SEC CHARGES FORMER BANK HOLDING COMPANY OFFICERS WITH DISCLOSURE FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23254 / May 7, 2015

Securities and Exchange Commission v. David R. Gibson, et al., Civil Action No. 15-cv-00363 (D. Del., May 6, 2015)

SEC Charges Four Former Officers of Delaware Bank Holding Company with Disclosure Fraud

On May 6, 2015, the Securities and Exchange Commission filed fraud charges against four former officers of Wilmington Trust for intentionally understating past due bank loans during the financial crisis.  The former Delaware-based bank holding company was acquired by M&T Bank in May 2011 and paid $18.5 million in September 2014 to settle related SEC charges of improper accounting and disclosure fraud.

The SEC’s complaint, filed in federal district court in Wilmington, Delaware, alleges the four took part in a scheme to mask the impact of real estate market declines on the bank’s portfolio of commercial real estate loans.  According to the SEC’s complaint, the former officials improperly excluded hundreds of millions of dollars of past due real estate loans from financial reports filed by Wilmington Trust in 2009 and 2010, violating a requirement to fully disclose the amount of loans 90 or more days past due.

The complaint names the bank’s former Chief Financial Officer David R. Gibson, former Chief Operating Officer and President Robert V.A. Harra, former Controller Kevyn N. Rakowski, and former Chief Credit Officer William B. North.  The complaint alleges that Gibson, Rakowski, and North omitted approximately $351 million of matured loans 90 days or more past due from Wilmington Trust’s disclosures in the third quarter of 2009, so that the bank disclosed only $38.7 million of such loans.  The four former officials allegedly omitted approximately $330.2 million of these loans in the fourth quarter of 2009, so that the bank’s annual report disclosed just $30.6 million in matured loans 90 days or more past due.

In addition, the complaint alleges that Gibson, Rakowski and North schemed to materially misreport this category of past due loans in the first half of 2010.  Gibson also is alleged to have materially understated the amount of non-accruing loans in Wilmington Trust’s portfolio in the third quarter of 2009 and the bank’s loan loss provision and allowance for loan losses in the fourth quarter of 2009.  Gibson, Harra, Rakowski and North are each charged with violating or aiding and abetting violations of the antifraud provisions of the federal securities laws.  Each also is charged with aiding and abetting violations of the reporting, recordkeeping, and internal controls provision of the federal securities laws.  The SEC is seeking to have all four return allegedly ill-gotten gains with interest and pay civil monetary penalties, and to have Gibson and Harra barred from serving as corporate officers or directors.

In a related action, the U.S. Attorney’s Office for the District of Delaware today announced criminal charges against Rakowski and North.

The SEC’s investigation has been conducted by Margaret Spillane, James Addison, and Thomas P. Smith, Jr. of the New York Regional Office.  Jack Kaufman and Ms. Spillane will lead the SEC’s litigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Delaware, Federal Bureau of Investigation, Federal Reserve, and Office of the Special Inspector General for the Troubled Asset Relief Program.

SEC CHARGES OF ACCOUNTING AND DISCLOSURE FRAUD AGAINST DELAWARE BANK HOLDING COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

September 11, 2014

The Securities and Exchange Commission announced accounting and disclosure fraud charges against a Delaware-based bank holding company for failing to report the true volume of its loans at least 90 days past due as they substantially increased in number during the financial crisis.

An SEC investigation found that as the real estate market declined in 2009 and 2010 and its construction loans began to mature without repayment or completion of the underlying project, Wilmington Trust Company did not renew, extend, or take other appropriate action for 90 days or more on a material amount of its matured loans.  Instead of fully and accurately disclosing the amount of these accruing loans as required by accounting guidance, Wilmington Trust improperly excluded the matured loans from its public financial reporting.

Wilmington Trust, which was acquired by M&T Bank in May 2011, has agreed to pay $18.5 million in disgorgement and prejudgment interest to settle the SEC’s charges.

“Improper application of accounting principles by Wilmington Trust had the effect of misleading investors about a key credit quality metric during a time of significant upheaval and financial distress for the bank,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Investors must know when banking institutions are unable to recover on material amounts of outstanding loans, which means those institutions must carefully adhere to relevant accounting rules.”

Andrew M. Calamari, Director of the SEC’s New York Regional Office, added, “By failing to fully disclose the actual volume of accruing loans past due 90 days or more, Wilmington Trust prevented investors from learning the full scope of the troubles in its commercial real estate loan portfolio.”

According to the SEC’s order instituting a settled administrative proceeding, Wilmington Trust omitted from its disclosures in the third and fourth quarters of 2009 approximately $338.9 million and $330.2 million, respectively, in matured loans 90 days or more past due.  Instead, it disclosed just $38.7 million in such loans for the third quarter and only $30.6 million in its annual report following the fourth quarter.  Wilmington Trust also materially misreported this category of loans in the first and second quarters of 2010.  Furthermore, Wilmington Trust failed to accurately disclose during the second half of 2009 the amount of non-accruing loans in its portfolio, and materially understated its loan loss provision and allowance for loan losses during this same period.

Wilmington Trust consented to the entry of the order finding that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  In addition to the monetary sanctions, Wilmington Trust agreed to cease and desist from committing or causing any violations and any future violations of these provisions.

The SEC’s investigation, which is continuing, has been conducted by Margaret Spillane, James Addison, and Michael Osnato of the New York Regional Office.  The SEC appreciates the assistance of the U. S. Attorney’s Office for the District of Delaware, Federal Bureau of Investigation, Federal Reserve, and Office of the Special Inspector General for the Troubled Asset Relief Program.

BANK HOLDING COMPANY CEO AND CFO CHARGED BY SEC WITH MISLEADING INVESTORS

FROM:  SEC
Commission Charges Texas Bank Holding Company’s CEO and CFO with Misleading Investors about Loan Quality and Financial Health during the Financial Crisis
The Commission announced that it charged Franklin Bank Corp.’s former chief executives for their involvement in a fraudulent scheme designed to conceal the deterioration of the bank’s loan portfolio and inflate its reported earnings during the financial crisis.

The SEC alleges that former Franklin CEO Anthony J. Nocella and CFO J. Russell McCann used aggressive loan modification programs during the third and fourth quarters of 2007 to hide the true amount of Franklin’s non-performing loans and artificially boost its net income and earnings.  The Houston-based bank holding company declared bankruptcy in 2008.

“Nocella and McCann used the loan modification scheme like a magic wand to change non-performing loans into performing assets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.  “Their disclosure and accounting tricks misled investors into believing that Franklin was outperforming other banks during the height of the financial crisis.”

David Woodcock, Director of the SEC’s Fort Worth Regional Office, added, “Franklin’s analysts and investors monitored the quality of the bank’s loan portfolio as a key indicator of its financial health.  But Nocella and McCann intentionally concealed the fact that the quality of the bank’s loan portfolio was rapidly deteriorating.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Texas late Thursday, as Franklin’s holdings of delinquent and non-performing loans rose significantly in the summer of 2007, Nocella and McCann instituted three loan modification schemes that caused Franklin to classify such loans as performing.  By the end of September 2007, Nocella and McCann had used the loan modification programs to conceal more than $11 million in non-performing single family residential loans and $13.5 million in non-performing residential construction loans.

As a result of the loan modifications, Franklin overstated its third-quarter 2007 net income and earnings by 317% and 77% respectively, and reported that it earned $0.30 per share, of which $0.23 per share was directly attributable to the loan modifications.  On May 2, 2008, in a Form 8-K report filed with the SEC, Franklin acknowledged that the accounting for the loan modifications should be revised and that investors should no longer rely upon Franklin’s Form 10-Q for the quarter ended September 30, 2007.
The SEC’s complaint seeks financial penalties, officer-and-director bars, and permanent injunctive relief against Nocella and McCann to enjoin them from future violations of the federal securities laws.  The complaint also seeks repayment of bonuses received by Nocella and McCann under Section 304 of the Sarbanes Oxley Act of 2002, which allows for “clawbacks” of bonuses received by executives if the company later must restate its earnings.