SEC Partially Settles Another Market Crisis Banking Fraud Action

While the market crisis ended years ago, the SEC continues to bring cases relating to the period. Now the Commission has filed a partially settled case against eleven executives of Superior Bank and its holding company based on a financial fraud implemented to conceal the deteriorating condition of the loans held by the institution and the true financial condition of the bank. SEC v. Bailey (N.D. Fla. Filed January 13, 2016).

Named as defendants are: Charles Bailey, CEO and chairman of holding company Superior Bancorp; William Caughran, general counsel of the bank and its holding company; John Figlewski, former president; George Hall, president of the bank’s Florida operations; Dewaye Maddox, market executive of the bank; William McKinnon, senior vice president; Robert Parrish, senior vice president and commercial loan officer; Kenneth Pomeroy, president of the Central Florida region for a period; Charles Roberts, president of the Central Florida region; Charles Scott, a credit officer; and James White, CFO of the holding company.

From 2006 through 2011 the defendants engaged in an accounting fraud centered on its loan portfolio. Specifically, when it became apparent that numerous loans were backed by collateral that was insufficient to protect the bank, and that a number of borrowers for the bank’s largest loans would no longer make payments, a cover-up commenced. Defendants engaged in various schemes to extend or roll-over the loans. By taking these actions the bank avoided properly classifying the loans as impaired and increasing the Allowance of Loan and Lease Losses.

Schemes used to understate the Allowance of Loan and Lease Losses included:

• Borrows of a severely delinquent loan were replaced with others who were in default on a number of other loans as an explicit accommodation to avoid foreclosure;

• Stale appraisals were used which overstated the value of the loan properties and identified inaccurate or unviable projected future uses of the properties;

• Loans were renewed or modified by rolling forward payments or funding new loans to the borrower and using those proceeds to pay down the prior loan; and

• Non-recourse joint venture agreements were structured with defaulted borrowers which benefited the bank by creating the appearance that the loan was current despite near certainty that it would again become delinquent.

Additional fraudulent actions were taken with respect to the bank’s loans held for sale and its treatment of a deferred tax asset. These schemes resulted in the filing of false reports with the Commission and concealing the true financial condition of the bank. For example, in fiscal year 2009 the bank’s pretax income was misstated by 71%. The next year its pretax income was misstated by about 54%.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)5, 14(a) and 20(a).

Each of the defendants settled except Messrs. Pomeroy and McKinnon. Each of the settling defendants agreed to be barred from serving as an officer or director of a public company. Mr. Baily will pay a penalty of $250,000; Messrs. White and Maddox, $200,000 each; Mr. Caughran, $150,000; and Messrs. Roberts and Parris $100,000 each. Messrs. Scott, Figlewski and Hall have each agreed to bifurcated settlements in which the court will determine financial penalties at a later date.