Thu, 05/12/2013 - 14:12
The Securities and Exchange Commission has charged the holding company of Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis.
Fifth Third agreed to pay USD6.5m to settle the SEC’s charges, and Daniel Poston agreed to pay a USD100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.
According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required. Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans. Once Fifth Third formed the intent to sell the loans, US accounting rules required the company to classify them as “held for sale” and value them at fair value.
Proper accounting would have increased Fifth Third’s pre-tax loss for the quarter by 132 per cent. Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly suggested that the company had not made the decision to sell the loans.
“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” says George S Canellos, co-director of the SEC’s division of enforcement. “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”
According to the SEC’s order, Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans. Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required. Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008.
“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” says Stephen L Cohen, an associate director in the SEC’s division of enforcement.
Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws. Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions. Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.
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