SEC Files Another Market Crisis Case

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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