Wilmington Trust Execs |Facing Federal Charges

(CN) - Four former top executives at Wilmington Trust Co. knowingly misled investors during the recent financial crises by keeping over $350 million worth of bad loans off the company's books, federal financial regulators claim.

In a complaint filed May 6 in Delaware Federal Court, the U.S. Securities and Exchange Commission says the four defendants - former Wilmington Trust president Robert V.A. Harra Jr., former chief financial officer David Gibson, former controller Kevyn Rakowski and former Chief Credit Officer William North -- violated federal law by failing to report all loans that were 90 days or more past due over a 15-month period beginning in 2009.

Rakowski and North are also accused of making false statements to the SEC and the Federal Reserve.

The SEC charged Rakowski and North with aiding and abetting Harra and Gibson in violating the Securities Exchange Act.

All four defendants are accused of falsifying the company's books and records and aiding and abetting false SEC filings.

From late 2009 through mid-2010, according to the complaint, defendants knowingly made false disclosures concerning their commercial loans that were more than 90 days or more past due.

So even though the borrowers had stopped making payments on these loans, defendants allowed the bank to continue "recording as income the borrower's obligation for ongoing interest payments as if the Bank expected payment," states the lawsuit.

Accruing loans more than 90 days past due are a "key credit quality metric" for banks and investors. Under General Accepted Accounting Principles, or GAAP, Wilmington Trust was required to fully report these types of loans to the SEC and its banking regulator, the Federal Reserve Bank of Philadelphia.

The SEC says in the complaint that Wilmington Trust bet big on Delaware real estate-related loans in the 2000s, so that by mid-2009 the company had over $9 billion in commercial loans.

But during this period, the SEC says in the complaint, "the Bank's loan administration and monitoring was poor, particularly regarding its Delaware portfolio."

Gibson, Harra, Rakowski and North, says the SEC, "maintained a practice of omitting - or "waiving" - past due loans that were not delinquent for interest but that were matured 90 days or more, and thus past due for principal, from its public disclosures of accruing loans past due 90 days or more."

And when the economic downturn stalled commercial construction, "an increasing volume of the loans matured," meaning the term of the loan expired and the principal payment became due, says the SEC in the complaint.

"From the third quarter of 2009 through the second quarter of 2010, Gibson, Harra, Rakowski and North knowingly engaged in conduct that fraudulently misled investors concerning the extent of past due, matured and extended loans in the Bank's commercial loan portfolio," the SEC says.

The SEC says that defendants "knew that the waiver practice was inappropriate, but they maintained it even as the economic crises deepened, despite knowing that the Bank came to have an exceedingly high volume of matured loans, and despite knowing that omitting past due loans from reporting had the effect of falsely and misleadingly making the Bank's loan portfolios appear to the public to have less potential for deterioration than they actually did."

In its 2009 year-end earnings release and SEC filings, Wilmington Trust disclosed "only $30.6 million in accruing loans 90 days or more past due," when the true number of bad loans was $330.2 million, the complaint states.

Federal authorities say that North told Harra in an email exchange "that the Bank could not fully address the issues with many of the matured loans before year end because they were "credit turds."

The SEC says that all four defendants signed off on these filings.

Shortly thereafter, says the SEC, "Gibson recommended to the Bank's CEO that the Bank attempt to raise additional capital by means of a public offering of common stock, despite widespread internal awareness of deep problems in the Bank's loan portfolios." P68

And so in March 2010, basing its public stock offering on materially false SEC filings, Wilmington Trust sold $287 million in common stock to the public for $13.25 per share, says the SEC. At the same time period Wilmington Trust granted Gibson stock options and in turn Gibson increased his and Harra's salaries, while Rakowski and North were awarded bonuses.

The SEC is seeking return of these payments estimated to be in the millions.

M&T Bank Corp. bought Wilmington Trust in 2011 for $351 million, paying the company's shareholders just $3.84 per share, a fraction of what they once were worth. Last September Wilmington Trust, founded by du Pont family members in 1903, agreed to pay $18.5 million in federal fines for failing to disclose delinquent commercial loans and set aside sufficient money to offset the loan losses.

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