The U.S. Securities and Exchange Commission (SEC) has charged Franklin Bank Corp.'s former chief executives with attempting to conceal the deterioration of the bank's loan portfolio and inflate its reported earnings during the financial crisis.
The SEC alleges that former CEO Anthony J. Nocella and fomer Chief Financial Officer J. Russell McCann used ‘aggressive loan modification programs during the third and fourth quarters of 2007 to hide the true amount of Franklin's nonperforming loans and artificially boost its net income and earnings.’
The SEC charges that by the end of September 2007, Nocella and McCann had used the loan modification programs to conceal more than $11 million in nonperforming single-family residential loans and $13.5 million in nonperforming residential construction loans. The Houston-based Franklin Bank Corp. declared bankruptcy in 2008.
‘Nocella and McCann used the loan modification scheme like a magic wand to change nonperforming loans into performing assets,’ says 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.’
The SEC's complaint 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 received by Nocella and McCann under Section 304 of the Sarbanes Oxley Act of 2002, which allows for ‘clawbacks’ of bonuses received by executives if the company later must restate its earnings.