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The SEC brought another significant market crisis case,
this time against the senior officers of a failed financial institution. The
complaint centers on repeated efforts by the CEO, COO and manager of credit
risk to conceal the rapidly devolving financial condition of the institution
from the auditors and the public as key large loans and collateral deteriorated
in the wake of the evolving financial crisis in 2008 and 2009. Ultimately their
efforts failed and the bank was closed by California authorities at a huge loss
to the FDIC. SEC v. Wu, Case No. CV-11-4988 (N.D. Cal. Filed Oct. 11,
The Commission's action names as defendants: Thomas Wu,
then the Chief Executive Officer of United Commercial Bank and UCBH Holdings,
Inc.; Ehrahim Shabudin, COO of the bank and its holding company and for part of
the period chief credit officer; Thomas Yu, First Vice President, Manager of
Credit Risk and Portfolio Management; and Craig On, CFO of the holding company.
Each defendant invoked his Fifth Amendment rights during the underlying
investigation. The complaint alleges violations of Securities Act 17(a) and
Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and the
United Commercial Bank was a rapidly growing San
Francisco based financial institution. Over a period of ten years the bank
doubled its size while making a number of acquisitions. Those included a bank
in the People's Republic of China, the first by a U.S. bank. It was lead by its
CEO Thomas Wu who became a prominent figure in the banking industry.
In 2008 as the economic crisis unfolded and the real
estate market declined, the value of loans and collateral held in the bank's
portfolio of commercial and construction loans declined. Delinquencies
increased. Seven large loans in particular deteriorated and had a significant
impact on the bank.
Mr. Wu monitored large and troubled loans in the bank's
portfolio as the crisis unfolded in 2008. The bank set up a Special Assets
Group which he led with the assistance of Mr. Shabudin and others. By December
2008, and continuing through first quarter of the next year, the committee met
weekly to examine the largest problem loans. The committee examined updated
appraisals and other new information revealing the true status of the loans.
Much of this information was withheld from the auditors. Messrs. Wu and
Shabusdin discussed ways to delay any negative financial impact from the deteriorating
Messrs. Wu and Shabudin worked with Mr. Yu, to minimize
the impact of the declining loans and collateral on the financial statements,
according to the complaint. Mr. Yu was responsible for managing the bank's
problem loans under their supervision. He also had a lead role in the bank's
efforts to sell troubled loans and concealed information from the auditors.
Since subordinates were instructed to delay incorporating updated negative
information regarding problem loans and collateral, losses and reserves were
not properly recorded. Thus the bank's reserve package, including a section
which focused on troubled loans, was materially incorrect. It was furnished to
During this period the bank had at least seven large
loans which were carried at inflated values or with understated reserves.
Individually, and collectively these loans had a material impact on the
financial statements. If restated in accord with GAAP these loans would have
increased the reported losses by about 50% from a net loss of $134 million to a
net loss of $200 million.
Mr. Shabudin, as the bank's Chief Credit Officer,
coordinated the information made available to the outside auditors. Key facts
updating the condition of large loans and showing their deterioration were
withheld from the auditors. The auditors were however furnished with inaccurate
memoranda along with the materially false loan loss package.
Mr. On certified the accuracy of the 2008 Form 10-K as
the CFO of UCBH. He also executed internal loan loss calculations and made
representations to the auditors. "Given the concerted efforts of other senior
executives to hide and delay loan losses, and given what he knew about at last
a portion of the mounting losses, On should have known . . ." that the financial
statements were not accurate according to the complaint. That Form 10-K was
filed with the Commission on May 20, 2009 following an earlier earnings call
which reported results.
On November 6, 2009 the California Department of
Financial Institutions closed the bank and appointed the FDIC as receiver. UCB
was the ninth largest bank to fail during the financial crisis of 2008 and
2009. That failure cost the FDIC $2.5 billion.
Only Mr. On settled with the Commission. He consented to
the entry of a permanent injunction prohibiting violations of Securities Act
Sections 17(a)(2) & (3) along with reporting, recordkeeping and internal
control provisions. He also agreed to pay a civil penalty of $150,000 and
consented to an entry in a related administrative proceeding of an order
suspending him from appearing or practicing before the SEC as an accountant
with a right to reapply after five years. The other defendants are litigating
Program: The Impact of the
Supreme Court's Decision in Morrison v. National Bank of Australia on
securities litigation and SEC enforcement actions. Presented by Celequ Legal
Education in conjunction with West Thomson. Webcast on October 12, 2011 from
12:00 to 1:00 EST. For further information please click here
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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