Charges Filed Against Bank Execs for Hiding Millions in Losses

Jack Humphrey, Regulatory journalist
October 11, 2011 /

The Securities and Exchange Commission has sued the former executives of San Francisco-based United Commercial Bank for misleading investors about the mounting loan losses during the height of the financial crisis in 2008 and 2009.

According to the suit filed in federal court in San Francisco, the bank’s former chief executive officer Thomas Wu, chief operating officer Ebrahim Shabudin, and senior officer Thomas Yu hid loan losses and other assets from the bank’s auditors. As a result, the bank’s public holding company UCBH Holdings Inc. (UCBH) understated the 2008 operating losses by at least $65 million (approximately 50 percent).

A few months later, continued declines in the value of the bank’s loans drove the bank into collapse, and the California Department of Financial Institutions closed the bank. The Federal Deposit Insurance Corporation (FDIC) was then appointed as receiver.

United Commercial Bank was one of the 10 largest bank failures of the recent financial crisis, causing a loss of $2.5 billion to the FDIC’s insurance fund.

The lawsuit filed by the SEC “reflects 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,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Lloyd Farnham, Michael Fortunato, Jason Habermeyer, and Cary Robnett of the SEC’s San Francisco Regional Office conducted the investigation. The SEC’s litigation will be handled by Lloyd Farnham and Robert Mitchell.

At the same time, the U.S. Attorney for the Northern District of California filed parallel criminal charges against former employees of the bank, and the FDIC announced enforcement actions against 13 individuals for violations of federal banking regulations.

According to the SEC’s complaint, UCBH and its subsidiary United Commercial Bank grew rapidly, doubling in size after an initial public offering in 1998. It was the first U.S. bank to acquire a bank in the People’s Republic of China, and Wu was considered a rising star in the banking industry. By 2009, however, Wu found himself at the helm of a bank on the brink of failure.

The SEC claimed that Wu, Shabudin, and Yu deliberately delayed the proper recording of loan losses, and each committed securities fraud by making false and misleading statements to investors and UCBH’s independent auditors.

During December 2008 and the first three months of 2009 as the company prepared its 2008 financial statements, Wu, Shabudin, and Yu were aware of significant losses on several large loans.

Among other things, these executives allegedly learned about dramatically reduced property appraisals and worthless collateral securing the loans, yet they repeatedly hid this information from UCBH’s auditors and investors.

The SEC’s complaint also alleges that the bank’s former chief financial officer 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, record-keeping, and internal controls provisions of the federal securities laws and will pay a $150,000 penalty.

On also consented to an administrative order suspending him from appearing or practicing before the SEC as an accountant, with a right to apply for reinstatement after five years.

The litigation against the other defendants is ongoing.

 

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