One of the defining characteristics of the current financial
crisis has been the large number of banks that have
failed—348 during 2008 through March
2011—taking investor money and the FDIC's Deposit
Insurance Fund ("DIF") funds with them. These failed
banks had approximately $604.4 billion of assets, and cost the DIF
approximately $80.1 billion. Not surprisingly, the financial crisis
has triggered an outcry from politicians, the public, regulators,
and law enforcement, who are concerned that improper behavior
contributed to the economic meltdown, or caused losses to the
Troubled Asset Relief Program ("TARP") or the DIF, and
believe that those responsible should be held accountable and
pursued civilly and/or criminally.
Much of this outcry has been directed toward "Wall
Street," although executives and directors of failed banks,
most of which were community banks, are now potential targets of
prosecutorial zeal. A handful of bank executives have been charged,
and brief summaries of those cases are provided to illustrate the
approach taken so far. It is unknown whether this small number of
prosecutions is just the beginning of a trend similar to the over
1,800 criminal cases brought against bank insiders in the wake of
the savings & loan crisis of 1988—1994 (the
"S&L Crisis"), but these cases should be watched
by those involved with troubled or failed banks. These cases also
provide useful examples of operating risks and the need for strong
internal controls and active oversight for healthy banks.
The Fraud Enforcement and Recovery Act of 2009 was enacted as a
response to the financial crisis. This Act, among other things,
authorized significant appropriations for various federal agencies
including the Department of Justice ("DOJ"), FBI, and SEC
to hire new agents and staff to investigate and prosecute financial
fraud. The Emergency Economic Stabilization Act of 2008 also
created the Special Inspector General for the TARP
("SIGTARP") to uncover and prosecute fraud and waste of
TARP funds. Additionally, the DOJ launched a specialized
interagency Financial Fraud Task Force to combat financial crime,
with Attorney General Eric H. Holder, Jr., vowing to root out
financial wrongdoing that helped bring about the meltdown and
prosecute future criminal actions by "unscrupulous
executives," boldly declaring, "We will investigate you,
we will prosecute you, and we will incarcerate
you."1
This increase in resources continued into 2010, with the DOJ
securing a 12 percent budget increase to fight financial fraud and
requesting an additional 23 percent increase in 2011.2
The enforcement effort also has continued to clearly target
executives of financial entities, including banks. For example, in
a September report to the Senate on current Fraud Enforcement,
Assistant Attorney General Lanny A. Breuer described the ongoing
"aggressive efforts to hold bank executives to account"
and stressed DOJ's intention to make enforcement examples out
of them through future prosecutions.3
Despite the rhetoric, increased resources, and ever-increasing list
of failed banks, there have been only a handful of prosecutions of
failed bank executives. There are significant numbers of ongoing
investigations and prosecutions relating to mortgage fraud and bad
loans,4 but, other than the several bank actions
summarized below, the vast majority of the prosecutions to date
have been against mortgage brokers and borrowers rather than bank
executives. This may be because individual mortgage brokers and
borrowers are "low hanging fruit" for prosecutors, with
politically attractive results on behalf of consumer
borrowers.
Still, executives of failed and failing banks should be wary.
First, prosecutions of bank executives often involve complex and
resource-intensive investigations, which delay the bringing of
charges. It is difficult to distinguish between what actions were
merely business judgments that ended poorly in the recession versus
actions that were made with criminal intent. After the S&L
Crisis, over 1,800 bank insiders were prosecuted between 1990 and
1995, resulting in more than 1,000 officers, directors, and other
officials being sent to prison—but the prosecutions were
often brought years later, as late as 1998.5 Indeed, the
FDIC's current deputy inspector general, Fred W. Gibson, noted
that charges often are not filed for at least 18 months after a
bank has failed.6
Second, prosecutors appear convinced there were plenty of bad
actors in the banking industry leading to the meltdown.
Undoubtedly, many banks were merely victims of fraudulent borrowers
and mortgage brokers, or the economic downturn. The FDIC's
acting general counsel assured bankers in late 2010 that "as
long as they compl[ied] with their legal duties, they don't
have anything to worry about."7 However, federal
officials are seeking to identify bankers who played fast and loose
with regulations, looked the other way as borrowers diverted funds
from their intended purpose, or failed to properly account for the
true market value of assets. Even though few such cases have been
brought so far, prosecutors have publicly stated that they are
actively pursuing criminal investigations in connection with a
number of failed banks, and further indictments are
likely.8 After each bank failure, the FDIC investigates,
along with the DOJ and the FBI, possible grounds for recovery of
its losses against bank officers, directors, and insiders, and
whether the likely recoveries outweigh the expenses of pursuing
claims against insiders.9 This can be a long process.
The FDIC has recently confirmed that it is actively conducting
investigations and considering criminal claims against insiders of
about 50 failed banks, with the targeted individuals typically
ranking as vice president or higher (including former directors),
and it expects the heightened industry scrutiny to continue for
years.10
Third, when prosecutors do decide to institute a criminal
proceeding as a result of improper conduct, they have a wide range
of laws with which to prosecute bankers. Beyond traditional bank
fraud11 and embezzlement12 statutes,
prosecutors can also base charges on a wide range of banking and
general fraud violations including making false
statements13 or concealing material facts,14
making false entries in bank books and records,15
receipt of commissions or gifts for procuring loans,16
mail or wire fraud,17 and organizing a continuing
financial crimes enterprise.18 Additionally, there are
newly created offenses related to fraud connected with TARP
funds.19
Bank insiders should be mindful of the heightened scrutiny of the
industry and increased government resources being focused on
seeking to identify and prosecuting fraud. The facts uncovered in
civil actions and FDIC investigations, as well as bank regulatory
examinations and enforcement actions taken before a FDIC-insured
institution fails, may be used in criminal actions.
Criminal Prosecutions of Executives of Failed Banks
The following is a short summary of the primary criminal
prosecutions to date of executives of failed banks from the current
financial crisis, including the first two TARP-fraud indictments
ever, as well as prosecutions that may be on the horizon.
Integrity Bank, Alpharetta, Georgia. Integrity
Bank ("Integrity") failed in August 2008. Real estate
developer Guy Mitchell and related parties obtained over $80
million in business loans from Integrity between 2004 and January
2007 with the help of Integrity's Executive Vice President and
Chief Lending Officer, Douglas Ballard. Mitchell was unable to
repay the loans, and Integrity became undercapitalized.
On April 14, 2010, Ballard was indicted on more than 20 counts of
bank fraud, receipt of bribes, securities fraud, evasion of
currency reporting requirements, and conspiracy. The indictment was
unsealed on May 7, 2010, and Ballard entered a guilty plea on July
6, 2010 for conspiracy and one additional new count of tax evasion.
As part of the plea, Ballard admitted to conspiring with Mitchell
to receive loans under false pretenses and improperly distributing
nearly $20 million in loan proceeds to Mitchell's businesses to
Mitchell's personal account to be used for his personal
purposes in violation of the Bank's loan approvals and
documents. In return, Ballard received over $200,000 in bribes from
Mitchell. Ballard could receive 10 years in prison and a $500,000
fine.
Additionally, in the April 14, 2010 indictment, Integrity's
Vice President of Risk Management, Joseph Todd Foster, was charged
with two counts of securities fraud based on insider trading in the
publicly traded stock of Integrity's parent holding company.
Foster entered a guilty plea to both of those counts on July 6,
2010, admitting that he discovered in 2006 that Mitchell was in a
precarious financial situation, that Mitchell was likely to default
on the loans, and that Integrity did not have sufficient liquid
capital to survive that default. In light of this nonpublic
knowledge of Integrity's likely failure in the near future,
Foster sold the shares of Integrity that he owned. He could receive
up to 20 years in prison and a $5 million fine.
Ballard and Foster have not yet been sentenced. Mitchell was
charged in the April 14, 2010 indictment as well but has entered a
plea of not-guilty and is proceeding toward trial. The court has
postponed sentencing Ballard and Foster until after conclusion of
the case against Mitchell. Additionally, civil charges seeking
recovery of the estimated $250-350 million of losses to the DIF
from Integrity's failure were brought by the FDIC against
selected Integrity insiders on January 14, 2011, in the U.S.
District Court for the Northern District of Georgia (Case No.
1:11-cv-111.).
Bank of Clark County, Vancouver, Washington. Bank
of Clark County ("BOCC") was scheduled for a safety and
soundness examination by FDIC and state regulators on November 3,
2008. In the two weeks prior to that examination, however,
BOCC's Chief Lending Officer, David S. Kennelly, received
updated appraisals on a number of subdivision and condo properties
that served as security for some of BOCC's loans. The
appraisals showed that the value of the properties had depreciated
by several million dollars. For example, one subdivision
property's appraised value dropped from $8.1 million to $2.9
million. Fearing the negative effect the appraisals would have on
the examination and on BOCC's capitalization, Kennelly
panicked, concealed the appraisals from the regulators, and falsely
told regulators that all current appraisals had been provided to
them. Two weeks later, a whistleblower alerted the FDIC, and
examiners returned to BOCC and confronted Kennelly. Kennelly
initially denied the appraisals existed but ultimately produced
them and instructed other BOCC personnel to claim they had not been
originally scanned into the system due to disorganization and staff
being too busy.
After reviewing the concealed appraisals, the FDIC declared BOCC
undercapitalized, and BOCC entered FDIC receivership on January 16,
2009.
In February 2010, Kennelly was charged with one count of scheming
to conceal a material fact pursuant to 18 U.S.C. § 1001(a)(1),
and entered a guilty plea one week later. Kennelly asked the
sentencing judge to forgo any incarceration because Kennelly did
not personally profit from his actions and was only acting to
preserve the welfare of BOCC, its employees, shareholders, and
depositors. The court, however, did not find Kennelly's
arguments persuasive and sentenced him to four months'
incarceration, 120 days of electronically monitored home
confinement, 100 hours of community service, three years of
supervised release, and a fine of $5,000. He has been banned for
life from employment in the financial services industry without
prior written approval from federal regulatory agencies.
FirstCity Bank, Stockbridge, Georgia. FirstCity
Bank ("FirstCity") reported a relatively healthy Tier 1
capital ratio of 7.29 percent and a total risk-based ratio of 8.54
percent as of December 31, 2008, even though approximately
one-third of its loans were in some stage of default. On March 20,
2009, FirstCity was closed.
Two years later, on March 21, 2011, federal agents arrested Mark A.
Conner, who had served as FirstCity's President and interim CEO
and Chairman of the Board of Directors, at the Miami International
Airport. That same day, the U.S. Attorney's Office in Atlanta
unsealed a criminal indictment charging him with bank fraud,
conspiracy to commit bank fraud, and conducting a continuing
financial crimes enterprise. The indictment also charged Clayton A.
Coe, former Vice President and Senior Loan Officer, with bank
fraud, conspiracy to commit bank fraud, and making false statements
to a financial institution.
Prosecutors claim Conner and Coe falsified documents and caused the
Bank's loan committee and board to approve several multimillion
dollar commercial loans for borrowers to purchase property that
was, unbeknownst to FirstCity, actually owned by Conner and Coe.
Conner and Coe then allegedly caused other banks to purchase
participations in these loans to shift some of the risk of default
and routinely misled regulators to conceal the scheme. Connor also,
according to the indictment, made an unsuccessful application for
TARP funds.
Conner faces a mandatory minimum sentence of 10 years in prison, a
maximum sentence of life in prison, and a potential fine of up to
$10 million for organizing a continuing financial crimes
enterprise. Connor and Coe each face a maximum of 30 years in
prison and fine of up to $1 million on each of the counts of bank
fraud and conspiracy to commit bank fraud.
Omni National Bank, Atlanta, Georgia. Omni
National Bank ("Omni"), which was a community development
financial institution or "CDFI," had a Community
Redevelopment Department, headed by Omni's co-founder and
Executive Vice President, Jeffrey L. Levine. Omni borrowed federal
funds at low rates to make high-interest, short-term loans to
borrowers for purchasing and rehabilitating distressed properties
for resale or Section 8 rental in run-down, inner-city
neighborhoods. These loans were often made to borrowers with less
than stellar credit and often no steady employment or formal
education, and many of the borrowers failed to sufficiently
rehabilitate the property. Omni had a high rate of foreclosures and
significantly lower profits than originally predicted. As real
estate market prices fell, Omni masked its deteriorating financial
condition by listing properties at values higher than they were
worth, and even recycling foreclosed loans into higher-value new
loans to disguise losses. In the summer of 2008, regulators ordered
Omni to write off 33 percent of the value of its foreclosed
properties.
On March 27, 2009, Omni was closed and taken over by the FDIC,
leaving large amounts of decrepit real estate that had not been
redeveloped.
On December 22, 2009, Levine was charged in a criminal information
with making, and causing others to make, materially false
statements in bank books, reports, and statements. Levine entered a
guilty plea on January 14, 2010, admitting to knowing that
Omni's loans were overvalued but failing to disclose violations
of Omni's policies and procedures for many of the loans, which
resulted in an overvaluation of Omni's assets by regulators,
auditors, and shareholders. He is scheduled to be sentenced on
April 22, 2011, and could receive up to 30 years in prison and a $1
million fine.
Colonial Bank, Montgomery, Alabama. In 2008,
Colonial Bank ("Colonial") was one of the 50 largest
banks in the United States, with 350 branches, approximately $26
billion in assets, and $19 billion in deposits. However, on August
14, 2009, Colonial was closed and taken over by the FDIC, becoming
the fifth largest bank failure in U.S. history.
Lee Bentley Farkas is the former chairman of Taylor, Bean &
Whitaker Mortgage Corporation ("TBW") (once one of the
largest private mortgage companies in the United States and one of
Colonial's largest customers). He was charged in a
16‑count indictment on June 15, 2010, with perpetrating a
massive fraud scheme with fake mortgages and a fraudulent
application for TARP money by Colonial, resulting in losses
exceeding $1.9 billion and contributing to the Bank's failure.
Farkas' indictment alleged that he orchestrated and executed
his scheme with the help of co-conspirators that included unnamed
executives and employees of Colonial, and prosecutors stated
publicly that they would seek to hold other individuals accountable
at a later time.
Following through with that assertion, federal prosecutors have
secured guilty pleas from a number of former TBW executives in
connection with the alleged scheme:
- Desiree Brown, the former treasurer of TBW, pleaded guilty on February 24, 2011, to one count of conspiracy to commit wire fraud, bank fraud, and securities fraud. Brown is scheduled to be sentenced on June 10 and faces up to 30 years in prison, a $250,000 fine, and restitution to victims.
- Raymond E. Bowman, the former president of TBW, pleaded guilty on March 14, 2011, to one count of conspiracy to commit wire fraud, bank fraud, and securities fraud, and one count of making false statements. Bowman is scheduled to be sentenced on June 10 and faces up to five years in prison and a $250,000 fine on each count, and restitution to victims.
- Sean Ragland, a former senior financial analyst of TBW, pleaded guilty on March 31, 2011, to one count of conspiracy to commit bank fraud and wire fraud. Ragland is scheduled to be sentenced on June 21 and faces up to five years in prison, a $250,000 fine, and restitution to victims.
- Paul Allen, the former CEO of TBW, pleaded guilty on April 1, 2011, to one count of conspiracy to commit bank fraud and wire fraud, and one count of making false statements. Allen is scheduled to be sentenced on June 21 and faces up to five years in prison and a $250,000 fine on each count, and restitution to victims.
Criminal law enforcement actions have also been taken against
Colonial executives:
- Catherine L. Kissick, a former senior vice president and head of Colonial's Mortgage Warehouse Lending Division, pleaded guilty on March 2, 2011, to conspiracy to commit wire fraud, bank fraud, and securities fraud. Kissick is scheduled to be sentenced June 17 and faces up to 30 years in prison, a $250,000 fine, and restitution.
- Teresa A. Kelly, a former operations supervisor at Colonial's Mortgage Warehouse Lending Division, pleaded guilty on March 16, 2011, to conspiracy to commit wire fraud, bank fraud, and securities fraud. Kelly is scheduled to be sentenced June 17 and faces up to five years in prison, a $250,000 fine, and restitution.
Furthermore, the SEC has charged Kissick and Kelly with securities
fraud for falsely reporting TBW-originated loans and mortgage
securities held by Colonial to the investing public as
high-quality, liquid assets. The SEC announcements regarding these
charges reflect the interrelationship between civil and criminal
investigations and the numerous agencies involved, which included
the Fraud Section of the DOJ's Criminal Division, the FBI,
SIGTARP, the FDIC's Office of the Inspector General, the U.S.
Department of Housing and Urban Development's Office of the
Inspector General, and the Civil Division of the U.S.
Attorney's Office for the Eastern District of Virginia as part
of the Financial Fraud Enforcement Task Force.
Community Bank & Trust, Cornelia, Georgia.
Community Bank & Trust ("CBT") opened in 1900 and
had 36 branches, 400 employees, and $1.1 billion in assets. It was
closed by the FDIC on January 29, 2010, and an FDIC Inspector
General report in September 2010 found that CBT had failed to
follow its loan policies and had made more than $10 million in bad
loans.
On January 20, 2011, CBT's former Executive Vice President and
Chief Credit Officer Robert "Randy" Jones pleaded guilty
to conspiracy to commit bank fraud. The criminal information stated
that Jones had received over $770,000 in kickbacks for approving
loans so a customer could purchase tracts of land, and then caused
the Bank to finance subsequent purchases of the land at inflated
prices. It alleged Jones also made loans to straw purchasers and
issued loans in the names of unsuspecting family members.
On February 24, 2011, Jones agreed to a Prohibition Order from the
FDIC banning him from working in the banking industry. He is
scheduled to be sentenced on May 10, 2011 and faces up to 30 years
in prison and a fine of up to $1 million.
La Coste National Bank, La Coste, Texas. La Coste
National Bank ("LCNB"), a bank founded in 1921, had not
been the subject of FDIC enforcement actions and even made a profit
for 2009. However, $7.3 million in fraudulent transactions and $1.1
million in related loan losses were uncovered in early 2010, which
the FDIC attributed to an unnamed former LCNB executive. The
Bank's financials gave no indication of potential problems,
much less failure, and we suspect these problems were only
discovered as part of a regulatory examination late in the
Bank's life.
The Comptroller of the Currency, LCNB's primary regulator,
determined that LCNB was critically undercapitalized with no
reasonable chance at recovery, and placed LCNB into FDIC
receivership on February 19, 2010.
On April 21, 2010, a seven-count indictment charging embezzlement
and bank fraud was issued against LCNB's former President, Jody
P. Gwyn. Gwyn was hired by LCNB in 1995 as Assistant Vice President
and promoted to President in 2009. The indictment alleges that from
2007 to 2010, Gwyn made a number a transfers, including transfers
from LCNB's asset accounts into customer accounts, then
withdrew or diverted the monies from client accounts for his own
use. Gwyn entered a guilty plea on October 27, 2010, and is
scheduled to be sentenced on April 7, 2011. He faces three to five
years' imprisonment and $8 million restitution.
Also, on June 16, 2010, former LCNB Vice President Mary Magdalene
Crawford was indicted on two counts of embezzlement related to
fraud discovered after LCNB failed. The indictment alleged that
Crawford fraudulently prepared 10 cashier checks for $3,000 each,
which she used to pay bills, and balanced LCNB's accounts by
withdrawing funds from a customer's individual retirement
account. It also alleged Crawford stole $10,000 from LCNB's
vault. Crawford entered a guilty plea on October 10, 2010, to the
count involving cashier checks, but has stated she does not have
any knowledge of the fraud allegedly committed by Gwyn. She is
scheduled to be sentenced on April 20, 2011.
Park Avenue Bank, New York, New York. Park Avenue
Bank ("PAB") had retail branches in Manhattan and
Brooklyn, with a client base primarily consisting of small
businesses. Between October 2008 and February 2009, PAB applied for
and tried to obtain over $11 million in funds from TARP, but its
application was ultimately denied and regulators became suspicious
of PAB's capitalization.
On March 12, 2010, PAB was closed and taken over by the FDIC due to
ineffective management and inadequate capital. The next day, a
10-count criminal complaint was issued against Charles J.
Antonucci, Sr., who was PAB's President and Chief Executive
Officer from 2004 to 2009. Antonucci was arrested on March 15,
2010, and became the first defendant to be charged with fraud on
TARP by falsifying PAB's capital position. On October 8, 2010,
Antonucci, a former bank examiner, entered a guilty plea to six
counts, becoming the first defendant to be convicted of fraud on
TARP.
As part of the guilty plea, Antonucci admitted misrepresenting
PAB's capital position in pursuit of TARP funds by
orchestrating a sham "round-trip" using the Bank's
own money to make it appear he had made a personal investment in
the Bank. Prosecutors said PAB made loans to a group of companies
tied to Antonucci, these entities funneled the loan proceeds to
Antonucci, and then Antonucci invested the funds back into PAB. In
exchange for the "investment," Antonucci received more
than 308,000 shares in the Bank, giving him about 52 percent of the
Bank's outstanding shares. In order to conceal the
"round-trip" investment, Antonucci allegedly created a
counterfeit certificate of deposit, in the amount of $2.3 million,
purportedly issued by the Bank. Additionally, Antonucci admitted to
a number of other crimes, including accepting over $250,000 in
bribes for approval of various banking transactions, self-dealing,
embezzlement and misappropriation of bank funds, and false
statements in connection with the sale of an insurance company that
later failed. Antonucci already consented to an $11.2 million
judgment entered against him, and he is scheduled to be sentenced
on April 8, 2011. He faces up to 135 years in prison.
Most recently, insurers that had supplied PAB's director and
officer insurance and blanket bond brought an action to rescind
these policies based on misrepresentations in the applications for
renewal of these policies, and reimbursement for $70,000 of claims
paid.20 The claim is based, in part, upon
Antonucci's guilty plea in the criminal proceedings. If
successful, the rescission will leave other PAB directors and
officers without coverage.
Other Failures That May Lead To Criminal Charges
First Southern Bank, Batesville, Arkansas.
First Southern Bank ("First Southern"), which was
extremely well-capitalized as of September 30, 2010, with an 11.1
percent Tier 1 leverage capital ratio, failed suddenly on December
17, 2010 as a result of an apparent bond fraud. First Southern
purchased approximately $22.0 million worth of rural improvement
district bonds (the "Bonds") from December 2008 through
September 2010. These purchases exceeded the Bank's equity.
According to Arkansas Business, bank officials, the FDIC,
and possibly the FBI began scrutinizing the Bonds in November 2010.
First Southern believed that the Bonds might be fraudulent and
tried to contact attorney Kevin Lewis, who sold the Bonds to the
Bank but had disappeared in December 2010. Arkansas
Business reported that Kevin Lewis is a member of the family
that controlled First Southern when the Bank failed. Several other
Arkansas banks have sued Lewis for damages related to these banks,
and an attorney for Lewis has stated that Lewis is "under
investigation by federal law enforcement authorities."
Pierce Commercial Bank, Tacoma, Washington. Pierce
Commercial Bank ("Pierce") failed on November 5, 2010. In
2008 and 2009, Pierce, along with other area lenders, fell prey to
a mortgage fraud scheme involving real estate flips reminiscent of
the Texas bank failures in 1988-1994 where Seattle resident Mark
Ashmore, with the help of several associates in the mortgage
industry, recruited "straw buyers" to purchase homes by
taking out inflated mortgage loans. Ashmore and his associates
would skim the excess over the actual sales price based on the
inflated property values. Usually, the loans also were based on
false application information regarding the buyers' employment
and income, which Ashmore sometimes supported with fake
documentation. The same homes would be sold and resold to different
"straw buyers" as part of the scheme. On each flip, the
homes were sold at higher and higher prices. Eventually, many of
the loans on the properties went into foreclosure, resulting in
losses to the lending banks. Christopher DiCugno, a loan officer at
Pierce, was one of four men, including Ashmore, indicted in
November 2009. All of the men involved were charged with multiple
counts of wire fraud and conspiracy to commit wire fraud. Three of
the four charged in the scam pleaded guilty, and Ashmore was
convicted in September 2010. DiCugno was sentenced to eight
months' imprisonment for his role, with the amount of
restitution to be determined at a later date.
As a result of this mortgage scheme and the general downturn in the
residential mortgage market, Pierce's home loan portfolio
suffered severe damage. Despite a $4.5 million injection of TARP
proceeds, Pierce struggled to keep up with its losses. Before it
failed, Pierce consented to a cease and desist order (the
"C&D Order") from the Federal Reserve and the
Washington Department of Financial Institutions on December 4,
2009, after selling the mortgage banking division in an attempt to
"correct deficiencies in its residential mortgage
underwriting, consumer compliance, and operational risk
management." The C&D Order prohibited the Bank from
making any more residential mortgage loans and required the Bank to
institute an improved consumer compliance program.
Further criminal charges relating to the Pierce failure may be
forthcoming. Government prosecutors have stated in court filings
that DiCugno is assisting them in ongoing investigations into
activities at Pierce. Additionally, prosecutors have filed a civil
forfeiture action alleging that Shawn Portmann, a Senior Vice
President of Pierce until July 2008, and "two other
principals" at Pierce made a large number of fraudulent loans,
and that a related criminal investigation is ongoing.
Conclusions
The extensive regulation of banks creates legal risks for
directors, officers, and other "institution-affiliated
parties."21 Regulatory enforcement powers are
broad, ranging from corrective actions to personal civil money
penalties to individual bans from the industry. Banks and holding
companies, especially those that are public, are subject to
enforcement actions, as well as civil and criminal penalties under
federal securities laws.
Banks and their directors and officers should carefully consider
their compliance programs and create a culture of compliance within
their organization, including appropriate internal controls and
effective insider trading policies. Prompt filing of confidential
suspicious activity reports ("SARs") should be made
timely and provided to the bank's board of directors whenever
there is a known or suspected violation of federal law or a
suspected money laundering activity or Bank Secrecy Act
violation.22 Bank directors should make sure their bank
has appropriate procedures for timely filing SARs.
So far, the financial crisis that began in 2008 has claimed
numerous banks but has resulted in few criminal sanctions. Civil
actions by the FDIC to recover losses to the DIF from failed bank
insiders are at an early stage. Potential criminal charges are
likely to lag behind the civil actions, except in the most obvious
cases and where criminal investigations were underway before the
banks failed, such as the Park Avenue Bank and Pierce Commercial
Bank failures.
Civil and criminal actions can be interrelated and may have
widespread consequences, including FDIC claims upon insurance
policies and blanket bonds, and even loss of such insurance as the
insurers seek rescission based upon fraudulent or other
misrepresentation in the insurance applications. Both of these may
leave bank directors and officers further exposed,
personally.
Prevention, early detection, and correction of crimes against
banks—whether by third parties, insiders, or some
combination—are fundamental. Directors and officers of
banks that become unhealthy or subject to regulatory enforcement
should consider their activities with a view to avoiding potential
later civil and criminal charges, especially in the event the bank
fails. Boards of directors should consider very carefully their
institutions' responses to:
- insider dealings;
- transactions and results that are "too good to be true;"
- any indications that the company's books and records, including the accounting and valuation of assets, may be inaccurate;
- indicia of fraud and possible illegal activity reported by employees, auditors, and customers;
- information from regulators, including examination reports and enforcement actions; and
- civil money penalties against insiders personally and bars or suspensions under FDI Act, Section 19.
The good news is that few bank failures during 2008-2011 appear, based on public information, to have been caused by illegal activities. Banks in trouble and their boards of directors should be sensitive to potential civil and possibly criminal charges if their institutions fail, and they should be fully informed as to how to minimize these risks.
Footnotes
1. Remarks of Attorney General Eric Holder at the Financial Fraud Enforcement Task Force Press Conference, Nov. 17, 2009, available at http://www.justice.gov/ag/speeches/2009/ag-speech-091117.html .
2. Jerry Markon, "Cases Against Wall Street Lag Despite Holder's Vows To Target Financial Fraud," Wash. Post, June 18, 2010, at A3.
3. Statement of Assistant Attorney General Lanny Breuer Before the Senate Judiciary Committee at a Hearing Regarding Financial Fraud Enforcement, Sept. 22, 2010, available at http://www.justice.gov/criminal/pr/speeches/2010/crm-speech-100922.html .
4. For example, the DOJ's largest mortgage-fraud sweep ever—"Operation Stolen Dreams"—culminated in June 2010, rounding up 1,517 criminal defendants. Id.
5. See Jean Eaglesham, "U.S. Sets 50 Bank Probes," Wall St. J., Nov. 17, 2010, at A1; Steven M. Biskupic, "Fine Tuning the Bank Fraud Statute: A Prosecutor's Perspective," 82 Marq. L. Rev. 381, 390-91 (1999); Dep't of Justice, Financial Institution Fraud Special Report, June 30, 1995.
6. See Eaglesham, supra note 5.
7. See id.
8. The U.S. Attorney for the Northern District of Georgia, Sally Yates, has noted that Georgia has had more bank failures that any other state, and that her office has opened criminal investigations into a number of those failures. See Bill Rankin & Paul Donsky, "Bank Failures Draw Criminal Probes," Atlanta Journal-Constitution, Apr. 28, 2010. So far, her office has brought charges against executives at four of those banks, securing guilty pleas in three of the cases.
9. The FDIC is required by statute to investigate the causes of FDIC-insured bank failures that result in a material loss to the FDIC. See 12 U.S.C. § 1831o(k) (requiring a report after a material loss to the DIF). The FDIC may then bring claims against responsible parties for the benefit of the FDIC as Receiver. See 12 U.S.C. § 1821(k) (stating that an officer or director of an insured depository institution may be held personally liable for monetary damages in any civil action by, on behalf of, or at the request or direction of the FDIC).
10. See Eaglesham, supra note 5.
11. See 18 U.S.C. § 1344.
12. See 18 U.S.C. § 656.
13. See 18 U.S.C. § 1001(a)(2).
14. See 18 U.S.C. § 1001(a)(1).
15. See 18 U.S.C. § 1005.
16. See 18 U.S.C. § 215.
17. See 18 U.S.C. § 1341, 1343.
18. See 18 U.S.C. § 225. A "continuing financial crimes enterprise" is defined as a series of enumerated violations (such as bank fraud, making false entries in bank books or records, embezzlement, or mail and wire fraud affecting a financial institution) committed by at least four persons acting in concert. 18 U.S.C. § 225(b).
19. See 15 U.S.C. §§ 77q(a), 77x.
20. Tim Zawacki, "Insurer seeks to rescind policies involving bank exec convicted of defrauding TARP," SNL Financial, Mar. 29, 2011.
21. Federal Deposit Insurance ("FDI") Act, Section 3(u).
22. See FDIC Regs. Part 353 (12 C.F.R. pt. 353); Office of the Comptroller of the Currency Regs. Part 21 (12 C.F.R. pt. 21); and Board of Governors of the Federal Reserve System Reg. H (12 C.F.R. pt. 208, subpt. F).
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