Pick Your Poison: Regulators Find Overvalued Assets, Securities Fraud, and Insider Trading at Failed Thrift

In a case involving all of the hallmarks of the housing and economic crisis, on September 25, 2012 the SEC announced that it had charged three Nebraska bank executives and the CEO’s son with violations of securities fraud and insider trading laws stemming from subprime lending, undercapitalization, and the ultimate demise of TierOne Bank.

TierOne Bank was a century-old thrift that had traditionally focused on loans to the agricultural and residential sectors in Midwestern states, but like many banks caught up in the housing boom, in 2004 TierOne expanded into riskier loans in then-exploding markets such as Nevada, Florida, and Arizona. All of these markets would collapse just a few years later, leaving banks like TierOne with significant losses on their books. As a result, in June 2008, the Office of Thrift Supervision gave TierOne a choice: maintain elevated core and risk-based capital ratios or face enforcement action—the top leaders at TierOne allegedly chose neither.

Rather than increase capital ratios or accept an OTS enforcement action, CEO Gilbert Lundstrom, COO James Laphen, and Chief Credit Officer Don Langford allegedly materially understated TierOne’s loan and OREO losses. Not to be confused with the cookie, “OREO” in the banking context refers to “other real estate owned”—in this case real estate that TierOne had repossessed. Though TierOne was left holding real estate from failed markets around the country, its executives allegedly ignored the fact that the value of these assets was based on stale and inadequately discounted appraisals, and consequently made misstatements in its 2008 10-K and a number of other filings. Read More

Supreme Court to Resolve Split on Timing for SEC Penalty Actions

Today, the Supreme Court granted a petition for certiorari in Gabelli v. Securities and Exchange Commission (11-1274). In the appeal from a Second Circuit opinion, the Court will decide whether a governmental claim for penalties accrues on the date that the underlying violation occurs, or when the SEC discovers (or reasonably could have discovered) the violation, for purposes of the 5-year statute of limitations for governmental penalty actions embodied in 28 U.S.C. s. 2462. The precise question presented is:

“When Congress has not enacted a separate controlling provision, does the government’s claim first accrue for purposes of applying the five-year limitations period under 28 U.S.C. s. 2462 when the government can first bring the action for a penalty?”

The Second Circuit, in an opinion adopting the SEC’s position, held that the discovery rule applies to SEC enforcement actions rooted in fraud. Under that rubric, the SEC could bring an enforcement action within five years of learning about a fraud, which, in many cases, can be far more than five years after the underlying violation occurred. The Supreme Court’s decision to take the case follows closely on the heels of the Fifth Circuit’s August 7, 2012 decision in SEC v. Bartek, previously discussed here. In Bartek, the Fifth Circuit held that the statute of limitations for penalties in SEC enforcement actions began to run on the date of the underlying in violation, and that the discovery rule does not apply to 28 U.S.C. s. 2462. The Bartek decision therefore created a clear Circuit split that the Supreme Court is poised to resolve next term.

Fifth Circuit Tells the SEC “Time’s Up”

In SEC v. Bartek, filed August 7, 2012, the Fifth Circuit held that the discovery rule does not apply to 28 U.S.C. § 2462, the statute of limitations governing penalties in SEC civil enforcement actions, thus affirming a district court’s grant of summary judgment in favor of the defendants. Under the Fifth Circuit’s ruling, the SEC’s claims for penalties accrue on the date of the violation, not on the date that the SEC discovers the violation. This opinion creates a circuit split after the Second Circuit’s decision in SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011), which held that the discovery rule applied to Section 2462, and increases the likelihood that the Supreme Court will weigh in on the issue. Read More