Wilmington Trust indictment unique in financial world
The criminal indictment last week of former Wilmington Trust President Robert V.A. Harra Jr. and former Chief Financial Officer David R. Gibson stands as a dismal milestone in Delaware’s banking history.
Not only is the criminal prosecution of top-tier Delaware bankers a sorry coda for a once-proud institution founded by du Pont family members, but the case is among the rare prosecutions nationally of C-suite executives following the financial meltdown of the last decade.
“This certainly stands out,” said Helen Bowers, head of the finance department at the University of Delaware. “Even though the amount of money involved is small relative to other major banks in the financial crisis, the level of the executives indicted is high and these are severe indictments. That’s what’s so striking about it.”
“In terms of the impact on the community and level of trust, this has certainly hit home,” said Kyra Daley, spokeswoman for Office of Special Inspector General for the federal Troubled Asset Relief Program, which investigates fraud in connection with the government effort in 2008 to stabilize the country’s financial system during the banking crisis.
Besides Harra and Gibson, a grand jury indicted former Chief Credit Officer William B. North and former Controller Kevyn N. Rakowski. The 19-count indictment charges the four with conspiracy to commit fraud related to the purchase and sale of securities; conspiracy to defraud the United States; and with making false statements to regulators.
Harra and Gibson, who are next-door neighbors on Kentmere Parkway in Wilmington, also are charged with making false statements in SEC filings. Gibson is charged with falsely certifying financial reports.
Prosecutors have alleged bank officials hid the true condition of the bank’s loan portfolio during the banking crisis through a practice of waiving past-due loans. The former executives are accused of making false statements to federal agencies and the investing public. If convicted, the four face significant prison time.
The indictment last week brought to 10 the number of federal prosecutions since 2013 related to the demise of Wilmington Trust as an independent bank.
The criminal cases have had the biggest impact on a community of any of the prosecutions involving institutions that received money under TARP, Daley said. Wilmington Trust was the largest full-service retail-commercial bank in Delaware as ranked by deposits. Its branches could be found from Claymont to Delmar.
In 2008, the U.S. Treasury invested $330 million in Wilmington Trust in TARP bailout money. On the brink of collapse from loans made in Kent and Sussex counties, the bank was sold in 2011 to M&T Bank Corp. of Buffalo in one of the biggest fire sales in banking history.
“Wilmington Trust was the cornerstone of the banking industry in Delaware,” Daley said.
Few prosecutions
The Wilmington Trust prosecutions stand in contrast to the national prosecutorial scene.
Former U.S. Attorney General Eric Holder has been sharply criticized for failing to bring any prosecutions of top bank executives. The lack of significant prosecutions has been so unusual, U.S. District Judge Jed S. Rakoff of the Southern District of New York even went so far as to pen a piece last year for The New York Review of Books.
Rakoff wrote that if intentional fraud led to the recent Great Recession, then “the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years.”
“Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past fifty years or so in bringing to justice even the highest-level figures who orchestrated mammoth frauds. Thus, in the 1970s, in the aftermath of the ‘junk bond’ bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken,” Rakoff wrote.
The savings-and-loan crisis of the 1980s resulted in the successful criminal prosecution of more than 800 individuals, Rakoff wrote. The accounting frauds of the 1990s, including Enron and WorldCom, led to successful prosecutions of respected CEOs, he writes.
This time around, there have been scant prosecutions of top tier executives at the too-big-to-fail banks.
“All these very large banks that got in trouble walked away with paying big fines,” said Stuart Greenberg, a banking consultant and commercial lending expert based in Baltimore, Maryland. “I was asking myself when the hell are they going to get somebody.”
Brandon Garrett, a law professor at the University of Virginia School of Law and author of “Too Big to Jail: How Prosecutors Compromise with Corporations,” said one challenge in these cases is “pinpointing who knew what during the relevant time period.”
“It may be easier to hold higher ups accountable in a case involving a smaller bank where there are fewer layers in the hierarchy,” he said.
Daley of SIGTARP said there are other cases nationally of larger banks that are still under investigation. But because of the complexity of the cases it is not unusual for it to take five or six years for a prosecution. Federal investigators first began looking into Wilmington Trust in 2011. The first prosecution of the late real estate developer Michael Zimmerman wasn’t brought until 2013.
“The larger the bank, the less centralized and more diffuse things are,” Daley said. “Finding evidence to support intent becomes much harder.”
Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, agreed that major prosecutions have been very rare because the government has to show some kind of fraudulent intent and that’s very difficult to demonstrate.
“The standards for a criminal action are very high and that’s why you haven’t seen many prosecutions,” Elson said. “It’s very tough to get a criminal conviction in a financial transaction. You have to show some kind of illicit gain by the individuals involved and that’s hard.”
Because of the high bar for bringing this case, the Wilmington Trust prosecutions indicate to lawyers and others that the government believes it has a strong case.
“It suggests to me the government must feel it has some very tangible and provable issues to go after these individuals,” Greenberg said.
Successful prosecutions
So far, the U.S. Attorney’s Office in Delaware has gotten five guilty pleas as a result of the Wilmington Trust investigation. Three of those convictions are from former bank officials, including Delaware market manager Brian Bailey.
No one has been sentenced, yet. Harra, Gibson, North and Rakowski say they are not guilty and have vowed to fight the charges in court.
The few banking prosecutions in other states indicate that successful convictions can carry harsh penalties.
In 2013, the federal government successfully convicted three top executives at the Bank of the Commonwealth in Norfolk, Virginia, in what was called one of the largest bank frauds in the state’s history. The officials were accused of a scheme to camouflage non-performing assets. In 2011, Commonwealth shut down, costing the Federal Deposit Insurance Corporation an estimated $268 million, according to the government.
Former Commonwealth CEO Edward J. Woodard, who served as chairman of the board for more than 30 years, was sentenced to 23 years in federal prison for conspiracy to commit bank fraud, false entry in a bank record and false statements to a financial institution, among others. In addition, Woodard was ordered to pay more than $333 million in restitution to the FDIC.
“When the loans resulted in losses, he hid the losses through criminal accounting tricks and with lies to bank examiners, and he stole, lining his own pockets,” Christy Romero, special inspector general for TARP, said in a statement.
Former Commonwealth commercial loan officer Stephen G. Fields, was sentenced to 17 years in federal prison for his conviction on charges of conspiracy to commit bank fraud, false entries in a bank record and false statement to a financial institution. He was ordered to pay $331.8 million in restitution to the FDIC and to forfeit $61.6 million in proceeds from the offense.
“As a former bank examiner, Fields should have stopped and blown the whistle, but instead, he engaged in an extend and pretend scheme to mask past-due loans, rigged auctions to get foreclosed property off of the bank’s books, and lied to bank examiners,” Romero said.
Woodard’s son, Troy Brandon Woodard, who was vice president of a wholly-owned bank subsidiary, was convicted of conspiracy to commit bank fraud and unlawful participation in a loan. He was sentenced to eight years in federal prison and ordered to pay restitution of approximately $2.4 million to the FDIC. He was also ordered to forfeit more than $4 million in proceeds from the offense.
In March, Ebrahim Shabudin, the former chief operating officer and chief credit officer at United Commercial Bank in San Francisco, was convicted of conspiring with other officials to falsify bank records to hide losses and falsely pump up the institution’s financial statements in a so-called “delay and pray” scheme.
Prosecutors alleged Shabudin and others failed to downgrade loans despite knowing the collateral had declined in value or was missing. Falsified records included filings with the U.S. Securities and Exchange Commission and earnings information for the investing public, the government alleged.
UCB was taken over by the FDIC in 2009.
In September 2014, a former chief credit officer at TierOne Bank in Lincoln, Nebraska, pleaded guilty to conspiring to commit securities fraud, wire fraud and making false entries in a bank’s books and records. He has not been sentenced, yet.
The Wilmington Trust case is expected to go to trial next year.
Hannah Ross, the co-lead counsel in a federal civil shareholders case against former Wilmington Trust executives in federal court, said the new criminal indictment “confirms our allegations that Wilmington Trust defrauded its investors.”
“The indictment makes clear that these bank executives lied to regulators and shareholders for years about the bank’s true financial condition. These defendants need to be held accountable to the thousands of innocent shareholders who lost millions of dollars when the bank collapsed,” Ross said.
Contact Maureen Milford at (302) 324-2881 or mmilford@delawareonline.com.