SEC Busts Fifth Third Bank, CFO for Hiding Real Estate Loan Losses in 2008

The Securities and Exchange Commission on Wednesday charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis in 2008, which had the effect of hiding greater losses on its books.

To settle the SEC’s charges, Fifth Third agreed to pay $6.5 million, and the bank’s former CFO, Daniel Poston, agreed to pay a $100,000 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, the SEC’s order states. “Once Fifth Third formed the intent to sell the loans, U.S. 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 pretax loss for the quarter by 132 percent. 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.”

George Canellos, co-director of the SEC’s Division of Enforcement, said in a statement that “improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress” for the company. “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.”