.

It had $24.4 billion of assets and $24.7 billion of debt when it filed for protection from creditors, and its bankruptcy remains one of the largest in the U.S. financial sector.

The SEC lawsuit called for the former executives to give up improper profits, pay civil fines, and be barred from serving as officers or directors of public companies.

Joel Sher, a court-appointed trustee liquidating Thornburg, previously sued Goldstone and Simmons to recover alleged improper bonuses and funds and documents they allegedly took to launch a start-up venture.

Sher, who leads the bankruptcy practice at Shapiro Sher Guinot & Sandler in Baltimore, did not immediately return a call seeking comment.

The SEC case is SEC v. Goldstone et al, U.S. District Court, District of New Mexico, No. 12-00257. The bankruptcy case is In re: TMST Inc, U.S. Bankruptcy Court, District of Maryland, No. 09-17787. (Reporting By Aruna Viswanatha in Washington, D.C. and Jonathan Stempel in New York; editing by Andre Grenon)