Bank Settles SEC and FRB Charges for Related Party Loan Disclosure Failures

A Maryland-based bank settled parallel SEC and Federal Reserve Board ("FRB") charges for (i) extending lines of credit to affiliates of the bank's CEO without the majority approval of its board of directors, (ii) failing to disclose related party loans in its annual reports and proxy statements and (iii) issuing materially misleading statements. The FRB also charged the bank's former CEO with engaging in unsafe banking practices.

According to separate Orders (see here and here), the regulators found that the bank made loans to family trusts associated with the bank's CEO. The regulators said that the bank then omitted these loans from its annual reports and proxy statements, despite these loans consisting of more than twice the amount disclosed in the bank's reports. When questioned about the loans, the bank's CEO issued statements "essentially denying the allegations and asserting that all relevant loans were in compliance with the law."

The regulators found that in subsequent reports, the bank did acknowledge the existence of the loans, but falsely stated that the loans were not related party loans. The regulators noted that the bank eventually did disclose all details of the related party loans in its annual reports and proxy statements.

The bank's CEO also settled FRB charges for engaging in unsafe banking practices and aiding in the bank's violations.

The regulators determined that the bank violated Sections 17(a)(2) and 17(a)(3) of the Securities Act ("Fraudulent interstate transactions"), Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act ("Periodical and other reports") and Section 14(a) of the Exchange Act ("Proxies"). The bank was also found to have violated SEA Rule 12b-20 ("Registration and Reporting - Additional information"), Rule 13a-1 ("Requirements of annual reports"), Rule 14a-9 ("False or misleading statements") and Regulation O ("Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks"). The FRB found that the bank's CEO also violated Regulation O.

To settle the charges, the bank agreed to (i) a cease and desist, (ii) disgorgement of $2,600,000, (iii) prejudgment interest of $750,493 and (iv) a civil monetary penalty totaling $19,524,000, of which $10,000,000 will be paid to the SEC and $9,524,000 will be paid to the FRB. The bank's CEO also agreed to (i) a prohibition on further actions related to the violations without prior written consent and (ii) pay a civil monetary penalty of $90,000.