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SEC, FINRA Enforcement: Former Wilmington Trust Officers Charged With Fraud

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Among recent enforcement actions, the SEC has filed fraud charges against four former officers of Wilmington Trust for knowingly understating past-due loans during the financial crisis.

In addition, Merrill Lynch was the target of separate FINRA actions and First New York Securities was hit with a heavy fine on insider trading failures.

Four Former Wilmington Trust Officers Charged by SEC With Fraud

The SEC has charged four former officers of Wilmington Trust with fraud for intentionally understating past due bank loans during the financial crisis. The former Delaware-based bank holding company was acquired by M&T Bank in May of 2011, and in September of 2014 it paid $18.5 million to settle related charges from the SEC for improper accounting and disclosure fraud.

According to the agency, the four—David Gibson, former CFO; Robert Harra, former COO; Kevyn Rakowski, former controller; and William North, former chief credit officer—put together a scheme to hide the impact of declines in the real estate market on the bank’s portfolio of commercial real estate loans. They kept hundreds of millions of dollars of past-due real estate loans out of the financial reports filed by Wilmington Trust in 2009 and 2010.

Gibson, Rakowski, and North omitted approximately $351 million of matured loans 90 days or more past due from the bank’s disclosures in Q3 2009; as a result, only $38.7 million of such loans were disclosed. In Q4 2009, the four left out approximately $330.2 million of these loans, with the bank’s annual report disclosing only $30.6 million of such loans.

Gobson, Rakowski and North also got together to continue misreporting in the first half of 2010, while Gibson also materially understated the amount of nonaccruing loans in Wilmington Trust’s portfolio in Q3 2009 and the bank’s loan loss provision and allowance for loan losses in Q4 2009.

The SEC is seeking to have all four return allegedly ill-gotten gains with interest and pay civil monetary penalties, and to have Gibson and Harra barred from serving as corporate officers or directors. In a related action, the U.S. Attorney’s Office for the District of Delaware has announced criminal charges against Rakowski and North.

FINRA Censures Merrill Lynch and Clearing, Fines Both

Merrill Lynch, Pierce, Fenner & Smith Inc. and Merrill Lynch Professional Clearing Corp. were both censured by FINRA and fined in separate actions.

Merrill Lynch, Pierce, Fenner & Smith was censured and fined $100,000 after FINRA found that it failed to send required regulatory disclosures and notices in connection with the opening of approximately 12,989 firm accounts. Separately, it was censured and fined $115,000 on FINRA findings that for settlement dates between September 15, 2010, and February 29, 2012, the firm failed to report short interest positions; during the same period, underreported its short interest positions; and failed to report one position at all on June 29, 2012.

In the first instance, the firm found that its new account-opening platform failed to send packages with required business continuity plan disclosures, privacy pledges, payment for order flow disclosures, and affiliate marketing notices, to customers opening new college savings, education savings and individual investor accounts.

Despite having tested the platform before implementation, and despite subsequent systems testing, the firm failed to discover that it never activated a mechanism on the platform to deliver the packages.

FINRA also found that for almost a year, the firm failed to collect employer addresses for 345,789 customer accounts.

In the second instance, FINRA found that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance.

The firm neither admitted nor denied the findings, but consented to the sanctions.

Merrill Lynch Professional Clearing Corp. was censured and fined $57,500 after FINRA found that for settlement dates between March 31, 2011, and February 28, 2013, the firm inaccurately reported short interest positions. FINRA also found that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance.

Again, the firm neither admitted nor denied the findings, but consented to the sanctions.

First New York Securities Censured, Fined $400,000 by FINRA

FINRA censured First New York Securities and fined the firm $400,000, as well as requiring it to review and revise policies, procedures, and internal controls relating to detecting and preventing insider trading by its registered representatives.

According to the agency, while the firm’s WSPs included a policy statement prohibiting insider trading, and required random reviews by the firm’s CCO of trading activity in the firm’s proprietary accounts, the procedures didn’t describe what those reviews should look for.

In addition, they failed to say whether all trading accounts would be subject to a monthly random review or whether the sampling of trading was limited to only some of the firm’s accounts. They also provided no guidance on “look back” reviews of trading in the case of market moving events, including the identification of red flags indicative of possible insider trading, and red flags did not result in reviews.

In addition to failing to treat a trader’s relationship with a consultant as a red flag that should have resulted in more detailed communications reviews, the firm was also cited by FINRA for other failures, including in its supervisory system and written supervisory procedures, surrounding the issue.

The firm neither admitted nor denied the findings, but consented to the sanctions.

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