WASHINGTON (Legal Newsline) - Three former executives of Bank of the Commonwealth were charged by the Securities and Exchange Commission for understating millions of dollars in loan losses during the height of the financial crisis.
CEO, president and chairman of the board of the Norfolk, Va. based bank, Edward J. Woodard is responsible as well as CFO Cynthia A. Sabol, and executive vice president Stephen G. Fields.
Announced Jan. 9 by the SEC are allegations of the three executives masking the actual standings of the bank's loan portfolio and misrepresented by about 94 percent of the company's total assets in 2008 to investors by the bank's parent company Commonwealth Bankshares.
In a public statement and in SEC filings, the company claims they conservatory managed the loan accounts according to strict underwriting standards aimed at keeping the bank's reserved losses low during a time of unprecedented economic turmoil.
However, the SEC alleges the company's internal practice deviated significantly from what the public was told.
According to the SEC, even though Woodard knew the bank's loan portfolio was rapidly deteriorating, he continued to hide the problems with misleading public statements.
Sabol allegedly was aware of Woodard actions and continued to sign the disclosures and certified to the investing public they were accurate.
At the time, Fields oversaw the bank's largest portfolio of construction and development loans and also worked in conjunction to mask the issues, according to the SEC.
Filed in U.S. District Court for the Eastern District of Virginia, the SEC's complaint states the bank understated its allowance for loan and lease losses by about 17 to 25 percent from November 2008 to August 2010. As a result the bank understated its reported loss before income taxes by about 64 percent for the 2008 fiscal year.
In addition, Commonwealth also understated its repossessed real estate losses in two fiscal quarters which caused the bank to understate its reported loss before income.
The total of nonperforming loans was underreported by the Commonwealth for eight consecutive fiscal quarters, according to the complaint.
An appraisal for Commonwealth's largest collateral-dependent loan that falsely inflated the value of the collateral was obtained, according to the SEC's complaint. At the end of the quarter the bank executed hundreds of "change-in-terms agreements" to remove tens of millions of dollars for loans from its reported non-performing loans.
Woodard, Sabol, and Fields helped the bank artificially bring checking accounts associated with the loan guarantors to be overdrawn on what would have otherwise been delinquent loans.
"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."
The three bank executives are charged by the SEC with violations of antifraud, reporting, recordkeeping, internal controls, deceit or auditors, and Sarbanes-Oxley certification provisions of the federal securities law.
The SEC's investigation is continuing.