Wednesday, January 16, 2013

SEC Charges Three Former Bank Executives in Virginia for Understating Loan Losses During Financial Crisis

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.”

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