Texas Bankers Charged with Hiding Deteriorating Loans

by devteam April 7th, 2012 | Share

Charges were brought against two former bank executives Thursday for their involvement in a fraudulent scheme to conceal their bank’s deteriorating loan portfolio and inflate its reported earnings during the financial crisis.</p

Anthony J. Nocella and J. Russell McCann, CEO and CFO of Franklin Bank Corporation in Houston are accused by the Securities and Exchange Commission (SEC) of using three loan modification schemes that classified a growing list of delinquent and non-performing loans at the bank as performing.   By the end of September 2007 the two had used the loan modification programs to conceal more than $24.5 million in non-performing residential mortgages and residential construction loans.  </p

The SEC said these maneuvers allowed Franklin to overstate its third-quarter net income and earnings by 317 percent and 77 percent respectively and report earnings of $.30 per share of which $0.23 were directly attributable to the loan modifications.  The bank holding company declared bankruptcy in 2008.  </p

“Nocella and McCann used the loan modification scheme like a magic wand to change non-performing loans into performing assets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Their disclosure and accounting tricks misled investors into believing that Franklin was outperforming other banks during the height of the financial crisis.”</p

The SEC’s complaint, filed in U.S. District Court for the Southern District of Texas, seeks financial penalties, officer-and-director bars, and permanent injunctive relief against Nocella and McCann to enjoin them from future violations of the federal securities laws. The complaint also seeks repayment of bonuses under Section 304 of the Sarbanes Oxley Act of 2002, which allows for “clawbacks” of bonuses if the company later must restate its earnings.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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