SEC Charges Three Former Senior Officers of Commonwealth Bank With Understating Losses and Material Misstatements During Financial Crisis
The Securities and Exchange Commission today charged three former bank executives in Virginia for understating millions of dollars in losses and masking the true health of the bank's loan portfolio at the height of the financial crisis.
The SEC alleges that Edward J. Woodard, Jr., who was the CEO, President and Chairman of the Board at Norfolk, Virginia-based Bank of the Commonwealth and its publicly-traded parent, Commonwealth Bankshares, along with Chief Financial Officer and Secretary Cynthia A. Sabol, a CPA, and Executive Vice President and Commercial Loan Officer Stephen G. Fields understated the bank's loan-related losses as well as losses on real estate repossessed by the bank (other real estate owned or OREO).
The SEC's complaint alleges that, from in or about November 2008 through August 2010, the consistent message in Commonwealth's SEC filings and public statements was that its portfolio of loans, which comprised approximately 94% and 81% of the company's total assets in 2008 and 2009, respectively, was conservatively managed according to strict underwriting standards aimed at keeping Commonwealth's reserved losses low during a time of unprecedented economic turmoil. In reality, internal practice deviated so much from what the investing public was told that, from November 2008 through August 2010, Commonwealth understated its ALLL by approximately 17% to 25% with a corresponding understatement to its reported loss before income taxes for fiscal year 2008 of approximately 64%; understated its OREO in two quarters by approximately 19% to 20%, which resulted in a corresponding understatement of Commonwealth's reported loss before income taxes in the first quarter of 2010 of approximately 35%; and underreported its total non-performing loans throughout the entire period by at least 30%.
The SEC's complaint further alleges that Woodard, as CEO, knew of the true state of Commonwealth's loan portfolio, was involved in the activity to hide the deterioration of many of the loans at issue and was responsible for the misleading public statements and in particular those in earnings releases. Sabol, as CFO, knew of the activity to mask the problems with the company's loan portfolio and the corresponding effect these masking practices had on the bank's financial statements and disclosures, yet signed the disclosures and certified to the investing public that they were accurate. Fields oversaw the bank's largest portfolio of construction and development loans and was involved in the masking practices.
The SEC's complaint charges Woodard and Sabol with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC's complaint charges Fields with violating Exchange Act Section 13(b)(5) and aiding and abetting violations of Exchange Act Sections 10(b) and 13(a), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
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