Illustrations of SEC Remedies in Financial Fraud Actions

In PNC, the SEC brought a cease and desist action against the financial services company for a false quarterly filing made in 2001.  Specifically, the Order for Proceedings as to PNC claimed that the company entered into an arrangement with AIG to create special purpose entities used to remove approximately $762 million in loan and venture capital assets from its books.  The SEC claimed that these “transactions were an effort to eliminate PNC’s risk of loss on the transferred loans and other assets while allowing it to benefit from any long-term improvement in their values.  Had PNC continued to include these transferred assets in its financial statements, it would have been required to reflect in its financial statements any losses incurred and the benefit of any improvement in the value of these assets.”  Instead, the company transferred the assets to SPEs under an arrangement, which permitted it to book any long term increase but avoid the losses.  According to the SEC, under the arrangements although AIG invested 3% or more in the entities as required by GAAP, in fact its fees exceeded this amount so that its net investment was less than required.  Thus, the arrangements did not comply with GAAP.  According to the Order for Proceedings, during the third quarter of 2001 the Federal Reserve had “incomplete” communications with PNC in which it raised questions concerning the propriety of the arrangements.  Nevertheless, PNC continued with the improper arrangements, incorporating the false financial statements in registration statements filed with the SEC.  PNC also issued a press release in January 2002 that incorporated the false financial data despite the fact that it knew it would have to restate the results.