The Commission filed another market crisis case, this time naming as defendants two senior banking executives, Gilbert Lundstrom and James Laphen, alleged to have been at the center of a financial fraud at the now failed financial institution. Mr. Lundstrom was the Chairman and CEO of TierOne Corporation, a bank holding company, and James Laphen, the COO of the company. A separate count charging insider trading names Mr. Lundstrom’s son, Trevor Lundstrom. SEC v. Lundstrom, Civil Action No. 8:12-cv-00343 (D. Neb. Filed Sept. 25, 2012).

TierOne Bank, owned by the holding company, was a federally chartered savings bank. Traditionally the bank focused on residential and agricultural loans in the Midwest. Beginning in 2004, however, it expanded into high growth areas such as Las Vegas, Florida and Arizona. A significant number of loans were made to developers whose obligation to repay hinged on their ability to complete and sell or refinance the project.

As the market crisis unfolded in 2008 many of TierOne’s loans deteriorated. The Office of Thrift Supervision or OTS which supervised the bank increased its regulatory capital requirements in mid-2008. If the requirements were not met the bank could face enforcement actions and the removal of management.

To make it appear that the bank was in compliance with regulatory requirements, Messrs. Lundstrom and Lapen materially understated the bank’s loan losses and the losses on real estate it repossessed. This was achieved by disregarding reports stating that the collateral for these loans was materially overstated. As part of the scheme the executives executed management letters that were provided to the bank’s outside auditors and circumvented and failed to implement an effective system of internal controls. These actions made it appear the bank was in compliance with its regulatory requirements when in fact it was not. It also meant that filings made with the Commission were false.

In 2009 the full extent of the bank’s losses became known after the OTS required new appraisals for its impaired loans. Ultimately TierOne was required to disclose over $130 million of additional loan losses. If those losses had been recorded in the proper period the bank would have failed to meet its capital requirements by the end of 2008. Following the disclosure its share price dropped 70%. The bank tumbled into bankruptcy and was closed by the OTS in June 2010.

In a separate count the Commission alleged that Mr. Lundstrom tipped his son Treaver regarding an anticipated asset sale between the bank and Great Western Bank was announced September 4, 2009. Treaver Lundstrom traded, reaping illicit profits of $225,921. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5).

Mr. Lundstrom and his son settled. Mr. Lunstrom consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, he is barred from serving as an officer or director of a public company and will pay a civil penalty of $500,921.

His son consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to disgorge his trading profits and pay prejudgment interest and a civil penalty equal to his trading profits. Mr. Laphen is litigating the case. See also, Lit. Rel. No. 22493 (Sept. 25, 2012).