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Agencies Bring Actions against Bank Executives for Hiding Financial Losses During the Financial Crisis

Thursday, October 20, 2011

Tatiana Rodriguez | Bloomberg LawSEC Press Release No. PR -2011-202 (Oct. 11, 2011); SEC Litigation Release No. LR-22121 (Oct. 11, 2011); SEC v. Wu, No. 11-CV-04988(N.D. Cal. filed Oct. 11, 2011); FDIC Press Release No. PR-162-2011 (Oct. 11, 2011); U.S. Attorney's Office for the Northern District of CA, Press Release (Oct. 11, 2011); United States v. Shabudin, No. 11-CR-00664 (N.D. Cal. filed Sept. 15, 2011) The Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), and U.S. Attorney's Office for the Northern District of California (DOJ) (collectively, Agencies) brought parallel actions against bank executives of UCBH Holdings, Inc. (UCBH), for concealing millions in company losses that resulted in one of the 10 largest bank failures of the recent financial crisis. The bank's failure resulted in an estimated $2.5 billion dollar loss to the FDIC and a failure to repay $298 million of troubled asset relief program (TARP) funds. The Agencies' actions focus on bank executives and officers' alleged concealment of loan losses, and misrepresentations to outside auditors, regulators, and the investing public. According to Christy Romero, Acting Special Inspector General for TARP, "Shabudin and Yu are the first senior executives of a TARP bank charged in connection with a scheme to defraud investors, which included the Treasury, and by extension the American taxpayer."

Allegations Involved

United Commercial Bank (UCB) was a commercial bank headquartered in San Francisco, California, with branch offices throughout the United States, China and Taiwan. Its parent company was UCBH. UCB significantly increased its loans, between 2004 through 2007, from $4.4 billion to more than $8 billion. The former CEO of UCBH and UCB at the time, Thomas Wu, was considered a "rising star" in the bank industry. However, by September 2008, UCB suffered from growing financial losses. Following the implementation of TARP, UCB received approximately $298 million from the program. According to the Agencies, the bank executives and officers engaged in numerous activities to conceal the bank's losses. Specifically, the bank executive officers allegedly:
  • Concealed information showing that the bank’s loan collateral and repossessed assets had declined in value;
  • Understated the risk of certain loans;
  • Delayed downgrading the risk ratings of certain loans;
  • Falsified the bank’s books and records so that they falsely described, and omitted material information necessary to accurately describe, the likelihood that certain loans would be repaid and the value of the bank’s loan collateral and repossessed assets;
  • Lied to and misled the bank’s outside auditor;
  • Filed false call reports and SEC filings; and
  • Misrepresented the bank's financial health to the FDIC and state regulators.
UCBH allegedly made false statements that included a press release, an earnings call, and an annual report on SEC Form 10-K—understating losses by an estimated $68 million In May 2009, the bank announced that its 10-K filed in March was unreliable, and withdrew the financial statement with an intent to refile. In November 2009, the bank failed and went into FDIC receivership. The TARP funds have not been repaid. — SEC Action The SEC filed a civil complaint against Wu, COO Ebrahim Shabudin, and senior officer Thomas Yu, alleging that they deliberately delayed the proper recording of loan losses, and committed securities fraud by making false and misleading statements to investors and UCBH's independent auditors. The complaint further alleges that they violated and aided and abetted violations of the antifraud and reporting provisions of the Securities Act of 1933 and Securities Exchange Act of 1934 (Exchange Act). The SEC also alleged that the bank's former CFO Craig On acted negligently by misleading the company's outside auditors and aiding the filing of false financial statements. On agreed to settle the SEC charges, without admitting, or denying the allegations. He will be permanently enjoined from violating certain antifraud, reporting, recordkeeping, and internal controls provisions of the federal securities laws and will pay a $150,000 penalty. On also signed an administrative order consenting to not practice as an auditor before the SEC for five years. Robert Khuzami, the SEC Director of Enforcement, stated "Today’s charges reflect an all too familiar pattern—corporate executives once seen as rising stars embrace deception to avoid losses and conceal negative news, with investors and the FDIC insurance fund left to pick up the pieces…But accountability for these executives begins today.” The SEC also instituted an administrative order against UCBH for failing to file required periodic statements, since filing its 10-K in March 2009. The SEC's order requires a public hearing to determine whether (1) the allegations against UCBH are true, (2) UCBH can establish a defense for not submitting the required periodic filings, and (3) the SEC should suspend for a period not exceeding 12 months, or revoke, the registration of UCBH’s securities pursuant to Exchange Act Section 12.

DOJ Action

The DOJ brought a criminal action against Shabudin and Yu for conspiracy to commit securities fraud, securities fraud, falsifying corporate books and records, and lying to auditors. Shabudin and Yu were charged with conspiracy to commit securities fraud and securities fraud under 18 U.S.C. §§ 1349 and 1348, which holds a maximum statutory penalty of 25 years, plus a fine of up to $250,000 or twice the gain or loss, whichever is higher. They were also charged for falsifying corporate books and records under 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), 78ff, and 17 C.F.R. 240.13b2-1, and making false statements to accountants of a publicly traded company in violation of 15 U.S.C. § 78ff, and 17 C.F.R. 240.13b2-2, which each hold a maximum statutory penalty of 20 years,. According to United States Attorney Melinda Haag, "These charges demonstrate the Department of Justice's continuing commitment to pursue corporate wrongdoers to the fullest extent of the law." The DOJ noted that the investigation was in coordination with the SEC, FDIC, Board of Governors of the Federal Reserve System and FBI. — FDIC Action The FDIC cast a wider net, bringing numerous administrative orders against former UCB officers. It announced that the agency is seeking to remove and prohibit from further participation in the banking industry 10 former officers of UCB and assess civil money penalties totaling $1.64 million. It also issued consent removal and prohibition orders, as well as civil money penalties totaling $87,500 against three former officers, who cooperated in the investigation. The FDIC alleges that the bank's former management engaged in violations of law, unsafe or unsound practices, and breaches of fiduciary duties by falsifying the bank's financial records and hiding the bank's deteriorating condition. Of mention, prior to the above actions, Wu filed a complaint against the FDIC with respect to a proof of claim filed, failure to indemnify, and breach of contract for not reimbursing his legal claims arising from his employment with UCBH and UCB. The case is still ongoing.

Private Causes of Actions

Numerous private claims have also been filed against UCBH and former executives, including a class action case, Zhu v. UCBH Holdings, Inc., No. 09-CV-04208 (N.D. Cal. filed Sept. 11, 2009). The case is still ongoing.   DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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