SEC Charges Banking Organization and Former CFO with Improper Accounting of Substantial Loan Losses during Financial Crisis

The SEC has charged a banking organization and its former CFO with improper accounting of commercial real estate loans in the midst of the financial crisis. According to the SEC's order, the bank experienced a "substantial increase in non-performing assets" as the real estate market crashed in 2007 and 2008, when borrowers were failing to repay mortgage loans. In order for the loans to be sold, U.S. accounting rules state, the company must classify them as "held for sale" and value them at fair value. To avoid a 132-percent pretax loss, the bank classified the loans as "held for investment," which the SEC stated has suggested incorrectly that the company had not made the decision to sell its loans and therefore did not properly value them as required by law.

The SEC stated that the misclassification was known to the CFO, who was familiar with the company's effort to market and sell the loans to brokers. The SEC stated that, by failing to classify and value the large pools as required, the company prevented investors from understanding the value of its commercial real estate portfolio.

See: SEC Order; SEC Press Release.