Texas Court Rejects SEC Request for Bar of Two Ex-Franklin Execs, Calling it ‘Abusive’

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By  Rob Tricchinelli

Aug. 12 - A federal judge rejected an SEC request Aug. 11 to bar two former executives of Franklin Bank from serving as directors or officers of a publicly traded company.

"It is abusive to seek a permanent bar against two executives who were working for a troubled company in a troubled time without adequate evidence that they were responsible for the improper accounting," wrote Judge Lynn Hughes of the U.S. District Court for the Southern District of Texas.

The Securities and Exchange Commission sued Anthony Nocella and J. Russell McCann in April 2012, alleging they schemed to overstate Franklin Bank's earnings in 2007 to hide its loan losses.

Nocella and McCann "conjured and implemented a loan modification scheme to create the appearance that the bank's single-family and residential construction loan portfolios were outperforming other banks and that the bank's earnings were in line with analysts' expectations," the SEC alleged.

The agency sought an officer-director bar for the pair in their original complaint. The defendants requested partial summary judgment on that issue, arguing that a decision there would "both streamline the case and facilitate settlement" as the case continues.

Analysis

The court found that the alleged violations "were not egregious" and that "the defendants acted with no intent to defraud Franklin's shareholders and with no extreme departure from business judgment."

The court also found that the two only profited minimally from the conduct. "However misguided, the modifications were not a get-rich scheme for management," the court opined. "They appear to be a good-faith attempt to manage a floundering bank during a recession."

Because Nocella is retired and McCann now works for "a private bank that does not file public-securities reports," the court concluded that the misconduct is unlikely to recur.

Nocella was represented by Gardere Wynne Sewell LLP in Houston. McCann was represented by Gibbs & Bruns LLP in Houston.

 To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com

The court's opinion is available at http://www.bloomberglaw.com/public/document/Securities_and_Exchange_Commission_v_Nocella_et_al_2014_BL_222069 .