The SEC charged three former executives at
Norfolk, Va.-based Bank of the Commonwealth 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 the CEO was responsible along with the CFO
and the executive vice president for misrepresentations to investors by the
bank’s parent company Commonwealth Bankshares. The consistent message in
Commonwealth’s public statements and SEC filings was that its portfolio of
loans — which comprised approximately 94 percent of the company’s total assets
in 2008 — was conservatively managed according to strict underwriting standards
aimed at keeping the bank’s reserved losses low during a time of unprecedented
economic turmoil.
In reality, the SEC alleges
that internal practice deviated significantly from what the public was being
told. The CEO knew the true state of Commonwealth’s rapidly-deteriorating loan
portfolio, yet he worked to hide the problems and engineer the misleading
public statements, particularly those made in earnings releases. The 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 she signed the disclosures and certified to the
investing public that they were accurate. The executive vice president oversaw
the bank’s largest portfolio of construction and development loans and was
involved in the masking practices.
“During times of financial
stress, it’s more important than ever for executives to make full and honest
disclosure to the investing public,” said Scott W. Friestad, Associate Director
of the SEC’s Division of Enforcement. “Commonwealth’s executives did the
opposite and hid the company’s worsening performance from shareholders through
masking practices that understated the losses on its most troubled loans.”
