The Securities and Exchange Commission announced that Trinity National Corp. and its wholly owned subsidiary, Los Alamos Bank, have agreed to pay $1.5 million to settle charges of accounting fraud.
In its quarterly and annual filings with the SEC for 2010, 2011 and the first two quarters of 2012, Trinity materially misstated its provision for loan losses and its allowance for loan and lease losses. In 2011, it reported income of $4.9 million instead of a loss of $25.6 million, understating its net loss available to common shareholders by $30.5 million.
According to the SEC’s complaint, the fraud was director by Trinity’s former chief executive officer, William Enloe, its former chief credit officer, Jill Cook, and former senior lending officer Mark Pierce. The complaint also alleges that former chief financial officer Daniel Bartholomew and vice president of internal audit Karl Hjelvik failed to implement sufficient internal accounting controls and failed to ensure that the bank’s books and records were reasonably accurate. (For more details, see below.)
Trinity, Enloe, Bartholomew, and Hjelvik agreed to settle the SEC’s charges, while the litigation continues against Cook and Pierce.
Trinity and Enloe consented to an order to cease and desist from violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Trinity agreed to provide ongoing cooperation and to pay a $1.5 million penalty, which takes into account the company’s significant remedial measures and cooperation during the investigation. Enloe agreed to pay a $250,000 penalty and also agreed to be barred from serving as an officer or director at a public company for five years. Bartholomew and Hjelvik consented to charges of books and records, reporting, and internal control violations, and entered into cooperation agreements with the SEC to assist in the litigation against Cook and Pierce.
The SEC’s complaint filed against Cook and Pierce alleges they violated or aided and abetted violations of the antifraud, lying-to-auditors, books and records, internal accounting controls, and reporting provisions of the federal securities laws. The SEC is seeking injunctions, civil penalties, and officer and director bars.
"Trinity was facing dire financial straits but rather than accurately report its losses, we allege that the firm's executives grossly misreported its income to shareholders and regulators,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. "We will hold senior executives liable when they misstate the company's performance and fail to come clean with shareholders."
The alleged fraud was motivated, at least in part, by the bank’s desire to be released from a formal supervisory agreement between the bank and the Office of the Comptroller of the Currency.
THE DETAILS OF THE SCHEME
As laid out in the SEC’s complaint filed in federal court in Albuquerque, N.M, and the settled administrative proceedings, the fraudulent activities included:
- Enloe, Cook, and Pierce directed Trinity’s loan department to engage in a variety of conduct that kept the bank from properly recording losses on its financial statements, such as not downgrading loans that were delinquent and making delinquent loans appear to be paying on time; not identifying loans for which the bank was not going to be paid in full; and not properly measuring individual loans for impairment.
- Enloe, Cook, and Pierce extended credit to troubled borrowers that was used to make required payments on existing debt, which would result in the borrower appearing current on loan payments when, in fact, the bank was not actually making any collections from the borrower.
- Enloe, Cook, and Pierce failed to identify loans where it was probable that the bank would be unable to collect all amounts due under the loan agreement. In some instances, documents were intentionally drafted to avoid triggering a review of the transactions as troubled loans.
- Enloe, Cook, and Pierce knew that collateral was worth significantly less – sometimes millions of dollars less – than the amounts used in impairment measurements, yet they did nothing to correct the inaccuracies.
- Enloe and Cook instructed employees to reject and not use appraisals that indicated lower values on the bank’s collateral and other properties.
- Pierce drafted and reviewed loan memoranda that were false and misleading and, together with Enloe and Cook, permitted them to be presented to outside auditors and others when they knew, or were reckless in not knowing, that the information hid the troubled nature of various loans.
- Bartholomew and Hjelvik knew or should have known that certain impairment measurements were not correct and that some appraisal valuations were significantly overstated. In addition, neither of them took action to implement adequate internal accounting controls.
- As a result of this and other conduct, Trinity failed to downgrade loans on a timely basis; identify individually impaired loans; and measure impairments properly and take appropriate losses on real estate owned by the bank.
