Delaware Bankers Guilty of Fraud Tied to Subprime-Era Loans

(Bloomberg) -- Four former executives at Wilmington Trust Corp. were convicted of misleading regulators about the bank’s portfolio of soured real-estate loans during the 2008 financial crisis.

Jurors found former Wilmington Trust President Robert Harra and his colleagues guilty of fraud and conspiracy charges for hiding from the U.S. Federal Reserve the growing number of past-due commercial real-estate loans during the economic downturn.

The panel agreed with prosecutors that Harra, along with David Gibson, Wilmington Trust’s ex-chief financial officer; William North, ex-chief credit officer; and Kevyn Rakowski, former controller, intended to dupe regulators and investors about the number of bad loans. The Wilmington-based bank was acquired by M&T Bank Corp. for a fire-sale price in 2011.

Harra was one of a handful of high-ranking bank officials indicted in connection with the crash of the U.S. real estate market that began in 2008 and was sparked by problems with subprime mortgages. Ted Cecala, Wilmington Trust’s former CEO, wasn’t charged in the case.

Each member of the group faces 30 year in prison on the felony securities fraud and record-reporting counts. U.S. District Judge Richard Andrews hasn’t set a sentencing date for the group.

‘Own Arrogance’

“The defendants were a victim of their own arrogance,” David Weiss, the U.S. Attorney for Delaware, said at a press conference after the verdicts were announced. “They convinced themselves that they knew better” and violated bank policy by extending overdue loans, he added.

Lawyers for the group sought to persuade jurors waiving past-due loans was a long-standing practice at Wilmington Trust and none of the executives intended to violate the law with them.

“Rob Harra never in his life ever thought about committing a crime,” Michael Kelly, the former bank president’s lawyer, said in an emailed statement. “There was no evidence in this trial to suggest otherwise.” Kenneth Breen, Gibson’s lawyer, said he’ll seek to have the conviction reviewed on appeal. “We maintain David Gibson’s innocence,” he said in an email.

Bank Settlement

Prosecutors originally charged Wilmington Trust itself with participating in the scheme to hide mounting past-due loans. But the government dropped the case against the bank after it agreed to pay $44 million in a civil settlement.

Wilmington Trust melted down despite a $330 million injection of funds from the government’s Troubled Asset Relief Program and $287 million raised in a 2010 stock offering.

Founded by the DuPont family in 1903, Wilmington Trust put itself up for sale in 2010 as it prepared to report a sixth straight quarterly loss. In the four days before Buffalo, New York-based M&T bought the bank for about $351 million in stock, Wilmington Trust lost 46 percent of its value.

Inaccurate Filings

Prosecutors alleged North and Rakowski excluded a large number of the loans that were 90 days past due from the bank’s internal reports in 2008 and 2009. The duo knew their actions would conceal information from the Fed, the government claimed. Harra and Gibson signed off on reports about past-due loans knowing they weren’t accurate, the U.S. said.

During the trial, prosecutors presented testimony from Joseph Terranova, a former Wilmington Trust loan officer who pleaded guilty and agreed to wear a concealed recording device during card games that included developers and a fellow banker to gather evidence about the conspiracy. The canasta games were known as “ca-nasty” sessions, Terranova recalled.

Terranova also told jurors Harra and other executives pressured loan officers to expand the bank’s commercial real-estate loan portfolio by 10 percent annually. Bonuses were tied to such growth, he added. Terranova hasn’t been sentenced.

Prosecutors also presented emails showing members of the group decided in 2009 to launch a “mass extension” of faltering loans worth more than $1.3 billion. During that period, North noted in an email to Harra that some of the loans amounted to “credit turds.”

Kelly countered bank officials had been waiving past-due status for developers who stayed current on the interest portion of their loans for 28 years without objections.

Short-term extensions were made so bank officials had time to dig though files to evaluate the faltering real-estate loans, David Wilks, North’s lawyer, told jurors.

If the bankers had sought to cover up problems, they would have given longer-term exemptions and not done a deal-by-deal analysis, Wilks argued. “‘Nobody cheats by working themselves to the bone,” he added.

The case is U.S. v. Gibson, 15-cr-00023, U.S. District Court, District of Delaware (Wilmington).

©2018 Bloomberg L.P.

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