Bank Hammered for Misleading Investors
(CN) - A Florida lending bank misled investors about the health of loans in a large portfolio one executive described internally as "explosive piles of crap," a federal judge ruled.
The Security and Exchange Commission sued BankAtlantic Bancorp and its CEO Alan Levan for violating several securities laws regarding loans in their commercial residential portfolio.
While telling investors that the loans continued to perform extremely well, the defendants internally described them as "a pile of ticking time bombs" and "explosive piles of crap," U.S. District Judge Robert Scola wrote, calling the facts "undisputed."
In one email to the bank's major loan committee, Levan spoke about the "parade of land loans coming in for extensions recently," according to the Thursday ruling.
Attributing the change to declining absorption, Levan allegedly said in March 2007, "the music has stopped."
A month later, Levan told investors in a conference call: "we're not really seeing any difference in those characteristics as we've seen over the last 10 or 15 years;" "the portfolio ... continues to perform extremely well."
Amy Engelberg, senior vice president and manager of special assets, had made the "time bomb" comment in a July 9 email.
She went on to describe loans in the northern part of Florida as "explosive piles of crap that we're juggling by the handful, slinging it up in the air and covering our eyes, just waiting for the next one to go splat."
Two weeks later, Levan said in the second quarter earnings call: "There are no asset classes that we are concerned about in the portfolio as an asset class."
"So the portfolio has always performed extremely well, continues to perform extremely well," Levan also said.
The SEC said that BankAtlantic's disclosures about the health of its portfolio and accounting treatment of certain loans there violated the law.
Scola rejected BankAtlantic's bid for summary judgment and granted the SEC sided instead with the SEC about the falsity of certain statements Levan made during that July 2007 earnings conference.
The SEC says the bank and Levan purposely did not keep accurate records and accounting to mislead investors.
BankAtlantic monitored and approved three types of loans in its commercial residential portfolio through its loan committee, according to the ruling.
Builder Land Bank loans "were loans where the borrower had an option contract with a builder in which the builder agreed to give a down payment to the borrower and close on the purchase of a minimum number of lots by a certain date," Scola wrote.
The other non-BLB loans - Land Acquisition and Development (LAD) loans and Land Acquisition, Development and Construction (LADC) loans - did not involve such option contracts.
In late 2006 and early 2007, BankAtlantic's loan review department noticed three negative trends in the Commercial Residential Portfolio, present in both BLB and non-BLB loans, according to the ruling.
The trends included "(1) a slowed absorption in the sale of lots or homes by borrowers, (2) the depletion of loan-interest reserves and (3) a downward migration of loan grades," Scola wrote.
Regulators also secured summary judgment on BankAtlantic's first affirmative defense that it relied on the professional advice of accountants.
BankAtlantic had consulted with accountant Kevin Young of the outside auditor PricewaterhouseCoopers, according to the ruling.
Though the bank said the accountants found its disclosures about the risk of the loans adequate, "Young expressly contradicted this contention," Scola found.
"Not only did he testify that failing to object to disclosures did not constitute accounting advice, he testified that "[i]n my view, I'm not sure there was any accounting advice offered there with respect to that disclosure," the decision continues.
PwC did not speak to risk disclosure because the bank never asked for advice concerning its obligation to disclose adverse trends in the commercial residential portfolio, according to the ruling.