SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis

FOR IMMEDIATE RELEASE
2011-202
Washington, D.C., Oct. 11, 2011 – The Securities and Exchange Commission today charged former bank executives with misleading investors about mounting loan losses at San Francisco-based United Commercial Bank during the height of the financial crisis in 2008 and 2009.

The SEC alleges that the bank’s former chief executive officer Thomas Wu, chief operating officer Ebrahim Shabudin, and senior officer Thomas Yu concealed losses on loans and other assets from the bank’s auditors, causing the bank’s public holding company UCBH Holdings Inc. (UCBH) to understate 2008 operating losses by at least $65 million (approximately 50 percent). A few months later, continued declines in the value of the bank’s loans led the bank to fail, and the California Department of Financial Institutions closed the bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. United Commercial Bank was one of the 10 largest bank failures of the recent financial crisis, causing a loss of $2.5 billion to the FDIC’s insurance fund.

“Today’s charges reflect an all too familiar pattern – corporate executives once seen as rising stars embrace deception to avoid losses and conceal negative news, with investors and the FDIC insurance fund left to pick up the pieces,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “But accountability for these executives begins today.”

Marc Fagel, Director of the SEC’s San Francisco Regional Office, added, “This investigation shows how federal regulators can work together to ferret out fraud by the guardians of financial institutions entrusted to deal honestly with public investors.”

According to the SEC’s complaint filed in federal court in San Francisco, UCBH and its subsidiary United Commercial Bank grew rapidly, doubling in size after an initial public offering in 1998. It was the first U.S. bank to acquire a bank in the People’s Republic of China, and Wu was considered a rising star in the banking industry. By 2009, however, Wu found himself at the helm of a bank on the brink of failure.

The SEC alleges that Wu, Shabudin, and Yu deliberately delayed the proper recording of loan losses, and each committed securities fraud by making false and misleading statements to investors and UCBH’s independent auditors. During December 2008 and the first three months of 2009 as the company prepared its 2008 financial statements, Wu, Shabudin, and Yu were aware of significant losses on several large loans. Among other things, these executives allegedly learned about dramatically reduced property appraisals and worthless collateral securing the loans, yet they repeatedly hid this information from UCBH’s auditors and investors.

The SEC’s complaint also alleges that the bank’s former chief financial officer Craig On acted negligently by misleading the company’s outside auditors and aiding the filing of false financial statements. On agreed to settle the SEC charges without admitting or denying the allegations. He will be permanently enjoined from violating certain antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws and will pay a $150,000 penalty. On also consented to an administrative order suspending him from appearing or practicing before the SEC as an accountant, with a right to apply for reinstatement after five years.

The litigation against the other defendants is ongoing.

Lloyd Farnham, Michael Fortunato, Jason Habermeyer, and Cary Robnett of the SEC’s San Francisco Regional Office conducted the SEC’s investigation. The SEC’s litigation will be handled by Lloyd Farnham and Robert Mitchell.

The U.S. Attorney for the Northern District of California today announced parallel criminal charges against former employees of the bank, and the FDIC announced enforcement actions against 13 individuals for violations of federal banking regulations.

The SEC acknowledges the assistance of the FDIC, U.S. Attorney’s Office for the Northern District of California, Federal Bureau of Investigation, Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), FDIC’s Office of Inspector General, and Office of Inspector General for the Board of Governors of the Federal Reserve System.

FDIC Sues 3 Former Bank Execs for Risky Lending

Federal bank regulators are suing three former top executives of Washington Mutual, accusing them of allowing risky mortgage lending.

In the civil lawsuit, the Federal Deposit Insurance Corp. accuses the three former executives of risky lending practices that caused the bank to make mortgages "with little or no regard for borrowers' ability to repay them.”

Washington Mutual, which was the largest U.S. bank ever to fail, collapsed in September 2008. It was later sold for $1.9 billion to JPMorgan Chase & Co. WaMu held $307 billion in assets at the time.

The bank officials named in the lawsuit are former WaMu CEO Kerry Killinger, ex-Chief Operating Officer Stephen Rotella, and David Schneider, who headed the bank's home loans division.

The former bank officials have released statements calling the lawsuit “baseless” and “political theater.”

The lawsuit marks the first high-profile legal action the FDIC has taken in attempting to recover losses from failed banks, the Associated Press reports. The FDIC has shut down 347 banks since January 2008, the height of the financial crisis.

Source: “FDIC Sues 3 Former Top Executives of Failed Washington Mutual, Biggest U.S. Bank Failure,” Associated Press (March 17, 2011)

Are Your Deposits Safe?

I have received a number of calls and emails from clients asking if their deposits are safe or if they should pull their money out of their banks. Most deposits are insured by the Federal Deposit Insurance Corporation (FDIC), up to $100,000. If your bank or savings association is insured, and if your accounts come under the insurance limits, your money should be safe.

To check whether your bank or savings association is insured by the FDIC, call toll-free 1-877-275-3342, use Bank Find, or look for the official FDIC sign where deposits are received.

To find out if your deposit amounts are fully insured, go to EDIE. This calulator on the FDIC site will help you determine if your deposits adhere to the insurance limits.

Worried About Bank Failures?

Recent economic news has been bleak, and some people are beginning to get nervous about the stability of the banking industry. Even if the worst happens and your bank fails, your deposits will be safe if your bank is insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC was created during the Great Depression in response to thousands of bank failures, and it insures deposits in banks and thrift institutions.

Now may be a good time to confirm that your bank is covered by the FDIC. First, look for the FDIC logo at your local branch. If you don't see it, ask the bank, or go to the FDIC's Web site and click on "Bank Find." Here you'll be able to see if the bank carries this guarantee. Even if you are banking with an internet-only bank, they should be listed on the FDIC site. If you want to see how financially "healthy" the institution is, go to http://www.bankrate.com/.

The FDIC limits the type of banking products it insures, and for what amount. Individual deposits, such as checking, savings, CD's and money market accounts, are insured up to $100,000. Joint accounts can be insured up to $200,000. IRAs and Keoghs can be insured up to $250,000. These retirement accounts are considered separate from your individual bank accounts. What is not insured are investments, such as mutual or stock funds. Nor are the contents of your safe deposit box covered. A general rule of thumb is that deposits are insured, investments are not.

If your bank does go under, it will most likely be purchased by a healthy bank. As a depositor, all this usually means is that there is now a new name on your bank statements. Your checks will still be valid and you can still use your ATM card. Even if the worst happens and there is no buyer for the bank, your deposits are covered. Withing 48 hours, the FDIC will issue a check in the amount of your deposits.

However, there are some things that might change. If you have a CD with the failed bank, the new bank may change its terms (interest rate or length). If that happens and you don't like the new terms, you can cash in the CD without penalty. But if you have a loan with the bank, those rates and terms can not change.

The FDIC maintains that, since 1934, no depositor has lost a penny of insured funds as a result of a bank failure. That's a pretty good track record. But you do need to make sure your bank is covered, so take a few minutes and check. It'll be one less thing for you to worry about in these uncertain economic times.