In the wake of the worst market crisis since the great depression Main Street has clamored to hold the executives on Wall Street accountable. Perhaps more than any other agency the SEC has succeeded. It has brought dozens of market crisis related cases, many of which named senior executives as defendants.
The agency’s most recent market crisis action continues this trend. In SEC v. Woodard, Civil Action No. 2:13cv16 (E.D. Va. Filed Jan. 9, 2013) the Commission seeks to hold accountable three former senior officers of Virginia based Commonwealth Bankshares: Board Chairman, President and CEO Edward Woodard, Jr., Secretary and CFO Cynthia Sabol, and E.V.P. and Commercial Loan officer Stephen Fields. The action centers on a market crisis related financial fraud.
Mr. Woodward created Commonwealth and took it public in 1987. Under his leadership it grew into a regional banking organization which typically reported profits. By 2006 it had assets of about $715 million, a loan portfolio of about $670 million and a plan to increase its assets to over $1 billion by the end of 2009.
The growth plan was implemented beginning in 2006, increasing the bank’s portfolio of construction and development loans. In the same year Norfolk commercial real estate where the bank’s holdings were located began to show the impact of what would become the market crisis. Office space and condominiums were particularly hard hit.
During the period the bank had two large real estate development loans which are now the center of the Commission’s action. One loan was originated to renovate and covert an old, defunct hotel. The other was for a condominium development.
Despite having these loans on the books and the continuing market crisis, throughout much of 2008, 2009 and into 2010 Commonwealth and its executives touted the quality of its assets, underwriting and credit monitoring processes. Its filings with the Commission fortified the message that the institution’s portfolio of loans was conservatively managed according to strict standards.
That picture was, however, false according to the Commission’s complaint. It was achieved primarily by materially understating on its balance sheet the allowance for loan and lease losses or the ALLL and, at the same time, materially underreporting non-performing loans and its other real estate owned or OREO. Beginning in 2008 the bank understated its ALLL by about 17% to 25% with a corresponding understatement to its reported loss before taxes of about 64%. Likewise the bank understated its OREO in two quarters by about 19% to 20% with a corresponding understatement of its reported pre-tax loss in the first quarter of 2010 of about 35% and an underreporting of its total non-performing loans throughout the entire period of at least 30%.
ALLL and OREO were important metrics to the financial community as the defendants knew or should have known. Mr. Woodward knew the true state of the bank’s loan portfolio and participated in actions to conceal the deterioration of the loans. Similarly, Mr. Fields is alleged to have participated in the cover-up while Mr. Sabol knew, or was reckless in not knowing, the impact of the improper practices on the financial statements according to the court papers. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 13(b)(5). The case is in litigation. See also Lit. Rel. No. 3437 (Jan. 9, 2013).