FROM: U.S. DEPARTMENT OF JUSTICE
Thursday, January 17, 2013
Automotive Electronics Manufacturer Fined $500,000 for Selling Illegal Devices Resulting in Tons of Excess Particulate Matter Emissions
WASHINGTON –In a settlement with the United States on behalf of the U.S. Environmental Protection Agency, automotive electronics manufacturer Edge Products LLC (Edge) has agreed to pay a $500,000 civil penalty for manufacturing and selling electronic devices that allowed owners of model year 2007 and later diesel pickup trucks to remove emission controls from their vehicles. Diesel trucks that are not equipped with emission controls known as "diesel particulate filters" emit excess particulate matter (PM). When running, trucks without these types of controls leave behind a trail of dark, black smoke. PM is associated with a number of health problems, including respiratory and cardiovascular disease, chronic bronchitis, decreased lung function, and an increased risk of lung cancer.
The company, located in Ogden, Utah, sold more than 9,000 of these electronic devices nationwide, resulting in an estimated 158 tons of excess PM emissions released into the atmosphere. This is equivalent to the emissions from 422 new long-haul semi trucks operating for a period of 29 years.
"The Department of Justice will continue to vigilantly protect America’s health and environment through the enforcement of the Clean Air Act standards governing emissions from vehicles and engines," said Ignacia S. Moreno, Assistant Attorney General for the Justice Department’s Environment and Natural Resources Division. "This settlement holds Edge Products accountable for selling devices that allow consumers to disable the emission controls on their vehicles by requiring the company to pay a penalty, buy back the devices, and perform a project to offset the air pollution resulting from the Clean Air Act violations."
"Our goal is to have these illegal devices removed and proper emission controls installed," said Jared Blumenfeld, EPA’s Regional Administrator for the Pacific Southwest. "Allowing black smoke to billow conspicuously from the tailpipes of diesel pickup trucks is a practice that directly harms public health."
Diesel particulate filters remove approximately 90% of the particulate matter emissions from a truck’s exhaust. If the filter is removed, the truck will generally not operate properly as the filter is monitored by the truck’s computer. However, the electronic devices sold by Edge allowed individuals to reprogram the truck’s computer so that the truck would continue to operate even after the filter had been removed.
Although Edge stopped selling the illegal devices in mid-2011, the consent decree requires Edge to offer to buy back the devices from anyone who possesses one. In order to sell the device back to Edge, the truck from which the device came must be returned to its original factory programming. Edge is also required to spend at least $157,600 to implement an emission mitigation project to offset the excess PM emissions that it caused. Edge will use the additional funds to offer rebates to individuals who own old wood-burning stoves and who wish to replace them with cleaner burning appliances such as new pellet stoves or EPA-certified wood stoves.
The civil penalty of $500,000 is based on the United States’ determination that Edge has a limited ability to pay a penalty in this matter.
The consent decree resolves allegations in a complaint, filed today, that Edge violated the Clean Air Act by manufacturing and selling motor vehicle parts or components whose effect is to bypass, defeat, or render inoperative a motor vehicles emission control device.
Friday, January 18, 2013
Wednesday, January 16, 2013
THREE INDIVIDUALS AND ONE COMPANY SETTLE WITH SEC OVER ALLEGED STOCK MARKET MANIPULATION
FROM: SECURITIES AND EXCHANGE COMMISSION
Commission Settles with Four Defendants in Sedona Corporation Market Manipulation Fraud
The Securities and Exchange Commission announced that on December 19, 2012, the U.S. District Court for the Southern District of New York entered settled final judgments against defendants Andreas Badian, Jeffrey "Danny" Graham, Pond Securities Corporation (Pond), and Ezra Birnbaum in a Commission injunctive action arising from fraudulent manipulative trading in the securities of Sedona Corporation.
Without admitting or denying the allegations in the Commission's complaint, the defendants consented to the following relief: Badian consented to the entry of a judgment enjoining him from future violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rule 10b-5, and ordering him to pay disgorgement of $375,000, representing ill-gotten gains received as a result of the conduct alleged in the complaint, and a civil penalty of $75,000; Graham consented to the entry of a judgment ordering him to pay a civil penalty of $25,000; Pond consented to the entry of a judgment enjoining it from future violations of Section 17(a) of the Securities Act, Sections 10(b), 15(b), and 17(a) of the Exchange Act, Exchange Act Rules 10b-5, 15b7-1, and 17a-3, NASD Conduct Rule 3010, and a Commission Order issued pursuant to Section 21(a)(1) of the Exchange Act, and ordering it to pay disgorgement of $8,000, representing ill-gotten gains received as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $14,822.38, and a civil penalty of $177,177.62; and Birnbaum consented to the entry of a judgment enjoining him from future violations of NASD Conduct Rule 3010.
The Commission's complaint alleged that, from February to April 2001, Badian, Graham, Pond, and others participated in a scheme to manipulate Sedona's stock price. The complaint also alleged that Graham and others aided and abetted violations of the broker-dealer record-keeping requirements through the creation of trade tickets which falsely reported short sales of Sedona stock as "long" sales, and that Pond, Birnbaum, and defendant Shaye Hirsch violated NASD Conduct Rule 3010 by failing to supervise brokers at Pond.
On December 20, 2012, pursuant to its approval of the parties' stipulation of voluntary dismissal, the court entered an order dismissing all claims by the Commission against Hirsch. Defendants Jacob Spinner and Mottes Drillman had settled previously with the Commission. Accordingly, the civil action has been resolved in its entirety.
Commission Settles with Four Defendants in Sedona Corporation Market Manipulation Fraud
The Securities and Exchange Commission announced that on December 19, 2012, the U.S. District Court for the Southern District of New York entered settled final judgments against defendants Andreas Badian, Jeffrey "Danny" Graham, Pond Securities Corporation (Pond), and Ezra Birnbaum in a Commission injunctive action arising from fraudulent manipulative trading in the securities of Sedona Corporation.
Without admitting or denying the allegations in the Commission's complaint, the defendants consented to the following relief: Badian consented to the entry of a judgment enjoining him from future violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rule 10b-5, and ordering him to pay disgorgement of $375,000, representing ill-gotten gains received as a result of the conduct alleged in the complaint, and a civil penalty of $75,000; Graham consented to the entry of a judgment ordering him to pay a civil penalty of $25,000; Pond consented to the entry of a judgment enjoining it from future violations of Section 17(a) of the Securities Act, Sections 10(b), 15(b), and 17(a) of the Exchange Act, Exchange Act Rules 10b-5, 15b7-1, and 17a-3, NASD Conduct Rule 3010, and a Commission Order issued pursuant to Section 21(a)(1) of the Exchange Act, and ordering it to pay disgorgement of $8,000, representing ill-gotten gains received as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $14,822.38, and a civil penalty of $177,177.62; and Birnbaum consented to the entry of a judgment enjoining him from future violations of NASD Conduct Rule 3010.
The Commission's complaint alleged that, from February to April 2001, Badian, Graham, Pond, and others participated in a scheme to manipulate Sedona's stock price. The complaint also alleged that Graham and others aided and abetted violations of the broker-dealer record-keeping requirements through the creation of trade tickets which falsely reported short sales of Sedona stock as "long" sales, and that Pond, Birnbaum, and defendant Shaye Hirsch violated NASD Conduct Rule 3010 by failing to supervise brokers at Pond.
On December 20, 2012, pursuant to its approval of the parties' stipulation of voluntary dismissal, the court entered an order dismissing all claims by the Commission against Hirsch. Defendants Jacob Spinner and Mottes Drillman had settled previously with the Commission. Accordingly, the civil action has been resolved in its entirety.
Monday, January 14, 2013
HEDGE FUND MANAGER AND COMPANY PAY FINE FOR "...PATTERN OF DECEPTIVE CONDUCT..."
FROM: U.S. SECRUITIES AND EXCHANGE COMMISSION
Court Orders New York-Based Hedge Fund Manager and Firm to Pay Nearly $5 Million in Disgorgement and Penalties
The Securities and Exchange Commission announced today that, on January 3, 2013, Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York entered final judgments against hedge fund manager Chetan Kapur and his firm, ThinkStrategy Capital Management (ThinkStrategy), ordering them to jointly and severally pay disgorgement of $3,988,196.59 and civil penalties in the amount of $1,000,000.
The final judgments stem from a partially-settled civil injunctive action filed by the Commission on November 10, 2011. The SEC’s complaint alleged that over nearly seven years, Kapur and ThinkStrategy engaged in a pattern of deceptive conduct designed to bolster their track record, size, and credentials. In particular, Kapur and ThinkStrategy materially overstated the performance of their ThinkStrategy Capital Fund, giving investors the false impression that the fund’s returns were consistently positive and minimally volatile. The complaint also alleged that Kapur and ThinkStrategy repeatedly inflated the firm’s assets, exaggerated the firm’s longevity and performance history, and misrepresented the size and credentials of ThinkStrategy’s management team.
With respect to a second hedge fund they managed, the TS Multi-Strategy Fund, the complaint alleged that Kapur and ThinkStrategy misstated the scope and quality of due diligence checks on certain managers and funds selected for inclusion in the fund-of-funds’ portfolio. As a result, the TS Multi-Strategy Fund made investments in certain hedge funds that were later revealed to be Ponzi schemes or other serious frauds, including Bayou Superfund, Valhalla/Victory Funds, and Finvest Primer Fund.
The Commission charged Kapur and ThinkStrategy with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the allegations in the Commission’s complaint, Kapur and ThinkStrategy consented to the entry of November 18, 2011 judgments permanently enjoining them from violating the above provisions. Kapur also consented to a November 30, 2011 SEC order permanently barring him from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.
Court Orders New York-Based Hedge Fund Manager and Firm to Pay Nearly $5 Million in Disgorgement and Penalties
The Securities and Exchange Commission announced today that, on January 3, 2013, Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York entered final judgments against hedge fund manager Chetan Kapur and his firm, ThinkStrategy Capital Management (ThinkStrategy), ordering them to jointly and severally pay disgorgement of $3,988,196.59 and civil penalties in the amount of $1,000,000.
The final judgments stem from a partially-settled civil injunctive action filed by the Commission on November 10, 2011. The SEC’s complaint alleged that over nearly seven years, Kapur and ThinkStrategy engaged in a pattern of deceptive conduct designed to bolster their track record, size, and credentials. In particular, Kapur and ThinkStrategy materially overstated the performance of their ThinkStrategy Capital Fund, giving investors the false impression that the fund’s returns were consistently positive and minimally volatile. The complaint also alleged that Kapur and ThinkStrategy repeatedly inflated the firm’s assets, exaggerated the firm’s longevity and performance history, and misrepresented the size and credentials of ThinkStrategy’s management team.
With respect to a second hedge fund they managed, the TS Multi-Strategy Fund, the complaint alleged that Kapur and ThinkStrategy misstated the scope and quality of due diligence checks on certain managers and funds selected for inclusion in the fund-of-funds’ portfolio. As a result, the TS Multi-Strategy Fund made investments in certain hedge funds that were later revealed to be Ponzi schemes or other serious frauds, including Bayou Superfund, Valhalla/Victory Funds, and Finvest Primer Fund.
The Commission charged Kapur and ThinkStrategy with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the allegations in the Commission’s complaint, Kapur and ThinkStrategy consented to the entry of November 18, 2011 judgments permanently enjoining them from violating the above provisions. Kapur also consented to a November 30, 2011 SEC order permanently barring him from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.
Sunday, January 13, 2013
JUSTICE DEPARTMENT FILES ANTITRUST LAWSUIT AGAINST BAZAARVOICE
FROM: U.S JUSTICE DEPARTMENT
Lawsuit Seeks to Restore Competition in Market for Product Ratings and Reviews Platforms Sold to Retailers and Manufacturers
WASHINGTON — The Department of Justice filed a civil antitrust lawsuit today against Bazaarvoice Inc. challenging the company's June 2012 acquisition of PowerReviews Inc. The department said that the $168.2 million transaction substantially lessened competition in the market for product ratings and reviews platforms in the United States, resulting in higher prices and diminished innovation.
The department's lawsuit, filed in the U.S. District Court in the Northern District of California, in San Francisco, seeks to restore the competition that was extinguished by the transaction.
Bazaarvoice's acquisition of PowerReviews was not reported under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which requires companies to notify and provide information to the department and the Federal Trade Commission before consummating certain acquisitions. The department began its investigation shortly after the transaction closed.
"Bazaarvoice bought PowerReviews knowing that it was acquiring its most significant rival and hoping to benefit from diminished price competition," said Bill Baer, Assistant Attorney General in charge of the Department of Justice's Antitrust Division. "Without competitive pressure from PowerReviews, Bazaarvoice will be able to increase prices to retailers and manufacturers for its product ratings and reviews platform. This lawsuit seeks to prevent one firm from dominating the product rating and review platforms market, and demonstrates that transactions that are not reported to us are not immune from scrutiny."
Consumer-generated product ratings and reviews are a ubiquitous part of the online shopping experience and are displayed on retailers' and manufacturers' websites. This feature allows consumers to read feedback from authentic product owners before making a purchasing decision. This content is also a valuable asset for retailers and manufacturers because it can increase sales, decrease product returns and provide valuable structured, product-level data about consumer preferences and behavior. Retailers and manufacturers use product ratings and reviews platforms to collect, organize and display consumer-generated product ratings and reviews online.
According to the department's complaint, Bazaarvoice is the dominant commercial supplier of product ratings and reviews platforms in the United States, and PowerReviews was its closest rival. Before the transaction, PowerReviews was an aggressive price competitor, and Bazaarvoice routinely responded to competitive pressure from PowerReviews. As a result of the competition between Bazaarvoice and PowerReviews, many retailers and manufacturers received substantial price discounts, the department said. As the complaint describes, Bazaarvoice sought to stem competition through the acquisition of PowerReviews. The complaint quotes internal company documents in which senior Bazaarvoice executives describe PowerReviews's role in the market:
One of the company's co-founders noted that the acquisition of PowerReviews would
"[e]liminat[e] [Bazaarvoice's] primary competitor" and provide "relief from [] price erosion;"
The company's current chief executive officer wrote that Bazaarvoice had "literally, no other competitors" beyond PowerReviews; and
The company's former chief executive officer projected that, as a result of the transaction, Bazaarvoice would have "[n]o meaningful direct competitor."
The department alleges that the acquisition of PowerReviews has given Bazaarvoice the incentive and ability to raise the price of its product ratings and reviews platform above a competitive level. As a result of the transaction, many customers have lost critical negotiating leverage and are vulnerable to anticompetitive price increases.
Bazaarvoice is a Delaware corporation with its principal place of business in Austin, Texas. In its 2012 fiscal year, Bazaarvoice had revenues of approximately $106 million.
Before the transaction, PowerReviews was a Delaware corporation with its principal place of business in San Francisco. In the 2011 calendar year, PowerReviews had revenues of approximately $11.5 million.
Lawsuit Seeks to Restore Competition in Market for Product Ratings and Reviews Platforms Sold to Retailers and Manufacturers
WASHINGTON — The Department of Justice filed a civil antitrust lawsuit today against Bazaarvoice Inc. challenging the company's June 2012 acquisition of PowerReviews Inc. The department said that the $168.2 million transaction substantially lessened competition in the market for product ratings and reviews platforms in the United States, resulting in higher prices and diminished innovation.
The department's lawsuit, filed in the U.S. District Court in the Northern District of California, in San Francisco, seeks to restore the competition that was extinguished by the transaction.
Bazaarvoice's acquisition of PowerReviews was not reported under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which requires companies to notify and provide information to the department and the Federal Trade Commission before consummating certain acquisitions. The department began its investigation shortly after the transaction closed.
"Bazaarvoice bought PowerReviews knowing that it was acquiring its most significant rival and hoping to benefit from diminished price competition," said Bill Baer, Assistant Attorney General in charge of the Department of Justice's Antitrust Division. "Without competitive pressure from PowerReviews, Bazaarvoice will be able to increase prices to retailers and manufacturers for its product ratings and reviews platform. This lawsuit seeks to prevent one firm from dominating the product rating and review platforms market, and demonstrates that transactions that are not reported to us are not immune from scrutiny."
Consumer-generated product ratings and reviews are a ubiquitous part of the online shopping experience and are displayed on retailers' and manufacturers' websites. This feature allows consumers to read feedback from authentic product owners before making a purchasing decision. This content is also a valuable asset for retailers and manufacturers because it can increase sales, decrease product returns and provide valuable structured, product-level data about consumer preferences and behavior. Retailers and manufacturers use product ratings and reviews platforms to collect, organize and display consumer-generated product ratings and reviews online.
According to the department's complaint, Bazaarvoice is the dominant commercial supplier of product ratings and reviews platforms in the United States, and PowerReviews was its closest rival. Before the transaction, PowerReviews was an aggressive price competitor, and Bazaarvoice routinely responded to competitive pressure from PowerReviews. As a result of the competition between Bazaarvoice and PowerReviews, many retailers and manufacturers received substantial price discounts, the department said. As the complaint describes, Bazaarvoice sought to stem competition through the acquisition of PowerReviews. The complaint quotes internal company documents in which senior Bazaarvoice executives describe PowerReviews's role in the market:
"[e]liminat[e] [Bazaarvoice's] primary competitor" and provide "relief from [] price erosion;"
The company's current chief executive officer wrote that Bazaarvoice had "literally, no other competitors" beyond PowerReviews; and
The company's former chief executive officer projected that, as a result of the transaction, Bazaarvoice would have "[n]o meaningful direct competitor."
The department alleges that the acquisition of PowerReviews has given Bazaarvoice the incentive and ability to raise the price of its product ratings and reviews platform above a competitive level. As a result of the transaction, many customers have lost critical negotiating leverage and are vulnerable to anticompetitive price increases.
Bazaarvoice is a Delaware corporation with its principal place of business in Austin, Texas. In its 2012 fiscal year, Bazaarvoice had revenues of approximately $106 million.
Before the transaction, PowerReviews was a Delaware corporation with its principal place of business in San Francisco. In the 2011 calendar year, PowerReviews had revenues of approximately $11.5 million.
3 FORMER BANK EXECUTIVES CHARGED BY SEC WITH MASKING HEALTH OF LOAN PORTFOLIO
FROM: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today charged three former executives at Norfolk, Va.-based Bank of the Commonwealth for understating millions of dollars in losses and masking the true health of the bank’s loan portfolio at the height of the financial crisis.
The SEC alleges that Edward J. Woodard, who was CEO, president, and chairman of the board, was responsible along with CFO Cynthia A. Sabol and executive vice president Stephen G. Fields for misrepresentations to investors by the bank’s parent company Commonwealth Bankshares. The consistent message in Commonwealth’s public statements and SEC filings was that its portfolio of loans — which comprised approximately 94 percent of the company’s total assets in 2008 — was conservatively managed according to strict underwriting standards aimed at keeping the bank’s reserved losses low during a time of unprecedented economic turmoil.
In reality, the SEC alleges that internal practice deviated significantly from what the public was being told. Woodard knew the true state of Commonwealth’s rapidly-deteriorating loan portfolio, yet he worked to hide the problems and engineer the misleading public statements, particularly those made in earnings releases. Sabol knew of the activity to mask the problems with the company’s loan portfolio and the corresponding effect these masking practices had on the bank’s financial statements and disclosures, yet she signed the disclosures and certified to the investing public that they were accurate. Fields oversaw the bank’s largest portfolio of construction and development loans and was involved in the masking practices.
"During times of financial stress, it’s more important than ever for executives to make full and honest disclosure to the investing public," said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. "Commonwealth’s executives did the opposite and hid the company’s worsening performance from shareholders through masking practices that understated the losses on its most troubled loans."
According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Virginia, Commonwealth understated its allowance for loan and lease losses (known as ALLL) by approximately 17 to 25 percent from November 2008 to August 2010. This caused the bank to understate its reported loss before income taxes by approximately 64 percent for fiscal year 2008. Commonwealth also understated its losses on real estate repossessed by the bank (known as OREO) in two fiscal quarters, which caused the bank to understate its reported loss before income. For eight consecutive fiscal quarters, Commonwealth underreported its total non-performing loans.
The SEC’s complaint alleges that Commonwealth obtained an appraisal for its largest collateral-dependent loan that falsely inflated the value of the collateral. The bank executed hundreds of "change-in-terms agreements" at the end of the quarter to remove tens of millions of dollars of loans from its reported non-performing loans. Woodard, Sabol, and Fields helped enable the bank to artificially bring otherwise-delinquent loans current by permitting checking accounts associated with the guarantors of the delinquent loans to be overdrawn. The bank also disbursed loan proceeds without inspecting the property to confirm that the work requiring the disbursement had actually been performed.
The SEC’s complaint charges Woodard, Sabol, and Fields with violations of the antifraud, reporting, recordkeeping, internal controls, deceit of auditors, and Sarbanes-Oxley certification provisions of the federal securities laws.
The SEC’s investigation, which is continuing, has been conducted by Laura B. Josephs, Thomas D. Silverstein, David S. Karp, Lucas R. Moskowitz, and David Estabrook. The SEC’s litigation will be led by Richard Hong. The SEC appreciates the cooperation of the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Eastern District of Virginia, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Board of Governors of the Federal Reserve Board, the Federal Reserve Bank of Richmond, the Federal Deposit Insurance Corporation, and the Bureau of Financial Institutions of the Virginia State Corporation Commission.
Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today charged three former executives at Norfolk, Va.-based Bank of the Commonwealth for understating millions of dollars in losses and masking the true health of the bank’s loan portfolio at the height of the financial crisis.
The SEC alleges that Edward J. Woodard, who was CEO, president, and chairman of the board, was responsible along with CFO Cynthia A. Sabol and executive vice president Stephen G. Fields for misrepresentations to investors by the bank’s parent company Commonwealth Bankshares. The consistent message in Commonwealth’s public statements and SEC filings was that its portfolio of loans — which comprised approximately 94 percent of the company’s total assets in 2008 — was conservatively managed according to strict underwriting standards aimed at keeping the bank’s reserved losses low during a time of unprecedented economic turmoil.
In reality, the SEC alleges that internal practice deviated significantly from what the public was being told. Woodard knew the true state of Commonwealth’s rapidly-deteriorating loan portfolio, yet he worked to hide the problems and engineer the misleading public statements, particularly those made in earnings releases. Sabol knew of the activity to mask the problems with the company’s loan portfolio and the corresponding effect these masking practices had on the bank’s financial statements and disclosures, yet she signed the disclosures and certified to the investing public that they were accurate. Fields oversaw the bank’s largest portfolio of construction and development loans and was involved in the masking practices.
"During times of financial stress, it’s more important than ever for executives to make full and honest disclosure to the investing public," said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. "Commonwealth’s executives did the opposite and hid the company’s worsening performance from shareholders through masking practices that understated the losses on its most troubled loans."
According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Virginia, Commonwealth understated its allowance for loan and lease losses (known as ALLL) by approximately 17 to 25 percent from November 2008 to August 2010. This caused the bank to understate its reported loss before income taxes by approximately 64 percent for fiscal year 2008. Commonwealth also understated its losses on real estate repossessed by the bank (known as OREO) in two fiscal quarters, which caused the bank to understate its reported loss before income. For eight consecutive fiscal quarters, Commonwealth underreported its total non-performing loans.
The SEC’s complaint alleges that Commonwealth obtained an appraisal for its largest collateral-dependent loan that falsely inflated the value of the collateral. The bank executed hundreds of "change-in-terms agreements" at the end of the quarter to remove tens of millions of dollars of loans from its reported non-performing loans. Woodard, Sabol, and Fields helped enable the bank to artificially bring otherwise-delinquent loans current by permitting checking accounts associated with the guarantors of the delinquent loans to be overdrawn. The bank also disbursed loan proceeds without inspecting the property to confirm that the work requiring the disbursement had actually been performed.
The SEC’s complaint charges Woodard, Sabol, and Fields with violations of the antifraud, reporting, recordkeeping, internal controls, deceit of auditors, and Sarbanes-Oxley certification provisions of the federal securities laws.
The SEC’s investigation, which is continuing, has been conducted by Laura B. Josephs, Thomas D. Silverstein, David S. Karp, Lucas R. Moskowitz, and David Estabrook. The SEC’s litigation will be led by Richard Hong. The SEC appreciates the cooperation of the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Eastern District of Virginia, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Board of Governors of the Federal Reserve Board, the Federal Reserve Bank of Richmond, the Federal Deposit Insurance Corporation, and the Bureau of Financial Institutions of the Virginia State Corporation Commission.
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