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.

It was not until late 2009—after OTS had forced TierOne to get new appraisals—that TierOne revealed more than $130 million in additional loan losses. On the heels of the disclosure of this loss, TierOne’s stock price plunged 70 percent, OTS moved in to shut the operation down in June 2010, and the bank filed for bankruptcy.

If the alleged misstatements and tens of millions in losses were not enough, Gilbert Lundstrom purportedly tipped his son Trevor off to material non-public information about an asset sale that was in the works in 2009 between TierOne and Great Western Bank. Acting on the tip, Trevor Lundstrom allegedly bought more than 200,000 shares in TierOne and then sold them for more than $200,000 in profit after the transaction was announced.

The SEC’s complaint against Gilbert and Trevor Lundstrom as well as Laphen charges violations of the anti-fraud, deceit of auditors, reporting, record-keeping, and internal controls provisions of the federal securities laws, as well as insider trading. Father and son Lundstrom settled their fraud and insider trading charges, and Laphen settled his fraud charges. The Lundstroms and and Laphen agreed to collectively pay nearly $1.2 million in settlements. Langford has not settled his charges.