by T. GormanPosted on Posted in SECActions

The market crisis of the last decade seems to have a never ending dribble of cases. The SEC filed another this week, naming four former officers of Wilmington Trust Company as defendants. SEC v. Gibson (D.Del. Filed May 6, 2015). Two of those individuals were named as defendants in a parallel criminal action. Previously, the Bank settled administrative charges initiated by the Commission. In the Matter of Wilmington Trust Corporation, Adm. Proc. File No. 3-16098 (Sept. 11, 2014)(settled administrative proceeding charging violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B); settled with a cease and desist order and the payment of $16 million in disgorgement).

The defendants in the SEC’s newest action are David Gibson, the former CFO of the bank; Robert Harra, Jr., its former president and COO; Kevyn Rakowski, the comptroller; and William North, the chief credit officer. Messrs. Rakowski and North were charged by the U.S. Attorney’s Office for the District of Delaware in a parallel criminal case.

Wilmington Trust, a bank holding company, filed a Form S-3ASR with the SEC in November 2007. It was amended by a post-effective amendment in a January 2009 Prospectus that specifically incorporated any future SEC filings made under certain provisions of the Exchange Act. The final Prospectus Supplement, filed in February 2010 offered over 18 million shares of common stock. It incorporated by reference the Form 10K for the year ended 2009. Over 20.7 million shares of common stock were sold at $13.25 per share, raising $287.7 million. In May 2011 the Bank was acquired by M & T Bank.

Years of record growth preceded the stock offering. In 2009 the Bank had a loan balance of over $9 billion. As the credit crisis continued, and the housing market deteriorated, many of the construction projects underlying the Bank’s loans stalled. Others matured and the principal became due. As these events unfolded the Bank failed to classify these loans as non-accruing. To the contrary, the Bank continued to accrue or record income as if payment was expected. The bank also did not disclose, for the most part, this fact. In the third quarter of 2009 the Bank disclosed only $38.7 million of these loans, omitting about $351 million. In the fourth quarter of that year actions by the four defendants resulted in the omission of about $330.2 million of these loans. Disclosures for that quarter reflected only $30.6 million in matured loans 90 days or more past due.

Mr. Gibson’s actions are also alleged to have resulted in the failure by the Bank to disclose significant events which occurred after the close of the quarter but prior to the completion of the financial statements. Following the close of the third quarter of 2009 the Bank did not disclose a significant increase in its non-accruing loans for that quarter. Likewise, a material increase in the Bank’s allowance for loan losses was not disclosed in its Form 10-K for 2009, contrary to the requirements of GAAP. Mr. Gibson signed the filings despite these omissions.

The Commission’s 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) and13(b)(5). The action is pending.

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by T. GormanPosted on Posted in SECActions

The question of waivers from certain disqualifications under the securities laws which are triggered automatically in certain instances — such as on the entry of a guilty plea — continues to be a controversial topic at the SEC. Earlier this year Commissioners Luis Aguilar and Kara Stein dissented from granting waivers to Oppenheimer & Co. from the “bad actor” provisions of the statutes (here). Commissioner Gallagher (here) and Chair White (here) have each delivered remarks addressing the application of the provisions, offering conflicting views.

Commissioner Stein again dissented from the granting of a waiver. In an order dated May 1, 2015 the Commission granted Deutsche Bank AG a waiver from being disqualified from the WKSI provisions based on the guilty plea of a subsidiary in the LIBOR scandal (here). The brief order provides that the bank subsidiary must comply with the terms of its guilty plea for the waiver to continue in effect. Those terms are not specified in the SEC order.

Commissioner Stein dissented (here). The WKSI, or well-known seasoned issuer provisions, created as part of the Securities Offering Reforms of 2005, apply to the most widely followed issuers who raise the most significant amounts of capital in the U.S. markets. The provisions give eligible issuers, advantages over other firms by affording them virtually instance access to the capital markets.

These privileges come with what Commissioner Stein called a “modicum of responsibility . . . the very low hurdle of not being ineligible.” To avoid being ineligible the issuer need only not have been convicted of, or plead guilty to, certain felonies or misdemeanors within the last three years. To obtain a waiver the issuer must show good cause.

Until recently the SEC did not grant WKSI waivers for criminal misconduct, according to Commissioner Stein. In September 2013 and then in April 2014, however, that changed. Waivers were granted to, respectively, UBS AG and RBS.

Deutsche Bank can now be added to the list of those who obtained waivers in the face of a criminal guilty plea despite the fact that it has failed to demonstrate good cause, according to Commissioner Stein. This failure is apparent in view of “Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating, and stealing. This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR. The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.”

The bank is also a recidivist. “Since 2004, Deutsche Bank has, among other violations, a criminal admission of wrongdoing connected to promoting tax shelters, a settlement involving misleading investors about auction rate securities, and a violation against its investment bank for improperly asserting influence over research analyst. Deutsche Bank requested and was granted a WKSI waiver in 2007 and 2009,” Commissioner Stein noted.

In view of Deutsche Bank’s conduct in connection with the LIBOR scandal, and its past violations, Commissioner Stein was “unable to conclude that Deutsche Bank’s culture of compliance and the reliability and accuracy of its future disclosures establishes good cause for a waiver. As the U.S. Commodity Futures Trading Commissioner’s (“CFTC”) Director of Enforcement noted: ‘Deutsche Bank’s culture allowed such egregious and pervasive misconduct to thrive.’” This is not a predicate for granting a waiver.

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