By Nate Raymond

(Reuters) - The U.S. Securities and Exchange Commission on Friday dropped its case against two former executives at now-defunct home lender Thornburg Mortgage Inc in a lawsuit brought in the wake of the 2008 financial crisis.

In papers filed in federal court in Albuquerque, New Mexico, the SEC said it would no longer pursue its civil case against former Thornburg CEO Larry Goldstone and former CFO Clarence Simmons, which had been set for a re-trial on Feb. 21.

The decision marked a setback in the agency's push to hold executives accountable in connection with the U.S. housing meltdown and financial crisis, and came after a jury in July returned a mixed verdict in the initial trial in the case.

The jury found Goldstone and Simmons not liable on five of 10 counts while deadlocking on the other claims. The SEC later in September dropped three remaining claims and said it would no longer pursue what the defense called its central allegation.

Randall Lee, a lawyer for Goldstone and Simmons, said his clients were "thrilled to have finally been exonerated."

"We always believed that the evidence in this case demonstrated that our clients had acted in good faith in attempting to navigate through the early stages of the financial crisis," Lee said in a statement.

The SEC did not immediately respond to a request for comment.

Thornburg, which specialized in making "jumbo" home loans larger than $417,000 to borrowers with good credit, filed for bankruptcy in May 2009 amid the U.S. financial crisis.

The SEC's lawsuit, filed in 2012, accused Goldstone, Simmons and former Thornburg Chief Accounting Officer Jane Starrett of hiding the company's fast-deteriorating financial condition at the onset of the financial crisis.

The SEC at that time claimed that Goldstone and Simmons defrauded investors by overstating Thornburg's income by more than $400 million and falsely reporting a profit rather than a loss for the fourth quarter in its 2007 annual report.

That claim, though, was dropped by the SEC in September following the initial trial.

Goldstone continued to face a claim based on statements he made after Thornburg's annual report was filed. Both Goldstone and Simmons also faced a claim that they misrepresented or omitted facts to the company's auditors. They denied wrongdoing.

Starrett agreed in May to pay $25,000 to settle the lawsuit without admitting or denying the allegations.

The case is Securities and Exchange Commission v. Goldstone et al, U.S. District Court, District of New Mexico, No. 12-00257.

(Reporting by Nate Raymond in New York; Editing by Chris Reese and Lisa Shumaker)