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Saturday, February 22, 2020

SEC: Capital One, two former executives understated auto loan losses

By Stephanie Ostrowski | May 7, 2013


WASHINGTON (Legal Newsline) - Capital One Financial Corporation and two former senior executives have been charged for understating millions of dollars in auto loan losses during the months leading into the financial crisis.

An investigation by the Securities and Exchange Commission (SEC) found Capital One failed to properly account for losses in its auto finance business in financial reporting for second and third quarters of 2007.

According to the SEC, beginning in October 2006 Capital One Auto Finance (COAF) experienced significantly higher charge-offs and delinquencies for auto loans than originally forecasted. Profits on auto loans were primarily derived from offering credit to subprime consumers.

Losses occurred within every type of loan in each of COAF's lines of business, according to the claim. Even though an internal loss forecasting tool found the declining credit environment had a significant impact on loan loss expense, Capital One did not properly incorporate this into its financial reporting.

Capital One understated its loan loss expense by approximately 18 percent in the second quarter and nine percent in the third quarter of 2007.

"Accurate financial reporting is a fundamental obligation for any public company, particularly a bank's accounting for its provision for loan losses during a time of severe financial distress," said George Canellos, Co-Director of the Division of Enforcement. "Capital One failed in this responsibility by underreporting expenses relating to its loan losses even as its own internal forecasting tool had signaled an increase in incurred losses due to the impending financial crisis."
Two former executives, Chief Risk Officer Peter A. Schnall and Divisional Credit Officer David A. LaGassa, according to the SEC's order, caused Capital One's understatements of its loan loss expense by deviating from established policies and procedures and failing to implement proper internal controls for determining its load loss expense.
Capital One's material understatements of its loan loss expense and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13.
Schnall and LaGassa caused Capital One's violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder and violated Exchange Act Rule 13b2-1 by indirectly causing Capital One's books and records violations.
"Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses," said Gerald W. Hodgkins, Associate Director of the Division of Enforcement. "The SEC will not tolerate deficient controls surrounding an issuer's financial reporting obligations, including quarterly reporting obligations."
To settle the SEC's charges announced April 24, Capital One agreed to pay $3.5 million. Schnall agreed to pay $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the charges against them.

Capital One, Schnall and LaGassa neither admit nor deny any of the SEC charges.

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