SEC Charges Two Bank Executives for Financial Misstatements and Failure to Disclose Probable Loss on Troubled Loan
The Securities and Exchange Commission today charged two former bank executives at Illinois-based Mercantile Bancorp with failing to recognize in financial statements a probable loss on one of the bank’s largest troubled loans.
Former CEO Ted Awerkamp of Amarillo, Texas, and former CFO Michael McGrath of Quincy, Ill., agreed to settle the SEC’s charges by paying penalties of $100,000 each and being barred from acting as an officer or director of a publicly traded company.
The SEC alleges that prior to the end of the third quarter in 2010, Awerkamp knew that the borrower in a shared national credit loan for a large residential real estate development to be built in Colorado Springs was unwilling or unable to contribute the necessary funds to complete the project, which served as collateral for the loan. He also knew that the collateral had declined significantly in value. After the third quarter but still weeks before the bank’s quarterly report was filed, Awerkamp and McGrath also learned that the borrower missed a loan payment and declared bankruptcy. Based on these and other events, U.S. accounting rules required Mercantile to recognize a $5.28 million loan loss in its third quarter financial statements, yet the bank failed to do so.
“As bank executives, Awerkamp and McGrath had an important responsibility to share critical financial information with their shareholders and auditors,” said Robert J. Burson, Associate Director of the SEC’s Chicago Regional Office. “Their failure to report a probable loss on one of Mercantile’s largest problem loans created a misleading impression of the bank’s finances.”
According to the SEC’s complaint, the failure to report the loan loss caused Mercantile to falsely state that its main subsidiary bank had met certain capital ratio thresholds required by the Federal Deposit Insurance Corporation (FDIC). Mercantile also understated its net loss for the quarter and the nine months ending September 30. The bank reported those figures as $7.5 million and $11 million when they were actually at least $12.78 million and $16.28 million. Mercantile also falsely stated that its main subsidiary bank had a net income of $1.8 million for the first nine months of 2010 when it actually had a net loss of at least $3.48 million during that period.
The SEC’s complaint charges Mercantile with violations of Section 17(a)(3) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-11 and 13a-13. Awerkamp is charged with violations of Section 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2. He also is charged with aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13. McGrath is charged with violations of Section 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2. He also is charged with aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13.
Mercantile, Awerkamp, and McGrath consented to the entry of final judgments without admitting or denying the SEC’s allegations. In addition to the monetary sanctions and officer-and-director bars against Awerkamp and McGrath, they agreed to be permanently enjoined from future violations of these provisions of the securities laws.
The SEC’s investigation was conducted by Jake Schmidt, Timothy T. Tatman, and James A. Davidson of the Chicago office.