Virginia RE Developer Guilty of Massive Fraud Leading to Bank's Failure

by devteam April 23rd, 2012 | Share

A Virginia real estate developer has pled guilty to conspiracy to commit wire fraud, making false statements, and conspiracy to commit bank fraud in connection with a complicated scheme in which an estimated $61 million was bled from a bank and state and federal governments, and which ultimately led to the failure of Virginia’s Bank of the Commonwealth.  Eric H. Menden of Chesapeake, Virginia is facing up to five years in prison on each of the counts.</p

Menden admitted that he and his partner George P. Hranowskyj also of Chesapeake did favors for insiders at the Bank in return for favorable lending treatment and assisted the Bank in concealing the extent of the Bank’s non-performing assets by purchasing Bank-owned property.</p

In one instance Menden submitted construction draw requests to the Bank that included inflated amounts owed to subcontractors and work that was not completed.  The Bank, in turn approved and funded the requests without proper due diligence.  With the original loan of $16 million fully funded but the renovations far from complete, Menden conspired with the Bank to obtain another $2.45 million of which Menden and his partner used $550,000 to pay down negative balances in their checking accounts.  By April 2011 the Bank had charged of approximately $12.5 million of this loan and the property, which a Bank conspirator had fraudulently appraised at $20 million in 2008, was revalued at $2.8 million.</p

Starting in 2008 Menden and his partner conspired with Bank insiders to purchase underperforming Bank-owned properties with advances from the Bank which were later written off at significant loss.  In one instance the Bank funded the purchase of a property at auction after Menden had bid the price up over $900,000.  In April 2011 the Bank obtained an appraisal that indicated the property had no useful life and the Bank charged off more than a half million dollars of the loan.  </p

Even after regulators forced the Bank to withdraw an application for TARP funds and after the Bank signed an agreement in June 2010 with the Federal Reserve that specifically prohibited it from extending, renewing, or restructuring any loans to specific borrowers including Menden and his partner the Bank continued to sell and attempt to sell underperforming Bank-owned property to him through a nominee borrower.  At the time the Bank failed in September 2011 Menden and his business partner owned the Bank approximately $41 million.</p

Menden and Hranowskyj were also charged under a 14-count indictment involving an alleged historic tax credit scheme under which they borrowed funds from financial institutions to purchase and renovate properties that could qualify for these credits which they did not need.  They applied for the credits, and sold them to investors for $8.7 million; the investors then used them to reduce their own tax liabilities.  This scheme cost the Federal government $6.2 million and the Commonwealth of Virginia $6.3 million.  Charges against Hranowskyj are still pending.</p

The alleged scheme was were investigated by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) FBI, IRS, and the FDIC with and the case is being prosecuted by the Department of Justice.

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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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