When you or I apply for a loan, the bank expects an honest and complete loan application. Lie about your income or assets and it’s possible that you can be charged criminally with bank fraud. What happens when the banks lie? Trinity National Corp and its subsidiary, Los Alamos Bank, answered that question earlier this fall.
Like most banks, Los Alamos Bank must answer to both regulators and shareholders. The SEC wasn’t impressed when in 2011 the bank reported it had net income (profit) of $4.9 million when really it had lost $25.6 million.
The SEC claims the bank’s former CEO, Chief Credit Officer and a senior lending officer were behind the illegal accounting fraud scheme.
The bank settled earlier this fall and agreed to pay $1.5 million. Some of the individual officers, however, elected to proceed to trial.
What makes this case worse was that at the time of the accounting fraud, Los Alamos was already subject to a supervisory agreement with the Office of the Comptroller of the Currency. The OCC typically steps in when they believe banks are failing.
According to the SEC, “Trinity [Los Alamos’ parent company] was facing dire financial straits but rather than accurately report its losses, we allege that the firm’s executives grossly misreported its income to shareholders and regulators. We will hold senior executives liable when they misstate the company’s performance and fail to come clean with shareholders.”
We applaud the efforts of the SEC in pursuing accounting fraud cases. What makes this case a bit unusual was that it involves a bank. Typically it is a bank regulator that pursues these cases but the SEC was certainly within its rights to do so.
Banks often commit fraud but often aren’t caught by anyone despite being regulated by many agencies. The best defense against fraud isn’t the SEC or alphabet soup of regulatory agencies. It is the common whistleblower and ordinary worker who becomes a hero by stepping forward.
FIRREA, SEC Whistleblower Programs
Bank employees, compliance officers and auditors with knowledge of accounting fraud at banks may qualify for a cash award under the FIRREA statute. Short for the Financial Institution Reform, Recovery and Enforcement Act, FIRREA can pay whistleblowers with inside information up to $1.6 million dollars.
Publicly traded companies – whether banks or not – fall within the SEC’s whistleblower statute as well. Awards are fewer but there are no statutory caps on the size of any award. Already the SEC has paid a $30 million award.
The SEC’s whistleblower statute also has strong whistleblower anti-retaliation and protection provisions.
If you are a would be whistleblower and wondering how Los Alamos Bank pulled off the accounting fraud while under the watchful eyes of the OCC, the SEC says:
- The bank failed to downgrade delinquent loans and reported them as paying on time;
- The bank gave additional credit to delinquent borrowers so they could pay their old debt (“throwing good money after bad” while making the books appear as though loans are being paid timely);
- Ignored inadequate collateral
- Rejected appraisals that properly valued collateral
- Provided outside auditors with “false and misleading” information.
We suspect Los Alamos Bank isn’t the first troubled bank to try these tricks. If a borrower did so, however, they would likely be criminally prosecuted. Unfortunately, the SEC doesn’t have that authority.
So what why is a whistleblower the best line of defense? The OCC, FDIC, SEC and Federal Reserve Board can’t be in all places all the time. Whistleblowers are the eyes and ears of regulators. Their actions protect taxpayers against fraud and corporate greed. Under the FIRREA and SEC whistleblower statutes, they can be rewarded for their information as well.
Need more information about becoming a whistleblower? Give us a call! Our whistleblower clients have received over $100,000,000.00 in award monies. For more information, contact attorney Brian Mahany at or by telephone at (direct).
MahanyLaw – America’s Whistleblower Lawyers