Why it matters

A group of bank executives and board members were hit with fraud charges by the Securities and Exchange Commission (SEC), with the agency accusing the defendants of engaging in a scheme to mislead investors and bank regulators prior to the bank's failure in 2011. The 11 individuals associated with Superior Bank used straw borrowers, bogus appraisals, and insider deals to prop up the bank's financial condition, the SEC alleged, and the defendants extended, renewed, and rolled over bad loans to avoid impairment and the need to report losses in its financial accounting. The tactics used by the Alabama-based bank were an effort to conceal the extent of its losses as the bank faltered during the financial crisis and resulted in the bank overstating its net income in public filings by about 99 percent for 2009 and 50 percent in 2010, the SEC said. Nine of the defendants reached a deal with the agency, although the former president and a senior vice president are contesting the Florida federal court complaint. The individuals that settled neither admitted nor denied the SEC charges and are permanently banned from serving as officers or directors of a public company, with financial penalties ranging from $100,000 (for outside directors of the bank) up to $250,000 (assigned to the former CEO and chairman of the bank's holding company).

Detailed discussion

For engaging in "widespread and egregious" fraud during the financial crisis, the SEC has filed a federal court complaint against a group of 11 former executives and board members at Superior Bank and its holding company. According to the agency, the Alabama-based bank's high-ranking officers and directors schemed to mislead both bank regulators and investors by painting a rosy picture of the bank's finances when it was in fact faltering and ultimately failed.

"Accurate and fair reporting of loan impairment is of paramount importance for financial institutions during periods of severe financial stress," Andrew J. Ceresney, Director of the SEC's Enforcement Division, said in a statement. "Superior's senior-most officers and certain directors allegedly engaged in a widespread and egregious accounting fraud by concealing significant losses from loan impairments."

Between 2006 and 2011 the defendants engaged in a variety of fraudulent activity to avoid the need to report ever-increasing allowances for loan and lease losses in the bank's financial accounting, the SEC said. In some instances the officers replaced the borrowers of record for a severely delinquent loan with alternative borrowers who were in default on multiple other loans from Superior. Borrowers agreed to the additional loan relationship to avoid foreclosure or collection efforts with the understanding they were not obligated to repay the bank under the new loans.

In other cases the officers and directors permitted the use of appraisals that were several years out of date, the SEC said, routinely overstating the value of the loan properties. Some appraisals called for wholly inaccurate or unviable projected future uses of the properties, while other times the bank made use of conflicted appraisers that were beholden to Superior or the borrower.

The agency alleged that renewals or modifications of severely delinquent loans were routinely approved by the defendants by rolling forward relevant payment dates or funding new loans to the borrower and using the proceeds to pay down the prior loan, in an attempt to make the loan appear current on paper and within Superior's internal systems. The scheme also included non-recourse joint venture agreements with defaulted borrowers and a now deceased outside director of the bank's holding company. The deals helped the loans appear current despite the "near certainty" of falling back into delinquency and default, the SEC said.

Four defendants were additionally charged with orchestrating a separate accounting fraud by failing to appropriately impair more than $250 million in substandard loans that were actively marketed for sale to third parties at less than 50 cents on the dollar. And a trio of the executives knowingly failed to write down to zero a deferred tax asset that the bank holding company was using to offset future income despite their awareness that it would never materialize because of the fraudulent lending schemes and operating losses.

Because of the defendants' activities, Superior Bank overstated its net income in public filings by approximately 99 percent for 2009 and 50 percent for 2010. The bank failed in 2011. The agency's Florida federal court complaint listed counts of fraud, aiding and abetting fraud, circumvention of internal controls and falsified books and records, false statements to accountants, and violation of certificates.

Two of the defendants—the president of the bank's central Florida region and a senior vice president and commercial loan officer—are contesting the federal complaint. The remaining nine defendants agreed to settle, neither admitting nor denying the SEC's charges. Each is permanently barred from serving as an officer or director of a public company.

In addition, each will pay a financial penalty ranging from $250,000 for the former CEO and chairman of the bank's holding company to $200,000 for a former CFO and former market executive down to $150,000 for the former general counsel and $100,000 for outside directors. Three other defendants—a former bank president and CEO, former chief credit officer, and former president—reached bifurcated settlements and will receive their financial penalties from the court at a later date.

To read the complaint in SEC v. Bailey, click here.